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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number 001-11981
Municipal Mortgage & Equity, LLC
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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52-1449733 |
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(I.R.S. Employer
Identification No.) |
621 East Pratt Street, Suite 300
Baltimore, Maryland 21202-3140
(Address of Principal Executive Offices) |
(443) 263-2900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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| Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Shares
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New York Stock Exchange, Inc. |
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the common shares, no par value
per share (“common shares”), of the registrant held by
non-affiliates of the registrant was approximately $763,960,772
based upon the closing price of $23.32 on the New York Stock
Exchange composite tape on the last business day of the
Company’s most recently completed second fiscal quarter.
As of March 2, 2005, there were 37,832,775 common shares
outstanding.
Portions of the Company’s Proxy Statement for the
Company’s 2005 Annual Meeting of Shareholders to be filed
subsequent to the date hereof are incorporated by reference into
Part III of this Annual Report on Form 10-K.
Forward-Looking Information
This Annual Report on Form 10-K contains forward-looking
statements, that involve certain risks and uncertainties. Such
statements are included in this Annual Report on Form 10-K
pursuant to the “safe harbor” provision of the Private
Securities Litigation Reform Act of 1995. Assumptions contained
in various portions of this Annual Report on Form 10-K
involve judgments with respect to, among other things, future
economic and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately
and many of which are beyond the control of Municipal Mortgage
& Equity, LLC (“MuniMae” and, together with
its subsidiaries, the “Company”). Although the
Company believes that the assumptions underlying the
forward-looking information included herein are reasonable, any
of the assumptions could be inaccurate which may cause results
to differ materially. Therefore, there can be no assurance that
such forward-looking information will prove to be accurate and
readers should be cautioned not to place undue reliance on such
statements. In light of the significant uncertainties inherent
in forward-looking information, the inclusion of such
information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the
Company will be achieved.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-K
PART I
Item 1. Business.
Municipal Mortgage & Equity, LLC (“MuniMae”
and, together with its subsidiaries, the
“Company”) provides debt and equity financing
to developers of multifamily housing and other types of
commercial real estate. The Company invests in tax-exempt bonds,
or interests in bonds, issued by state and local governments or
their agencies or authorities to finance multifamily housing
developments. These tax-exempt bonds are not general obligations
of state and local governments, or the agencies or authorities
that issue the bonds. The multifamily housing developments, as
well as the rents paid by the tenants, typically secure these
investments. The Company also invests in other housing-related
debt and equity investments, including equity investments in
real estate operating partnerships; tax-exempt bonds, or
interests in bonds, secured by student housing or assisted
living developments; and tax-exempt bonds issued by community
development districts to finance the development of community
infrastructure which supports single-family housing, mixed use
and commercial developments and secured by specific payments or
assessments pledged by the local improvement district that
issues the bonds (“CDD bonds”). Interest income
derived from the majority of the Company’s bond investments
is exempt income for Federal income tax purposes. Real estate
finance activities include the origination of, investment in and
servicing of investments in multifamily housing and other types
of real estate, both for the Company’s own account and on
behalf of third parties. These investments generate income that
is includable income for Federal income tax purposes.
The Company is also a tax credit syndicator. As a syndicator,
the Company acquires and transfers to investors interests in
partnerships that receive and distribute to investors low-income
housing tax credits. The Company earns syndication fees on the
placement of these interests with investors. The Company also
earns fees for providing guarantees on certain tax credit equity
funds and for managing the low-income housing tax credit equity
funds it has syndicated.
MuniMae was organized in 1996 as a Delaware limited liability
company. As a limited liability company, the Company combines
many of the limited liability, governance and management
characteristics of a corporation with the pass-through income
features of a partnership. Since MuniMae is classified as a
partnership for Federal income tax purposes, MuniMae is not
itself subject to Federal and, in most cases, state and local
income taxes. Instead, each shareholder must include his or her
distributive share of MuniMae’s income, deductions and
credits on the shareholder’s income tax return. Most of the
Company’s real estate finance and tax credit equity
syndication activities are conducted through subsidiaries
classified as corporations for Federal income tax purposes.
These corporations do not have the pass-through income features
of a partnership and, as a result, are subject to Federal, state
and local income taxes.
The Company posts all reports it files with the Securities and
Exchange Commission (
“SEC”) on its website at
http://www.munimae.com. The Company also makes available free of
charge its Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K and any
amendments to those Reports filed pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after they are filed with the
SEC. These reports are available free of charge by contacting
Angela Richardson in Investor Relations at
621 E. Pratt Street, Suite 300, Baltimore,
Maryland, 21202 or
[email protected] and 888-788-3863.
Since the first quarter of 2002, MuniMae has had only common
shares outstanding. For a description of other MuniMae
securities of the Company that were outstanding prior to that
time, see Part II, Item 5 below.
Acquisition of Housing and Community Investing Business of
Lend Lease Corporation Limited
On July 1, 2003, the Company acquired the Housing and
Community Investing business of Lend Lease Real Estate
Investments (“HCI”), for $102.0 million in
cash ($105.3 million including acquisition costs). HCI is a
syndicator of low-income housing tax credit equity investments.
The HCI business is owned by MMA Financial TC Corp.
(“TC Corp”), a wholly owned subsidiary of
the Company. The
1
Company’s results for 2003 reflect six months of activity
from TC Corp and the Company’s results for 2004
reflect a full year of such activities.
Competition
In seeking out attractive tax credit, multifamily and other
housing-related investment opportunities, the Company competes
directly against a large number of syndicators, direct investors
and lenders-including banks, finance companies and other
financial intermediaries-and providers of related services such
as portfolio loan servicing. Certain of the Company’s
competitors have substantially greater financial and operational
resources than the Company. While the Company has historically
been able to compete effectively against such competitors on the
basis of its service, excellent access to investor capital,
longstanding relationships with developers and a broad array of
product offerings, many of the Company’s competitors
benefit from substantial economies of scale in their business
and have other competitive advantages.
The Company competes directly with other syndicators in raising
investor capital for tax credit investments. Certain of the
Company’s competitors have greater financial and
operational resources than the Company. While the Company has
historically been able to compete effectively against such
competitors on the basis of its service, track record, and
excellent access to high-quality investments, several of our
competitors benefit from the ability to use large amounts of tax
credit themselves, from balance sheets that allow them to
cost-effectively guarantee tax credit investments, and have
other competitive advantages.
In addition, in seeking permanent financing for their
developments, the Company’s customers generally evaluate a
wide array of taxable and tax-exempt financing options. While
tax-exempt financings offer specific attractions for developers,
they can be more complicated than taxable financings and can
involve ongoing restrictions on the owner’s use of the
property. As a result, the relative attractiveness of tax-exempt
permanent financing may increase or decrease over time based on
the availability and cost of taxable financing. In particular,
the differential in interest expense between tax-exempt and
taxable financing alternatives tends to be lower in a low
interest rate environment, which may make the Company’s
tax-exempt multifamily housing bond financings less attractive
to developers than taxable alternatives. While the Company
expects that its strategic emphasis will remain on tax-exempt
financing, absent a major change in the tax code, the Company
expects to continue to expand and diversify its other lines of
business.
Syndication
As a tax credit syndicator, the Company could be adversely
affected if it is unable to syndicate to investors the tax
credit investments it acquires for syndication, or if it
syndicates the tax credit investments to investors at a price
that is lower than the price paid for those investments. In most
cases, the Company acquires interests in tax credit investments
several months before those interests are sold to investors. In
the event of dramatic market changes in the time between
acquisition and sale of the interests, it is possible that the
Company could suffer losses upon sale of the investments. If
unable to sell the investments for an extended period of time,
the Company could face demands from its lenders and foreclosure
of tax credit interests. In over 17 years of tax credit
syndication, the Company (including its predecessor
organizations) has never failed to sell a tax credit investment
acquired for syndication, and has never sustained significant
losses in the syndication of tax credit investments. If market
conditions were to change suddenly and dramatically, however, it
is possible that the syndication risk would entail losses for
the Company.
Business Segments
The Company has three reportable business segments: (1) an
investing segment consisting primarily of subsidiaries producing
tax-exempt interest income through investments in tax-exempt
bonds, interests in bond securitizations, taxable loans and
derivative financial instruments; (2) a tax credit equity
segment that primarily generates fees by providing tax credit
equity syndication and asset management services; and (3) a
real estate finance segment that primarily generates taxable fee
income by providing loan
2
servicing, loan origination, advisory and other related
services. Prior to the acquisition of HCI, the tax credit equity
and real estate finance segments were combined and reported as
one segment called the operating segment. Segment results
include all direct revenues and expenses of each segment and
allocations of indirect expenses based on specific
methodologies. The Company’s reportable segments are
strategic business units that primarily generate different
income streams and are managed separately.
For the years ended December 31, 2004 and 2003, the
Company’s total income, net income and identifiable assets
have been distributed among the following segments:
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For the year ended December 31, | |
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2004 | |
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2003 | |
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Real Estate | |
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Real Estate | |
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Tax | |
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Investing | |
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Finance | |
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Tax Credit | |
|
Adjustments(1) | |
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Total | |
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Investing | |
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Finance | |
|
Credit | |
|
Adjustments(1) | |
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Total | |
| (in thousands) |
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Total operating income
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$ |
109,336 |
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$ |
58,787 |
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$ |
71,480 |
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|
$ |
(21,197 |
) |
|
$ |
218,406 |
|
|
$ |
92,965 |
|
|
$ |
49,333 |
|
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$ |
44,595 |
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$ |
(15,408 |
) |
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$ |
171,485 |
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Net income (loss)
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63,431 |
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(9,271 |
) |
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|
(24,630 |
) |
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|
(2,493 |
) |
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|
27,037 |
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|
78,930 |
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(495 |
) |
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(3,330 |
) |
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(2,610 |
) |
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|
72,495 |
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|
Identifiable assets
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1,688,233 |
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760,713 |
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1,129,345 |
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(267,961 |
) |
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3,310,330 |
|
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1,476,420 |
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|
|
601,618 |
|
|
|
424,854 |
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(253,273 |
) |
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|
2,249,619 |
|
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| (1) |
Represents origination fees on purchased investments that are
deferred and amortized into income over the life of the
investment, and intercompany interest, expense, receivables and
payables that are eliminated in consolidation. |
Employees
As of March 2, 2005, the Company had 433 employees.
The Company is not a party to any collective bargaining
agreement.
Item 2. Properties.
The Company leases office space as follows:
Baltimore, Maryland. In October 2003, the Company
relocated its corporate offices in Baltimore. The office space
contains 21,283 square feet. In the third quarter of 2004, the
Company exercised its option to expand into an additional
13,045 square feet of space in the same building. This
lease expires in January 2014.
Clearwater, Florida. In January 2001, the Company
negotiated a lease in Clearwater. The office space contains
36,004 square feet and the lease expires in December 2005.
Tampa, Florida. In January 2005, the Company negotiated a
new lease in Tampa. The office space contains 34,484 square
feet. This lease expires in March 2016.
Boston, Massachusetts. In July 2003, the Company assumed
a lease for 36,982 square feet of office space in connection
with the acquisition of HCI. In the fourth quarter of 2004, the
Company exercised its option to expand into an additional 11,762
square feet of office space in the same building. This lease
expires July 2007.
The Company also leases office space for its regional offices in
Chicago, Illinois; Dallas, Texas; Detroit, Michigan; Washington
D.C.; Atlanta, Georgia; Providence, Rhode Island; San Francisco,
California; San Diego, California; Boulder, Colorado; and New
York, New York. The Company believes its facilities are suitable
for its requirements and are adequate for its current and
contemplated future operations.
Item 3. Legal Proceedings.
The Company is not a party to any material litigation or
proceeding, or to the best of its knowledge, any threatened
litigation or legal proceedings, which, in the opinion of
management, individually or in the aggregate, would have a
material adverse effect on its results of operations or
financial condition.
Item 4. Submission of Matters to a Vote of Security
Holders.
No matter was submitted to a vote of the Company’s
shareholders during the three months ended December 31,
2004.
3
PART II
Item 5. Market For Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.
The following table sets forth the high and low sale prices per
common share as reported by the New York Stock Exchange for each
calendar quarter in 2004 and 2003 and the distributions declared
with respect to such shares allocable to such period.
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Common Stock | |
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Market Price | |
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Distributions | |
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High | |
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Low | |
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Declared | |
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2004:
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Fourth Quarter
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$ |
27.21 |
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$ |
25.10 |
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$ |
0.4725 |
|
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Third Quarter
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|
25.26 |
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|
23.35 |
|
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|
0.4675 |
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Second Quarter
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|
25.74 |
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|
22.41 |
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|
0.4625 |
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First Quarter
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26.11 |
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24.60 |
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|
0.4575 |
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2003:
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Fourth Quarter
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$ |
24.94 |
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$ |
23.60 |
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$ |
0.4525 |
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Third Quarter
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26.05 |
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|
23.25 |
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|
0.4500 |
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Second Quarter
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26.25 |
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|
23.53 |
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|
0.4475 |
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First Quarter
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|
25.99 |
|
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|
22.90 |
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|
0.4450 |
|
As of March 2, 2005, there were approximately 2,671 holders
of record of common shares.
It is the Company’s current policy to pay distributions to
its holders of common shares quarterly in February, May, August
and November.
Description of Shares
Since March 2002, the common shares have been MuniMae’s
only outstanding capital securities. The common shares have no
par value. At December 31, 2004, 39,471,099 common shares
were authorized. The holders of the common shares are entitled
to distributions as and when declared by the Board of Directors
out of funds legally available for that purpose. The
Company’s current policy is to maximize shareholder value
through increases in cash distributions to shareholders. The
Company’s Board of Directors declares quarterly
distributions based on management’s recommendation, which
itself is based on evaluation of a number of factors, including
the Company’s retained earnings, business prospects and
available cash.
The common shares are not redeemable (except pursuant to certain
anti-takeover provisions), and upon liquidation share ratably in
any assets remaining after payments to creditors. The holders of
the common shares voting as a single class have the right to
elect the directors of the Company and have voting rights with
respect to a merger or consolidation of the Company (in which it
is not the surviving entity) or the sale of substantially all of
its assets, the removal of a director, the dissolution of the
Company and certain anti-takeover provisions. Each common share
entitles its holder to cast one vote on each matter presented
for shareholder vote.
Prior to March 2002, MuniMae had four types of shares
outstanding: preferred shares, preferred capital distribution
shares (“preferred cd shares”), term growth
shares and common shares. These shares differed principally with
respect to allocation of income and cash distributions, as
provided by the terms of MuniMae’s Operating Agreement.
MuniMae was required to distribute to the holders of preferred
shares and preferred cd shares cash flow attributable to such
shares as defined in MuniMae’s Operating Agreement. MuniMae
was required to distribute 2.0% of the net cash flow to the
holders of term growth
4
shares. The balance of the Company’s cash flow was
available for distribution to the holders of the common shares.
MuniMae’s Operating Agreement provided that the preferred
shares and the preferred cd shares were subject to partial
redemption when any bond attributable to the shares was sold, or
beginning in the year 2000, when any bond attributable to the
shares reached par value based on an appraisal.
Between December 2000 and January 2002, all of the bonds
attributable to the preferred shares and preferred cd shares
were either paid off, sold and/or reached par value. As a
result, in March 2002, MuniMae redeemed the last outstanding
preferred shares and preferred cd shares. The Operating
Agreement also required that the term growth shares be redeemed
after the last preferred share was redeemed. As a result, the
term growth shares, which had no residual value, were also
redeemed in 2002.
The preferred shares and the preferred cd shares were not listed
on any national security exchanges and there was no established
public trading market for these shares.
Securities Authorized for Issuance under Equity Compensation
Plans
The following table sets forth information regarding
MuniMae’s securities authorized for issuance under the
Company’s equity compensation plans as of December 31,
2004.
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Number of securities | |
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remaining available for | |
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future issuance under | |
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Number of securities to | |
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Weighted-average | |
|
equity compensation | |
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be issued upon exercise | |
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exercise price of | |
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plans (excluding | |
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of outstanding options, | |
|
outstanding options, | |
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securities reflected in | |
| Plan Category |
|
warrants and rights(1) | |
|
warrants and rights | |
|
first column) | |
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Equity compensation plans approved by security holders:
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Non-employee director’s share plans
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152,000 |
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$ |
22.75(2 |
) |
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412,922 |
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Employee share incentive plans
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638,008 |
(3) |
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$ |
17.59(2 |
) |
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1,683,222 |
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Equity compensation plans not approved by security holders
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— |
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— |
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Total
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790,008 |
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|
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2,096,144 |
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| (1) |
Does not include any deferred shares which have already vested,
as such shares are already reflected in the Company’s
common shares outstanding. |
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| (2) |
Represents the weighted-average exercise price of the
outstanding stock options. |
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| (3) |
Includes 199,073 unvested deferred shares and 438,935 stock
options. |
5
Item 6. Selected Financial Data.
The following selected financial data have been summarized or
derived from the Company’s audited financial statements.
Additional financial information is set forth in the audited
consolidated financial statements and notes thereto contained in
“Item 8. Financial Statements and Supplementary
Data.”
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As of and for the year ended December 31, | |
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2004(9) | |
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2003(6) | |
|
2002 | |
|
2001 | |
|
2000 | |
| (in thousands) |
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INCOME STATEMENT DATA:
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Interest income
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$ |
134,399 |
|
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$ |
111,005 |
|
|
$ |
108,597 |
|
|
$ |
92,227 |
|
|
$ |
79,225 |
|
|
Fee income
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|
66,048 |
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|
|
60,480 |
|
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|
26,057 |
|
|
|
28,956 |
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|
|
19,308 |
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Net rental income
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|
17,959 |
|
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|
— |
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— |
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— |
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— |
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Total income
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|
218,406 |
|
|
|
171,485 |
|
|
|
134,654 |
|
|
|
121,183 |
|
|
|
98,533 |
|
|
Interest expense
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|
69,884 |
|
|
|
44,528 |
|
|
|
36,596 |
|
|
|
30,696 |
|
|
|
31,152 |
|
|
Interest expense on debentures and preferred shares(1)
|
|
|
17,318 |
|
|
|
6,189 |
|
|
|
— |
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|
— |
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|
— |
|
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Operating expenses
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|
|
107,103 |
|
|
|
57,076 |
|
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|
34,154 |
|
|
|
33,409 |
|
|
|
24,249 |
|
|
Depreciation and amortization
|
|
|
14,159 |
|
|
|
7,492 |
|
|
|
1,857 |
|
|
|
2,509 |
|
|
|
1,887 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
208,464 |
|
|
|
115,285 |
|
|
|
72,607 |
|
|
|
66,614 |
|
|
|
57,288 |
|
|
Net gain on sale of loans
|
|
|
3,393 |
|
|
|
4,864 |
|
|
|
3,407 |
|
|
|
3,477 |
|
|
|
2,127 |
|
|
Net gain on sale of tax-exempt investments
|
|
|
304 |
|
|
|
2,133 |
|
|
|
4,896 |
|
|
|
2,396 |
|
|
|
192 |
|
|
Net gain on sale of investments in tax credit equity partnerships
|
|
|
3,019 |
|
|
|
2,747 |
|
|
|
282 |
|
|
|
2,322 |
|
|
|
— |
|
|
Net loss on derivatives
|
|
|
(219 |
) |
|
|
(1,919 |
) |
|
|
(24,474 |
) |
|
|
(7,935 |
) |
|
|
— |
|
|
Impairments and valuation allowances
|
|
|
(7,141 |
) |
|
|
(6,983 |
) |
|
|
(730 |
) |
|
|
(3,229 |
) |
|
|
(1,508 |
) |
|
Net losses from equity investments in partnerships
|
|
|
(169,404 |
) |
|
|
(3,173 |
) |
|
|
(3,057 |
) |
|
|
(1,279 |
) |
|
|
— |
|
|
Income tax (expense) benefit
|
|
|
(2,737 |
) |
|
|
138 |
|
|
|
(1,484 |
) |
|
|
(1,383 |
) |
|
|
(2,006 |
) |
|
Net income (expense) allocable to minority interest
|
|
|
178,280 |
|
|
|
(6,032 |
) |
|
|
(11,938 |
) |
|
|
(10,779 |
) |
|
|
(8,475 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,437 |
|
|
|
47,975 |
|
|
|
28,949 |
|
|
|
38,159 |
|
|
|
31,575 |
|
|
Discontinued operations
|
|
|
11,080 |
(7) |
|
|
25,748 |
(5) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Cumulative effect of a change in accounting principle
|
|
|
520 |
(8) |
|
|
(1,228 |
)(2) |
|
|
— |
|
|
|
(12,277 |
)(3) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,949 |
|
|
$ |
25,882 |
|
|
$ |
31,575 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,796 |
|
|
$ |
23,847 |
|
|
$ |
29,076 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares (diluted earnings per share before discontinued
operations and cumulative effect of accounting change)
|
|
$ |
0.44 |
|
|
$ |
1.61 |
|
|
$ |
1.13 |
|
|
$ |
1.66 |
|
|
$ |
1.62 |
|
|
Common shares (diluted earnings per share)
|
|
$ |
0.78 |
|
|
$ |
2.44 |
|
|
$ |
1.13 |
|
|
$ |
1.09 |
|
|
$ |
1.62 |
|
6
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of and for the year ended December 31, | |
| |
|
| |
| |
|
2004(9) | |
|
2003(6) | |
|
2002 | |
|
2001 | |
|
2000 | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
BALANCE SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in tax-exempt bonds and interests in bond
securitizations, net
|
|
$ |
1,275,748 |
|
|
$ |
1,043,973 |
|
|
$ |
781,384 |
|
|
$ |
629,755 |
|
|
$ |
500,190 |
|
|
Loans receivable, net
|
|
|
630,939 |
|
|
|
552,376 |
|
|
|
461,448 |
|
|
|
440,031 |
|
|
|
349,291 |
|
|
Investments in partnerships
|
|
|
827,273 |
(9) |
|
|
282,492 |
|
|
|
99,966 |
|
|
|
5,393 |
|
|
|
— |
|
|
Investment in derivative financial instruments
|
|
|
3,102 |
|
|
|
2,563 |
|
|
|
18,762 |
|
|
|
2,912 |
|
|
|
— |
|
|
Total assets
|
|
|
3,310,330 |
|
|
|
2,249,619 |
|
|
|
1,552,918 |
|
|
|
1,289,276 |
|
|
|
987,882 |
|
|
Notes payable
|
|
|
880,224 |
|
|
|
663,544 |
|
|
|
460,449 |
|
|
|
420,063 |
|
|
|
329,159 |
|
|
Mortgage notes payable
|
|
|
132,237 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Short-term debt
|
|
|
413,157 |
|
|
|
371,881 |
|
|
|
219,945 |
|
|
|
78,560 |
|
|
|
41,290 |
|
|
Long-term debt
|
|
|
164,014 |
|
|
|
172,642 |
|
|
|
137,832 |
|
|
|
134,881 |
|
|
|
70,899 |
|
|
Subordinate debentures
|
|
|
84,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Preferred shares subject to mandatory redemption(1)
|
|
|
168,000 |
|
|
|
168,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Tax credit equity guarantee liability
|
|
|
186,778 |
|
|
|
151,326 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Investment in derivative financial instruments
|
|
|
4,923 |
|
|
|
15,287 |
|
|
|
49,359 |
|
|
|
18,646 |
|
|
|
— |
|
|
Minority interest in subsidiary companies
|
|
|
404,586 |
(9) |
|
|
31 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Preferred shareholders’ equity in a subsidiary company(1)
|
|
|
71,031 |
|
|
|
— |
|
|
|
160,465 |
|
|
|
160,645 |
|
|
|
137,664 |
|
|
Total shareholders’ equity
|
|
|
672,935 |
|
|
|
641,835 |
|
|
|
487,064 |
|
|
|
436,708 |
|
|
|
364,783 |
|
| |
|
CASH DISTRIBUTIONS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
For the year ended December 31, paid quarterly(4)
|
|
$ |
1.8600 |
|
|
$ |
1.7950 |
|
|
$ |
1.7550 |
|
|
$ |
1.7150 |
|
|
$ |
1.6725 |
|
|
|
| (1) |
As a result of the adoption of Statement of Financial Accounting
Standards (“FAS”) No. 150,
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity”
(“FAS 150”), the Company has reclassified
the liquidation preference value of its preferred
shareholders’ equity of $168.0 million to a separate line
in the liability section of the consolidated balance sheets. In
addition, offering costs of $7.5 million related to these
preferred shares have been reclassified to other assets and are
being amortized through the redemption dates of the preferred
shares. Amounts previously classified as income allocable to
preferred shareholders are now recorded as interest expense. |
| |
| (2) |
As a result of the adoption of Financial Accounting Standards
Board’s (“FASB”) Financial Interpretation
No. 46, “Consolidation of Variable Interest
Entities” (“FIN 46”), the Company
determined its residual interests in bond securitizations
represented equity interests in variable interest entities
(“VIEs”), and the Company was the primary
beneficiary of the VIEs and, therefore, needed to consolidate
the securitization trusts. The cumulative effect of adopting FIN
46 was a decrease to net income of approximately
$1.2 million as of December 31, 2003. |
| |
| (3) |
The Company has several types of financial instruments that meet
the definition of a derivative financial instrument under
Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging
Activities” and Statement of Financial Accounting
No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities” (collectively,
“FAS 133”), including interest rate swaps,
put option contracts and total return swaps. FAS 133 requires
the Company’s investment in derivative financial
instruments be recorded on the balance sheet with changes in the
fair value of these instruments recorded in current earnings. As
of January 1, 2001, the Company’s put option contracts
were recorded on the balance sheet with a fair value of zero and
the Company’s interest rate swaps and total return swaps
were reclassified to trading securities and those with a
negative balance were reflected as liabilities on the balance
sheet. The cumulative effect of adopting FAS 133 was a decrease
to net income of approximately $12.3 million as of
January 1, 2001. |
| |
| (4) |
This amount represents total distributions declared for the year. |
| |
| (5) |
During 2003, the Company acquired a property by deed in lieu of
foreclosure. This property previously served as collateral for a
tax-exempt bond held by the Company. The Company sold the
property for net proceeds of $38.1 million, which resulted
in a |
7
|
|
|
$26.8 million gain. The
$26.8 million gain and $1.0 million of losses from
operations of the property were classified as discontinued
operations in the consolidated statements of income.
|
| |
| (6) |
The 2003 column includes six months
of income and expense from HCI, which was acquired July 1,
2003.
|
| |
| (7) |
During 2004, the Company acquired a
property by deed in lieu of foreclosure. This property
previously served as collateral for a tax-exempt bond held by
the Company. The company sold the property for net proceeds of
$16.2 million, which resulted in a $11.1 million gain.
The $11.1 million gain on the property was classified as
discontinued operations in the consolidated statements of income.
|
| |
| (8) |
Upon adoption of Financial
Accounting Standards Board’s Financial Interpretation
No. 46 (Revised), “Consolidation of Variable Interest
Entities” (“FIN 46R”), in March 2004,
the Company determined that it was the primary beneficiary in
certain of the tax credit equity funds it originated where there
are multiple limited partners. As a result, the Company
consolidated these equity investments at March 31, 2004.
The cumulative effect of adopting FIN 46R was an increase to net
income of approximately $0.5 million as of March 31,
2004.
|
| |
| (9) |
The decrease in net income and
increase in investments in partnerships and minority interest in
subsidiary companies, is primarily attributable to the
consolidation of tax credit equity funds pursuant to
FIN 46R and the financing method of accounting.
|
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
General Business
The Company provides debt and equity financing to developers of
multifamily housing and other real estate investments. The
Company invests in tax-exempt bonds, or interests in bonds,
issued by state and local governments or their agencies or
authorities to finance multifamily housing developments. These
tax-exempt bonds are not general obligations of state and local
governments, or the agencies or authorities that issue the
bonds. The multifamily housing developments, as well as the
rents paid by the tenants, typically secure these investments.
The Company also invests in other housing-related debt and
equity investments, including equity investments in real estate
operating partnerships; tax-exempt bonds, or interests in bonds,
secured by student housing or assisted living developments; and
tax-exempt bonds issued by community development districts to
finance the development of community infrastructure supporting
single-family housing, mixed use and commercial developments and
secured by specific payments or assessments pledged by the local
improvement district that issues the bonds. Interest income
derived from the majority of these bond investments is exempt
income for Federal income tax purposes. Real estate finance
activities include the origination of, investment in and
servicing of investments in multifamily housing, both for the
Company’s own account and on behalf of third parties. These
investments generate income that is includable income for
Federal income tax purposes.
The Company is also a tax credit syndicator. As a syndicator,
the Company acquires and transfers to investors interests in
partnerships that receive and distribute to investors low-income
housing tax credits. The Company earns syndication fees on the
placement of these interests with investors. The Company also
earns fees for providing guarantees on certain tax credit equity
funds and for managing the low-income housing tax credit equity
funds it has syndicated.
While the Company expects continued growth in taxable fee income
and taxable interest on loans in 2005, tax-exempt interest on
bonds and interests in bond securitizations is expected to
continue to account for a substantial part of the Company’s
cash flow and distributions to shareholders.
MuniMae was organized in 1996 as a Delaware limited liability
company. As a limited liability company, the Company combines
many of the limited liability, governance and management
characteristics of a corporation with the pass-through income
features of a partnership. Since MuniMae is classified as a
partnership for Federal income tax purposes, MuniMae is not
itself subject to Federal and, in most cases, state and local
income taxes. Instead, each shareholder must include his or her
distributive share of MuniMae’s income, deductions and
credits on the shareholder’s income tax return. Most of the
Company’s real estate finance and tax credit equity
syndication activities are conducted through subsidiaries
classified as corporations for Federal income tax purposes,
which do not have the pass-through income features of a
partnership and, as a result, are subject to Federal, state and
local income taxes.
8
Acquisition of Housing and Community Investing Business of
Lend Lease Real Estate Investments
On July 1, 2003, the Company acquired the Housing and
Community Investing (“HCI”) business of Lend
Lease Real Estate Investments for $102.0 million in cash
($105.3 million including acquisition costs). HCI is a
syndicator of low-income housing tax credit equity investments.
The HCI business is owned by MMA Financial TC Corp.
(“TC Corp”), a wholly owned subsidiary of the
Company, and the Company’s results for 2003 reflect six
months of activity from TC Corp.
Investing Segment
The Company originates for its own account and for others
investments in tax-exempt bonds and taxable loans secured
primarily by non-recourse mortgage loans on affordable and
market rate multifamily housing. Tax-exempt bonds are issued by
state and local government authorities to finance real estate,
including multifamily housing developments or other types of
real estate.
The Company invests in other housing-related securities,
including CDD bonds. The Company also invests in tax-exempt
bonds, or interests in bonds, secured by student and senior
housing developments.
The Company may from time to time make taxable equity
investments for its own account in income-producing real estate
operating partnerships. To date, the Company’s equity
investments have been made in partnership with CAPREIT, Inc. and
its affiliates.
The Company’s sources of capital to fund its investing
activities include proceeds from equity and debt offerings,
securitizations, loans from warehousing facilities with various
pension funds and commercial banks and draws on lines of credit.
The Company earns interest income from its investments in
tax-exempt bonds and taxable loans. The Company also earns
origination, construction administration and servicing fees
through subsidiaries classified as corporations for Federal
income tax purposes for originating and servicing the tax-exempt
bonds.
The Company’s strategy currently includes the maintenance
and expansion of a diversified portfolio of tax-exempt bonds and
related investments, thereby increasing the interest income
earned by the Company. The Company’s business plan includes
originating $450.0 million to $650.0 million in
tax-exempt bonds and related investments in 2005. For the years
ended December 31, 2004, 2003 and 2002, the Company
structured $401.6 million, $220.9 million and
$144.9 million, respectively, in tax-exempt bond
transactions.
Tax Credit Segment
The Company acquires and transfers to investors interests in
partnerships that provide low-income housing tax credits. The
Company earns syndication fees on the placement of these
interests with investors. In conjunction with the sale of these
partnership interests, the Company may provide performance
guarantees with respect to the underlying real estate project
partnerships holding the real estate projects owned by the tax
credit equity funds (“Project Partnerships”) or
guarantees to the fund investors. The Company earns fees for
providing these guarantees. The Company also earns asset
management fees for managing the low-income housing tax credit
equity funds syndicated. The Company also acts as general
partner of the tax credit equity funds and receives a share of
cash distributions that may be distributed to the tax credit
equity funds’ partners pursuant to a sale of the Project
Partnerships or their assets. The Company’s general partner
interests in tax credit equity funds range from 0.1% to 1.0%.
The Company, through a subsidiary, acquires limited partner
interests in Project Partnerships. As investor capital is raised
and investors are admitted as limited partners in, or
subsequently contribute additional capital to, the tax credit
equity funds, the tax credit equity funds acquire those Project
Partnership limited partner interests from the subsidiary. The
Company evaluates these transactions as real estate
transactions, notwithstanding the fact that it is acquiring and
transferring limited partner interests and not the underlying
real property itself. The Company does not transfer options or
contracts to buy properties in its tax credit syndication
business.
9
The Company’s sources of capital to fund its syndication
activities include draws on lines of credit, proceeds from debt
and equity offerings and working capital. The Company earns
syndication, asset management and guarantee fees in conjunction
with its syndication transactions.
The Company significantly grew its syndication business in 2003
through the acquisition of HCI. The Company syndicated equity
investments totaling $1.1 billion, $555.1 million and
$152.4 million, for the years ended December 31, 2004,
2003 and 2002, respectively. The Company’s 2005 business
plan includes syndicating $900.0 million to
$1.1 billion of equity investments in low-income housing
tax credits.
Real Estate Finance Segment
The Company engages in a variety of real estate finance
activities. These activities include the origination, investment
in and servicing of investments in multifamily housing and other
real estate investments, both for its own account and on behalf
of third parties.
The Company originates equity financing and taxable
construction, permanent and supplemental loans to the
multifamily housing industry. Supplemental loans include:
|
|
|
| |
• |
Pre-development loans, which are project-specific short-term
loans for qualifying, early stage pre-development expenditures
and are structured to be repaid by the first installments of
equity or construction financing; and |
| |
• |
Bridge and other loans, which have expenditure purposes and
sources of repayment that may or may not be limited to a single
project. Bridge and other loans are repaid with general
operating cash flow of the development or other capital sources
of the borrower, including cash flows from other investments. |
Collateral for the supplemental loans can take many forms,
including a mortgage against land or other real estate, an
assignment of syndication proceeds, an assignment and pledge of
developer fees, an assignment and pledge of cash flows from
properties, a corporate guarantee and a personal guarantee.
The Company’s sources of capital to fund its real estate
finance activities include (1) warehousing facilities and
short-term lines of credit with commercial banks and finance
companies, (2) debt and equity financings, either through
the Midland Affordable Housing Group Trust (the “Group
Trust”) or the Midland Multifamily Equity REIT
(“MMER”) and (3) working capital. The
Company earns income from the difference between the interest
charged on its loans and the interest due under its notes
payable and other funding sources. The Company also earns
(1) origination fees, (2) loan servicing fees, or in
the case of construction loans, construction administration fees
and (3) guarantee and other fees in cases where the Company
provides credit support to the obligations of a borrower to a
third party.
The Company conducts real estate finance activities through
certain subsidiaries that originate loans on behalf of, or in
conjunction with, the following entities and their respective
programs: Fannie Mae Delegated Underwriting and Servicing
(“DUS”) program; Government National Mortgage
Association (“GNMA”) — GNMA Mortgage
Backed Security program; Federal Housing Administration
(“FHA”) and U.S. Department of Housing and
Urban Development (“HUD”)
— HUD’s Multifamily Accelerated Processing
program; and Federal Home Loan Mortgage Corporation
(“Freddie Mac”) — Targeted Affordable
Housing program. These entities’ programs provide an
important source of liquidity to the Company. Typically, the
loans originated in conjunction with these programs are
underwritten and structured in accordance with strict financial
requirements set by the sponsoring entity that the
Company’s subsidiaries must abide by, including maintaining
a minimum net worth, liquidity and insurance coverages, and
collateral pledges. Certain programs require the Company to bear
a portion of losses incurred on underlying loans. As a Fannie
Mae DUS lender, the Company underwrites and originates
multifamily housing loans in accordance with Fannie Mae’s
underwriting guidelines and sells those loans directly to Fannie
Mae. For certain loans made under the DUS program, MMA Financial
Holdings, Inc. (together with its subsidiaries,
“MFH”) and formerly Midland Financial Holdings,
Inc. , a wholly owned subsidiary of the Company, is indemnified
by the Group Trust against losses it may incur in
10
connection with its servicing of $316.3 million of these
loans. As of December 31, 2004, the Company had not
incurred any losses on this portfolio of loans. In addition, at
times the Company retains the servicing rights attached to the
loans.
During 2003, the Company also began originating permanent loans
through other mortgage conduits. These other mortgage conduits
provide an alternative liquidity strategy for the delivery of
permanent loans. These conduits are not contractually obligated
to purchase any loans.
The Company has grown its real estate finance business by
increasing production levels, which, in turn, is expected to
increase the fees generated by origination services and loan
servicing fees.
The Company’s business plan includes originating
$1.3 billion to $1.5 billion in taxable construction,
permanent and supplemental loans, agency bonds and third party
equity financing in 2005. The following table shows the
Company’s originations in its real estate finance business
for the years ended December 31, 2004, 2003 and 2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (in thousands) |
|
| |
|
| |
|
| |
|
Transaction Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$ |
355,673 |
|
|
$ |
254,475 |
|
|
$ |
338,202 |
|
|
Taxable permanent loans
|
|
|
459,084 |
|
|
|
348,376 |
|
|
|
351,868 |
|
|
Supplemental loans
|
|
|
54,527 |
|
|
|
57,956 |
|
|
|
76,154 |
|
|
Agency bonds
|
|
|
147,015 |
|
|
|
29,510 |
|
|
|
21,455 |
|
|
Third-party equity financing
|
|
|
26,607 |
|
|
|
59,637 |
|
|
|
47,643 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,042,906 |
|
|
$ |
749,954 |
|
|
$ |
835,322 |
|
| |
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
As noted above, the Company relies on the regular availability
of capital from equity and debt offerings, securitization
transactions, bank lines of credit, pension funds and government
sponsored enterprises (“GSEs”) to finance its
growth. In 2004, the Company completed one common share
offering, one offering of preferred shares of a subsidiary and
two debt offerings and diversified its access to securitization
capital to fund its growth in the tax-exempt bond business. The
two debt offerings were completed through the issuance of trust
preferred securities. The Company also expanded its access to
capital through an expansion of its bank and other lines of
credit and the establishment of new syndicated bank lines of
credit to fund its real estate finance activities and tax credit
equity business. The Company’s sources of capital are
discussed below.
The Company expects to meet its cash needs in the short-term,
which consist primarily of funding of new investments, payment
of distributions to shareholders, operating expenses, funding
the warehousing of operating partnerships for syndication
activities and funding of real estate finance activities, from
securitization transactions, equity and debt offering proceeds,
cash on hand and bank lines of credit. To continue to grow these
activities, the Company will need to increase its access to
capital in 2005 and future years. The Company expects it will
need approximately $700.0 million to $900.0 million in
new net capital including approximately $100.0 million of
off balance sheet securitizations to meet its 2005 production
targets for its lending and tax credit equity businesses. In
2005, the Company expects to generate proceeds through the
expansion of existing and new debt facilities, the issuance of
privately placed preferred and trust preferred securities and
the issuance of listed common shares. The Company has entered
into discussions with its existing capital providers to increase
their financing commitments. In addition, the Company is seeking
to establish relationships with additional pension funds and to
expand its relationships with GSEs.
11
Equity Offerings
Common Shares
The Company periodically obtains equity capital from public
offerings of common shares.
In February 2005, the Company sold to the public
2.6 million common shares at a price of $26.51 per share
and granted underwriters the option, which was not exercised, to
purchase up to an aggregate of 386,250 common shares to cover
over-allotments at the same price. Net proceeds of the offering
approximated $65.0 million. The net proceeds from this
offering were used for general corporate purposes, including
funding of new investments, paying down debt and working capital.
In March 2004, the Company sold 2.2 million common shares
(including the underwriters’ overallotment option) to the
public at a price of $25.55 per share. Net proceeds of this
offering were $52.5 million and were used for general
corporate purposes, including funding of new investments, paying
down debt and working capital.
In October 2003, the Company sold 3.7 million common shares
(including the entire underwriters’ overallotment option)
to the public at a price of $24.40 per share. Of the
$83.6 million net proceeds, $82.0 million was used to
repay debt incurred in connection with the acquisition of HCI.
The remainder of the proceeds was used for general corporate
purposes.
In February 2003, the Company sold 3.2 million common
shares (including the entire underwriters’ overallotment
option) to the public at a price of $23.60 per share. Net
proceeds of this offering were $71.9 million and were used
for general corporate purposes, including funding of new
investments, paying down debt and working capital.
Preferred Shares
The Company has raised long-term capital from offerings of
preferred shares of MuniMae TE Bond Subsidiary, LLC (“TE
Bond Sub”), an indirect subsidiary of the Company. TE
Bond Sub was established as a vehicle to raise capital through
private placements to institutional investors of preferred
shares that pay tax-exempt distributions. TE Bond Sub sold
$73 million of Series A-2, B-2, C, C-1 and C-2
Cumulative Preferred Shares (collectively, the “Preferred
Shares”) to institutional investors in October 2004. The
assets of TE Bond Sub and its subsidiaries, while indirectly
controlled by MuniMae and thus included in the consolidated
financial statements of the Company, are legally owned by TE
Bond Sub and are not available to the creditors of the Company.
Debt Offerings
The Company has also raised long-term capital from offerings of
preferred securities of MFH Financial Trust I (“MFH
Trust”), a special purpose financing entity formed by
MFH. MFH Trust sold a total of $84.0 million of trust
preferred securities (the “Trust Preferred
Securities”) to institutional investors in May and
September 2004. MFH Trust used the proceeds from the offerings
to purchase junior subordinated debentures issued by MFH (the
“Debentures”). MFH Trust can make distributions
to the holders of the Trust Preferred Securities only if MFH
makes payments on the Debentures. The Debentures are unsecured
obligations and are subordinate to all of MFH’s existing
and future senior debt. MFH loaned the net proceeds from the May
offering to one of its subsidiaries, which in turn used the
proceeds to pay off inter-company indebtedness to the Company.
MFH used the net proceeds from the September offering to repay a
portion of an inter-company loan from the Company. The Company
used these amounts to repay a portion of its indebtedness to
Merrill Lynch, which was incurred in connection with the HCI
acquisition, as well as for general corporate purposes.
12
Securitizations
The Company securitizes assets in order to enhance its overall
return on its investments and to generate proceeds that
facilitate the acquisition of additional investments. The
Company uses various programs to facilitate the securitization
and credit enhancement of its bond investments.
The Company securitizes assets by depositing bonds into a trust
or structuring a transaction whereby a third party deposits
bonds into a trust. The trust issues senior and subordinate
certificates and the Company receives cash proceeds from the
sale of the senior certificates and retains the subordinate
certificates. The interest rate on the senior certificates may
be fixed or variable. If the interest rate is variable, the rate
on the senior certificates is reset weekly by a remarketing
agent. To increase the attractiveness of the senior certificates
to investors, the senior certificates are credit enhanced or the
bond underlying the senior certificates is credit enhanced. The
residual interest retained by the Company is the subordinate
security, which receives the residual interest on the bond after
the payment of all fees and the senior certificate interest. For
certain programs, the counterparty or a third party provides
liquidity to the senior certificates. Liquidity advances are
used to provide bridge funding for the redemption of senior
certificates tendered upon a failure to remarket senior
certificates or in the event of other mandatory tender events.
13
As illustrated by the table below, in establishing and managing
its securitization programs, the Company endeavors to maintain a
diverse array of capital partners:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
December 31, 2004 | |
| (in thousands) |
|
|
|
|
|
|
|
| |
| |
|
|
|
|
|
|
|
(A) | |
|
(B) | |
|
(A) - (B) | |
|
|
| |
|
|
|
|
|
|
|
|
|
Face | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Amount | |
|
|
|
Percentage of | |
| |
|
|
|
Provider of | |
|
|
|
|
|
of Senior | |
|
|
|
Total Senior | |
| |
|
Nature of | |
|
Credit | |
|
Provider of | |
|
Fair Value of | |
|
Security | |
|
|
|
Securities | |
| Sponsor |
|
Senior Security | |
|
Enhancement | |
|
Liquidity | |
|
Total Bonds | |
|
Outstanding | |
|
Difference | |
|
Outstanding(1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
On Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch
|
|
short-term, floating rate, weekly reset(2) |
|
Merrill Lynch or Fannie Mae |
|
|
Merrill Lynch |
|
|
$ |
269,535 |
|
|
$ |
262,512 |
|
|
$ |
7,023 |
|
|
|
38.0 |
% |
|
Freddie Mac
|
|
|
fixed |
|
|
|
Freddie Mac |
|
|
|
Freddie Mac |
|
|
|
87,333 |
|
|
|
63,835 |
|
|
|
23,498 |
|
|
|
9.3 |
|
|
MBIA
|
|
short-term, floating rate, weekly reset |
|
|
MBIA |
|
|
Bayerische Landesbank (BLB) and Landesbank Baden-Wurttenberg (LBBW) |
|
|
134,486 |
|
|
|
138,315 |
|
|
|
(3,829 |
) |
|
|
20.1 |
|
|
Term
|
|
|
fixed |
|
|
MMA Credit
Enhancement I, LLC
through the pledge
of additional bonds |
|
|
N/A |
|
|
|
36,009 |
|
|
|
43,170 |
|
|
|
(7,161 |
) |
|
|
6.3 |
|
|
CDD
|
|
|
fixed |
|
|
|
Compass Bank |
|
|
|
N/A |
|
|
|
43,807 |
|
|
|
41,616 |
|
|
|
2,191 |
|
|
|
6.0 |
|
|
Other
|
|
weekly reset or
fixed |
|
|
Compass Bank |
|
|
|
Compass Bank |
|
|
|
12,823 |
|
|
|
12,330 |
|
|
|
493 |
|
|
|
1.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
583,993 |
|
|
$ |
561,778 |
|
|
$ |
22,215 |
|
|
|
81.5 |
% |
|
Off Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FSA Bonds
|
|
|
fixed |
|
|
|
FSA |
|
|
|
N/A |
|
|
|
121,675 |
|
|
|
66,900 |
|
|
|
54,775 |
|
|
|
9.7 |
|
|
CDD
|
|
|
fixed |
|
|
|
Various |
|
|
|
N/A |
|
|
|
64,668 |
|
|
|
61,005 |
|
|
|
3,663 |
|
|
|
8.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
186,343 |
|
|
$ |
127,905 |
|
|
$ |
58,438 |
|
|
|
18.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
770,336 |
|
|
$ |
689,683 |
|
|
$ |
80,653 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
| (in thousands) |
|
| |
| |
|
(A) | |
|
(B) | |
|
(A) - (B) | |
|
|
| |
|
|
|
Face | |
|
|
|
|
| |
|
|
|
Amount | |
|
|
|
Percentage of | |
| |
|
|
|
of Senior | |
|
|
|
Total Senior | |
| |
|
Fair Value of | |
|
Security | |
|
|
|
Securities | |
| Sponsor |
|
Total Bonds | |
|
Outstanding | |
|
Difference | |
|
Outstanding(1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
On Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch
|
|
$ |
229,320 |
|
|
$ |
220,641 |
|
|
$ |
8,679 |
|
|
|
37.1 |
% |
|
Freddie Mac
|
|
|
87,060 |
|
|
|
64,085 |
|
|
|
22,975 |
|
|
|
10.8 |
|
|
MBIA
|
|
|
139,266 |
|
|
|
138,910 |
|
|
|
356 |
|
|
|
23.4 |
|
|
Term
|
|
|
38,642 |
|
|
|
44,283 |
|
|
|
(5,641 |
) |
|
|
7.4 |
|
|
CDD
|
|
|
43,019 |
|
|
|
41,946 |
|
|
|
1,073 |
|
|
|
7.1 |
|
|
Other
|
|
|
17,866 |
|
|
|
17,740 |
|
|
|
126 |
|
|
|
3.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
555,173 |
|
|
$ |
527,605 |
|
|
$ |
27,568 |
|
|
|
88.8 |
% |
|
Off Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FSA Bonds
|
|
|
117,737 |
|
|
|
67,200 |
|
|
|
50,537 |
|
|
|
11.2 |
|
|
CDD
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
117,737 |
|
|
$ |
67,200 |
|
|
$ |
50,537 |
|
|
|
11.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
672,910 |
|
|
$ |
594,805 |
|
|
$ |
78,105 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
This percentage is calculated by dividing the face amount of the
senior security outstanding from each securitization program by
the total face amount of all senior securities outstanding. |
| |
| (2) |
At December 31, 2004, $15.0 million of senior
securities had a fixed rate for a term of one to three years. |
14
Lines of Credit
The Company relies on short-term lines of credit with commercial
banks and finance companies to finance its growth.
During the first quarter of 2004, the Company obtained a
$70.0 million secured line of credit from Bank of America.
This facility is primarily used to warehouse construction loans.
In addition, this facility has a letter of credit sublimit of
$14.0 million. As of December 31, 2004, borrowings
under this facility totaled $63.5 million.
The Company currently has a $200.0 million line of credit
with Residential Funding Corporation that the Company does not
expect to renew once it comes due during fiscal 2005. As of
December 31, 2004, borrowings under this facility totaled
$128.8 million. The Company is contractually obligated to
pay back borrowings under this facility within six months of
termination. The Company expects to pay back borrowings under
this facility through existing credit facilities or future debt
and equity offerings. During the fourth quarter of 2004, the
Company entered into a new $250.0 million line of credit
with Bank of America as an alternative source of capital. As of
December 31, 2004, borrowings under the new Bank of America
facility totaled $14.1 million.
In addition, the Company increased two of its existing lines of
credit in 2004. A $30.0 million line of credit with United
Bank was increased to $60.0 million, of which
$10.0 million is to be used for the issuance of letters of
credit. The remaining $50.0 million will be used to fund
tax-exempt bonds, taxable construction loans and pre-development
loans. As of December 31, 2004, borrowings under this
facility totaled $10.0 million. Additionally, the Company
has increased its line of credit with Fleet National Bank (Bank
of America) from $125.0 million to $140.0 million in
order to meet the warehousing needs of the tax credit equity
business through September 2005. This facility also has a letter
of credit sublimit of $15.0 million. As of
December 31, 2004, borrowings under this facility totaled
$33.0 million.
For further discussion of letters of credit and related
balances, see the paragraphs below. The following table
summarizes the Company’s borrowings under lines of credit
as of December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
|
|
| |
|
| |
| |
|
|
|
Aggregate | |
|
|
|
Aggregate | |
|
|
| |
|
Principal purpose |
|
facilities | |
|
Balance | |
|
facilities | |
|
Balance | |
| (in thousands) |
|
|
|
| |
|
| |
|
| |
|
| |
|
General bank lines of credit
|
|
Working capital and funding supplemental loans |
|
$ |
80,000 |
|
|
$ |
10,000 |
|
|
$ |
50,000 |
|
|
$ |
35,250 |
|
|
Loan warehousing lines
|
|
Warehousing construction and permanent loans |
|
|
592,000 |
|
|
|
278,364 |
|
|
|
272,000 |
|
|
|
150,883 |
|
|
Tax credit equity warehousing line
|
|
Property acquisition and working capital |
|
|
140,000 |
|
|
|
33,022 |
|
|
|
125,000 |
|
|
|
80,020 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
$ |
812,000 |
|
|
$ |
321,386 |
|
|
$ |
447,000 |
|
|
$ |
266,153 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rates on these lines of credit range from 3.3% to 5.3%
in 2004 and 2.0% to 4.1% in 2003.
Under the terms of the various credit facilities, the Company is
required to comply with covenants including net worth, interest
coverage, leverage, collateral and other terms and conditions.
At December 31, 2004, the Company was in compliance with
all covenants of the facilities listed above.
Letters of Credit
The Company has available letter of credit facilities with
multiple financial institutions. At December 31, 2004, the
Company had outstanding letters of credit of
$159.0 million, which typically provide credit support to
various third parties for real estate activities. These letters
of credit expire at
15
various dates through September 2017. The unused portion of
the letter of credit facilities was $104.3 million at
December 31, 2004.
As disclosed in the guarantee table below, the Company has
provided a guarantee on certain of these letters of credit. The
maximum exposure was $152.5 million as of December 31,
2004.
Pension Funds
At times, the Company secures capital for its real estate
finance business from a group of pension funds with which MFH
has had relationships for over twenty-five years. Through the
Group Trust and MMER, these pension funds provide the Company
with debt financing. In addition, from time to time the pension
funds make direct investments in debt or equity financings
originated by the Company.
The Group Trust was established by a group of pension funds for
the purpose of investing in real estate debt investments. The
Group Trust provides loans and lines of credit to finance a
variety of the Company’s loan products. In addition, the
Group Trust provides credit support for short-term credit
facilities of the Company. As of December 31, 2004, these
credit facilities provided $142.0 million of total
potential capital for the Company’s real estate finance
business. MMER is a Maryland real estate investment trust
established by a group of pension funds including those invested
in the Group Trust. MMER acquires equity interests in market
rate income-producing real estate partnerships and provides the
Company short-term lines of credit to finance the Company’s
lending activities. A subsidiary of MFH is the investment
manager for the Group Trust and MMER and receives advisory fees
for these services. The Company also earns origination fees on
the placement of equity interests in real estate partnerships
with MMER, debt investments with the Group Trust and the
placement of direct equity or debt investments with individual
pension funds.
The following table shows the balance of the Company’s
borrowings from the Group Trust, MMER and direct pension funds
at December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Notes | |
|
Lines of | |
|
|
|
Notes | |
|
Lines of | |
|
|
| |
|
payable | |
|
Credit(1) | |
|
Total | |
|
payable | |
|
Credit | |
|
Total | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Group Trust
|
|
$ |
133,885 |
|
|
$ |
— |
|
|
$ |
133,885 |
|
|
$ |
182,122 |
|
|
$ |
4,713 |
|
|
$ |
186,835 |
|
|
MMER
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,950 |
|
|
|
15,950 |
|
|
Direct pension fund investment
|
|
|
128,389 |
|
|
|
N/A |
|
|
|
128,389 |
|
|
|
70,918 |
|
|
|
N/A |
|
|
|
70,918 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
262,274 |
|
|
$ |
— |
|
|
$ |
262,274 |
|
|
$ |
253,040 |
|
|
$ |
20,663 |
|
|
$ |
273,703 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
At December 31, 2004, the Company’s borrowing
facilities under its lines of credit with the Group Trust and
MMER totaled $160.0 million and $35.0 million,
respectively. The borrowing available through MMER is limited by
MMER’s available cash. |
For the years ended December 31, 2004 and 2003, the Company
structured $26.6 million and $59.6 million,
respectively, in equity investments for MMER and direct pension
fund investments.
Government Sponsored Enterprises
The Company relies on the GSEs as a source of liquidity and
credit enhancement. In addition, at times the Company sells to
GSEs interests in tax credit equity funds. Consequently, the
Company’s results may be impacted by changes in the lending
and investing activities of the GSEs, particularly those that
diminish their appetite for investments in affordable housing or
make their debt rates relatively more expensive and therefore
less attractive to the Company’s developer clients.
Certain construction and permanent loans originated by the
Company are underwritten and structured so as to be eligible for
ultimate placement with GSEs. For the years ended
December 31, 2004 and 2003, the Company delivered
$185.3 million and $91.2 million, respectively, of
loans in conjunction with GSE programs.
16
Other Financings
During 2003, the Company financed the acquisition of HCI through
a $120.0 million secured term credit facility provided by a
syndicate of banks led by the Royal Bank of Canada. The
$120.0 million secured credit facility was repaid by
December 31, 2003 with the proceeds from a common equity
offering and a $38.0 million term loan and total return
swap with Merrill Lynch & Company, Inc. and certain
subsidiaries including Merrill Lynch Capital Services, Inc.
During the fourth quarter of 2004, the $38.0 million term
loan, of which $10.0 million was outstanding, was repaid
and the related total return swap was terminated. The Company
simultaneously executed a new promissory note and swap with
outstanding balances of $30.0 million each. The new
promissory note and swap contain the same terms and interest
rates as the original term loan with the exception of a new
maturity date of November 16, 2006 for the term loan and
April 30, 2005 for the swap.
Leverage
As a result of the acquisition of HCI and the adoption of new
accounting standards, the Company’s on-balance sheet assets
and liabilities increased significantly in 2003 and again in
2004. Due to the acquisition of HCI, the Company has an
investment in guaranteed syndicated tax credit funds. These
funds are subject to Statement of Financial Accounting Standards
No. 66, “Accounting for Sales of Real Estate”
(“FAS 66”). FAS 66 requires
consolidation of certain transactions and financings, including
certain tax credit syndications and securitizations, even those
with respect to which the Company believes it has minimal risk
of loss. As a result of FAS 66, the guaranteed syndicated
tax credit funds have been recorded on the balance sheet of the
Company using finance accounting.
New accounting standards that were adopted by the Company in
2003 and 2004 have significantly impacted the Company’s
leverage. FAS 150 requires the reclassification to debt of
certain securities which were previously classified as preferred
equity interests in a subsidiary. FIN 46 requires the
consolidation of a Company’s equity investment in a
variable interest entity (“VIE”) if the Company
is the primary beneficiary of the VIE and if risks are not
effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the
Company absorbs the majority of the losses of the VIE. The
Company determined its interests in bond securitizations
represented equity interests in VIEs, and the Company was the
primary beneficiary of the VIE and, therefore was required to
consolidate the securitization trusts as of December 31,
2003. In December 2003, FASB approved various amendments to
FIN 46 and released FIN 46R. The Company has general
partnership interests in low-income housing tax credit equity
funds where the respective funds have one or more limited
partners. The determination of whether the Company is the
primary beneficiary of (and must consequently consolidate) a
given tax credit equity fund depends on a number of factors,
including the number of limited partners and the rights and
obligations of the general and limited partners in that fund.
Upon adoption of FIN 46R in March 2004, the Company
determined that it was the primary beneficiary in certain of the
tax credit equity funds it originated where there are multiple
limited partners. As a result, the Company consolidated these
tax credit equity funds at March 31, 2004. At times, the
Company takes ownership of the general partnership interest in
the underlying Project Partnerships in which the tax credit
equity funds hold investments. For those property-level general
partnership interests the Company has discontinued the equity
method of accounting and consolidated the underlying Project
Partnership pursuant to FIN 46R. As of December 31,
2004, the Company recorded approximately $327.0 million of
debt as a result of the consolidation of tax credit equity funds
and Project Partnerships pursuant to FIN 46R. This debt is
nonrecourse to the Company. The effects of FIN 46R
pertaining to the tax credit equity funds and Project
Partnerships are not considered under certain Company debt
covenant compliance computations.
Risk Factors
The following discussion outlines certain general risk factors
affecting the Company. Those risk factors specific to the
Company’s financial instruments are discussed in
“Item 7A. Qualitative and Quantitative Disclosures
about Market Risk.” in this report.
17
In seeking out attractive multifamily and other real
estate-related investment opportunities, the Company competes
directly with a large number of lenders, including banks,
finance companies and other financial intermediaries, and
providers of related services such as portfolio loan servicing.
Certain of the Company’s competitors have substantially
greater financial and operational resources than the Company.
While the Company has historically been able to compete
effectively against such competitors on the basis of its
service, longstanding relationships with developers and a broad
array of product offerings, many of the Company’s
competitors benefit from substantial economies of scale in their
business and have other competitive advantages.
In addition, in seeking permanent financing for their
developments, the Company’s customers generally evaluate a
wide array of taxable and tax-exempt financing options. While
tax-exempt financings offer specific attractions for developers,
they can be more complicated than taxable financings and can
involve ongoing restrictions on the owner’s use of the
property. As a result, the relative attractiveness of tax-exempt
permanent financing may increase or decrease over time based on
the availability and cost of taxable financing. In particular,
the differential in interest expense between tax-exempt and
taxable financing alternatives tends to be lower in a low
interest rate environment, which tends to make the
Company’s tax-exempt multifamily housing bond financings
less attractive to developers than taxable alternatives. While
the Company’s strategic emphasis on tax-exempt financing
will — absent a major change in the
Code — continue, the Company will continue to
expand and diversify its other lines of business.
The Company’s results of operations also could be affected
materially by changes in the performance of the properties
underlying its investments. The Company may receive less income
from its investments than expected due to any number of factors,
including:
|
|
|
| |
• |
Persistent high levels of unemployment and other adverse
economic conditions, either locally, regionally or nationally,
limiting the amount of rent that can be charged for units at the
properties. Adverse economic conditions may also result in a
reduction in timely rent payments or a reduction in occupancy
levels. |
| |
• |
Occupancy and rent levels may decrease due to the construction
of additional housing units or the establishment of rent
stabilization or rent control laws or similar agreements. |
| |
• |
A decline in the level of mortgage interest rates may encourage
tenants in multifamily rental properties to purchase housing,
reducing the demand for rental housing. |
| |
• |
City, state and Federal housing programs that subsidize many of
the properties impose rent limitations and may limit the ability
of the operators of the properties to increase rents. This may
discourage operators from maintaining the properties in proper
condition during periods of rapid inflation or declining market
value of the properties. In addition, the programs may impose
income restrictions on tenants, which may reduce the number of
eligible tenants in the properties and result in a reduction in
occupancy rates. Even if a property is not subject to legal
restrictions on the amount of rent that may be charged to low
and moderate income tenants, rental market conditions and other
factors may result in reduced rents. |
| |
• |
Tenants who are eligible for subsidies or similar programs may
not find the differences in rents between the subsidized or
supported properties and other multifamily rental properties in
the same area to be a sufficient economic incentive to reside at
a subsidized or supported property, which may have fewer
amenities or otherwise be less attractive as a residence. |
| |
• |
Expenses at the property level, including but not limited to
capital needs, real estate taxes and insurance, may increase. |
Periods of economic slowdown or recession that result in
declining property performance, particularly declines in the
value or performance of multifamily properties, may adversely
affect the Company. Any material decline in property values
weakens the collateral value of the properties the Company
invests in, and prolonged poor performance in the rental market,
particularly the affordable housing market segment, could result
in a decline in demand for financing. Additionally, some of the
Company’s income comes from contingent interest on
participating tax-exempt bonds. A decline in the
18
performance of the related multifamily property would likely
have a negative effect on the Company’s cash available for
distribution.
Other governmental policies relating to affordable housing also
directly impact the Company’s business. For example, in
2000 Congress passed legislation increasing the supply of
low-income housing tax credits (“LIHTC”) and
tax-exempt “private activity” bonds. The amount of
LIHTC, which is determined on a state-by-state basis according
to each state’s population, was increased from $1.25 per
capita in 2000 to $1.50 in 2001 and $1.75 in 2002. Also in 2000,
Congress approved a 50% increase in allocations for tax-exempt
and other “private activity” bonds, from $50.00 per
state resident for 2000 to $75.00 for 2002. Current law provides
for inflation-based adjustments to the amount of LIHTC and
tax-exempt bond allocations; accordingly, in 2005, each
state’s LIHTC allocation will be $1.85 per state resident,
and its private activity bond allocation will be $80.00 per
state resident. In addition, each state has minimum amounts of
LIHTC and private activity bond allocations that increase with
inflation. For 2005, the minimum LIHTC allocation is
$2.1 million and the minimum private activity bond
allocation is $239.2 million.
The tax credit business may be directly impacted by governmental
tax policies, which may affect the demand for tax credit equity
investments, or by changes to regulations governing the
availability or allocation of tax credits, which would affect
the supply of tax credit product. Although there is a history of
affordable housing subsidies by the Federal government, changes
in governmental policy could have a significant and adverse
effect on the Company.
To the extent that certain other government programs are enacted
or modified, they may have an impact on the Company’s tax
credit business. Changes that may impact the Company’s tax
credit syndication business include but are not limited to:
passage of a home ownership tax credit program (which is
currently supported by the Bush administration), which may
reduce the supply and/or demand for LIHTC; reduction of funding
for rent supplements, including the HUD voucher program, which
may affect the cash flow and financial performance of LIHTC
properties in funds syndicated by the Company; and significant
changes to the Federal tax code which may reduce the benefits
that investors currently receive from the LIHTC program.
Demand for tax credit products may be impacted by the Community
Reinvestment Act, which requires financial institutions to
invest in affordable housing. As a supplier of investment
products backed by affordable housing, the Company benefits from
the demand for investments that help financial institutions meet
Community Reinvestment Act requirements. Changes in the
Community Reinvestment Act could have a significant and material
effect on the Company by reducing demand for its products.
The Company’s future results are also dependent on the
Company’s maintenance of its relationships with the GSEs
participating in the affordable housing market, particularly
Fannie Mae. The maintenance of the Company’s DUS license
with Fannie Mae is important to the continued productivity and
growth of the Company’s real estate finance operations. As
a DUS lender, the Company is subject to periodic reviews by
Fannie Mae and must comply with a variety of underwriting and
servicing guidelines imposed by Fannie Mae contractually.
Noncompliance or failure to adhere to these guidelines could
result in loss of delegated authority and a revocation of the
Company’s DUS license. Alternatively, Fannie Mae could
impact the value of the DUS license to the Company by either
issuing new DUS licenses to the Company’s competitors or
changing the delegated authority of its DUS lenders or making it
more costly or otherwise more difficult for DUS lenders to
underwrite and service loans on Fannie Mae’s behalf.
In addition, because Fannie Mae and Freddie Mac are the largest
corporate buyers of low-income housing tax credits in the
industry, any change in their appetite for such credits, or the
Company’s loss of either Fannie Mae or Freddie Mac as a
LIHTC customer, could adversely affect the Company’s
syndication business.
The Company’s future results could also be impacted by
deterioration in the credit quality of Fannie Mae and Freddie
Mac, which provide credit enhancement that facilitates the
securitization of certain of the Company’s assets. If
Fannie Mae or Freddie Mac ceased to provide such support, the
Company would
19
have to seek alternative forms of credit support in order to
continue to securitize those assets currently credit enhanced by
Fannie Mae and Freddie Mac. The Company does not have any reason
to believe that either entity will cease to provide such support.
Recently, Fannie Mae and Freddie Mac have been under heavy
scrutiny by the Office of Federal Housing Enterprise Oversight
and Congress and, in the case of Fannie Mae, by the SEC. Both
have experienced accounting problems and changes in top
management. It is possible that the on-going scrutiny of Fannie
Mae and Freddie Mac could result in changes in their regulatory
oversight, accounting practices or special benefits, including
the following: (1) their earnings are exempt from state and
local corporate income taxes; (2) their securities are
exempt from SEC registration requirements; and (3) their
securities are eligible for unlimited investment by Federally
insured thrifts, national banks and state bank members of the
Federal Reserve system. A number of sizeable financial services
companies and trade associations have launched a concerted
effort to limit the growth of the GSEs and spur close
examination of how the benefits of their GSE status are being
employed. While it is impossible to predict what changes will
occur and what their impact will be on the activities of the
GSEs, any changes could conceivably result in a contraction of
the GSEs’ support of the affordable housing market or an
increase to the GSEs’ cost of capital, either of which
could make some of the Company’s products less competitive.
The Company relies on the GSEs as a source of liquidity and
credit enhancement. The Company’s results may be impacted
by changes in the strategic direction of the GSEs, particularly
those that diminish their appetite for investments in affordable
housing. In addition, changes in the GSEs’ charters could
reduce their capital cost advantage, which in turn, could have a
negative impact on the Company.
The pension fund participants in the Group Trust and MMER
provide financial support to the Company’s real estate
finance activities. While the Company believes its relations
with these pension funds are good, it is possible that these
funds will reduce or withdraw their financing commitments in the
future.
The Company’s capital partners require collateral support
for providing capital to the Company. As a result, the Company
posts its assets as collateral to support its borrowings under
notes payable, lines of credit, and securitization facilities.
The degree to which the Company’s investments and other
assets are pledged as collateral varies according to asset
class; however, the Company’s collateral arrangements can
be summarized as follows:
|
|
|
| |
• |
Tax-exempt Bonds. The majority (approximately
$955.9 million carrying value as of December 31, 2004)
of the Company’s tax-exempt bonds are owned in a
subsidiary, TE Bond Sub, which has issued nine series of
cumulative preferred shares with an aggregate redemption value
of $241.0 million. The holders of the preferred shares have
a senior claim to the income from this subsidiary. In addition,
$537.0 million (the majority of which is held in TE Bond
Sub) of the Company’s investments in tax-exempt bonds were
pledged as collateral for securitization facilities, notes
payable and lines of credit as of December 31, 2004. |
| |
• |
Loans Receivable. Substantially all of the Company’s
construction loans (approximately $485.9 million as of
December 31, 2004) are pledged as collateral to support
borrowings under the Company’s notes payable, bank lines,
pension fund credit lines or other credit facilities. Certain of
the Company’s supplemental and permanent loans totaling
$46.7 million and $24.6 million, respectively, as of
December 31, 2004 are pledged as collateral under
short-term bank lines of credit. Certain of the Company’s
other taxable loans totaling $0 as of December 31, 2004 are
pledged for securitization facilities and other programs. |
| |
• |
Restricted Assets. The Company’s restricted assets
include cash and short-term investments pledged as collateral
under terms of the Company’s interest rate swap contracts,
securitizations, certain guarantees and other obligations (see
Note 7 to the Company’s consolidated financial
statements). |
| |
• |
Investments in Partnerships. A portion of the
Company’s investments in partnerships is pledged as
collateral for borrowings under a line of credit. In addition, a
portion of the Company’s investments in partnerships on the
consolidated balance sheets relates to certain tax credit equity
funds where the Company provides a guarantee or otherwise has
continuing involvement with the |
20
|
|
|
| |
|
assets of the fund. Although GAAP required the inclusion of the
properties in these funds in investments in partnerships as of
December 31, 2004, the Company does not own or control
them; therefore, the Company considers these assets to be
restricted. |
The table below shows the proportion of the Company’s total
assets (excluding goodwill and interests in bond securitizations
carried as liabilities), which was either pledged as collateral
or otherwise restricted as of December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| (in millions) |
|
| |
|
| |
|
Tax-exempt bonds pledged
|
|
$ |
537.0 |
|
|
$ |
452.3 |
|
|
Loans receivable pledged
|
|
|
557.2 |
|
|
|
480.1 |
|
|
Restricted assets
|
|
|
72.8 |
|
|
|
75.5 |
|
|
Bonds in securitization trusts
|
|
|
584.0 |
|
|
|
555.2 |
|
|
Residual interests in bond securitizations, net
|
|
|
3.7 |
|
|
|
— |
|
|
Investments in partnerships, pledged
|
|
|
39.1 |
|
|
|
101.8 |
|
|
Investments in partnerships, restricted
|
|
|
149.1 |
|
|
|
110.6 |
|
| |
|
|
|
|
|
|
|
Total
|
|
$ |
1,942.9 |
|
|
$ |
1,775.5 |
|
| |
|
|
|
|
|
|
|
As % of total assets, excluding goodwill and intangible assets
|
|
|
61.1 |
%(1) |
|
|
84.0 |
% |
|
Total assets
|
|
$ |
3,310.3 |
|
|
$ |
2,249.6 |
|
|
Goodwill and intangible assets
|
|
|
(129.0 |
) |
|
|
(134.7 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
3,181.3 |
|
|
$ |
2,114.9 |
|
|
|
| (1) |
This percentage does not take into account the fact that, at
December 31, 2004, the Company’s common equity
interest in TE Bond Sub was pledged as collateral to secure
the Company’s total return swap associated with the
Company’s $30.0 million term loan. Assuming for
purposes of calculating this percentage that additional bond
assets having a fair value of $30.0 million were treated as
having been pledged, the pro forma figure would be 62.0%. |
For several years, the Company has been engaged in a
comprehensive overhaul of its information systems infrastructure
in order to develop scalable, integrated accounting and
financial reporting, loan underwriting, deal management and loan
servicing systems tailored to the Company’s needs and
expected growth profile. As of December 31, 2004, the
Company had: (1) standardized its hardware and internal
communications platforms; (2) upgraded its accounting and
financial systems to an enterprise resource planning system; and
(3) implemented new loan servicing systems to increase the
efficiencies in its permanent and construction loan servicing.
The Company has also invested in asset management software to
move towards a fully integrated system for all assets under
management. Management expects these information systems
upgrades to continue at least through 2005. The Company believes
that successful implementation of the upgrades will increase the
Company’s efficiency in future years; however, delays or
complications in implementation may have an adverse impact on
the Company’s operations.
The operating results from the Company’s tax credit equity
syndication business, which increased significantly as a portion
of its total business as a result of the HCI acquisition, are
expected to fluctuate based on seasonal patterns. The Company
anticipates that its highest revenues from that business
— and thus overall — will occur in the third
and fourth calendar quarters. In addition, seasonality in
tax-exempt bond originations results in higher volume in the
second calendar quarter and especially in the fourth calendar
quarter. Because of the effect of seasonality on the
Company’s business, results for any quarter are not
necessarily indicative of the results that may be achieved for a
full fiscal year and cannot be used to indicate financial
performance for a full fiscal year. Seasonal fluctuations in
cash flow may impact the cash distributions to shareholders on a
quarterly basis.
Substantially all of the Company’s investments are
illiquid. There is no regular trading market for substantially
all of the Company’s investments. This lack of liquidity
would be worse during turbulent market conditions or if any of
the Company’s tax-exempt bonds were determined to be
taxable or go into default. If the Company requires additional
cash during a turbulent market, it may be necessary to sell
21
investments on unfavorable terms. In addition, the illiquidity
associated with the Company’s investments makes them hard
to value and may cause significant changes in the fair value of
the investments, which would be reflected in carrying value and
other comprehensive income. Significant unfavorable changes in
the fair value of the Company’s investments could reduce
the value of its common shares and its ability to pay
distributions to holders of its common shares. Additionally, the
Treasury Department recently released proposed regulations
governing “tax shelter opinions” that could apply to
tax-exempt bonds. If finalized in their current form, the
regulators could cause the opinions or disclosures for
tax-exempt bonds to substantially change, which could affect the
fair market value and liquidity of tax-exempt bonds. Thus the
Company’s ability to realize cash proceeds from these
investments might be reduced, resulting in a decrease in its
ability to pay distributions to holders of its common shares.
The form of the final regulations, their effective date and
their impact on the market for tax-exempt bonds are unclear.
A portion of the Company’s investments are subordinated
securities or interests in bonds that are junior in right of
payment to other bonds, notes or instruments. Among the risks of
these investments are that borrowers may not be able to make
payments on both the senior and the junior interests and that
the value of the underlying asset may be less than the amounts
owed to both the senior and the junior interest holders. As a
consequence, the Company, as a holder of the junior security,
could receive less than the full and timely repayment of its
investment. Moreover, the holders of the senior interests may
control the ability to enforce remedies. Without the consent of
the senior holders, the Company will have limited ability to
take actions that might protect its interests. If the cash flow
with respect to a particular investment is not sufficient to
make full payments on the junior interests, this may adversely
affect the amount of cash that the Company has available to make
distributions to holders of its common shares.
All of the Company’s income is derived from contractual
obligations, and therefore the Company’s income depends on
the performance of the Company’s contractual
counterparties. Some of the Company’s structured
transactions, such as the securitization transactions, are
extremely complex. The Company also engages in limited amounts
of buying and selling of hedging products and mortgage
instruments, including, but not limited to, buying and selling
total return swaps and financial futures contracts and options
on financial futures contracts and trading forward contracts in
order to hedge bond purchase commitments. These instruments are
complex and can produce volatile results, including margin
calls. Hedging and participating in structured transactions,
particularly of a complex nature, exposes the Company to the
credit risks of counterparties who may in certain circumstances
not pay or perform under their contracts. Accordingly, the
Company cannot assure that its investment or hedging strategies
will have the desired results.
The Company has obligations under guarantee and loss sharing
agreements. As part of the Company’s regular
business, it sometimes guarantees obligations of third parties
and agrees to share losses, if any, with investors and other
counterparties. These commitments include guarantees of payment
on bank credit lines, tax indemnities to holders of preferred
shares issued by one of its subsidiaries, guarantees for the
benefit of investors in its tax credit equity syndication
business, guarantees of performance on certain financing and
swap agreements and guarantees of payment and loss sharing
agreements with financial partners. The Company assumes these
obligations to facilitate the completion of some investments it
makes and transactions it structures, and to increase the yield
it offers to shareholders and can realize itself or decrease the
rate charged to the Company by investors or lenders. If the
Company were required to fulfill obligations on one or more of
these commitments, it would adversely affect the amount of cash
that the Company would have available to make distributions to
holders of the Company’s common shares. The Company is a
party to a number of credit facilities and other borrowings that
could have significant adverse effects on its business. This
debt makes it more difficult to obtain additional financing on
favorable terms, and requires the Company to dedicate a
substantial portion of cash flows from operations to the
repayment of principal and interest on debt, imposes operating
and financial restrictions that may impair the Company’s
ability to respond to changing business and economic conditions
or to grow business and makes the Company more vulnerable to
economic downturns. If the Company is unable to generate
sufficient cash flows from operations in the future, it
22
may have to refinance all or a portion of its debt and/or obtain
additional financing. The Company may not be able to obtain
refinancing or additional financing on favorable terms.
The Company has limited recourse upon a tax-exempt bond default
or upon the bankruptcy of a borrower under a mortgage bond.
Although state or local governments or their agencies or
authorities issue the tax-exempt mortgage revenue bonds that the
Company owns (or which underlie many of its investments), the
tax-exempt bonds are not general obligations of any state or
local government. No government is liable under the tax-exempt
bonds, nor is the taxing power of any government pledged to the
payment of principal or interest under the tax-exempt bonds. An
assignment of the related mortgage loan secures each tax-exempt
bond the Company owns. The loan is secured by a mortgage on the
underlying property and an assignment of rents. The owners of
the underlying properties are only liable for the payment of
principal and interest under the mortgage loans to the extent of
the cash flow and sale proceeds from the properties.
Accordingly, the revenue derived from the operation of the
properties and amounts derived from the sale, refinancing or
other disposition of the properties is the sole source of funds
for payment of principal and interest to the Company under the
tax-exempt bonds.
The Company’s revenue may also be adversely affected by the
bankruptcy of a borrower. A borrower under bankruptcy protection
may be able to restructure its debt payment and stop making
mortgage payments.
The Company’s CDD bonds are secured by special assessments
to be paid by the owners of the land being improved as part of
the community development project. The land owners are not
legally bound to pay more than the assessment on their parcel of
land, so if any development does not meet financial expectations
or is otherwise delayed, or in the event of a developer
bankruptcy, there could be a shortfall in the amount of
assessment revenues to pay the bonds.
The Company holds investments that have failed in the past to
meet their debt service obligations and may fail to meet their
obligations again in the future. Additionally, some of the
Company’s tax-exempt bonds have been refunded on terms that
defer, and in certain circumstances reduce, the debt service
obligations on such tax-exempt bonds. The Company generally has
no ability to limit or initiate these refundings. The Company
cannot assure that defaults and refundings will not occur in the
future and that when they do occur, that they will not result in
reduced cash flow from its investments. At December 31,
2004, 2003 and 2002, $185.5 million, $136.7 million
and $115.5 million (face value), respectively, of
tax-exempt bonds and loans were on non-accrual status. Interest
income recognized on these bonds and loans was
$7.8 million, $6.6 million and $9.0 million for
the years ended December 31, 2004, 2003 and 2002,
respectively. Additional interest income that would have been
recognized by the Company had these bonds and loans been on
accrual status was approximately $6.0 million,
$3.7 million and $1.2 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
A decrease in market interest rates may result in a bond issuer
redeeming or a bond borrower prepaying or refinancing the bond
prior to its stated maturity. The Company may not be able to
reinvest the proceeds of any redeemed investment at an
attractive rate of return. This may adversely affect the
Company’s ability to generate sufficient net income to pay
distributions to holders of its common shares. An increase in
market interest rates may lead the Company’s securitization
counterparties or prospective purchasers of its existing
investments to demand a higher annual yield than they currently
receive. This could increase the Company’s cost of capital
and reduce the market value of its investments, and may result
in a reduction, possibly to zero, of interest distributions the
Company receives from its residual trust interests. These
occurrences would adversely affect the amount of cash that the
Company has available to discharge its obligations to the
holders of its common shares. In addition, an increase in market
interest rates could lead to a decrease in the value of some of
its investments. This could cause some counterparties to demand
additional collateral to preserve its existing securitization
facilities. To the extent that additional collateral could not
be provided to satisfy these demands, these securitization
facilities could be terminated, which could also adversely
affect the Company’s financial condition and it may not be
able to generate sufficient net income to pay distributions to
holders of its common shares.
23
Tax-exempt income could decrease if the focus of the
Company’s business changes. If the real estate finance
segment of the business, which generates taxable income,
represents a larger percentage of the Company’s business in
the future or if the Company invests in a larger percentage of
taxable investments, the percentage of net income that is
tax-exempt could decrease significantly. Additionally, the
Company receives interest income on intercompany loans made to
corporate subsidiaries and it also receives dividend income from
corporate subsidiaries. Unlike tax-exempt distributions from a
subsidiary organized as a limited liability company that can act
as a pass through entity, taxable interest income and dividend
income from a corporation are not tax-exempt. The percentage of
net income that is tax-exempt could decrease significantly if,
and to the extent, the Company receives interest or dividends
from corporate subsidiaries. Investors may be less willing to
fund the Company’s operations if the after-tax return on
their investment decreases, which could raise the Company’s
cost of financing and decrease the amount of cash available for
distribution.
The Company’s major policies, including policies with
respect to acquisitions, financing, growth, debt,
capitalization, interest rate risk management and distributions,
are determined by its board of directors. Although the board of
directors has no present intention to broadly change the
Company’s business plan, the board of directors may amend
or revise these and certain other policies from time to time
without a vote of shareholders. Accordingly, shareholders will
have no control over certain changes in the Company’s
policies. Such changes could affect the returns to the
Company’s shareholders.
The Company’s organizational documents contain provisions
that may be deemed to have an anti-takeover effect. These
provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Company’s board of
directors and management and in the policies formulated by the
board of directors and to discourage an unsolicited takeover if
the board of directors determines that such a takeover is not in
the best interests of the Company’s shareholders. These
provisions may, however, have the effect of delaying, deferring
or preventing a takeover attempt that a shareholder might
consider to be in the shareholder’s best interest,
including offers that might result in a premium over market
price for the common shares. These provisions may reduce
interest in the Company as a potential acquisition target or
reduce the likelihood of a change in the Company’s
management or voting control without the consent of the then
incumbent board of directors. In addition, if certain business
combination or share acquisition transactions occur, and the
Company’s special shareholder — Shelter
Development Holdings, Inc., an affiliate of the Company’s
Chairman — does not approve of the transaction, the
special shareholder has the right to withdraw as a shareholder
and, in that event, the Company would be obligated to pay the
withdrawing special shareholder $1.0 million.
The Company business prospects are directly impacted by
governmental tax policies, which affect demand for its debt and
equity financing products as well as investor demand for its
securities. Although there is a history of affordable housing
subsidies by the Federal government, changes in governmental tax
policy could have a significant and material effect on the
Company. The Bush administration has appointed a commission to
investigate and recommend changes in the tax laws. There has
been speculation about what the recommendations will be. It is
possible that there will be some recommendations, which, if
enacted, could have a significant negative impact on the
Company. These impacts could be direct, such as abolition of the
LIHTC, or indirect, by making other investments more attractive
to the Company’s investors, or making the Company’s
debt and equity products less attractive to its customers and
clients. Changes in tax rates could have similar effects, for
example, by making tax-exempt bonds less attractive. There could
also be changes that might create new opportunities for the
Company, such as the enactment of a single-family housing tax
credit. The fact that various proposals are being made and
discussed could cause investors and borrowers to delay entering
into transactions until the likely outcome is known. This could
lead to a reduction in the Company’s transaction volume,
which could negatively impact its operating results, even if no
changes to the Code are ultimately enacted.
On the date of initial issuance of each of the tax-exempt bonds
in which the Company invests, bond counsel, or special tax
counsel, rendered an opinion to the effect that, based on the
Federal income tax law in effect on the date of issuance,
interest on such tax-exempt bonds was excludable from gross
income for Federal income tax purposes, except with respect to
any tax-exempt bond, other than a tax-exempt bond
24
the proceeds of which are loaned to a charitable organization
qualifying as a certain type of tax-exempt organization under
the Federal income tax law, during any period in which such
tax-exempt bond is held by a “substantial user” of the
property or by a “related person” to such substantial
user as such terms are described in the relevant provisions of
the Federal income tax law. These opinions are typically
conditioned on the compliance with state and local usury laws.
For purposes of this discussion, the Company treats Federal
income tax law as a body of authorities consisting of the Code,
Treasury Regulations issued under the Code, administrative
interpretations of the Code and judicial interpretations of the
Code.
Federal income tax law establishes certain requirements which
must be met by the issuer of bonds and certain other persons
subsequent to the issuance of such bonds for interest to remain
excluded from gross income for Federal income tax purposes.
Among these continuing requirements are restrictions on the
investment and use of the bond proceeds and, for bonds the
proceeds of which are loaned to a certain type of tax-exempt
charitable organization, the continued tax-exempt status of such
charitable organization borrower. In addition, the continuing
requirements include income restrictions and compliance with an
arbitrage compliance certificate, regulatory agreement or
similar document. Failure to comply with the continuing
requirements of the Federal income tax law may cause interest on
such bonds to be includable in gross income for purposes of the
Federal income tax law retroactive to the date of issuance,
regardless of when such non-compliance occurs. Each issuer of
the bonds, as well as each conduit borrower of a tax-exempt
bond, has covenanted in an arbitrage compliance certificate,
regulatory agreement or similar document, that it would comply
with certain procedures and guidelines designed to ensure
satisfaction of the continuing requirements of the Federal
income tax law. Failure to comply with these continuing
requirements may cause the interest on such bonds to be
includable in gross income for Federal income tax purposes,
retroactive to the date of issuance, regardless of when such
non-compliance occurs.
Interest payable on certain of the participating tax-exempt
bonds that the Company holds for investment depends upon the
cash flow from, and proceeds upon sale of, the underlying
properties. If the Internal Revenue Service determined that
these participating tax-exempt bonds involved an equity
investment in the respective underlying properties because of
this feature, all or part of the interest on those bonds would
not qualify as tax-exempt interest for Federal income tax
purposes. However, to the Company’s knowledge, the Internal
Revenue Service has not challenged the tax-exempt status of
these participating tax-exempt bonds.
Prior to the acquisition of the participating tax-exempt bonds,
the Company’s predecessor received opinions of counsel to
the effect that, based upon certain assumptions described in the
opinions, more likely than not, each of these tax-exempt bonds
would be treated, for Federal income tax purposes, as
representing indebtedness and that no portion of the tax-exempt
bond or any payments receivable thereunder would be considered
(i) an equity interest in the conduit borrower,
(ii) an equity interest in a venture between the Company
and the conduit borrower or (iii) an ownership interest in
the underlying properties. The Company has received similar
opinions with respect to the participating subordinate
tax-exempt bonds and one additional tax-exempt bond that the
Company acquired afterward.
The original opinions issued with respect to certain of these
tax-exempt bonds indicated that the tax-exempt bonds were, more
likely than not, indebtedness, but included a qualification that
no opinion was expressed with respect to the characterization of
the tax-exempt bonds as indebtedness or equity under
circumstances of a default. With respect to two of these
tax-exempt bonds that have defaulted, but were not refunded, the
Company has not received any updated opinions of counsel with
respect to the issue of whether the underlying tax-exempt bonds
should be treated as equity. With respect to one of these
participating tax-exempt bonds that have defaulted, but were not
refunded, the Company has received an updated opinion of counsel
that the bonds will be treated as indebtedness. Unlike a ruling
from the Internal Revenue Service, however, an opinion of
counsel has no binding effect or official status of any kind,
and no assurances can be given that the conclusions reached in
such opinion will not be contested by the Internal Revenue
Service or, if contested, will be sustained by a court. The
Company will use
25
commercially reasonable efforts to contest any adverse
determination by the Internal Revenue Service on this issue. The
Company will incur additional expenses if it contests any
adverse determination.
The Company will use various accounting and reporting
conventions to determine each shareholder’s allocable share
of income, including any market discount taxable as ordinary
income, gain, loss and deductions. The Company’s allocation
provisions will be respected for Federal income tax purposes
only if they are considered to have a “substantial economic
effect” or are in accordance with the partners’
“interest in the partnership.” There is no assurance
that the Internal Revenue Service will agree with the
Company’s various accounting methods, conventions and
allocation provisions, particularly its allocation, pursuant to
an election made by the Company, to shareholders of adjustments
attributable to the differences between the shareholders’
purchase price of common shares and their shares of the
Company’s tax basis in its assets.
The Company operates as a partnership for Federal income tax
purposes. This permits the Company to pass through most of its
tax items, including taxable income, tax-exempt income,
deductions, credits and other tax items, to shareholders. The
listing of common shares on the New York Stock Exchange,
however, causes the Company to be treated as a “publicly
traded partnership” for Federal income tax purposes. As a
publicly traded partnership, the Company will be taxed as a
corporation for any taxable year in which less than 90% of its
gross income consists of “qualifying income.”
Qualifying income includes interest (including tax exempt
interest), dividends, real property rents, gains from the sale
or other disposition of real property or other capital assets
held for the production of interest or dividends, and certain
other items.
If, for any reason, less than 90% of the Company’s gross
income constitutes qualifying income, the Company would be
required to pay Federal income tax at regular corporate rates on
its net income, with the exception of tax-exempt income. Also,
the Company’s income, deductions, credits and other tax
items would not pass through to shareholders, and shareholders
would be treated as stockholders in a corporation for Federal
income tax purposes. In addition, distributions by the Company
to its shareholders would constitute ordinary dividend income,
taxable to the shareholders to the extent of the Company’s
earnings and profits, which would include tax-exempt net income,
as well as any taxable net income it may have, reduced by any
Federal income taxes paid. The Company would not be able to
deduct the payment of these dividends.
The Company has completed three acquisitions and, as the Company
continues to grow and diversify its business, the Company may
make additional acquisitions in the future. Integration of
acquisitions generally involves a number of risks, including the
diversion of management’s attention to the assimilation of
the operations of businesses, difficulties in the integration of
operations and systems and the realization of potential
operating synergies, the assimilation and retention of
personnel, challenges in retaining the customers of the combined
businesses and potential adverse effects on operating results.
If the Company is unable to successfully complete and integrate
strategic acquisitions in a timely manner, its business and its
growth prospects could be negatively affected.
After the Company’s formation in 1996, it issued four kinds
of securities. The Company’s Operating Agreement required
it to redeem all of these securities, other than its common
shares, upon the occurrence of certain events relating to a pool
of bonds originally acquired by the Company’s predecessor.
As some of these events occurred, the Company redeemed portions
of the securities. In January 2002, an affiliate of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, known as
Merrill Lynch, acquired custodial receipts representing
interests in five of the bonds that had been owned by the
Company’s predecessor. After Merrill Lynch acquired the
custodial receipts, the Company redeemed the remaining
outstanding securities, other than its common shares. There can
be no assurance that the former holders of these securities will
not challenge the values the Company assigned to, or the
redemption of, their shares. Such challenges could negatively
affect the Company’s financial results.
The Company has in the past obtained, and may in the future
obtain, a portion of its funding from securitizing tax-exempt
bonds. When the Company securitizes a bond and purchases only
subordinate certificates, the Company’s rights are
subordinate to the payment in full of the value of outstanding
senior
26
certificates. Under the Company’s policies in effect prior
to September 30, 2001, and consistent with generally accepted
accounting principles, the Company did not include these
obligations and the related assets on its balance sheet.
Although generally accepted accounting principles allow the
Company to keep similar financing generated by future
securitization transactions off its balance sheet, due to
potential accounting issues associated with off-balance-sheet
transactions the Company decided to change its policies for most
transactions entered into after September 30, 2001. Under
the Company’s revised policies, it intends to treat most
future securitization transactions in which the Company owns
interests in the bonds prior to their securitization as
borrowings and include the senior certificate obligations and
the related assets on its balance sheet.
The Company intends to conduct business so as not to become
regulated as an investment company under the Investment Company
Act of 1940 as amended. The Company is exempt from registration
because, directly and through majority owned subsidiaries, it is
primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real
estate. In order to qualify for this exemption, according to
current interpretation of the Staff of the SEC, the Company must
maintain at least 55% of assets directly in mortgages and other
liens on and interests in real estate, and at least 80% of
assets in real estate-type interests. Unless an investment
represents all of the certificates issued with respect to a pool
of mortgages, the investment may be treated as separate from the
underlying mortgage loans and, thus, may not be considered as a
qualifying interest for purposes of the 55% requirement.
Additionally, the Company must own “whole” bonds in
order for its mortgage bonds to be considered qualifying
interests for purposes of the 55% requirement. The
Company’s interests and some tax-exempt bonds, however, are
not qualifying interests. The requirement that the Company
maintain 55% of its assets in qualifying interests may inhibit
its ability to acquire assets or to securitize additional
interests in the future. If the Company fails to qualify for an
exemption from registration as an investment company, it would
be unable to conduct business as it currently does, which could
result in penalties and additional operating costs.
Additionally, each of the Company’s subsidiaries must
qualify individually for an exemption from registration. Even if
the Company maintains its current exemption, if one or more of
its subsidiaries becomes subject to registration, the Company
would be unable to conduct business as it currently does.
The Company’s ability to achieve its investment objectives
depends largely on its ability to successfully securitize its
tax-exempt bonds, continue to operate its existing
securitization programs and manage its exposure to interest rate
risks. Some of the Company’s tax-exempt bonds may have
credit or other characteristics which make them unsuitable for
securitization at a given time. In addition, as discussed above,
certain types of securitized tax-exempt bonds may not be
considered “qualifying interests” for the purposes of
the 55.0% requirement under the Investment Company Act of 1940.
Any failure to maintain existing or consummate new
securitization and interest rate swap transactions could reduce
the Company’s net interest income and have a material
adverse effect on its operations.
A portion of the construction lending the Company originates
through MFH is facilitated by its access to funds from the Group
Trust. The Group Trust is funded by a group of pension funds
that are under no obligation to continue their investments in
the trust. If these pension funds were to liquidate their
investments in the Group Trust or MMER, the Company’s
ability to grow its operating segment would be impaired until
such time as the Company obtains alternative sources of capital
and advisory fees and other income, if the Company were able to
do so.
An affiliate of Mark K. Joseph, the Company’s Chairman,
provides property management functions for some of the
properties securing the Company’s investments. This
affiliate receives property management fees under management
contracts. The Company’s management believes that these
contracts provide for fees that are at or below market rates.
Each of these management contracts will continue to be renewed
only if it provides property management services at a price
competitive with the prices that would be charged by independent
third parties for comparable goods and services in the same
geographic location and, in the case of any management contract
with any company managed or controlled by any member of the
Company’s board of directors, the contract is approved by a
majority of the Company’s independent directors.
Nonetheless, conflicts may exist in determining whether to renew
or terminate
27
these management contracts and in setting the fees payable under
these contracts because any change in the fees could affect the
amounts available to make payments under the related tax-exempt
mortgage revenue bonds.
Mr. Joseph controls interests in, and one other officer own
interests in, entities that own some of the properties that
either secure the Company’s investments or otherwise relate
to projects from which it syndicates tax credits. The Company
transferred the deeds to some of these properties to these
related entities in order to protect its investments or preserve
the availability of the tax credits the Company had syndicated
to its investors. The Company’s officers do not generally
realize any value from these transactions. These entities could
have interests that do not coincide with, or even are adverse
to, the Company’s interests. If these affiliated entities
choose to act solely in accordance with their own interests, it
could adversely affect the Company. Among the actions these
entities could take might be selling a mortgaged property,
thereby causing a redemption event for the Company’s
investment at a time and under circumstances that could be
disadvantageous to the Company.
The Company has in the past syndicated, and expects in the
future to continue to syndicate, tax credits earned by projects
developed by affiliates of Mr. Joseph. These affiliates of
Mr. Joseph earn developer fees from the projects.
Additionally, certain of the Company’s officers serve
entities that operate for the benefit of third parties and its
shareholders in fiduciary capacities. For example, as directors
of TE Bond Sub these officers have fiduciary
responsibilities to holders of that subsidiary’s preferred
shares, which are owned by third parties, and to the Company, as
the holder of that subsidiary’s common shares. There may be
instances where the interests of TE Bond Sub and its
shareholders may not coincide with, or may even be adverse to,
the interests of the holders of the Company’s common
shares. Similar issues arise in connection with the Group Trust
and a charity with which the Company is affiliated and to which
the Company makes contributions. The Company established this
charity in order to ensure that a 501(c)(3) entity would
continue to act as borrower on certain bonds (the terms of which
require such an entity to act as borrower in order for the bonds
to remain tax exempt) in the event of a default by the original
owner and the Company’s foreclosure on the property.
Environmental problems at the properties securing the
Company’s investments could reduce the interest payments to
the Company as well as the value of the collateral securing the
investment and the investment itself. The Company’s
tax-exempt bonds, interests in bond securitizations and
investment in partnerships are generally secured by real estate.
Under various Federal, state and local laws, ordinances and
regulations, an owner or operator of real estate is generally
liable for the costs of removal or remediation of hazardous or
toxic substances released on, above, under or in such property.
These laws often impose liability without regard to whether the
owner knew of, or was responsible for, the presence of these
substances. The costs of removal or remediation could be
substantial and could negatively impact the availability of cash
flow at the property level for payments on the Company’s
investments. The Company has obtained Phase I environmental site
assessments (which involve inspection without soil sampling or
groundwater analysis). The Company cannot assure shareholders
that the environmental assessments or inspections have revealed
all environmental liabilities and problems relating to the
properties or that nothing has occurred since the completion of
such assessments. Additionally, the Company cannot assure
investors that the properties on which no environmental
assessment was conducted do not contain regulated toxic or
hazardous substances. The Company expects that all investments
acquired in the future will have Phase I environmental site
assessments.
Terrorist attacks or acts of war may cause damage or disruption
to the Company and its employees, facilities, information
systems and properties securing the Company’s investments,
which could significantly impact its financial condition. The
threat of terrorist attacks in the United States since
September 11, 2001 continues to create many economic and
political uncertainties. The potential for future terrorist
attacks, the national and international responses to terrorist
attacks and other acts of war or hostility may cause greater
uncertainty and cause the Company’s business to suffer in
ways that the Company currently cannot predict. The military
action taken by the United States and its allies in Iraq and
28
elsewhere could have a short or long term negative economic
impact upon the financial markets and the Company’s
business in general. In addition, events such as those referred
to above could cause or contribute to a general decline in
equity valuations, which in turn could reduce the market value
of an investment in the Company’s common shares.
Contractual Obligations
The following table provides the Company’s commitments, as
of December 31, 2004, to make future payments under the
Company’s debt agreements and other contractual obligations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payment due by period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| |
|
Total | |
|
1 year | |
|
1-2 years | |
|
3-5 years | |
|
5 years | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Short-term debt
|
|
$ |
413,157 |
|
|
$ |
413,157 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Notes payable
|
|
|
688,137 |
|
|
|
500,617 |
|
|
|
187,520 |
|
|
|
— |
|
|
|
— |
|
|
Long-term debt
|
|
|
164,014 |
|
|
|
— |
|
|
|
67,241 |
|
|
|
29,003 |
|
|
|
67,770 |
|
|
Operating lease obligations
|
|
|
22,647 |
|
|
|
6,401 |
|
|
|
8,436 |
|
|
|
2,838 |
|
|
|
4,972 |
|
|
Unfunded loan commitments
|
|
|
482,491 |
|
|
|
482,491 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Unfunded equity commitments
|
|
|
463,134 |
|
|
|
463,134 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Employment Contract Commitments
|
|
|
6,030 |
|
|
|
2,973 |
|
|
|
3,057 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
2,239,610 |
|
|
$ |
1,868,773 |
|
|
$ |
266,254 |
|
|
$ |
31,841 |
|
|
$ |
72,742 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees
The Company’s maximum exposure under its guarantee
obligations is not indicative of the Company’s expected
loss under the guarantees.
29
The following table summarizes the Company’s guarantees by
major group at December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2004 |
|
December 31, 2003 |
| |
|
|
|
|
|
|
| (in millions) |
|
|
|
Maximum | |
|
Carrying | |
|
|
|
Maximum | |
|
Carrying | |
|
|
| Guarantee |
|
Note | |
|
Exposure | |
|
Amount | |
|
Supporting Collateral |
|
Exposure | |
|
Amount | |
|
Supporting Collateral |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
Loss-sharing agreements with Fannie Mae and GNMA
|
|
|
(1) |
|
|
$ |
189.1 |
|
|
$ |
— |
|
|
$5.4 million Letter of Credit pledged |
|
$ |
181.4 |
|
|
$ |
— |
|
|
$5.2 million letter of credit pledged |
|
Bank line of credit guarantees
|
|
|
(2) |
|
|
|
187.1 |
|
|
|
187.1 |
|
|
Investment in partnership, loans and tax-exempt bonds totaling
$202.9 million |
|
|
256.4 |
|
|
|
256.4 |
|
|
Investment in partnership and loans totaling $258.9 million |
|
Tax credit related guarantees
|
|
|
(3) |
|
|
|
417.0 |
|
|
|
187.6 |
|
|
$24.3 million of tax- exempt bonds and cash |
|
|
293.8 |
|
|
|
151.3 |
|
|
$1.3 million of cash |
|
Other financial/payment guarantees
|
|
|
(4) |
|
|
|
295.2 |
|
|
|
166.1 |
|
|
$336.6 million of cash, equity and tax-exempt bonds |
|
|
177.0 |
|
|
|
13.3 |
|
|
$3.8 million of cash and tax-exempt bonds |
|
Put options
|
|
|
(5) |
|
|
|
105.6 |
|
|
|
— |
|
|
$55.6 million of tax- exempt bonds |
|
|
122.5 |
|
|
|
— |
|
|
$70.1 million of loans and tax-exempt bonds |
|
Letter of credit guarantees
|
|
|
(6) |
|
|
|
152.5 |
|
|
|
76.6 |
|
|
$2.4 million of cash |
|
|
54.0 |
|
|
|
40.0 |
|
|
$1.1 million letter of credit pledged |
|
Indemnification contracts
|
|
|
(7) |
|
|
|
32.0 |
|
|
|
11.1 |
|
|
None |
|
|
73.3 |
|
|
|
56.5 |
|
|
None |
|
Trust preferred guarantee
|
|
|
(8) |
|
|
|
85.3 |
|
|
|
85.3 |
|
|
None |
|
|
— |
|
|
|
— |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
1,463.8 |
|
|
$ |
713.8 |
|
|
|
|
$ |
1,158.4 |
|
|
$ |
517.5 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
As a Fannie Mae DUS lender and GNMA loan servicer, the Company
may share in losses relating to underperforming real estate
mortgage loans delivered to Fannie Mae and GNMA. More
specifically, if the borrower fails to make a payment on a DUS
loan originated by the Company and sold to Fannie Mae, of
principal, interest, taxes or insurance premiums, the Company
may be required to make servicing advances to Fannie Mae. Also,
the Company may participate in a deficiency after foreclosure on
Fannie Mae DUS and GNMA loans. The term of the loss sharing
agreement is based on the contractual requirements of the
underlying loans delivered to Fannie Mae and GNMA, which varies
to a maximum of 40 years. |
| |
| (2) |
The Company provides payment or performance guarantees for
certain borrowings under line of credit facilities. The amount
outstanding under these lines of credit is $185.9 million
at December 31, 2004. This amount is included in notes
payable in the Company’s consolidated balance sheet. |
| |
| (3) |
The Company acquires and sells interests in partnerships that
provide low-income housing tax credits for investors. In
conjunction with the sale of these partnership interests, the
Company may provide performance guarantees on the underlying
properties owned by the partnerships or guarantees to the fund
investors. These guarantees have various expirations to a
maximum term of 18 years. |
| |
| (4) |
The Company has entered into arrangements that require the
Company to make payments in the event a specified third party
fails to perform on its financial obligation. The Company
typically provides these guarantees in conjunction with the sale
of an asset to a third party or the Company’s investment in
equity ventures. The term of the guarantee varies based on loan
payoff schedules or Company divestitures. |
| |
| (5) |
The Company has entered into put option agreements with
counterparties whereby the counterparty has the right to sell to
the Company, and the Company has the obligation to buy, an
underlying investment at a specified price. These put option
agreements expire at various dates through April 1, 2007. |
| |
| (6) |
The Company provides a guarantee of the repayment on losses
incurred under letters of credit issued by third parties or to
provide substitute letters of credit at a predetermined future
date. In addition, the Company may provide a payment guarantee
for certain assets in securitization programs. These guarantees
expire at various dates through September 1, 2007. |
| |
| (7) |
The Company has entered into indemnification contracts, which
require the guarantor to make payments to the guaranteed party
based on changes in an underlying investment that is related to
an asset or liability of the guaranteed party. These agreements
typically require the Company to reimburse the guaranteed party
for legal and other costs in the event of an adverse |
30
|
|
|
judgment in a lawsuit or the
imposition of additional taxes due to a change in the tax law or
an adverse interpretation of the tax law. The term of the
indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the
underlying contracts, the maximum exposure amount only includes
amounts that can be reasonably estimated at this time. The
actual exposure amount could vary significantly.
|
|
|
| (8) |
The Company provides a payment guarantee of the underlying trust
preferred securities issued in May and September 2004. The
guarantee obligation is unsecured and subordinated to the
Company’s existing and future debt and liabilities except
for debt and liabilities which by their terms are specifically
subordinated to the guarantee obligations and the rights of the
holders of various classes of existing and future preferred
shares of the Company. |
Off-Balance Sheet Arrangements
The Company may invest in bonds that are subordinate in priority
of payment to senior bonds that are owned by a third party. Such
senior bonds represent off-balance sheet debt for the Company.
These senior bonds that are not reflected on the Company’s
balance sheet at December 31, 2004 and 2003 totaled
$11.9 million and $20.5 million, respectively (face
amount).
The Company securitizes bonds and other assets in order to
enhance its overall return on its investments and to generate
proceeds that facilitate the acquisition of additional
investments. The Company uses various programs to facilitate the
securitization and credit enhancement of its bond investments.
The substantial majority of the Company’s securitizations
are reflected as indebtedness on its consolidated balance sheet,
and off-balance securitizations are not material to the
Company’s liquidity and capital needs. At December 31,
2004 and 2003, the Company’s total off-balance-sheet debt
relating to securitizations totaled $144.1 million and
$83.6 million, respectively.
Distribution Policy
The Company’s current policy is to maximize shareholder
value through increases in cash distributions to shareholders.
The Company’s board of directors declares quarterly
distributions based on management’s recommendation, which
itself is based on evaluation of a number of factors, including
the Company’s retained earnings, business prospects and
available cash.
The Company’s distribution per common share for the three
months ended December 31, 2004 and 2003 was $0.4725 and
$0.4525, respectively. The Company’s distribution per
common share for the years ended December 31, 2004 and 2003
was $1.8600 and $1.7950, respectively.
Cash Flow
At December 31, 2004 and 2003, the Company had cash and
cash equivalents of approximately $92.9 million and
$50.8 million, respectively. Cash flow from operating
activities was $54.1 million, $45.7 million and
$97.1 million for the years ended December 31, 2004,
2003 and 2002, respectively. The $8.4 million increase in
operating cash flow for 2004 versus 2003 is due primarily to a
decrease in net income before discontinued operations and
cumulative effect of a change in accounting principle of
$32.5 million, a decrease in non-cash items and tax
benefits of $15.3 million and an increase in net changes in
assets and liabilities of $56.2 million. The
$51.4 million decrease in operating cash flow for 2003
versus 2002 is primarily attributable to a $19.0 million
increase in the Company’s net income before discontinued
operations and cumulative effect of a change in accounting
principle due to the increase in the tax credit business offset
by a $55.3 million decrease in the net changes in assets
and liabilities and a $15.1 million decrease in non-cash
items and tax benefits.
Critical Accounting Estimates and Results of Operations
Critical Accounting Policies and Estimates
The Company’s discussion of its financial condition and
results of operations is based upon the Company’s
consolidated financial statements, which are prepared on the
accrual basis of accounting in accordance with GAAP. The
Company believes the following critical accounting policies
contain significant estimates used in the preparation of its
consolidated financial statements.
31
Investment in Tax-Exempt Bonds and Interests in Bond
Securitizations
Investment in tax-exempt bonds and interests in bond
securitizations (collectively, “investments in
bonds”) are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities” (“FAS 115”). All investments
in bonds are classified and accounted for as available-for-sale
debt securities and are carried at fair value. Unrealized gains
or losses arising during the period are recorded through other
comprehensive income in shareholders’ equity, while
realized gains and losses and other-than-temporary impairments
are recorded through operations. The Company evaluates on an
ongoing basis the credit risk exposure associated with these
assets to determine whether any other-than-temporary impairments
exist in accordance with the Company’s policy discussed in
the Other-Than-Temporary Impairments on Bonds section of this
discussion. Future adverse changes in market conditions or poor
operating results from the underlying real estate could result
in losses or an inability to recover the carrying value of the
investments.
The Company bases the fair value of non-participating bonds
(i.e., bonds that do not participate in the net cash flow
and net capital appreciation of the underlying properties) and
interests in bond securitizations, which also have a limited
market, on quotes from external sources, such as brokers, for
these or similar bonds or investments. Net operating income is
one of the key assumptions used to value the non-participating
bonds and interests in bond securitizations. Had net operating
income been decreased by 10% and 20%, the fair value
of the bonds and interests in bond securitizations would have
decreased by approximately $35.7 million and
$69.2 million, respectively.
The Company determines the fair value of participating bonds
that are wholly collateral dependent and for which only a
limited market exists by discounting the underlying
collateral’s expected future cash flows using current
estimates of discount rates and capitalization rates. The
Company selected discount rates ranging from 10.1%
to 12.9% and capitalization rates ranging from 7.8%
to 10.75% for the year ended December 31, 2004.
Increasing the discount rates by 50 basis points and the
capitalization rates by 100 basis points would result in
decreasing the recorded asset on the Company’s balance
sheet by approximately $12.6 million, with an offsetting
decrease to other comprehensive income.
Because the Company’s investment in tax-exempt bonds and
interests in bond securitizations are secured by non-recourse
mortgage loans on real estate properties, the value of the
Company’s assets is subject to all of the factors affecting
bond and real estate values, including macro-economic
conditions, interest rate changes, demographics, local real
estate markets and individual property performance. Further,
many of the Company’s investments are subordinated to the
claims of other senior interests and uncertainties may exist as
to a borrower’s ability to meet principal and interest
payments.
Other-Than-Temporary Impairments on Bonds
The Company evaluates on an ongoing basis the credit risk
exposure associated with its assets to determine whether
other-than-temporary impairments exist or a valuation allowance
is needed. The Company considers the credit risk exposure of the
investment, the Company’s ability and intent to hold the
investment for a period of time to allow for anticipated
recoveries in market value, the length of time and extent to
which the market value has been less than carrying value, the
financial condition of the underlying collateral including the
payment status of the investment and general economic and other
more specific conditions applicable to the investment, other
collateral available to support the investment and whether the
Company expects to recover all amounts due under its mortgage
obligations on a net present value basis. Third party quotes of
securities with similar characteristics or discounted cash flow
valuations are used to assist in determining if an impairment
exists on investments. If the fair value of the investment is
less than its amortized cost, and after assessing the
above-mentioned factors, it is determined that an
other-than-temporary impairment exists, the impairment is
recorded currently in earnings and the cost basis of the
security is adjusted accordingly.
32
Mortgage Servicing Rights
The Company accounts for its mortgage servicing rights under
Statement of Financial Accounting Standards No. 140,
“Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities” (“FAS
140”). FAS 140 requires servicing rights retained
by the Company after the origination and sale of the related
loan to be capitalized by allocating the carrying amount between
the loan and the servicing rights based on their relative fair
values. The fair value of the mortgage servicing rights is based
on the expected future net cash flow to be received over the
estimated life of the loan discounted at market discount rates.
The capitalization of the mortgage servicing rights is reported
in the income statement as a gain or loss on sale and results in
an offsetting asset or liability. Mortgage servicing rights are
amortized over the estimated life of the serviced loans. The
amortization expense is included in amortization of intangibles
in the consolidated statements of income.
The Company selected a discount rate of 12% for the year
ended December 31, 2004. Using a lower discount rate
of 10% would result in increasing the recorded asset on the
Company’s balance sheet by approximately $258,000,
with an offsetting increase in the Company’s corresponding
gain on sale of loans. Using a higher discount rate of 14%
would result in decreasing the recorded assets on the
Company’s balance sheet by approximately $224,000,
with an offsetting decrease in the Company’s corresponding
gain on sale of loans.
The Company evaluates all capitalized mortgage servicing rights
for impairment when changes indicate that impairment is
probable, but no less than at each reporting date. The mortgage
servicing rights are considered to be impaired when the carrying
amount exceeds the fair value of the expected future net cash
flows to be received under the servicing contract. Impairment,
if any, is recognized through a valuation allowance.
Goodwill
In June 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 141
“Business Combinations”
(“FAS 141”) and No. 142
“Goodwill and Other Intangible Assets
(“FAS 142”), which were effective
July 1, 2001 and January 1, 2002, respectively.
FAS 141 requires that the purchase method of accounting be
used for all business combinations consummated after
June 30, 2001. The Company adopted FAS 142 on
January 1, 2002. Upon adoption of FAS 142,
amortization of goodwill and indefinitely lived intangible
assets, including goodwill and indefinitely lived intangible
assets recorded in past business combinations, was discontinued.
All goodwill was tested for impairment in accordance with the
provisions of FAS 142 and the Company found no instances of
impairment. The Company determined that none of the intangible
assets, other than goodwill, recorded by the Company were
indefinitely lived; therefore, amortization of these intangible
assets has not ceased.
The Company bases its test for impairment on the present value
of estimates of the future cash flows generated by the reporting
units containing goodwill discounted at market discount rates.
The Company selected a discount rate of 9% for the year
ended December 31, 2004. Increasing the discount rate
by 10% and 20% would result in an approximate decrease
in the estimated value of the reporting units of
$66.3 million and $125.6 million, respectively. These
decreases in value would not require the Company to record
impairment.
The Company estimated the growth in the future cash flows
generated by the reporting units based on assumptions of 4%
annual growth in revenue and 4% annual growth in expenses.
Decreasing the assumed annual revenue growth rate by 10%
and 20% would cause a decrease in the value of the
estimated value of the reporting units of $77.4 million and
$151.5 million, respectively. These decreases in value
would not require the Company to record impairment. Increasing
the assumed annual expense rate by 10% and 20% would
cause a decrease in the estimated value of the reporting units
of $46.4 million and $94.9 million, respectively.
These decreases in value would not require the Company to record
impairment. Additionally, tax and regulatory changes could have
unpredictable impacts which can not be easily captured in a
discounted cash flow analysis.
33
Tax Credit Guaranteed Funds
The Company accounts for its transactions with guaranteed funds
under Statement of Financial Accounting Standard No. 66
“Accounting for Sales of Real Estate”
(“FAS 66”). In conjunction with the sale of
certain partnership interests, the Company may provide
performance guarantees on the Project Partnerships or guarantees
to the tax credit equity fund investors. The Company earns fees
for providing these guarantees. Fees received for providing
these guarantees are deferred and recognized as income over the
guarantee period.
FAS 66 generally requires the profit to be deferred on a
sale of real estate when the seller of the real estate
guarantees a return on the buyer’s investment or a return
on that investment for a limited or extended period. The Company
is deemed to have continuing involvement with Project
Partnerships that are sold by the Company with a guarantee to a
tax credit equity fund. In accordance with FAS 66, the
investor capital paid into a tax credit equity fund where the
investors are provided a guarantee by the Company is recorded as
a guarantee liability in the consolidated balance sheet. In
addition, the assets, liabilities and operations of the tax
credit equity fund are recorded in the consolidated financial
statements. The guarantee liability is recognized as guarantee
income over the life of the guarantee period. A gain or loss is
recorded upon the termination of the guarantee as the assets and
liabilities are removed from the consolidated financial
statements.
New Accounting Pronouncements
In January 2003, the FASB approved FIN 46 which requires
the consolidation of a company’s equity investment in
a VIE if the company is the primary beneficiary of
the VIE and if risks are not effectively dispersed among
the owners of the VIE. The Company is considered to be the
primary beneficiary of the VIE if the company absorbs the
majority of the “expected losses” of the VIE as
defined in the pronouncement. FIN 46 is effective
for VIEs created after January 31, 2003. For
any VIE in which the Company held an interest that it
acquired before February 1, 2003, FIN 46 was effective
for the first interim reporting period beginning after
June 15, 2003. In December 2003, FASB approved various
amendments to FIN 46 and released FIN 46R. In
addition, FASB extended the effective date of FIN 46 until
the first reporting period ending after March 15, 2004
for VIEs which are not special purpose entities, and the
Company elected to defer adoption of that portion of FIN 46
until that time.
The Company’s interests in bond securitizations represent
equity interests in VIEs, and the Company is the primary
beneficiary of those VIEs. The Company determined that its
bond securitization trusts were special purpose entities
(“SPEs”) and did not qualify for the deferral.
Therefore, these securitization trusts were consolidated at
December 31, 2003. The Company examined each of
its SPEs to determine if it met the definition of a
qualified SPE. Certain of the Company’s SPEs are
qualified SPEs and are not consolidated accordingly.
The Company initially measured the assets and liabilities of the
securitization trusts at the carrying amounts.
The Company has general partnership interests in tax credit
equity funds where the respective funds have one or more limited
partners. The determination of whether the Company is the
primary beneficiary of (and must consequently consolidate) a
given tax credit equity fund depends on a number of factors,
including the number of limited partners and the rights and
obligations of the general and limited partners in that fund.
Upon adoption of FIN 46R in March 2004, the Company
determined that it was the primary beneficiary in certain of the
funds it originated where there are multiple limited partners
with restrictions on their ability to sell, transfer or pledge
their investment. As a result, the Company consolidated these
equity investments at March 31, 2004. The Company’s
general partner interests typically represent a one percent or
less interest in each fund. For those funds which it
consolidates, the Company reports the assets and liabilities of
the funds, consisting primarily of restricted cash, investments
in real estate partnerships and notes payable, which are
nonrecourse to the Company, in the Company’s consolidated
balance sheet. In addition, the limited partnership interests in
the funds, owned by third party investors, are reported as a
minority interest. The net income (loss) from these tax
credit equity funds is reported in the appropriate
34
line items of the Company’s consolidated statement of
income. An adjustment for the income (loss) allocable to
the limited partners (investors) in the funds is recorded
through minority interest (expense) income in the
Company’s consolidated statement of income. At
March 31, 2004, the Company recorded net assets of these
tax credit equity funds of $1.2 billion, consisting
primarily of $1.4 billion in investment in partnerships,
$129.5 million in restricted assets and $208.7 million
in notes payable, which are non-recourse to the Company. The
Company recorded $1.2 billion in minority interest in
subsidiary companies. As of March 31, 2004, the Company
also recorded a $0.5 million cumulative effect of a change
in accounting principle as a result of recording the net equity
allocable to the Company’s general partner interest in the
funds.
At times, the Company takes ownership of the general partnership
interest in the underlying Project Partnerships in which the tax
credit equity funds hold investments. For those property-level
general partnership interests the Company has discontinued the
equity method of accounting and consolidated the underlying
Project Partnership pursuant to FIN 46R. Such consolidation
was inadvertently not recorded in the first quarter in
conjunction with the adoption of FIN 46R but was recorded
in the second quarter of 2004 and resulted in an increase
in assets of $172.0 million, an increase in liabilities of
$172.0 million, which are non-recourse to the Company, and
net income of zero. The Company does not believe that the error
in the first quarter was material. At December 31, 2004,
$177.5 million of land, building and equipment is
collateral for the obligations of the underlying Project
Partnership.
The Company also has a general partnership interest in certain
other low-income housing tax credit equity funds where it has
concluded that it is not the primary beneficiary. Accordingly,
funds with assets of $2.1 billion and liabilities of
$263.9 million as of December 31, 2004 have not been
consolidated and continue to be accounted for using the equity
method.
The Company initially measured the assets and liabilities of the
tax credit equity funds at fair value as of July 1, 2003,
the acquisition date of HCI, which was the point in time
that the Company first met the criteria to be the primary
beneficiary of the VIE. For funds consolidated pursuant to
FIN 46R as of March 31, 2004, the fair value was used
to record the net assets of the tax credit equity funds when the
fair value was less than the carrying amount. For funds where
the Company took ownership of the general partnership interest
in the underlying Project Partnership in which the fund held an
investment, the underlying Project Partnership was recorded at
cost in consolidation. During the quarter ended
December 31, 2004, the Company amended certain of its funds
to remove certain restrictions placed on limited partners’
ability to sell, transfer or pledge their investments. As a
result, funds with assets of $954.8 million and liabilities
of $134.6 million have been deconsolidated.
In December 2004, FASB approved Statement of Financial
Accounting Standards No. 123R, “Share-based
Payment” (“FAS 123R”). FAS 123R
requires that the compensation cost relating to share-based
payment transactions be recognized and applies to all
outstanding and unvested share-based payment awards at the
adoption date. Share-based payments result in a cost that will
be measured at fair value on the awards’ grant date, based
on the estimated number of awards that are expected to vest. The
Company will be required to apply FAS 123R as of the first
reporting period that begins after June 15, 2005. The
Company does not anticipate that the adoption of FAS 123R
will have a material effect on the Company’s financial
statements.
Results of Operations
As further discussed in “New Accounting
Pronouncements,” FIN 46R requires, in some cases,
consolidation of certain tax credit equity funds. As a result of
the adoption of FIN 46R, the Company consolidated certain
tax credit equity funds at March 31, 2004. The Company is
the general partner in these funds and the Company’s
interests typically represent a one percent or less interest in
each fund. For those funds which it consolidates, the Company
reports the net assets of the funds, consisting primarily of
restricted cash, investments in real estate partnerships and
notes payable, in the Company’s consolidated balance sheet.
In addition, the limited partnership interests in the funds,
owned by third party investors, are reported as a minority
interest. The net income (loss) from these tax credit
equity funds is reported in
35
the appropriate line items of the Company’s consolidated
statement of income. An adjustment for the income
(loss) allocable to the limited partners
(investors) in the funds is recorded through minority
interest expense (income) in the Company’s
consolidated statement of income. The consolidation of these tax
credit equity funds, coupled with the financing accounting for
guaranteed tax credit equity funds, makes the year over year
comparison for results of operations difficult. To facilitate
comparison, the effect of financing accounting and consolidation
for the tax credit funds is broken out in certain of the
explanations below.
Net Interest Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31 | |
| |
|
| |
| |
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
2002 | |
|
% | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Interest on bonds and interests in bond securitizations
|
|
$ |
85,505 |
|
|
|
181.2 |
% |
|
$ |
71,636 |
|
|
|
118.9 |
% |
|
$ |
70,757 |
|
|
|
98.3 |
% |
|
Interest on loans
|
|
|
43,874 |
|
|
|
93.0 |
% |
|
|
37,211 |
|
|
|
61.7 |
% |
|
|
36,585 |
|
|
|
50.8 |
% |
|
Interest on short-term investments
|
|
|
5,020 |
|
|
|
10.6 |
% |
|
|
2,158 |
|
|
|
3.6 |
% |
|
|
1,255 |
|
|
|
1.7 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total interest income
|
|
|
134,399 |
|
|
|
|
|
|
|
111,005 |
|
|
|
|
|
|
|
108,597 |
|
|
|
|
|
|
Interest expense
|
|
|
(69,884 |
) |
|
|
- 148.1 |
% |
|
|
(44,528 |
) |
|
|
- 73.9 |
% |
|
|
(36,596 |
) |
|
|
- 50.8 |
% |
|
Interest expense on debentures and preferred shares
|
|
|
(17,318 |
) |
|
|
- 36.7 |
% |
|
|
(6,189 |
) |
|
|
- 10.3 |
% |
|
|
— |
|
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net interest income
|
|
$ |
47,197 |
|
|
|
100.0 |
% |
|
$ |
60,288 |
|
|
|
100.0 |
% |
|
$ |
72,001 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2004, the majority of the
increase in interest income on bonds is offset by an increase in
interest expense related to these bond investments. These
increases are due to a change in the method of accounting for
certain securitization entities in accordance with FIN 46R
beginning December 31, 2003. For the year ended
December 31, 2004, for these entities, the Company is
reporting the interest income related to the securitization
trust assets (tax-exempt bonds) and interest expense related to
the senior interest in the trusts (short-term debt) due to the
consolidation of the securitization trust. In 2003, the net
interest income earned on the securitization trusts was reported
as interest on bonds and as a result, $2.2 million of
securitization-related interest expense was included in interest
income. In addition, upon the adoption of FAS 150 as of
July 1, 2003, interest expense on preferred shares was
recorded as interest expense on debentures and preferred shares
rather than interest income (expense) allocable to minority
interest. During 2003, $6.0 million of interest expense on
preferred shares was recorded as interest income
(expense) allocable to minority interest and
$6.2 million of interest expense on preferred shares was
recorded as interest expense on debentures and preferred shares.
Net interest income decreased $13.1 million from 2003 to
2004 primarily due to (1) a $20.5 million increase in
interest on bonds and loans due to an increase in the average
investment in tax-exempt bond and loan receivable balances and
the abovementioned $2.2 million amount of
securitization-related interest expense included in 2003
interest income; (2) a $3.1 million increase in
interest on short term investments resulting from interest
earned on advances to tax credit equity funds from a full year
of operations from the HCI business in 2004 versus six months of
operations in 2003; (3) a $13.7 million increase in
interest expense primarily due to (i) a $6.4 million
increase in interest expense on senior debt interests in
securitizations due to an increase in the number of
securitizations; (ii) a $1.1 million increase in
interest expense on notes payable due to an increase in note
payable balances coupled with an increase in market interest
rates throughout 2004; and (iii) a $6.7 million
increase in interest expense on lines of credit due to an
increase in outstanding line of credit balances fueled by
increased volumes in investment activity coupled with higher
interest rates in 2004; and (4) a $5.2 million
increase in interest expense and amortization of debt issue
costs associated with debentures and the new 2004 trust
preferred securities, excluding the $6.0 million of
interest expense on preferred shares recorded during 2003, to
interest income (expense) allocable to minority interest
(discussed above). In addition, for the year ended
36
December 31, 2004, the Company recorded interest expense of
$11.9 million related to the financing method and
consolidation of the tax credit equity funds. These adjustments
are primarily the result of eliminating intercompany interest
from the consolidated tax credit equity funds and the financing
method as well as the interest expense related to the
consolidated Project Partnerships.
Net interest income for the year ended December 31, 2003
decreased $11.7 million compared to 2002 due primarily to
(1) a $2.3 million increase in the accrual of interest
on bonds and loans due to an increase in average loan receivable
and investment in tax-exempt bond balances; (2) a
$7.8 million increase in interest expense due primarily to:
(i) $3.0 million of interest expense due to borrowings
for the acquisition of HCI; (ii) $2.1 million of debt
issue cost amortization on credit lines related to the
acquisition of HCI and the warehousing of real estate operating
partnerships for the tax credit equity business;
(iii) $1.8 million of financing costs due to new
securitization programs; and (iv) a $0.9 million
increase in interest expense due to higher average notes payable
balances; and (3) a $6.2 million increase in interest
expense due to the reclassification of the preferred shares
distribution as interest expense in accordance with the terms of
FAS 150 as of July 1, 2003.
Fee Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
2002 | |
|
% | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Syndication fees
|
|
$ |
25,535 |
|
|
|
38.8 |
% |
|
$ |
26,856 |
|
|
|
44.4 |
% |
|
$ |
7,221 |
|
|
|
27.7 |
% |
|
Origination and brokerage fees
|
|
|
7,934 |
|
|
|
12.0 |
% |
|
|
6,584 |
|
|
|
10.9 |
% |
|
|
6,632 |
|
|
|
25.5 |
% |
|
Guarantee fees
|
|
|
7,852 |
|
|
|
11.9 |
% |
|
|
3,614 |
|
|
|
6.0 |
% |
|
|
232 |
|
|
|
0.9 |
% |
|
Asset management and advisory fees
|
|
|
12,733 |
|
|
|
19.3 |
% |
|
|
10,337 |
|
|
|
17.1 |
% |
|
|
3,887 |
|
|
|
14.9 |
% |
|
Loan servicing fees
|
|
|
4,579 |
|
|
|
6.9 |
% |
|
|
4,234 |
|
|
|
7.0 |
% |
|
|
3,882 |
|
|
|
14.9 |
% |
|
Other income
|
|
|
7,415 |
|
|
|
11.1 |
% |
|
|
8,855 |
|
|
|
14.6 |
% |
|
|
4,203 |
|
|
|
16.1 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total fee income
|
|
$ |
66,048 |
|
|
|
100.0 |
% |
|
$ |
60,480 |
|
|
|
100.0 |
% |
|
$ |
26,057 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income for the year ended December 31, 2004
increased $5.6 million over 2003 due primarily to
(1) a $24.2 million increase in syndication fees
resulting from the increased volume of syndications closed,
which were primarily driven by four new guaranteed funds, two
new multi-investor funds, two new corporate investor funds and a
full year of operations from the HCI business in 2004 versus six
months of operations in 2003; (2) a $9.7 million
increase in asset management and advisory fees due primarily to
a full year of operations from the HCI business in 2004 versus
six months of operations in 2003; (3) a $1.4 million
increase in origination and brokerage fees primarily the result
of an increase in production volume from taxable loans and
bonds; (4) a $0.4 million increase in loan servicing
fees due to an increase in the size of the permanent loan
portfolio serviced; (5) a $0.5 million increase in
guarantee fees primarily from the establishment of four new
guaranteed tax credit equity funds and a full year of operations
from the HCI business in 2004 versus six months of operations in
2003; and (6) a $0.7 million decrease in other income
primarily attributable to a $2.4 million decrease in fees
collected on conventional equity deals and a collateral release
after the sale of property offset in part by a $1.7 million
increase related to extension, cancellation, application and
loan fees and income recognized on written put options. These
increases were offset by adjustments of $29.9 million
related to the financing method and consolidation of certain tax
credit equity funds. These adjustments are primarily the result
of eliminating syndication fees, asset management fees and other
income earned by the Company from the consolidated tax credit
equity funds and guarantee fee income generated from the
financing method.
Total fee income for the year ended December 31, 2003
increased $34.4 million over 2002 due primarily to
(1) a $19.6 million increase in syndication fees due
primarily to the increased volume of syndications closed;
(2) a $6.5 million increase in asset management and
advisory fees due primarily to tax credit equity asset
management fees and an increase in tax credit equity and MMER
assets under management; (3) a $0.4 million increase
in loan servicing fees due to an increase in the size of the
permanent loan portfolio serviced. The increases in fees from
the tax credit equity business were chiefly
37
attributable to the acquisition of HCI in July 2003; (4) a
$3.3 million increase in guarantee fee income due primarily
to (i) $2.1 million from the guaranteed tax credit
funds; (ii)$1.0 million in guarantee fee income from the
tax credit equity business; and (iii) $0.3 million of
amortization of a guarantee fee received in the fourth quarter
of 2002; and (5) a $4.7 million increase in other
income due primarily to: (i) $1.7 million in
prepayment fees collected from the early payment of tax-exempt
bond investments; (ii) $1.6 million in fees collected
on a conventional equity deal; (iii) $1.5 million in
valuation service fees and other property related income from
the tax credit equity business; (iv) $0.8 million
collected as the result of a collateral release after the sale
of a property; (v) $0.6 million of income recognized
on written put options; and (vi) a $1.5 million
decrease in commission income.
Net Rental Income
At times, the Company takes ownership of the general partnership
interest in the underlying Project Partnerships in which the tax
credit equity funds are the limited partners. The Company takes
a 0.01% to 1% general partner interest in the Project
Partnership, and the tax credit equity fund, which the Company
may also consolidate, is typically the 99.99% to 99% limited
partner. Net rental income represents income from tax credit
equity Project Partnerships that are consolidated by the Company
pursuant to the adoption of FIN 46R effective
March 31, 2004.
Net Gain (Loss) on Sales
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
2002 | |
|
% | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Net gain on sale of investments in tax credit equity partnerships
|
|
$ |
3,019 |
|
|
|
46.5 |
% |
|
$ |
2,747 |
|
|
|
35.1 |
% |
|
$ |
282 |
|
|
|
- 1.8 |
% |
|
Net gain on sale of tax-exempt investments
|
|
|
304 |
|
|
|
4.7 |
% |
|
|
2,133 |
|
|
|
27.3 |
% |
|
|
4,896 |
|
|
|
- 30.8 |
% |
|
Net gain on sale of loans
|
|
|
3,393 |
|
|
|
52.2 |
% |
|
|
4,864 |
|
|
|
62.1 |
% |
|
|
3,407 |
|
|
|
- 21.4 |
% |
|
Net loss on derivatives
|
|
|
(219 |
) |
|
|
- 3.4 |
% |
|
|
(1,919 |
) |
|
|
- 24.5 |
% |
|
|
(24,474 |
) |
|
|
154.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gain (loss) on sales
|
|
$ |
6,497 |
|
|
|
100.0 |
% |
|
$ |
7,825 |
|
|
|
100.0 |
% |
|
$ |
(15,889 |
) |
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sales decreased $1.3 million for the year ended
December 31, 2004 compared to 2003 due primarily to
(1) a $1.8 million decrease in gain on sale of
tax-exempt investments due to two large tax exempt investment
sales during 2003 generating $2.2 million of gain with no
similar substantial gains in 2004; (2) a $1.5 million
decrease in gain on sale of loans resulting from (i) a
$1.2 million decrease from taxable loans due to two large
taxable loan sales during 2003 generating $1.2 million of
gain with no similar substantial gains in 2004; (ii) a
$0.7 million decrease due to a decrease in premiums on the
sale of loans to GSEs; (iii) a $0.4 million increase
in gains from mortgage servicing rights; and (3) a
$1.7 million increase in net gain (loss) on
derivatives primarily driven by market fluctuations in the value
of the Company’s derivatives. In addition, the Company
recorded adjustments of $0.2 million related to the
financing method and consolidation of the tax credit equity
funds, which decreased the total net gain in 2004.
Net gain on sales for the year ended December 31, 2003
increased $23.7 million over 2002 due primarily to
(1) a $2.5 million increase in gain on sales due to
the sale of investments in tax credit equity partnerships, which
increased due to the acquisition of HCI; (2) a
$2.8 million decrease in gain on sale of tax-exempt
investments; (3) a $1.5 million increase in gain on
sale of loans due to an increase in premiums on the sale of
loans to GSEs; and (4) a $22.5 million increase in net
gain (loss) on derivatives primarily driven by market
fluctuations in the value of the Company’s derivatives.
38
Operating Expenses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
2002 | |
|
% | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Salaries and benefits
|
|
$ |
69,540 |
|
|
|
64.9 |
% |
|
$ |
41,736 |
|
|
|
73.1 |
% |
|
$ |
22,678 |
|
|
|
66.4 |
% |
|
General and administrative
|
|
|
26,445 |
|
|
|
24.7 |
% |
|
|
11,152 |
|
|
|
19.5 |
% |
|
|
6,516 |
|
|
|
19.1 |
% |
|
Professional fees
|
|
|
11,118 |
|
|
|
10.4 |
% |
|
|
4,188 |
|
|
|
7.4 |
% |
|
|
4,960 |
|
|
|
14.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$ |
107,103 |
|
|
|
100.0 |
% |
|
$ |
57,076 |
|
|
|
100.0 |
% |
|
$ |
34,154 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses increased $50.0 million for the
year ended December 31, 2004 over 2003 due primarily to
(1) a $25.2 million increase in salaries and benefits
resulting from a full year of operations from the HCI business
in 2004 versus six months of operations in 2003, employment
growth and an increase in bonus and other compensation costs;
(2) a $4.4 million increase in general and
administrative expenses due primarily to (i) increases of
$0.5 million, $1.8 million and $1.0 million in
increased travel, rent, information and technology and service
agreement costs, respectively, resulting from a full year of
operations from the HCI business in 2004 versus six months of
operations in 2003; (ii) a $0.7 million increase in
unreimbursed deal expenses; and (iii) a $0.4 million
increase in charitable contributions; (3) a
$6.1 million increase in professional fees due to higher
legal and accounting fees attributable to Sarbanes-Oxley
compliance initiatives, new transactions and a full year of
operations from the HCI business in 2004 versus six months of
operations in 2003. In addition, the Company recorded operating
expenses of $14.3 million, after giving effect for
eliminations, related to the financing method and consolidation
of certain tax credit equity funds.
Total operating expenses for the year ended December 31,
2003 increased $22.9 million over 2002 due primarily to
(1) a $19.1 million increase in salaries and benefits
due primarily to: (i) $13.4 million of expense from
the acquisition of HCI; (ii) a $3.4 million increase
in bonus expense due to the Company accruing at a higher bonus
level than in 2002; and (iii) a $2.3 million increase
in salaries and other compensation (2) a $4.6 million
increase in general and administrative expenses due primarily
to: (i) $3.7 million of expense from the acquisition
of HCI; and (ii) a $0.9 million increase due primarily
to an increase in unreimbursed deal expenses and integration
costs related to the acquisition of HCI; and (3) a
$0.8 million decrease in professional fees due to
$1.0 million of expense from HCI partially offset by a
$1.6 million decrease in commission expense.
Depreciation and Amortization
For the year ended December 31, 2004, depreciation and
amortization increased $6.7 million over 2003 due primarily
to (1) a $6.4 million increase in depreciation expense
resulting from the consolidation of the Company’s general
partner interests in tax credit equity Project Partnerships; and
(2) a $0.3 million increase in depreciation and
amortization related to assets from the July 2003 acquisition of
HCI.
For the year ended December 31, 2003, depreciation and
amortization increased $5.6 million over 2002 due primarily
to (1) a $5.1 million increase in amortization of
intangibles due primarily to (i) $4.8 million of
amortization of capitalized asset management fee contracts from
HCI; (ii) a $0.2 million increase in amortization
of mortgage servicing rights; and (iii) $0.1 million
of amortization expense from the guaranteed tax credit funds;
and (2) a $0.5 million increase in depreciation
primarily attributable to six months of operations related to
the assets of the July 2003 acquisition of HCI.
Impairments and Valuation Allowances Related to
Investments
In accordance with the Company’s valuation and impairment
policies, the Company recorded $7.1 million in impairments
and valuation allowances in 2004 related primarily to:
(1) $5.5 million on five bonds and five taxable loans
with an aggregate face amount of $37.0 million as of
December 31, 2004; and (2) $1.6 million in
impairment charges on fixed assets of one consolidated Project
Partnership. The Company recorded $7.0 million in
impairments and valuation allowances in 2003 related primarily
39
to (1) two bonds and eight taxable loans with an aggregate
face amount of $39.0 million; and (2) advances to two
tax credit equity funds with total outstanding balances of
$9.3 million. In 2002, the Company recorded
$0.7 million in impairments and valuation allowances
related to four bonds and one taxable loan with an aggregate
face amount of $57.6 million.
Net Losses from Equity Investments in Partnerships
Net losses from equity investments in partnerships increased
$166.2 million for the year ended December 31, 2004 as
compared to 2003. The increase is due to net losses from equity
investments in partnerships resulting from the financing method
and consolidation of certain tax credit equity funds, as
discussed at the beginning of this “Results of
Operations” section.
Net losses from equity investments in partnerships remained
relatively unchanged in 2003 compared to 2002. The most
significant variances were (1) a $3.4 million increase
from the guaranteed tax credit funds; (2) a
$1.5 million increase in losses from investments in real
estate operating partnerships that are being warehoused before
transfer to syndicated tax credit equity funds; and (3) a
$5.0 million decrease in losses from an investment in
income-producing real estate partnerships and related swap
partnerships. While these later investments generate cash flow
to the Company in the form of quarterly distributions on a GAAP
basis they may generate a net loss due to non-cash adjustments
for depreciation and mark-to-market adjustments related to the
swap partnerships.
Income Tax Expense
Income tax expense for the year ended December 31, 2004
increased $2.9 million compared to 2003. This increase is
due primarily to state tax liabilities computed on a separate
company basis and deferred tax expense primarily associated with
the Company’s equity investments in real estate
partnerships.
Income tax expense for the year ended December 31, 2003
decreased $1.6 million compared to 2002. This decrease is due
primarily to a decrease in deferred tax expense caused by
temporary differences related to asset management fees and
syndication fees from the tax credit equity business. These
differences are new in 2003 due to the acquisition of HCI.
Net Income Allocable to Minority Interest
Net income allocable to minority interest for the year ended
December 31, 2004 increased $184.3 million over 2003.
The increase is primarily due to recording income allocable to
the limited partners in tax credit equity funds that the Company
consolidated pursuant to FIN 46R and the financing method. The
Company typically holds a 0.01% to 1% interest in the tax credit
equity funds and therefore approximately 99% of the funds’
losses are shown as net income allocable to minority interest in
the consolidated statement of income.
Income allocable to minority interest was reclassified as
interest expense for the six months ended December 31,
2003. For the year ended December 31, 2003, income
allocable to minority interest decreased $6.0 million
compared to 2002 due to this reclassification. Total payments to
preferred shareholders were $12.2 million during 2003. Of
this amount, $6.0 million was recorded as income allocable
to minority interest and $6.2 million was recorded as
interest expense due to the adoption of FAS 150. Total payments
to preferred shareholders were consistent with payments of
$12.0 million made during 2002.
Discontinued Operations
During 2004, the Company acquired a property by deed in lieu of
foreclosure. This property previously served as collateral for a
tax-exempt bond held by the Company. The Company sold the
property for net proceeds of $16.2 million, which resulted
in an $11.1 million gain. The $11.1 million gain was
classified as discontinued operations in the consolidated
statements of income.
40
During 2003, the Company acquired a property by deed in lieu of
foreclosure. This property previously served as collateral for a
tax-exempt bond held by the Company. The Company sold the
property for net proceeds of $38.1 million, which resulted
in a $26.8 million gain. The $26.8 million gain and
$1.0 million of losses from operations of the property were
classified as discontinued operations in the consolidated
statements of income.
Cumulative Effect of a Change in Accounting Principle
During the first quarter of 2004, the Company recorded a
cumulative effect of a change in accounting principle of
$0.5 million as a result of the adoption of FIN 46R
discussed above.
In December 2003, as a result of the adoption FIN 46R, the
Company determined that its investments in residual interests in
bond securitizations represented equity interests in VIEs. The
Company further determined the Company was the primary
beneficiary of the VIEs and therefore was required to
consolidate the securitization trusts. As a result, the Company
made adjustments to (1) reclassify the Company’s
residual interests in bond securitizations to investment in
tax-exempt bonds, (2) reflect the senior interests in the
bond securitization trusts in investment in tax-exempt bonds so
that the total investment in tax-exempt bonds reported equals
the total assets in the securitization trusts,
(3) reclassify costs of the securitization transactions to
debt issue costs, which are included in other assets on the
Company’s consolidated balance sheets and (4) record
the senior interest in the securitization trusts as short-term
debt. The Company also recorded a $1.2 million cumulative effect
of a change in accounting principle related to this transaction
as a result of the reversal of gain on sales reported in prior
periods on these investments.
Net Income
Net income for the year ended December 31, 2004 decreased
$45.5 million from 2003 due primarily to (1) an
increase in interest income of $23.4 million offset by an
increase in interest expense and interest expense on debentures
and preferred shares of $36.5 million; (2) an increase
in net rental income of $18.0 million; (3) an increase
in salaries and benefits expense of $27.8 million; (4) an
increase in general and administrative expense of $15.3 million;
(5) an increase in net losses from equity investments in
partnerships of $166.2 million offset by an increase in net
income (expense) allocable to minority interest of
$184.3 million; and (6) a decrease in income from
discontinued operations of $14.7 million.
Net income for the year ended December 31, 2003 increased
$43.5 million over 2002 due primarily to (1) a
$25.7 million increase from discontinued operations;
(2) a $21.2 million decrease in net holding losses on
derivatives; (3) a $19.6 million increase in
syndication fees; partially offset by (4) a
$19.1 million increase in salaries and benefits; and
(5) a $6.9 million increase in interest expense.
Other Comprehensive Income
For the year ended December 31, 2004, the net adjustment to
other comprehensive income for unrealized holding gains on
tax-exempt bonds and residual interests in bond securitizations
available for sale was $7.4 million. After a
reclassification adjustment for gains of $2.7 million
included in net income, other comprehensive income for the year
ended December 31, 2004 was $4.7 million and total
comprehensive income was $31.8 million.
For the year ended December 31, 2003, the net adjustment to
other comprehensive income for unrealized holding gains on
tax-exempt bonds and residual interests in bond securitizations
available for sale was $2.0 million. After a
reclassification adjustment for gains of $27.5 million
included in net income, other comprehensive loss for the year
ended December 31, 2003 was $25.5 million and total
comprehensive income was $47.0 million.
For the year ended December 31, 2002, the net adjustment to
other comprehensive income for unrealized holding gains on
tax-exempt bonds and residual interests in bond securitizations
available for sale was $1.5 million. After a
reclassification adjustment for gains of $4.9 million
included in net income,
41
other comprehensive loss for the year ended December 31,
2002 was $3.4 million and total comprehensive income was
$25.6 million.
Related Party Transactions
Transactions with Mr. Joseph and the Shelter Group
Mr. Mark K. Joseph, the Company’s Chairman of its
Board of Directors and, through December 31, 2004, its
Chief Executive Officer, controls and is an officer of Shelter
Development Holdings, Inc. and of Shelter Property Holdings,
Inc. (collectively “Shelter Holdings”), which own a
34.7% interest in Shelter Development, LLC and Shelter
Properties, LLC respectively (collectively, the “Shelter
Group”). The Shelter Group is a real estate developer and
provides property management services primarily to multifamily
residential properties.
It is the policy of the Company that Mr. Joseph abstains
from any involvement in the structuring or review of any
contracts or transactions between the Shelter Group and the
Company in both his capacity as a partner and officer in various
entities of the Shelter Group and as a director and, previously,
as an officer of the Company.
Property Management Contracts
The Shelter Group provides management services for certain
properties that serve as collateral for the Company’s
tax-exempt bond investments. The Shelter Group receives fees
under management contracts for properties that it manages.
During 2004, 2003, and 2002, the Shelter Group had property
management contracts for eight, eight and ten properties,
respectively, that collateralize the Company’s investments.
In accordance with the Company’s Operating Agreement, the
disinterested members of the Company’s Board of Directors
review and approve these property management contracts on an
annual basis. Their review is based on information that compares
the proposed fees and services of the Shelter Group and fees and
services of similar property management companies in the market
areas of the properties. The fees charged under these contracts
were determined to be equal to or below market rates. During the
years ended December 31, 2004, 2003 and 2002, these fees
were approximately $0.8 million, $1.0 million, and
$1.1 million, respectively.
Related Party Transactions resulting from Acquisition of Tax
Credit Business from Lend Lease
During the 15 years prior to the July 2003 acquisition of
the Lend Lease HCI business, Lend Lease and its predecessors
made and syndicated tax credit equity investments in affordable
housing projects sponsored by the Shelter Group. Prior to 1996,
the Shelter Group participated in these projects directly
through Shelter Holdings, of which Mr. Joseph, and certain
family interests, owned 100% of the equity. Since 1996, the
Shelter Group has participated in these transactions through
Shelter Development, LLC, in which Mr. Joseph and his
family, acting through Shelter Holdings, have at all times owned
less than a majority interest (presently 34.7%).
Since the HCI acquisition, the Company’s tax credit
operating subsidiaries have closed three transactions with the
Shelter Group and expect to close additional deals in the
future. Consistent with Company policy, Mr. Joseph has not
participated, and will not participate, in the structuring or
negotiation of these transactions. Future transactions are
expected to be consistent with the terms offered by Lend Lease
to the Shelter Group prior to the acquisition of the HCI
business as well as terms offered by the Company to other
comparable quality developers with whom the Company has similar
long-standing relationships. The Shelter Group receives
development fees in connection with these transactions.
In accordance with the Company’s Operating Agreement, the
Board, acting through the disinterested directors, has
authorized the continued investment in and syndication of tax
credit equity investments in affordable housing projects
sponsored by The Shelter Group without the need for further
Board approval and approved and ratified all prior tax credit
transactions with The Shelter Group.
42
Investments/ Loans by Tax Credit Equity Business
It is customary in the tax credit industry for syndicators to
provide development loans to certain high caliber developers
with whom they have long-standing relationships. As part of its
growth plan, Shelter Development, LLC requested that the Company
provide a pre-development loan facility. In 2004, pursuant to
the Company’s Operating Agreement, the disinterested
Directors of the Board approved such a facility in an amount not
to exceed $1,500,000. The facility is evidenced by an umbrella
loan agreement and note with the Shelter Group together with
individual notes beneath it for each property on which a loan is
made, signed by the relevant property partnership. Loans for
individual transactions will be subject to the Company’s
normal due diligence requirements and are expected to include a
pledge of both the developer fees as well as the general partner
interest in the partnership that owns the property.
The transactions are being made on the usual and customary terms
upon which the Company’s tax credit business would make
loans to high caliber developers and upon which other similarly
situated tax credit businesses would make development loans to
developers like Shelter Development, LLC. Mr. Joseph did
not and will not participate in, or influence, the structuring
of this facility in any way and will not personally receive any
of the proceeds of these Loans.
The Company has previously made individual pre-development loans
to Shelter Group prior to the approval of the facility. In 2004
a pre-development loan was made to and repaid by the borrower on
the Shelter Group’s Woodbridge Commons transaction.
Southgate Crossing Partnership
Through its subsidiary, MMA Mortgage Investment Corporation
(“MMIC”), formerly Midland Mortgage Investment
Corporation (“Midland”), the Company has provided a
supplemental loan through the Fannie Mae DUS program to the
Southgate Crossing apartment project partnership, which is
located in Columbia, Maryland. The supplemental loan was a part
of a debt restructuring of the project. Due to the debt
restructuring, which consisted of the infusion of new equity
from outside parties and the supplemental loan from Midland, all
of the partnership interests in this project partnership were
sold to new owners in 2003. Mr. Joseph indirectly held a 1.5%
limited partnership interest in the borrowing entity for the
project. He also owned interests in two of the three general
partners of the same entity, which gave him a 0.67% general
partner interest in the borrowing entity. Shelter Development,
LLC. now owns an 80.36% interest in the new general partner of
the borrowing entity. This new general partner owns a 10%
interest in the borrowing entity. As a result of the sale of the
partnership interests to new owners, a company that is owned
100% by Mr. Joseph received approximately $22,000 in
distributions for its prior equity interest in Southgate
Crossing and $151,000 in repayment of a loan. The Shelter Group
also receives fees in connection with this transaction.
Mr. Joseph will benefit from these fees by virtue of his
investment in Shelter Group, but will not directly receive any
fees. In accordance with approval procedures mandated by the
Company’s Operating Agreement, the disinterested directors
of the Company reviewed and approved this transaction and found
it fair to the Company based upon management’s evaluation
of the supplemental loan, the sale terms of the project
partnerships and other terms of the transactions, which included
a review of property valuations and an internally prepared
valuation analysis indicating that the purchase price paid by
the new owners represented fair market value.
The Company has held a first mortgage bond on the Southgate
Crossing property since 1998. As of December 31, 2004, the
outstanding amount of this loan was $10.2 million. The
first mortgage loan on Southgate Crossing was made at market
rate. Payment of principal and interest on the related bond is
credit enhanced by Fannie Mae.
Lakeview Gardens Transaction
With respect to the defaulted Lakeview Bonds (as defined below),
the Company, through a newly created and wholly owned
subsidiary, took title to a defaulted property by a deed in lieu
of foreclosure, sold the subsidiary that took title to the
property, and used the sale proceeds to retire the defaulted tax-
43
exempt bonds. While the Company owned the subsidiary, the
Company earned a de minimis amount of taxable income.
The Company owned approximately $9.0 million in aggregate
principal amount of mortgage revenue bonds (the “Lakeview
Bonds”) and parity working capital loans related to the
Lakeview Bonds in an aggregate principal amount of $305,000 (the
“Lakeview Loans”) secured by the Lakeview Garden
Apartments Project (“Lakeview”). A limited partnership
in which Mr. Joseph indirectly owned 100% of the general
partner interest and a lesser percentage of the limited partner
interests, was the owner of Lakeview and was the borrower under
the bond documents (the “Lakeview Borrower”). The
Lakeview Borrower has been in monetary default under the bond
documents since the original borrower defaulted, which was not a
related party.
On September 29, 2004, the Company (i) exercised its
rights under the bond documents as a result of the default and
took title to Lakeview by a deed in lieu of foreclosure through
an entity formed to hold the deed, and (ii) subsequently sold
that entity to an unrelated third party for a purchase price of
approximately $16.2 million, of which approximately
$11.2 million was used to retire all of the outstanding
principal and deferred interest on the Lakeview Bonds and the
Lakeview Loans. The remainder was a gain to the Company.
No partner in the Lakeview Borrower or the entities owning the
Lakeview Borrower (including Mr. Joseph or entities of
which he is an owner (other than the Company)) received any
distributions resulting from these transactions. The
disinterested members of the Company’s Board of Directors,
in accordance with the Company’s Operating Agreement,
approved these transactions. Mr. Joseph did not participate
in, or influence, the structuring or the approval of these
transactions.
Mr. Joseph’s ownership interest in partnerships
holding “defaulted assets”
Certain transactions with affiliates are described below under
the heading “Affiliate and Non-Profit Management and
Control of Defaulted Assets.” One of these transactions is
the creation by the Company of certain partnerships that hold
defaulted or previously defaulted assets. In connection with
these partnerships, Mr. Joseph controls direct and indirect
membership interests in the aggregate of 69.12% in what the
Company calls an “umbrella” limited liability company
(“LLC”) holding certain defaulted or previously
defaulted assets as described in more detail below. The umbrella
LLC holds a 99% limited partnership interest in the borrowing
partnership for these defaulted or previously defaulted assets.
In addition, Mr. Joseph controls and is a 56% indirect
owner in the 1% general partnership interest in the borrowing
partnerships (or, in the case of the Creekside project
partnership, is a 56% indirect owner in a 0.5% general
partnership interest) for these defaulted or previously
defaulted assets. In addition, an entity wholly owned by
Mr. Joseph is the manager of this LLC. While the purpose of
this paragraph is to discuss Mr. Joseph’s interest in
these transactions, the section entitled “Affiliate and
Non-Profit Management and Control of Defaulted Assets”
describes the nature and the impact of these transactions on the
Company.
Refinancing of FSA Portfolio
In February 1995, the Company’s predecessor by merger, as
bondholder, and various property-owning partnerships indirectly
controlled by Mr. Joseph, as borrowers, participated in the
refunding of 11 tax-exempt bonds with an aggregate principal
balance of $126.6 million into senior Series A
tax-exempt bonds and subordinate Series B tax-exempt bonds
with aggregate principal balances of $67.7 million and
$58.9 million, respectively. The borrowing partnerships are
currently owned by general partners controlled by
Mr. Joseph and by the umbrella LLC described above under
“Mr. Joseph’s ownership interest in partnerships
holding ‘defaulted assets’.” The Series B
bonds are held by a subsidiary of the Company. The Series A
bonds were deposited, at the direction of the Company, into a
custody arrangement wherein payments of principal and interest
on the Series A bonds were credit enhanced by insurance
policies issued by Financial Security Assurance, Inc
(“FSA”), and custodial receipts were issued to
third-party investors evidencing beneficial ownership interests
in the FSA-enhanced Series A bonds (the “Custodial
Receipts”).
44
Although the Series A bonds could have been redeemed and
refunded at the direction of the borrowing partnerships
beginning in early 2005, the Company avoided the cost and time
involved in refunding by keeping the Series A bonds and the
Custodial Receipts outstanding and by causing a subsidiary to
direct the purchase of the Custodial Receipts in lieu of
redemption in February 2005. The subsidiary then caused the
Custodial Receipts to be deposited into a securitization
vehicle, whereby new receipts, benefiting from FSA’s
underlying credit enhancement, were issued to third-party
investors and the subsidiary purchased certificates representing
residual beneficial interests in the Custodial Receipts. This
residual beneficial interest will indirectly produce tax-exempt
income for the Company.
The transaction does not affect the obligations of the borrowing
partnerships in connection with the Series A bonds.
Pursuant to the Company’s Operating Agreement, the
transaction was approved by the disinterested members of the
Company’s Board of Directors. Mr. Joseph did not
participate in, or influence, the structuring or the approval of
the transaction.
Special Shareholder
Shelter Holdings is personally liable for the obligations and
liabilities of the Company under the Company’s Amended and
Restated Certificate of Formation and Operating Agreement as the
“Special Shareholder.” Under the terms of the
Operating Agreement, if a business combination or change in
control occurs, and the Special Shareholder does not approve the
transaction, the Special Shareholder can terminate its status as
the Special Shareholder. In this case, the Company would be
obligated to pay $1.0 million to Shelter Holdings, as the
Special Shareholder.
Transactions with Outside Directors
Richard O. Berndt, Esq., a member of the Company’s Board of
Directors, is the managing partner of the law firm Gallagher,
Evelius & Jones LLP (“GEJ”). Mr. Berndt owns
6% of GEJ’s equity interest. GEJ provides legal services to
the Company. Some of GEJ’s legal services are provided as
part of real estate transactions and the fees charged are billed
to and paid for by the borrowers. For the year ended
December 31, 2004, GEJ received $1.0 million in legal
fees for these transactions. For the year ended
December 31, 2004, GEJ received $1.7 million in legal
fees directly from the Company. The fees paid by the Company
represented 11.5% of GEJ’s total revenues for 2004. It is
anticipated that the Company will transact an equal or greater
amount of business with GEJ during 2005.
In 2004, the Company appointed Stephen A. Goldberg as its
General Counsel. Mr. Goldberg remains a partner at GEJ and
the firm bills the Company its standard hourly rates for
Mr. Goldberg’s services.
Fred N. Pratt, Jr., a member of the Company’s Board of
Directors, was a founder and chief executive officer of The
Boston Financial Group, the predecessor to the Lend Lease HCI
business. As a result of this prior role, Mr. Pratt owns certain
limited partnership and other interests in entities related to
the Company’s affordable housing investment business. Most
of these interests were granted to Mr. Pratt prior to 1986
and relate to pre-tax credit properties. MMA serves as asset
manager to these properties, and Mr. Pratt does not
influence their management. Most of these properties are
expected to be sold over the next few years, and besides asset
management and disposition fees, the Company has no economic
interest in them. It is expected that Mr. Pratt will receive
payments from his interests in these properties when they are
sold, but this will not represent payments to Mr. Pratt by
the Company.
Transactions with Management Directors And Executive
Officers
Charles M. Pinckney is an Executive Vice President with the
Company. Through the end of 2010, the Company will pay
Mr. Pinckney $32,500 per year for consulting fees earned,
but deferred, prior to his becoming an employee of the Company.
The Company also distributes to Mr. Pinckney approximately
$7,000 per year, to the extent received by the Company, as an
annuity on certain assets that the Company acquired from
Whitehawk Capital LLC, a company owned by Mr. Pinckney and
acquired by the Company in 2002. The Company is obligated to pay
Mr. Pinckney these amounts as a part of the agreement under
which the Company acquired Whitehawk Capital, LLC.
45
On January 1, 2000, Shelter Holdings made personal loans to
Mr. Michael L. Falcone, President of the Company and, since
January 1, 2005, Chief Executive Officer, and Mr. Gary
A. Mentesana, Executive Vice President of the Company.
Mr. Falcone’s original loan amount was approximately
$542,000 with an interest rate of LIBOR plus 1.85%. The unpaid
balance on this loan, as of December 31, 2004, is
approximately $399,087. Mr. Mentesana’s original loan
amount was $132,000 with an interest rate of LIBOR plus 1.85%.
The unpaid balance on this loan, as of December 31, 2004,
is approximately $83,627. The purpose of these loans was to
allow Messrs. Falcone and Mentesana to purchase the
Company’s common shares.
Prior to the Company’s acquisition of the Midland Companies
by the Company in 1999, Mr. Robert J. Banks, an employee of
the Company and Vice Chairman of the Board of Directors through
the end of 2004, and Mr. Keith J. Gloeckl, Executive Vice
President of the Company, assumed interests in various real
estate properties related to transactions in which the Midland
Companies participated that had defaulted on their financing
obligations. Messrs. Banks and Gloeckl undertook the
responsibility of replacing the defaulted general partners in
order to protect and preserve the investments for the benefit of
the tax credit investors who had participated in low-income
housing tax credit funds syndicated and managed by the Midland
Companies. These properties generated tax credits that were sold
to, and benefited, third party investors. These properties are
no longer in default. Messrs. Banks and Gloeckl’s
interests derived from the ownership of shares in four
corporations that are investors in the partnerships that control
them as operating general partners. In one of the partnerships,
Mr. Gloeckl acts as the managing general partner. It is
very unlikely that either Mr. Banks or Mr. Gloeckl
will personally profit from these transactions.
Mr. Robert J. Banks, an employee of the Company and Vice
Chairman of the Board of Directors through the end of 2004,
serves on the Board of Directors of United Bank and Trust
Company, an affiliate of Synovus Financial Holdings. Through
various subsidiaries, United Bank has extended to the Company a
$50.0 million line of credit and $10.0 million letter
of credit facility and the Company currently has deposits with
United Bank of approximately $39.3 million.
Transactions with Affiliates and Non-Profit Entities
Affiliate and Non-Profit Management and Control of Defaulted
Assets
From time to time, borrowers have defaulted on their debt
obligations to the Company. Some of these obligations were
incurred in connection with the development of properties that
collateralize the Company’s tax-exempt bonds. These
properties are sometimes referred to as “defaulted
assets.” In a number of these circumstances the Company
has, after evaluating its options, chosen not to foreclose on
the property. Instead and in lieu of foreclosure, the Company
has negotiated the transfer of a property’s deed in lieu of
foreclosure to, or replaced the general partner of an original
borrowing partnership with, an entity controlled by and
affiliated with certain officers of the Company. The Company has
taken this action to preserve the value of the original
tax-exempt bond obligations and to maximize cash flow from the
defaulted assets. Following the transfer of a property to, or
the replacement of the general partner with, an affiliated
entity, that entity controls the defaulted or previously
defaulted asset, which serves as collateral for the debt to the
Company. The Company will refer to all transferees as
“affiliated entities” for purposes of this discussion.
These affiliated entities include partnerships in which
Mr. Joseph has interests, for purposes of this discussion,
affiliate entities also include a 501(c)(3) corporation and a
non-501(c)(3) corporation that have Board members and officers
who are also executive officers of the Company. These officers
acting as Board members and officers of the affiliated entities
do not have a personal financial interest in the entities. Only
Mr. Joseph has a personal financial interest in these
partnerships, as described above in the section entitled
“Related Party Transactions.” A portion of the
defaulted assets subsequently ceased to be in default.
46
This result is consistent with the Company’s goal of
providing tax-exempt income to its shareholders. The following
table outlines these affiliate relationships at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Carrying Value of | |
| |
|
|
|
Company’s Investment | |
| (in thousands) |
|
Number of Properties Owned | |
|
at | |
| Affiliate or Non-Profit Entity |
|
(directly or indirectly) | |
|
December 31, 2004 | |
| |
|
| |
|
| |
|
SCA Successor, Inc. (1)
|
|
|
2 |
|
|
$ |
39,781,869 |
|
|
SCA Successor II, Inc. (1)
|
|
|
12 |
|
|
|
65,339,156 |
|
|
MMA Affordable Housing, Inc. and
|
|
|
|
|
|
|
|
|
| |
MMA Successor I, Inc. (2)
|
|
|
1 |
|
|
|
5,991,217 |
|
|
MuniMae Foundation, Inc. (3)
|
|
|
3 |
|
|
|
52,178,159 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
18 |
|
|
$ |
163,290,401 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
These corporations are general partners of the operating
partnerships whose property collateralizes the Company’s
investments. All of these general partner investments, except
for the Company’s Creekside project, are 1% interests in
the related operating partnerships. See above for a discussion
of Mr. Joseph’s interest in these general partners.
The property partnerships in which the SCA Successor entities
are the general partners include the partnerships in which the
umbrella LLC described above is the limited partner. |
| |
| (2) |
MuniMae Affordable Housing, Inc. (“MMAH”), formerly
known as MuniMae Foundation, Inc., is a private non-profit
entity organized to promote affordable housing. No part of its
earnings inures to the benefit of any individual or for-profit
entity. Executive officers of the Company serve as directors of
MMAH. MMA Successor I, Inc. is a for profit entity owned and
controlled by Mr. Joseph. MMAH and MMA Successor I,
Inc. are, respectively, the 99% limited partner and the 1%
general partner in a partnership whose property collateralizes
one of the Company’s investments. |
| |
| (3) |
MuniMae Foundation, Inc. (“MMF”), formerly known as
MMA Affordable Housing Corp. (“MMAHC”), is a 501(c)(3)
non-profit entity organized to provide affordable housing. No
part of its earnings inures to the benefit of any individual or
for-profit entity. Executive officers of the Company serve as
directors of MMF. |
The affiliated entities that own and operate the defaulted or
previously defaulted assets could have interests that do not
fully coincide with, or could even be adverse to, the interests
of the Company’s tax-exempt bond business. If any of these
entities chose to act solely in accordance with their ownership
interest in the defaulted or previously defaulted assets, such
as selling a property or filing a bankruptcy, the interests of
the tax-exempt bondholders could be adversely impacted. In
making decisions relating to the defaulted or previously
defaulted assets, the Company, by direction to its affiliates
and officers, has, consistent with its overall strategy of
providing largely tax-exempt income to its shareholders, elected
to manage the defaulted or previously defaulted assets in such a
manner that maximizes the tax-exempt cash flow from the
projects. The Company could, therefore, make a decision to defer
the capital needs of a defaulted or previously defaulted asset
in favor of paying the debt service, which could adversely
impact the value of the Company’s collateral.
As part of the sale of certain taxable notes in 1998 and 1999,
the Company provided a guarantee on behalf of the operating
partnerships that hold these defaulted assets for the full and
punctual payment of interest and principal due under the taxable
notes. The face amount of these notes at December 31, 2004
was $16.2 million. The Company’s obligation under this
guarantee is included in the summary of the Company’s
guarantees in Note 14 of Notes to the Consolidated Financial
Statements.
501(c)(3) Organization
Some of the Company’s properties are financed by tax-exempt
bonds issued on behalf of borrowers that are tax-exempt
organizations under Section 501(c)(3) of the Internal Revenue
Code. For such bonds to remain tax-exempt, the property at all
times must be owned by a 501(c)(3) organization. Accordingly,
whenever one of these properties requires a workout or
restructuring where a change in ownership is desirable, the
Company seeks to find a qualified 501(c)(3) organization to act
as owner. In order to assure that a 501(c)(3) organization will
always be available, the Company helped organize and remains
closely associated with MMF, a 501(c)(3) organization devoted to
the ownership and operation of affordable housing for all
citizens. MMF owns several of the Company’s bond financed
properties and may in the future own more of such properties.
This ownership accomplishes both the preservation of affordable
47
housing and the preservation of the tax-exempt status of the
Company’s bonds. The Company’s valuation, workout and
other policies are the same for these properties and bonds as
for all other 501(c)(3) bonds in the Company’s portfolio.
The Company may from time to time make additional loans
available to its 501(c)(3) borrowers or may make charitable
contributions to such entities, including MMF. Such loans and
grants must be used for the recipient’s charitable
purposes, which may include payment of debt service on bonds
held by the Company. Because the Company’s 501(c)(3) bonds,
like most of the Company’s loans, are non-recourse, the
Company values these bonds by reference to the underlying
property and therefore such loans or contributions by the
Company do not change the value of the bonds on the
Company’s books, which is determined by reference to the
underlying property.
On April 1, 2004, a wholly owned subsidiary of MMF, took
title to the Peaks at Conyers property by a deed in lieu of
foreclosure, assuming the obligations of the previous borrower
under the 501(c)(3) tax-exempt bond documents. The subsidiary
was and still is called MMA Affordable Housing Corp. —
Conyers, LLC.
On October 13, 2004, the entire membership interest in
MMA Affordable Housing Corp. —
Conyers, LLC was assigned by MMF to a newly created
for-profit corporation, Peaks at Conyers Corp., a Maryland
corporation, which is owned 100% by MMAH. On the same
day, the 501(c)(3) tax-exempt bonds were redeemed in whole,
and MMA Affordable Housing Corp. —
Conyers, LLC issued taxable corporate bonds that are
guaranteed by an insurance policy issued by
QBE International Insurance Limited. The proceeds from the
sale of the new taxable bonds were used to pay off the existing
501(c)(3) bonds. The Company has no interest in the new
bonds.
On December 14, 2004, MMF took control of the
defaulted borrower under the Cool Springs bond documents by
receiving an assignment of the entire membership interest in
this borrower, which is called ASF of Franklin, LLC, a
Tennessee limited liability company. The 501(c)(3) Cool
Springs bonds remain outstanding.
By acquiring the entire membership interest in the existing
borrower, MMF was able to avoid the transfer taxes that
would have been assessed if the property itself had been
conveyed by a deed in lieu of foreclosure to MMF or a
subsidiary.
Winter Oaks Partners, Ltd., (L.P.), a Georgia limited
partnership (the “Borrower”), is the owner of the
Winter Oaks Apartments project in Winterhaven, Florida. Until
May 12, 2004, the Borrower was owned by MMA
Successor I, Inc., an entity owned and controlled by
Mr. Joseph, as the 1% general partner and by Winter
Oaks, L.P., a Delaware limited partnership, as the 99%
limited partner. Winter Oaks, L.P. is owned 1% by MMA
Successor I, Inc. and 99% by MMAH. The
Borrower was the borrower under bond documents related to two
subordinate bonds and a related junior mortgage owned by
MuniMae TE Bond Subsidiary, LLC. The Borrower was also
the borrower under a taxable loan from the Company. A senior
mortgage loan was held by Fannie Mae.
On May 12, 2004, MMA Successor I, Inc. assigned
its 1% general partner interest in the Borrower to a third
party, and Winter Oaks, L.P. assigned its 99% limited
partner interest to a third party. On the same day, the proceeds
of the sale were used to redeem the two subordinate bonds and to
pay off the taxable loan from the Company. The senior bond and
first-lien mortgage remained outstanding and the new partners in
the Borrower assumed the obligations related thereto. There were
insufficient proceeds from the sale to pay off all the deferred
interest owed under the most junior bond. As a result,
MuniMae TE Bond Subsidiary, LLC waived its right to
receive full payment of the deferred interest and permitted the
redemption to take place.
Neither the assignors, MMA Successor I, Inc. and Winter
Oaks, L.P., nor Mr. Joseph, received any proceeds from
the assignments.
48
Fees Paid to the Company from Unconsolidated Entities
Pension Funds
The Company, through its subsidiary MMA Advisory
Services, Inc. (“MAS”), formerly Midland Advisory
Services, Inc., receives fee income from two pooled investment
vehicles, the Group Trust and MMER. The Group Trust invests
primarily in real estate backed debt investments, and MMER
makes equity investments in real estate. Both are owned by and
comprised exclusively of a select group of institutional
investors. To date, the Group Trust and MMER engage in business
transactions only with the Company. The Group Trust invests in
loans originated by the Company and, on occasion, provides
short-term financing to the Company through a market rate credit
facility. MMER invests in income-producing real estate
partnerships originated by the Company and provides short-term
lines of credit to the Company also through a market rate credit
facility.
MAS earns fee income for investment management services provided
to MMER. In addition, the Company receives origination fees
for investments placed with MMER. Collectively these fees
totaled $1.5 million, $1.4 million, and
$1.6 million for the years ended December 31, 2004,
2003, and 2002 respectively.
The Company, directly and through MAS, receives fee income from
the Group Trust for providing investment management services,
originating Group Trust loans, and servicing individual Group
Trust investments. The Company receives these fees on both Group
Trust direct investments and investments funded through lines of
credit backed by Group Trust assets. For the years ended
December 31, 2004, 2003, and 2002, these fees amounted to
$4.5 million, $4.1 million, and $2.5 million
respectively.
Contributions to Tax-Exempt Entities in which the
Company’s Officers Are Directors
For the year ended December 31, 2004, the Company made a
$1.0 million charitable contribution to MMF.
Income Tax Considerations
MuniMae is organized as a limited liability company. This
structure allows MuniMae to combine many of the limited
liability, governance and management characteristics of a
corporation with the pass-through income features of a
partnership. Therefore, the distributive share of
MuniMae’s income, deductions and credits is included
in each shareholder’s income tax return. In addition, the
tax-exempt income derived from certain investments remains
tax-exempt when it is passed through to the shareholders.
MuniMae records cash dividends received from subsidiaries
organized as corporations as dividend income for tax purposes.
Shareholders’ distributive share of
MuniMae’s income, deductions and credits are reported
to shareholders on Internal Revenue Service Schedule K-1.
The tax returns of the Company are subject to examination
by Federal and state taxing authorities. If such examinations
result in adjustments to distributive shares of taxable income
or loss, the tax liabilities of the partners (the Company’s
common shareholders) could be adjusted accordingly.
The tax attributes of the Company’s net assets flow
directly to each individual shareholder. Since the Company
is taxed as a partnership, and its shareholders are therefore
treated as partners, individual shareholders will have different
investment bases depending upon the timing and prices of
acquisition of partnership units. Further, each
shareholder’s tax accounting, which is partially dependent
upon the shareholder’s individual tax position, may differ
from the accounting followed in the financial statements.
Accordingly, there could be significant differences between each
individual shareholder’s tax basis and the
shareholder’s proportionate share of the net assets
reported in the financial statements. Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes” (“FAS 109”) requires
disclosure by a publicly held partnership of the aggregate
difference in the basis of its net assets for financial and tax
reporting purposes. However, the Company does not have access to
information about each individual shareholder’s tax
attributes in the Company, and the aggregate tax bases
cannot be readily
49
determined. In any event, management does not believe that, in
the Company’s circumstances, the aggregate difference
would be meaningful information.
Tax-exempt bonds make up the majority of
MuniMae’s investments. Historically, these bonds were
purchased using financing sources other than debt. However,
the Company may use debt-funding sources to finance
tax-exempt bond acquisitions. As a result, the associated
interest expense incurred in connection with loans used to
finance these acquisitions will be disallowed as a deduction.
While the bulk of the Company’s recurring interest
income is tax-exempt, from time to time the Company may
sell or securitize various assets, which may result in capital
gains and losses for tax purposes. These capital gains and
losses are passed through to shareholders and are reported on
each shareholder’s Schedule K-1.
The Company previously made an election under the relevant
provisions of the federal income tax law to adjust the basis of
its partnership property on the transfer between shareholders of
its common shares by the difference between the transferee
shareholder’s purchase price for the shares and the
transferee shareholder’s proportionate share of the basis
of the Company’s assets. Under this election, the
increase or decrease affected the basis of
the Company’s property only with respect to the
transferee shareholder’s shares. In January 2003,
the Company applied to have its election under
Section 754 of the Internal Revenue Code revoked.
The Company applied for this revocation due to the
increasing administrative burden attributable to this election
resulting from the increased numbers of common shareholders and
the increasing frequency of events generating capital gain or
loss and of purchases and sales of common shares. In
May 2003, the Internal Revenue Service approved
the Company’s application to revoke its election under
Section 754 effective beginning with
the Company’s tax year ending December 31, 2003.
In October 2004, new tax legislation was enacted that
requires partnerships that have aggregate built-in losses in all
partnership assets of greater than $250,000 at the time a
shareholder purchases and interest in the Company to make basis
adjustments similar to those described above. Although
the Company does not currently have aggregate built-in
losses that would require such an adjustment, monitoring its
assets and making potential adjustments will eliminate the
administrative savings of having revoked such election. As a
result, MuniMae will attempt to retroactively reinstitute its
basis adjustment election under Section 754 of the Internal
Revenue Code effective January 1, 2003. Accordingly, if
such re-election is successful, the basis adjustment election
will apply to all MuniMae shares acquired after 1995.
The procedure for basis adjustments is complex and there is no
assurance that the IRS will not challenge the accounting
conventions the Company uses or the allocation of the basis
step-up among the Company’s assets.
A portion of the Company’s interest income is derived
from private activity bonds that for income tax purposes are
considered tax preference items for purposes of the alternative
minimum tax (“AMT”). AMT is a mechanism within
the Internal Revenue Code to ensure that all taxpayers pay
at least a minimum amount of taxes. All taxpayers are subject to
the AMT calculation requirements although the majority of
taxpayers will not actually pay AMT. As a result
of AMT, the percentage of the Company’s income
that is exempt from Federal income tax may be different for each
shareholder depending on that shareholder’s individual tax
situation.
The Company has numerous corporate subsidiaries that are
subject to income taxes. The Company provides for income
taxes in accordance with FAS 109. FAS 109 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
basis of assets and liabilities.
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
The Company holds a variety of financial instruments and other
investments, including available-for-sale investments in
tax-exempt bonds and interests in bond securitizations, taxable
construction, permanent and related loans, short- and long-term
debt and notes payable. These financial instruments are subject
to various forms of market risk including real estate risk,
interest rate risk, credit and liquidity risk and prepayment
risk. The Company seeks to prudently and actively manage such
risks, to earn sufficient
50
compensation to justify the undertaking of such risks and to
maintain capital levels consistent with the risks the Company
undertakes.
The following is a discussion of various categories of risk that
the Company may be subject to in the foreseeable future.
Real Estate Risk
The Company’s investments in bonds, interests in bond
securitizations and taxable loans are primarily collateralized
by non-recourse mortgage loans on real estate properties. One of
the major risks of owning investments collateralized by
multifamily residential properties is the possibility that the
owner of a property collateralizing the investment will not make
the payments due to the Company and therefore defaults on the
debt obligation. Defaults are influenced by a wide variety of
factors, including, but not limited to, property performance,
property management, owners’ financial health with respect
to other real estate investments, supply and demand forces,
economic trends, interest rates and other factors beyond the
control of the Company. The Company may receive less income from
its investments than expected due to any number of factors,
including:
|
|
|
| |
• |
Adverse economic conditions, at the local, regional or national
level, may limit the amount of rent that can be charged for
rental units at the properties. Adverse economic conditions may
also result in a reduction in timely rent payments or a
reduction in occupancy levels. |
| |
• |
Occupancy and rent levels may decrease due to the construction
of additional housing units or the establishment of rent
stabilization or rent control laws or similar arrangements. |
| |
• |
A decline in the level of mortgage interest rates and other
changes in the mortgage finance market, such as the increasing
availability of zero down payment mortgages, may encourage
tenants in multifamily rental properties to purchase housing,
which may reduce the demand for rental housing. |
| |
• |
City, state and Federal housing programs that subsidize many of
the properties impose rent limitations and may limit the ability
of the operators of the properties to increase rents. This may
discourage operators from maintaining the properties in proper
condition during periods of rapid inflation or declining market
value of the properties. In addition, the programs may impose
income restrictions on tenants, which may reduce the number of
eligible tenants in the properties and result in a reduction in
occupancy rates. Even if a property is not subject to legal
restrictions on the amount of rent that may be charged to low
and moderate income tenants, rental market conditions and other
factors may result in reduced rents. |
| |
• |
Tenants who are eligible for subsidies or similar programs may
not find the differences in rents between the subsidized or
supported properties and other multifamily rental properties in
the same area to be a sufficient economic incentive to reside at
a subsidized or supported property, which may have fewer
amenities or otherwise be less attractive as a residence. |
| |
• |
Expenses at the property level, including but not limited to
capital needs, real estate taxes and insurance, may increase. |
All of these conditions and events may increase the possibility
that a property owner may be unable to meet its obligations to
the Company under its tax-exempt bond and taxable debt business.
These conditions and events may also cause foreclosure in the
tax credit business. This could affect the Company’s cash
available for distribution to shareholders. The Company manages
this risk through a diligent underwriting process and by
carefully monitoring loan performance.
All of these conditions and events may also affect the
underlying performance of properties in the Company-sponsored
tax credit funds. Actual net operating income of the properties
in the funds may be lower than originally projected. In general,
the Company is not directly impacted by a decline in the net
operating income of the properties in Company-sponsored tax
credit funds. However, a decline in property net income may
result in a reduction of the asset management fees that the
funds can pay the Company. Also, to the extent that economic
conditions adversely affect a property so that the property can
no longer pay debt service and local general partners have
exhausted or do not honor their guarantees
51
to investors, and the property is subject to foreclosure by the
lender, the Company may be subject to additional liability under
its tax credit guarantees. However, the funds are structured
with funded reserves controlled by the General Partner entity of
the fund, which in almost all cases is an affiliate of the
Company, and those reserves may be used to provide assistance to
properties experiencing financial difficulties.
The Company may be adversely affected by periods of economic
slowdown or recession that result in declining property values
or property performance, particularly declines in the value or
performance of multifamily properties. Any material decline in
property values weakens the value of the properties as
collateral for the Company’s investments and increases the
possibility of a loss in the event of a default. Additionally,
some of the Company’s income comes from additional interest
on participating tax-exempt bonds. The collection of additional
interest may decrease in times of economic slowdown due to lower
cash available from the properties. Further, many of the
Company’s investments are subordinated to the claims of
other senior interests and uncertainties may exist as to a
borrower’s ability to meet principal and interest payments.
As a result of these factors, debt service on the investments,
and therefore cash flow available for distribution to
shareholders, is dependent upon the performance of the
underlying properties. Accordingly, a decline in the performance
of the related multifamily property could have a negative effect
on the Company’s cash available for distribution to
shareholders.
The Company has occasionally entered into put option agreements
with counterparties whereby the counterparty has the right to
sell to the Company, and the Company has the obligation to buy,
an underlying investment at a specified price. Under the put
options, the Company may receive an annual payment for assuming
the purchase obligation and providing asset management services
on the underlying investments. The purchase price can be reduced
in the event of a material adverse change (as defined in the put
agreements). The Company is at risk that the value of the
underlying investment decreases, causing the counterparty to
exercise its right to sell the investment to the Company at the
specified price. As a result, the Company may be purchasing
these investments for more than their market value. In addition,
the counterparty might exercise its option at times unfavorable
to the Company and the Company may need to liquidate investments
to meet the obligation. The Company’s aggregate obligation
under put options was $105.6 million and
$122.5 million at December 31, 2004 and 2003,
respectively.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including
governmental, monetary and tax policies, domestic and
international economic and political considerations and other
factors beyond the Company’s control. The interest income
collected on fixed-rate investments, interest paid on fixed-rate
debt and interest collected on investments that pay interest
based on the cash flow available from the underlying property
are not directly impacted by fluctuations in interest rates,
unless the investment or debt is prepaid as discussed below. In
contrast, certain of the Company’s investments in interests
in bond securitizations and the Company’s floating rate
short- and long-term debt are directly impacted by fluctuations
in market interest rates. If interest rates had increased by 100
basis points and 200 basis points at December 31, 2004, the
Company’s annual net interest income on these investments
and debt would have decreased by $4.0 million and
$8.1 million, respectively. If interest rates had increased
by 100 basis points and 200 basis points at December 31,
2003, the Company’s annual net interest income on these
investments and debt would have decreased by $3.2 million
and $6.4 million, respectively. As discussed below, the
Company attempts to manage this interest rate exposure through a
financial risk management strategy, which currently relies
heavily upon the use of interest rate swaps.
Changes in relative interest rates between taxable and
tax-exempt or rising interest rate environments could reduce the
demand for multifamily tax-exempt and taxable financing and tax
credit equity investments, which could limit the Company’s
ability to structure transactions. Conversely, falling interest
rates may prompt historical renters to purchase homes, which
could reduce the demand for multifamily housing. In addition, in
a falling interest rate environment, demand for taxable
financing could increase relative to tax-exempt financing.
52
The majority of the Company’s loans receivable and notes
payable related to the Company’s real estate finance
activities are generally not expected to be directly subject to
interest rate risk. The Company typically provides loans to
borrowers (loans receivable) by borrowing from third parties
(notes payable). The Company earns net interest income that
represents the difference between the interest charged to
borrowers and the interest paid to the Company’s lenders.
The Company typically attempts to match the terms and rates of
its loans receivable and notes payable to fix the net interest
income the Company will receive. However, because many of the
Company’s taxable loans receivable have a fixed interest
rate floor to the extent such loans are currently paying
interest based on the floor rather than a percentage spread over
a floating rate index, rising interest rates may cause the
Company’s cost of financing such loans to increase faster
than the Company’s interest income until rates on the loans
rise enough to cause the spread-based rate to exceed the floor.
Developing an effective interest rate management strategy can be
complex, and no strategy can insulate the Company from all
potential risks associated with interest rate changes.
Management believes the majority of the Company’s interest
rate risk arises in connection with: (1) certain of its
interests in bond securitizations and senior interests in
securitization trusts which are reflected as short- and
long-term debt in the Company’s consolidated balance
sheets; (2) properties warehoused prior to being placed in
tax credit equity funds; and (3) to the extent not
match-funded as described above, floating-rate debt used to
finance the Company’s real estate finance activities. The
Company manages its interest rate exposure on its investments in
certain tax-exempt bond securitizations through the use of
interest rate swaps. The Company may choose not to hedge all of
its floating rate exposure with hedging instruments. As a
result, changes in interest rates could result in either an
increase or decrease in the Company’s interest income and
cash flows associated with these investments. Also, certain of
the interest rate swap agreements are subject to risk of early
termination, possibly at times unfavorable to the Company. There
can be no assurance that the Company will be able to acquire
hedging instruments at favorable prices, or at all, when the
existing arrangements expire or are terminated. In this case,
the Company would be fully exposed to interest rate risk to the
extent the hedging instruments are terminated by the
counterparty while the floating rate exposure remains in
existence.
The duration of the Company’s interest rate swaps is less
than the duration of the Company’s floating rate
instruments. As a result, the Company would be fully exposed to
interest rate risk on its floating rate instruments if it were
not able to enter into new interest rate swaps when the existing
agreements expire. There can be no assurance that the Company
will be able to acquire interest rate swaps at favorable prices,
or at all, when the existing arrangements expire.
In addition, there is no guarantee that the securitization trust
will be in existence for the duration of the hedge, as these
securitization trusts would be collapsed if the related credit
enhancement or liquidity facilities are not renewed.
The interest required to be paid on certain of the
Company’s senior interests in bond securitization trusts
includes a remarketing spread over a floating market interest
rate. This remarketing spread varies on a weekly basis and is
not mitigated by the hedging instruments discussed above. As a
result, changes in the remarketing spread could result in either
an increase or decrease in the Company’s interest income
and cash flows associated with its interests in bond
securitizations. At December 31, 2004, the Company’s
weighted average remarketing spread was 8.8%. If the remarketing
spread had changed by 50% and 100% at December 31, 2004,
the Company’s annual interest income on these investments
would have changed by $0.2 million and $0.4 million,
respectively. At December 31, 2003, the Company’s
weighted average remarketing spread was 0.12%. If the
remarketing spread had changed by 50% and 100% at
December 31, 2003, the Company’s annual interest
income on these investments would have changed by
$0.2 million and $0.5 million, respectively.
The Company’s investments in tax-exempt bonds, interests in
bond securitizations, and investments in derivative financial
instruments are carried at fair value. Significant changes in
market interest rates could affect the amount and timing of
unrealized and realized gains or losses on these investments. If
interest rates had changed by 100 basis points and 200 basis
points at December 31, 2004, the market
53
value of these investments would have changed by 8% and 14%,
respectively. If interest rates had changed by 100 basis points
and 200 basis points at December 31, 2003, the market value
of these investments would have changed by 7% and 14%,
respectively. However, for the participating tax-exempt bonds
for which the fair value is determined by discounting the
underlying collateral’s expected future cash flows using
current estimates of discount rates and capitalization rates,
changes in market interest rates do not have a strong enough
correlation to discount and capitalization rates from which to
draw a conclusion. There are many mitigating factors to consider
in determining what causes discount and capitalization rates to
change, such as macroeconomic issues, real estate capital
markets, economic events and conditions, and investor risk
perceptions.
Credit and Liquidity Risks
Substantially all of the Company’s tax-exempt bond
investments lack a regular trading market and are illiquid. This
lack of liquidity could be exacerbated during turbulent market
conditions or if any of the tax-exempt bonds become taxable or
go into default. If the Company were required to raise
additional cash during a turbulent market, the Company might
have to liquidate its investments on unfavorable terms. In
addition, the illiquidity associated with the Company’s
tax-exempt bond investments can result in increased volatility
in the fair value of the Company’s investments, which could
impact the Company’s balance sheet and other comprehensive
income (loss).
There can also be significant credit risk assigned by investors
to the types of investments held by the Company. The illiquid
assets held by the Company trade at yields that can be traced to
spreads over “investment grade” instruments. On
occasion there may be periods of market volatility during which
the market investors demand an increased credit spread over
“investment grade” investments for the investments
owned by the Company. During these times, the market value of
the Company’s investments may decline significantly. If the
investors’ required rate of return on the Company’s
investments had changed 100 basis points and 200 basis points at
December 31, 2004, the market value of these investments
would have changed by 8% and 15%, respectively. If the
investors’ required rate of return on the Company’s
investments had changed 100 basis points and 200 basis points at
December 31, 2003, the market value of these investments
would have changed by 8% and 15%, respectively.
Under the terms of the Company’s interest rate swap
agreements with counterparties and certain other transactions
(see Note 7 to the consolidated financial statements), the
Company is required to maintain cash deposits with its
counterparties (“margin call deposits”). The
Company’s margin call deposits with counterparties were
$0.5 million and $9.1 million at December 31,
2004 and 2003, respectively. There is a risk that the Company
could be required to liquidate investments to satisfy margin
calls on its interest rate swap contracts if interest rates rise
or fall dramatically. If interest rates changed by 50 and 100
basis points at December 31, 2004, the Company would be
required to post additional margin call deposits of
$1.4 million and $3.5 million, respectively.
Additionally, the Company is exposed to the credit risks of the
Company’s counterparties in the interest rate swap. The
Company’s counterparties, under certain circumstances, may
not pay or perform under the contracts or they may terminate the
contract at times unfavorable to the Company. In addition, these
agreements contain covenants related to minimum net worth and
other terms and conditions. These covenants impose operating and
financial restrictions that may impair the Company’s
ability to respond to changing business and economic conditions
or to grow its business and make the Company more vulnerable to
economic downturns.
In order to facilitate the securitization of certain assets at
higher than normal leverage ratios, the Company has pledged
additional bonds that act as collateral for the senior interests
in the securitization trusts. In the event that a securitization
trust cannot meet its obligations, all or a portion of the bonds
pledged as collateral may be sold to satisfy the obligations of
the senior interest in the securitization trust. In addition, if
short-term tax-exempt interest rates rise dramatically and
exceed the coupon rate of the underlying fixed rate bond in a
securitization trust, the securitization trust would be
collapsed as a result of insufficient interest from the
underlying fixed rate bond available to service the floating
senior interest obligation.
54
Prepayment Risk
A decrease in market interest rates may result in the redemption
of an investment or a borrower prepaying or refinancing the
investment prior to its stated maturity. The Company may not be
able to reinvest the proceeds of the redeemed investment at an
attractive rate of return. This may affect the Company’s
ability to generate sufficient cash to pay distributions. The
risk of prepayment is mitigated by the existence of prepayment
penalties on certain of the Company’s investments.
Other Risks Associated with Securitizations and Financings
Through securitizations, the Company seeks to enhance its
overall return on its investments and to generate proceeds that
facilitate the acquisition of additional investments. In certain
of the Company’s floating rate on-balance sheet
securitization trusts, investment banks provide liquidity to the
trust (the “liquidity provider”) and credit
enhancement to the bonds (“the credit
enhancer”), which enable the senior interests to be
sold to qualified institutional buyers and accredited third
party investors seeking investments rated the equivalent AA- or
better by Standard and Poor’s. The Company retains the
residual interest in these trusts. To the extent that the credit
enhancer is downgraded below AA-, either an alternative credit
enhancer would be substituted to reinstate the desired
investment rating or the senior interests would be marketed to
qualified institutional buyers and other accredited investors.
In either case, it is anticipated that the return on the
residual interests would decrease, which would negatively impact
the Company’s income. The liquidity facilities generally
have one-year terms and are renewable annually by the liquidity
providers. If the liquidity provider does not renew the
liquidity facility, the Company would be forced to find an
alternative liquidity provider, sell the senior interests as
fixed-rate securities, repurchase the underlying bonds, or
liquidate the underlying bond and its investment in the residual
interests. Similarly, if the credit enhancer does not renew the
credit enhancement facility, the Company would be forced to find
an alternative credit enhancer, repurchase the underlying bonds,
or liquidate the underlying bond and its investment in the
residual interests. If the Company is forced to liquidate its
investment in the residual interests and potentially the related
interest rate swaps (discussed above), the Company would
recognize gains or losses on the liquidation, which may be
significant depending on market conditions. As of
December 31, 2004, $400.8 million and
$186.4 million of the senior interests in the
Company’s securitization trusts were subject to annual
“rollover” renewal for liquidity and credit
enhancement, respectively. As of December 31, 2003,
$331.2 million and $115.6 million of the senior
interests in the Company’s securitization trusts were
subject to annual “rollover” renewal for liquidity and
credit enhancement, respectively. Where possible, the Company
has already extended in advance the liquidity and credit
enhancement of the senior interests for a period of one year on
each trust. Certain liquidity and credit enhancement facilities
are automatically extended by one year unless the Company is
otherwise notified by the liquidity provider and credit enhancer
six months prior to the termination of the facilities. The
expiration of each facility is staggered for certain trusts so
that the annual renewals are not concentrated in any one month.
The Company continues to review alternatives that would reduce
and diversify credit risks.
The majority of the Company’s borrowings under lines of
credit are subject to annual renewal. If a line of credit is not
renewed, the Company would be forced to find alternative debt
facilities and repay the outstanding balance under the line. In
order to repay borrowings under the lines of credit, the Company
may need to liquidate investments at amounts and times
unfavorable to the Company.
The Company is party to a number of credit facilities and other
borrowings that could have significant adverse effects on its
business. This debt makes it more difficult for the Company to
obtain additional financing on favorable terms and requires the
Company to dedicate a substantial portion of its cash flows from
operations to the repayment of principal and interest on its
debt. In addition, certain of these facilities contain various
restrictive covenants, including, for example, covenants related
to minimum net worth, maximum leverage and interest coverage.
These covenants impose operating and financial restrictions that
may impair the Company’s ability to respond to changing
business and economic conditions or to grow its business and
make the Company more vulnerable to economic downturns. If the
Company is unable to generate sufficient cash flows from
operations in the future, it
55
may have to refinance all or a portion of its debt and/or obtain
additional financing. The Company may not be able to obtain
refinancing or additional financing on favorable terms.
Item 8. Financial Statements and Supplementary
Data.
The consolidated financial statements of the Company, together
with the report thereon of PricewaterhouseCoopers LLP dated
March 15, 2005, are listed in Item 15(a)(1) and
included at the end of this report.
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
The Company, under the supervision and with the participation of
its management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and
operation of the Company’s disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company’s disclosure
controls and procedures are effective in recording, processing,
summarizing and reporting material information relating to the
Company and the Company’s consolidated subsidiaries
required to be disclosed in the Company’s reports filed or
submitted under the Exchange Act. The Company has investments in
certain unconsolidated entities. As the Company does not control
these entities, its disclosure controls and procedures with
respect to such entities are necessarily substantially more
limited than those it maintains with respect to its consolidated
subsidiaries. Notwithstanding these limitations, the
Company’s controls and procedures are not limited insofar
as they relate to: the recording of amounts related to such
investments that are recorded in our consolidated financial
statements; the selection of accounting methods for the same;
the recognition of equity method earnings and losses; and the
determination, valuation and recording of our investment account
balances therefor. As discussed in this report, the Company
began consolidating the financial results of certain tax credit
equity funds effective March 31, 2004 pursuant to the
requirements of FIN 46R. Because the operations of these tax
credit equity funds are primarily driven by underlying entities
that the tax credit equity funds do not control or consolidate,
and the results of these unconsolidated entities are often
reported to the tax credit equity funds on a delayed basis,
these entities are among the entities with respect to whose
information the Company’s disclosure controls and
procedures are necessarily more limited than those for
consolidated subsidiaries the Company controls. See
“Management’s Discussion and Analysis of Results of
Operations and Financial Condition — New Accounting
Pronouncements” for more information regarding the
consolidation of the financial results of these tax credit
equity funds.
(b) Management’s Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act.
Under the supervision and with the participation of the
Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, the Company
conducted an evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2004
based on the criteria related to internal control over financial
reporting described in “Internal Control —
Integrated Framework” issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on the Company’s evaluation, management concluded
that the Company’s internal control over financial
reporting was effective as of December 31, 2004.
56
The Company’s management’s assessment of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2004 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
(c) Changes in Internal Controls Over Financial Reporting
In October 2004, in connection with its ongoing internal
controls initiatives relating to the Sarbanes-Oxley Act of 2002,
management of the Company implemented procedures to enhance its
controls relating to the approval of material contracts. Except
as disclosed above, during the fiscal quarter ended
December 31, 2004, there have been no changes in the
Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Item 9B. Other Information.
None.
57
PART III
Item 10. Directors and Executive Officers of the
Registrant.
The Company has adopted a Code of Ethics that applies to
Officers, Employees and Directors, a copy of which is available
on the Company’s website at www.munimae.com.
The remaining information required to be furnished by this
Item 10 is contained in the Company’s proxy statement
for its 2005 annual shareholders meeting under the captions
“Information about the Company’s Directors,”
“Identification of Executive Officers,” and
“Section 16(a) Beneficial Ownership Reporting
Compliance” and is incorporated herein by reference.
Item 11. Executive Compensation.
The information required to be furnished by this Item 11 is
contained in the Company’s proxy statement for its 2005
annual shareholders meeting under the heading “Executive
Compensation” and is incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The information required to be furnished by this Item 12 is
contained in the Company’s proxy statement for its 2005
annual shareholders meeting under the same caption and is
incorporated herein by reference.
Item 13. Certain Relationships and Related
Transactions.
The information required to be furnished by this Item 13 is
contained in the Company’s proxy statement for its 2005
annual shareholders meeting under “Related Party and
Affiliate Transactions” and is incorporated herein by
reference.
Item 14. Principal Accountant Fees and Services.
The information required to be furnished by this Item 14 is
contained in the Company’s proxy statement for its 2005
annual shareholders meeting under “Independent Registered
Public Accounting Firm” and is incorporated herein by
reference.
58
PART IV
Item 15. Exhibits, Financial Statement Schedules.
|
|
| (a) |
(1) The following is a list of the consolidated financial
statements included at the end of this report: |
|
|
| |
Report of Independent Auditors |
| |
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
| |
Consolidated Statements of Income for the Years Ended |
| |
December 31, 2004, 2003 and 2002 |
| |
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 2004, 2003 and 2002 |
| |
Consolidated Statement of Shareholders’ Equity for the
Years Ended December 31, 2004, 2003 and 2002 |
| |
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 |
| |
Notes to Consolidated Financial Statements |
| |
| |
(2) Financial Statement Schedules: |
| |
| |
Schedule II — Valuation and Qualifying Accounts |
| |
Schedules other than Schedule II are omitted as not
applicable or not required. |
| |
| |
(3) Exhibit Index |
| |
|
|
|
|
| |
3 |
.1 |
|
Amended and Restated Certificate of Formation and Operating
Agreement of the Company dated as of August 12, 2002 (filed
as part of the Company’s Form 10-K for the fiscal year
ended December 31, 2002 and incorporated by reference
herein). |
| |
3 |
.2 |
|
Amended and Restated Bylaws (filed as part of the Company’s
Form 10-K for the fiscal year ended December 31, 2003 and
incorporated by reference herein). |
| |
10 |
.1 |
|
Amended and Restated Master Recourse Agreement among Fannie Mae,
Municipal Mortgage & Equity, LLC and MMACAP, LLC dated
as of December 1, 2000. |
| |
10 |
.2 |
|
Registration Rights Agreement among the Registrant and Messrs.
Robert J. Banks, Keith J. Gloeckl and Ray F. Mathis
dated October 20, 1999 (filed as Item 16
Exhibit 2.2 to the Company’s report on Form S-3,
File No. 333-56049, filed with the Commission on
January 25, 2000 and incorporated by reference herein). |
| |
10 |
.3 |
|
Employment Agreement between the Company and Mark K. Joseph
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
| |
10 |
.4 |
|
Amendment to Employment Agreement between the Company and Mark
K. Joseph dated as of January 1, 2005. |
| |
10 |
.5 |
|
Employment Agreement between the Company and Michael L. Falcone
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
| |
10 |
.6 |
|
Employment Agreement between the Company and Michael L. Falcone
dated as of January 1, 2005. |
| |
10 |
.7 |
|
Employment Agreement between the Company and Earl W.
Cole, III dated as of July 1, 2003 (filed as part of
the Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
| |
10 |
.8 |
|
Employment Agreement between the Company and Keith J. Gloeckl
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
| |
10 |
.9 |
|
Employment Agreement between the Company and Gary A. Mentesana
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
59
| |
|
|
|
|
| |
10 |
.10 |
|
Employment Agreement between the Company and Jenny Netzer dated
as of July 1, 2003 (filed as part of the Company’s
Form 10-K for the fiscal year ended December 31, 2003 and
incorporated by reference herein). |
| |
10 |
.11 |
|
Employment Agreement between the Company and Charles M. Pinckney
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
| |
10 |
.12 |
|
Employment Agreement between the Company and Frank G. Creamer,
Jr. dated as of August 1, 2004 (filed as part of the
Company’s Form 10-Q/A for the quarter ended June 30,
2004 and incorporated by reference herein). |
| |
10 |
.13 |
|
Warehousing Credit and Security Agreement, Residential Funding
Corporation dated May 23, 2003. |
| |
10 |
.14 |
|
Credit Agreement with Bank of America dated November 12,
2004 (filed as part of the Company’s Form 8-K filed on
November 17, 2004 and incorporated by reference herein). |
| |
10 |
.15 |
|
Municipal Mortgage Equity, LLC 2004 Non-Employee Directors’
Share Plan (filed as part of the Company’s form 10-Q
for the quarter ended September 30, 2004 and incorporated
by reference herein). |
| |
10 |
.16 |
|
Municipal Mortgage & Equity, LLC Amended and Restated
2004 Share Incentive Plan and Form of Deferred Share
Agreement (filed as part of the Company’s Form 10-Q for the
quarter ended September 30, 2004 and incorporated by
reference herein). |
| |
10 |
.17 |
|
Form of Municipal Mortgage & Equity, L.L.C.
2001 Share Incentive Plan (filed as Appendix A of the
Company’s Definitive Proxy Statement filed on
April 12, 2001 and incorporated by reference herein). |
| |
10 |
.18 |
|
Form of Municipal Mortgage & Equity, L.L.C. 2001
Non-Employee Directors’ Share Incentive Plan (filed as
Appendix B of the Company’s Definitive Proxy Statement
filed on April 12, 2001 and incorporated by reference
herein). |
| |
10 |
.19 |
|
Form of Municipal Mortgage & Equity, L.L.C.
1998 Share Incentive Plan (filed as Appendix A of the
Company’s Definitive Proxy Statement filed on
April 29, 1998 and incorporated by reference herein). |
| |
10 |
.20 |
|
Form of Municipal Mortgage & Equity, L.L.C. 1998
Non-Employee Directors’ Share Incentive Plan (filed as
Appendix B of the Company’s Definitive Proxy Statement
filed on April 29, 1998 and incorporated by reference
herein). |
| |
10 |
.21 |
|
Indenture between Midland Financial Holdings, Inc. and
Wilmington Trust Company, dated as of May 3, 2004. |
| |
11 |
.1 |
|
Statement of Computation of Earnings Per Share. |
| |
14 |
.1 |
|
Code of Ethics. |
| |
21 |
.1 |
|
List of Subsidiaries. |
| |
23 |
.1 |
|
Consent of PricewaterhouseCoopers LLP, the Registrant’s
Independent Registered Public Accounting Firm. |
| |
31 |
.1 |
|
Certification of Michael L. Falcone, Chief Executive Officer and
President of Municipal Mortgage & Equity, LLC, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31 |
.2 |
|
Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
|
|
|
|
| |
32 |
.1 |
|
Certification of Michael L. Falcone, Chief Executive Officer and
President of Municipal Mortgage & Equity, LLC, pursuant to
18 U.S.C. Section 1350, as Adopted, Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32 |
.2 |
|
Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC, pursuant to 18 U.S.C.
Section 1350, as Adopted, Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
60
Schedule II
Valuation and Qualifying Accounts
December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions |
|
|
|
|
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
Balance at | |
|
Charged to costs | |
|
Charged to Other |
|
Deductions – | |
|
Balance at end | |
| Description |
|
beginning of period | |
|
and expenses | |
|
Accounts – Describe |
|
Describe | |
|
of period | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
Loan Loss Reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2004
|
|
$ |
(1,679 |
) |
|
$ |
(1,411 |
) |
|
$ |
— |
|
|
$ |
130 |
a |
|
$ |
(2,960 |
) |
| |
2003
|
|
|
(1,072 |
) |
|
|
(610 |
) |
|
|
— |
|
|
|
3 |
a |
|
|
(1,679 |
) |
| |
2002
|
|
|
(835 |
) |
|
|
(297 |
) |
|
|
— |
|
|
|
60 |
b |
|
|
(1,072 |
) |
|
|
| a |
Represents amounts collected for loan previously determined as
uncollectible |
| |
| b |
Represents amounts adjusted to loan receivable and loan loss
reserve to properly reflect loan loss reserve balance |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
(1,411 |
) |
|
Amount per above |
| |
|
|
|
|
|
|
(4,170 |
) |
|
Other-than-Temporary Impairments Related to Bonds |
| |
|
|
|
|
|
|
(1,582 |
) |
|
Impairment of Fixed Assets |
| |
|
|
|
|
|
|
22 |
|
|
Other Impairments/ Write offs |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
(7,141 |
) |
|
Impairments and Valuation Allowances per 2004 |
| |
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income |
| |
| |
|
|
|
|
|
$ |
(610 |
) |
|
Amount per above |
| |
|
|
|
|
|
|
(3,831 |
) |
|
Other-than-Temporary Impairments Related to Bonds |
| |
|
|
|
|
|
|
(2,542 |
) |
|
Other Impairments/ Write offs |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
(6,983 |
) |
|
Impairments and Valuation Allowances per 2003 |
| |
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income |
| |
| |
|
|
|
|
|
$ |
(297 |
) |
|
Amount per above |
| |
|
|
|
|
|
|
(433 |
) |
|
Other-than-Temporary Impairments Related to Bonds |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
(730 |
) |
|
Impairments and Valuation Allowances per 2002 |
| |
|
|
|
|
|
|
|
|
|
Consolidated Statement of Income |
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
Municipal Mortgage &
Equity, LLC
|
|
|
|
| |
By: |
/s/ Michael L. Falcone
|
|
|
| |
|
| |
Michael L. Falcone |
| |
Chief Executive Officer |
Date: March 15, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons, in
the capacities and on the dates indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Mark K. Joseph
Mark
K. Joseph |
|
Chairman of the Board and Director |
|
March 15, 2005 |
| |
/s/ Michael L. Falcone
Michael
L. Falcone |
|
President, Chief Executive Officer (Principal Executive Officer)
and Director |
|
March 15, 2005 |
| |
/s/ William S. Harrison
William
S. Harrison |
|
Executive Vice President and Chief Financial Officer |
|
March 15, 2005 |
| |
/s/ Charles C. Baum
Charles
C. Baum |
|
Director |
|
March 15, 2005 |
| |
/s/ Richard O. Berndt
Richard
O. Berndt |
|
Director |
|
March 15, 2005 |
| |
/s/ Eddie C. Brown
Eddie
C. Brown |
|
Director |
|
March 15, 2005 |
| |
/s/ Robert S. Hillman
Robert
S. Hillman |
|
Director |
|
March 15, 2005 |
| |
/s/ Douglas A. McGregor
Douglas
A. McGregor |
|
Director |
|
March 15, 2005 |
| |
/s/ Arthur S. Mehlman
Arthur
S. Mehlman |
|
Director |
|
March 15, 2005 |
| |
/s/ Fred N. Pratt, Jr.
Fred
N. Pratt, Jr. |
|
Director |
|
March 15, 2005 |
62
| |
|
|
| |
| |
|
PricewaterhouseCoopers LLP
Suite 2100
250 W. Pratt St.
Baltimore MD 21201
Telephone (410) 783 7600
Facsimile (410) 783 7680 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Municipal Mortgage & Equity LLC:
We have completed an integrated audit of Municipal Mortgage
& Equity LLC’s 2004 consolidated financial statements
and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedules
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Municipal Mortgage & Equity, LLC
and its subsidiaries at December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Notes 1 and 11, the Company adopted certain of
the provisions of Financial Accounting Standards Board
(“FASB”) Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46”) as of December 31, 2003, the
provisions of the amendment to Financial Accounting Standards
Board (“FASB”) Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46R”) as of March 31, 2004 and the
provisions of Statement of Financial Accounting Standards
No. 150, “Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity”
(“FAS 150”), as of July 1, 2003.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
63
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Baltimore, Maryland
March 15, 2005
64
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Investment in tax-exempt bonds and interests in bond
securitizations, net (Note 3)
|
|
$ |
1,275,748 |
|
|
$ |
1,043,973 |
|
|
Loans receivable, net (Note 4)
|
|
|
603,173 |
|
|
|
497,884 |
|
|
Loans receivable held for sale (Note 4)
|
|
|
27,766 |
|
|
|
54,492 |
|
|
Investments in partnerships (Note 5)
|
|
|
827,273 |
|
|
|
282,492 |
|
|
Investment in derivative financial instruments (Note 6)
|
|
|
3,102 |
|
|
|
2,563 |
|
|
Cash and cash equivalents
|
|
|
92,881 |
|
|
|
50,826 |
|
|
Interest receivable
|
|
|
18,368 |
|
|
|
16,843 |
|
|
Restricted assets (Note 7)
|
|
|
72,805 |
|
|
|
75,525 |
|
|
Other assets
|
|
|
66,040 |
|
|
|
73,961 |
|
|
Land, building and equipment, net
|
|
|
182,773 |
|
|
|
5,429 |
|
|
Mortgage servicing rights, net (Note 8)
|
|
|
11,349 |
|
|
|
10,967 |
|
|
Goodwill
|
|
|
106,609 |
|
|
|
107,505 |
|
|
Other intangibles
|
|
|
22,443 |
|
|
|
27,159 |
|
| |
|
|
|
|
|
|
|
Total assets
|
|
$ |
3,310,330 |
|
|
$ |
2,249,619 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Notes payable (Note 9)
|
|
$ |
880,224 |
|
|
$ |
663,544 |
|
|
Mortgage notes payable (Note 9)
|
|
|
132,237 |
|
|
|
— |
|
|
Short-term debt (Note 9)
|
|
|
413,157 |
|
|
|
371,881 |
|
|
Long-term debt (Note 9)
|
|
|
164,014 |
|
|
|
172,642 |
|
|
Subordinate debentures (Note 10)
|
|
|
84,000 |
|
|
|
— |
|
|
Preferred shares subject to mandatory redemption (Note 11)
|
|
|
168,000 |
|
|
|
168,000 |
|
|
Tax credit equity guarantee liability (Note 12)
|
|
|
186,778 |
|
|
|
151,326 |
|
|
Investment in derivative financial instruments (Note 6)
|
|
|
4,923 |
|
|
|
15,287 |
|
|
Accounts payable and accrued expenses
|
|
|
35,003 |
|
|
|
17,506 |
|
|
Interest payable
|
|
|
19,266 |
|
|
|
9,581 |
|
|
Unearned revenue and other liabilities
|
|
|
74,176 |
|
|
|
37,986 |
|
| |
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,161,778 |
|
|
|
1,607,753 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
Minority interest in subsidiary companies (Note 1)
|
|
|
404,586 |
|
|
|
31 |
|
|
Preferred shareholders’ equity in a subsidiary company,
liquidation preference of $73,000 and $0 at December 31,
2004 and 2003, respectively (Note 11)
|
|
|
71,031 |
|
|
|
— |
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
Common shares, par value $0 (39,471,099 shares authorized,
including 35,179,884 shares issued and outstanding, and 58,114
deferred shares at December 31, 2004 and 35,926,099 shares
authorized, 32,592,093 shares issued and outstanding, and 39,701
deferred shares at December 31, 2003)
|
|
|
681,227 |
|
|
|
654,700 |
|
|
Less common shares held in treasury at cost (124,715 at
December 31, 2004 and 2003, respectively)
|
|
|
(2,615 |
) |
|
|
(2,615 |
) |
|
Less unearned compensation (deferred shares) (Note 17)
|
|
|
(4,145 |
) |
|
|
(3,992 |
) |
|
Accumulated other comprehensive loss
|
|
|
(1,532 |
) |
|
|
(6,258 |
) |
| |
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
672,935 |
|
|
|
641,835 |
|
| |
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$ |
3,310,330 |
|
|
$ |
2,249,619 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements
65
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest on bonds and interests in bond securitizations
|
|
$ |
85,505 |
|
|
$ |
71,636 |
|
|
$ |
70,757 |
|
| |
Interest on loans
|
|
|
43,874 |
|
|
|
37,211 |
|
|
|
36,585 |
|
| |
Interest on short-term investments
|
|
|
5,020 |
|
|
|
2,158 |
|
|
|
1,255 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total interest income
|
|
|
134,399 |
|
|
|
111,005 |
|
|
|
108,597 |
|
| |
|
|
|
|
|
|
|
|
|
|
Fee income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Syndication fees
|
|
|
25,535 |
|
|
|
26,856 |
|
|
|
7,221 |
|
| |
Origination and brokerage fees
|
|
|
7,934 |
|
|
|
6,584 |
|
|
|
6,632 |
|
| |
Guarantee fees
|
|
|
7,852 |
|
|
|
3,614 |
|
|
|
232 |
|
| |
Asset management and advisory fees
|
|
|
12,733 |
|
|
|
10,337 |
|
|
|
3,887 |
|
| |
Loan servicing fees
|
|
|
4,579 |
|
|
|
4,234 |
|
|
|
3,882 |
|
| |
Other income
|
|
|
7,415 |
|
|
|
8,855 |
|
|
|
4,203 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total fee income
|
|
|
66,048 |
|
|
|
60,480 |
|
|
|
26,057 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net rental income
|
|
|
17,959 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
218,406 |
|
|
|
171,485 |
|
|
|
134,654 |
|
| |
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
69,884 |
|
|
|
44,528 |
|
|
|
36,596 |
|
|
Interest expense on debentures and preferred shares
(Notes 10 & 11)
|
|
|
17,318 |
|
|
|
6,189 |
|
|
|
— |
|
|
Salaries and benefits
|
|
|
69,540 |
|
|
|
41,736 |
|
|
|
22,678 |
|
|
General and administrative
|
|
|
26,445 |
|
|
|
11,152 |
|
|
|
6,516 |
|
|
Professional fees
|
|
|
11,118 |
|
|
|
4,188 |
|
|
|
4,960 |
|
|
Depreciation and amortization
|
|
|
14,159 |
|
|
|
7,492 |
|
|
|
1,857 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
208,464 |
|
|
|
115,285 |
|
|
|
72,607 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans
|
|
|
3,393 |
|
|
|
4,864 |
|
|
|
3,407 |
|
|
Net gain on sale of tax-exempt investments
|
|
|
304 |
|
|
|
2,133 |
|
|
|
4,896 |
|
|
Net gain on sale of investments in tax credit equity partnerships
|
|
|
3,019 |
|
|
|
2,747 |
|
|
|
282 |
|
|
Net loss on derivatives
|
|
|
(219 |
) |
|
|
(1,919 |
) |
|
|
(24,474 |
) |
|
Impairments and valuation allowances
|
|
|
(7,141 |
) |
|
|
(6,983 |
) |
|
|
(730 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income before income tax (expense) benefit, net income
(expense) allocable to minority interest, net losses from equity
investments in partnerships, discontinued operations and
cumulative effect of a change in accounting principle
|
|
|
9,298 |
|
|
|
57,042 |
|
|
|
45,428 |
|
|
Income tax (expense) benefit
|
|
|
(2,737 |
) |
|
|
138 |
|
|
|
(1,484 |
) |
|
Net income (expense) allocable to minority interest
|
|
|
178,280 |
|
|
|
(6,032 |
) |
|
|
(11,938 |
) |
|
Net losses from equity investments in partnerships
|
|
|
(169,404 |
) |
|
|
(3,173 |
) |
|
|
(3,057 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
15,437 |
|
|
|
47,975 |
|
|
|
28,949 |
|
|
Discontinued operations (Note 21)
|
|
|
11,080 |
|
|
|
25,748 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
26,517 |
|
|
|
73,723 |
|
|
|
28,949 |
|
The accompanying notes are an integral part of these
financial statements.
66
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF
INCOME — (Continued)
(In thousands, except share and per share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cumulative effect of a change in accounting principle
|
|
|
520 |
|
|
|
(1,228 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,949 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income allocated to:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Term growth shares
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
153 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Common shares
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,796 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings before discontinued operations and cumulative effect of
a change in accounting principle
|
|
$ |
0.44 |
|
|
$ |
1.63 |
|
|
$ |
1.16 |
|
| |
Discontinued operations
|
|
|
0.32 |
|
|
|
0.88 |
|
|
|
— |
|
| |
Cumulative effect of a change in accounting principle
|
|
|
0.02 |
|
|
|
(0.04 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic earnings per common share
|
|
$ |
0.78 |
|
|
$ |
2.47 |
|
|
$ |
1.16 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares outstanding
|
|
|
34,521,842 |
|
|
|
29,397,521 |
|
|
|
24,904,437 |
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings before discontinued operations and cumulative effect of
a change in accounting principle
|
|
$ |
0.44 |
|
|
$ |
1.61 |
|
|
$ |
1.13 |
|
| |
Discontinued operations
|
|
|
0.32 |
|
|
|
0.87 |
|
|
|
— |
|
| |
Cumulative effect of a change in accounting principle
|
|
|
0.02 |
|
|
|
(0.04 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted earnings per common share
|
|
$ |
0.78 |
|
|
$ |
2.44 |
|
|
$ |
1.13 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average common shares outstanding
|
|
|
34,783,888 |
|
|
|
29,766,032 |
|
|
|
25,473,815 |
|
The accompanying notes are an integral part of these
financial statements.
67
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net income
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,949 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Unrealized gains (losses) on investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Unrealized holding gains arising during the period
|
|
|
7,423 |
|
|
|
1,973 |
|
|
|
1,536 |
|
| |
|
Reclassification adjustment for gains included in net
income
|
|
|
(2,697 |
) |
|
|
(27,480 |
) |
|
|
(4,887 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
4,726 |
|
|
|
(25,507 |
) |
|
|
(3,351 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
31,763 |
|
|
$ |
46,988 |
|
|
$ |
25,598 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
68
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Preferred Capital |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Distribution |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred Shares |
|
Shares |
|
Term |
|
|
|
|
|
|
|
Accumulated Other |
|
|
| |
|
|
|
|
|
Growth |
|
Common |
|
Treasury |
|
Unearned |
|
Comprehensive |
|
|
| |
|
Series I |
|
Series II |
|
Series I |
|
Series II |
|
Shares |
|
Shares |
|
Shares |
|
Compensation |
|
Income (Loss) |
|
Total |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2002
|
|
$ |
6,914 |
|
|
$ |
2,326 |
|
|
$ |
2,552 |
|
|
$ |
411 |
|
|
$ |
229 |
|
|
$ |
406,733 |
|
|
$ |
(912 |
) |
|
$ |
(4,145 |
) |
|
$ |
22,600 |
|
|
$ |
436,708 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
153 |
|
|
|
28,796 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
28,949 |
|
| |
Unrealized losses on investments, net of reclassifications
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,351 |
) |
|
|
(3,351 |
) |
| |
Distributions
|
|
|
(115 |
) |
|
|
(15 |
) |
|
|
(49 |
) |
|
|
(1 |
) |
|
|
(382 |
) |
|
|
(42,683 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43,245 |
) |
| |
Purchase of treasury shares
|
|
|
(6,799 |
) |
|
|
(2,311 |
) |
|
|
(2,503 |
) |
|
|
(410 |
) |
|
|
— |
|
|
|
(7,275 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,298 |
) |
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,541 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,541 |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81,286 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81,286 |
|
| |
Reissuance of treasury shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(55 |
) |
|
|
55 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
190 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
190 |
|
| |
Deferred share grants (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
830 |
|
|
|
— |
|
|
|
(830 |
) |
|
|
— |
|
|
|
— |
|
| |
Amortization of deferred compensation (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,701 |
|
|
|
— |
|
|
|
1,701 |
|
| |
Tax benefit from exercise of options and vesting of deferred
shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
583 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
583 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
471,946 |
|
|
$ |
(857 |
) |
|
$ |
(3,274 |
) |
|
$ |
19,249 |
|
|
$ |
487,064 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
72,495 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
72,495 |
|
| |
Unrealized losses on investments, net of reclassifications
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25,507 |
) |
|
|
(25,507 |
) |
| |
Distributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(51,756 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(51,756 |
) |
| |
Purchase of treasury shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,758 |
|
|
|
(1,758 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,180 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,180 |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
155,457 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
155,457 |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
240 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
240 |
|
| |
Deferred share grants (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,665 |
|
|
|
— |
|
|
|
(3,665 |
) |
|
|
— |
|
|
|
— |
|
| |
Forfeiture of deferred shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(475 |
) |
|
|
— |
|
|
|
475 |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of deferred compensation (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,472 |
|
|
|
— |
|
|
|
2,472 |
|
| |
Tax benefit from exercise of options and vesting of deferred
shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
190 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
190 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
654,700 |
|
|
$ |
(2,615 |
) |
|
$ |
(3,992 |
) |
|
$ |
(6,258 |
) |
|
$ |
641,835 |
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,037 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
27,037 |
|
| |
Unrealized gains on investments, net of reclassifications
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,726 |
|
|
|
4,726 |
|
| |
Distributions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(63,181 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(63,181 |
) |
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,382 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,382 |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52,521 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
52,521 |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
377 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
377 |
|
| |
Deferred share grants (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,949 |
|
|
|
— |
|
|
|
(3,949 |
) |
|
|
— |
|
|
|
— |
|
| |
Amortization of deferred compensation (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,796 |
|
|
|
— |
|
|
|
3,796 |
|
| |
Tax benefit from exercise of options and vesting of deferred
shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
442 |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
442 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
681,227 |
|
|
$ |
(2,615 |
) |
|
$ |
(4,145 |
) |
|
$ |
(1,532 |
) |
|
$ |
672,935 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
69
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Preferred Capital |
|
|
|
|
|
|
| |
|
Preferred Shares |
|
Distribution Shares |
|
Term |
|
|
|
|
| |
|
|
|
|
|
Growth |
|
Common |
|
Treasury |
| |
|
Series I |
|
Series II |
|
Series I |
|
Series II |
|
Shares |
|
Shares |
|
Shares |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE ACTIVITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2002
|
|
|
10,995 |
|
|
|
3,176 |
|
|
|
5,742 |
|
|
|
1,391 |
|
|
|
2,000 |
|
|
|
21,820,236 |
|
|
|
59,330 |
|
| |
Redemption of preferred shares
|
|
|
(10,995 |
) |
|
|
(3,176 |
) |
|
|
(5,742 |
) |
|
|
(1,391 |
) |
|
|
(2,000 |
) |
|
|
— |
|
|
|
— |
|
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
192,031 |
|
|
|
— |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,436,463 |
|
|
|
— |
|
| |
Reissuance of treasury shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,886 |
|
|
|
(3,886 |
) |
| |
Issuance of common shares under employee share incentive plans
(Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
85,774 |
|
|
|
— |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,590 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,545,980 |
|
|
|
55,444 |
|
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
64,250 |
|
|
|
— |
|
| |
Purchase of treasury shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(69,271 |
) |
|
|
69,271 |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,844,082 |
|
|
|
— |
|
| |
Issuance of common shares under employee share incentive plans
(Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
112,181 |
|
|
|
— |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,857 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
32,507,079 |
|
|
|
124,715 |
|
| |
Options exercised
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
283,754 |
|
|
|
— |
|
| |
Issuance of common shares
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,147,470 |
|
|
|
— |
|
| |
Issuance of common shares under employee share incentive plans
(Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
156,563 |
|
|
|
— |
|
| |
Deferred shares issued under the Non-Employee Directors’
Share Plans (Note 17)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
18,417 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35,113,283 |
|
|
|
124,715 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
70
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the twelve months ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
27,037 |
|
|
$ |
72,495 |
|
|
$ |
28,949 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income allocated to preferred shareholders
|
|
|
755 |
|
|
|
5,989 |
|
|
|
11,977 |
|
| |
Cumulative effect of a change in accounting principle
|
|
|
(520 |
) |
|
|
1,228 |
|
|
|
— |
|
| |
Net holding (gains) losses on trading securities
|
|
|
(10,903 |
) |
|
|
(6,322 |
) |
|
|
14,863 |
|
| |
Impairments and valuation allowances related to investments
|
|
|
7,141 |
|
|
|
6,983 |
|
|
|
730 |
|
| |
Amortization of guarantee liability
|
|
|
(5,843 |
) |
|
|
(2,151 |
) |
|
|
— |
|
| |
Net gain on sales
|
|
|
(6,716 |
) |
|
|
(10,486 |
) |
|
|
(8,558 |
) |
| |
Loss on disposal of fixed assets
|
|
|
— |
|
|
|
193 |
|
|
|
— |
|
| |
Loss from investments in partnerships
|
|
|
169,404 |
|
|
|
3,173 |
|
|
|
3,057 |
|
| |
Minority interest income
|
|
|
(179,035 |
) |
|
|
— |
|
|
|
— |
|
| |
Net amortization of premiums, discounts and fees on investments
|
|
|
(5,666 |
) |
|
|
(14 |
) |
|
|
(203 |
) |
| |
Depreciation, accretion and amortization
|
|
|
20,819 |
|
|
|
10,825 |
|
|
|
1,856 |
|
| |
Discontinued operations
|
|
|
(11,080 |
) |
|
|
(25,748 |
) |
|
|
— |
|
| |
Deferred income taxes
|
|
|
1,765 |
|
|
|
190 |
|
|
|
583 |
|
| |
Deferred share compensation expense
|
|
|
3,796 |
|
|
|
2,472 |
|
|
|
1,701 |
|
| |
Common and deferred shares issued under the Non-Employee
Directors’ Share Plans
|
|
|
377 |
|
|
|
279 |
|
|
|
224 |
|
|
Net change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase in interest receivable
|
|
|
(1,688 |
) |
|
|
(686 |
) |
|
|
(298 |
) |
| |
(Increase) decrease in other assets
|
|
|
(9,102 |
) |
|
|
(16,272 |
) |
|
|
(3,651 |
) |
| |
Increase in accounts payable, accrued expenses and other
liabilities
|
|
|
25,417 |
|
|
|
15,311 |
|
|
|
4,349 |
|
| |
(Increase) decrease in loans held for sale
|
|
|
28,183 |
|
|
|
(11,740 |
) |
|
|
41,516 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
54,141 |
|
|
|
45,719 |
|
|
|
97,095 |
|
| |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of tax-exempt bonds and residual interests in bond
securitizations
|
|
|
(369,315 |
) |
|
|
(191,953 |
) |
|
|
(191,619 |
) |
|
Loan originations
|
|
|
(340,122 |
) |
|
|
(285,476 |
) |
|
|
(264,937 |
) |
|
Acquisition of HCI
|
|
|
— |
|
|
|
(105,337 |
) |
|
|
— |
|
|
Acquisition of an unconsolidated subsidiary
|
|
|
— |
|
|
|
— |
|
|
|
(1,100 |
) |
|
Purchases of property and equipment
|
|
|
(8,975 |
) |
|
|
(2,456 |
) |
|
|
(290 |
) |
|
Proceeds from the sale of property and equipment
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
Net investment in restricted assets
|
|
|
30,812 |
|
|
|
11,505 |
|
|
|
(23,387 |
) |
|
Principal payments received
|
|
|
247,022 |
|
|
|
253,458 |
|
|
|
203,389 |
|
|
Proceeds from the sale of investments
|
|
|
129,380 |
|
|
|
72,583 |
|
|
|
33,149 |
|
|
Distributions received from investments in partnerships
|
|
|
7,676 |
|
|
|
8,942 |
|
|
|
497 |
|
|
Net investments in partnerships
|
|
|
(348,370 |
) |
|
|
(98,346 |
) |
|
|
(98,023 |
) |
|
Termination of derivative financial instruments
|
|
|
(5,000 |
) |
|
|
(10,809 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(656,892 |
) |
|
|
(347,880 |
) |
|
|
(342,321 |
) |
| |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings from credit facilities
|
|
|
1,244,543 |
|
|
|
1,003,630 |
|
|
|
720,527 |
|
|
Repayment of credit facilities
|
|
|
(1,108,835 |
) |
|
|
(800,535 |
) |
|
|
(680,141 |
) |
|
Proceeds from tax credit syndication investors
|
|
|
321,287 |
|
|
|
15,417 |
|
|
|
— |
|
|
Proceeds from short-term debt
|
|
|
43,955 |
|
|
|
31,835 |
|
|
|
179,700 |
|
|
Repayment of short-term debt
|
|
|
(2,679 |
) |
|
|
(71,775 |
) |
|
|
(38,315 |
) |
|
Proceeds from long-term debt
|
|
|
85,140 |
|
|
|
42,371 |
|
|
|
3,538 |
|
|
Repayment of long-term debt
|
|
|
(4,358 |
) |
|
|
(7,561 |
) |
|
|
(587 |
) |
|
Issuance of common shares
|
|
|
52,521 |
|
|
|
155,418 |
|
|
|
77,821 |
|
|
Issuance of preferred shares
|
|
|
71,031 |
|
|
|
— |
|
|
|
— |
|
|
Redemption of preferred shares
|
|
|
— |
|
|
|
— |
|
|
|
(19,298 |
) |
|
Proceeds from stock options exercised
|
|
|
5,382 |
|
|
|
1,180 |
|
|
|
3,541 |
|
|
Distributions to common shares
|
|
|
(63,181 |
) |
|
|
(51,756 |
) |
|
|
(43,245 |
) |
|
Distributions to preferred shareholders in a subsidiary company
|
|
|
— |
|
|
|
(8,982 |
) |
|
|
(11,943 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
644,806 |
|
|
|
309,242 |
|
|
|
191,598 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
42,055 |
|
|
|
7,081 |
|
|
|
(53,628 |
) |
|
Cash and cash equivalents at beginning of period
|
|
|
50,826 |
|
|
|
43,745 |
|
|
|
97,373 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
92,881 |
|
|
$ |
50,826 |
|
|
$ |
43,745 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
financial statements.
71
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the twelve months ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
77,517 |
|
|
$ |
40,801 |
|
|
$ |
22,684 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$ |
1,023 |
|
|
$ |
212 |
|
|
$ |
1,109 |
|
| |
|
|
|
|
|
|
|
|
|
|
Disposals of advance to related party
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,618 |
|
| |
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the acquisition of
an unconsolidated subsidiary
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
100 |
|
| |
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the MFH acquisition
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
3,331 |
|
| |
|
|
|
|
|
|
|
|
|
|
Non-cash activity resulting from consolidation of VIEs under
FIN 46R (Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investment in partnerships
|
|
$ |
395,883 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Restricted assets
|
|
|
28,943 |
|
|
|
— |
|
|
|
— |
|
| |
Land, building and equipment, net
|
|
|
177,576 |
|
|
|
— |
|
|
|
— |
|
| |
Notes payable
|
|
|
75,410 |
|
|
|
— |
|
|
|
— |
|
| |
Mortgage notes payable
|
|
|
139,532 |
|
|
|
— |
|
|
|
— |
|
| |
Accounts payable, accrued expenses and other liabilities
|
|
|
53,508 |
|
|
|
— |
|
|
|
— |
|
| |
Minority interest in subsidiary companies
|
|
|
333,447 |
|
|
|
— |
|
|
|
— |
|
| |
Accumulated other comprehensive income
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
The accompanying notes are an integral part of these
financial statements.
72
NOTE 1 — Summary of Significant Accounting
Policies
Municipal Mortgage & Equity, LLC (“MuniMae”
and, together with its subsidiaries, the
“Company”) provides debt and equity financing
to developers of multifamily housing and other real estate
investments. The Company invests in tax-exempt bonds, or
interests in bonds, issued by state and local governments or
their agencies or authorities to finance multifamily housing
developments. These tax-exempt bonds are not general obligations
of state and local governments, or the agencies or authorities
that issue the bonds. The multifamily housing developments, as
well as the rents paid by the tenants, typically secure these
investments. The Company also invests in other housing-related
debt and equity investments, including equity investments in
real estate operating partnerships; tax-exempt bonds, or
interests in bonds, secured by student housing or assisted
living developments; and tax-exempt bonds issued by community
development districts to finance the development of community
infrastructure supporting single-family housing, mixed use and
commercial developments and secured by specific payments or
assessments pledged by the local improvement district that
issues the bonds (“CDD bonds”). Interest income
derived from the majority of the Company’s bond investments
is exempt income for Federal income tax purposes. Real estate
finance activities include the origination of, investment in and
servicing of investments in multifamily housing, both for the
Company’s own account and on behalf of third parties. These
activities generate income that is includable income for Federal
income tax purposes.
The Company is also a tax credit syndicator. As a syndicator,
the Company acquires and transfers to investors interests in
partnerships that receive and distribute to investors low-income
housing tax credits. The Company earns syndication fees on the
placement of these interests with investors. The Company also
earns fees for providing guarantees on certain tax credit equity
funds and for managing the low-income housing tax credit equity
funds it has syndicated.
MuniMae was organized in 1996 as a Delaware limited liability
company. As a limited liability company, the Company combines
many of the limited liability, governance and management
characteristics of a corporation with the pass-through income
features of a partnership. Since MuniMae is classified as a
partnership for Federal income tax purposes, MuniMae is not
itself subject to Federal and, in most cases, state and local
income taxes. Instead, each shareholder must include his or her
distributive share of MuniMae’s income, deductions and
credits on the shareholder’s income tax return. Most of the
Company’s real estate finance and tax credit syndication
activities are conducted through subsidiaries classified as
corporations for Federal income tax purposes. These corporations
do not have the pass-through income features of a partnership.
Basis of Presentation
The consolidated financial statements of the Company are
prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles in the United States
(“GAAP”). The presentation of financial
statements in conformity with GAAP requires the Company’s
management to make estimates and assumptions that affect the
amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those
estimates. Certain amounts in prior years’ financial
statements have been reclassified to conform to the current year
presentation with no effect on previously reported net income or
shareholders’ equity.
The following is a summary of the Company’s significant
accounting policies.
Consolidation
The consolidated financial statements include the accounts of
MuniMae, its wholly owned subsidiaries, its majority owned
subsidiaries and variable interest entities
(“VIEs”) where management determined that the
Company was the primary beneficiary of the VIE. All significant
intercompany balances and transactions have been eliminated.
73
Investing Segment
The Company originates for its own account and for others
investments in tax-exempt bonds and taxable loans secured
primarily by non-recourse mortgage loans on affordable and
market rate multifamily housing. Tax-exempt bonds are issued by
state and local government authorities to finance multifamily
housing developments or other types of real estate.
The Company also invests in other housing-related securities,
including CDD bonds. The Company also invests in tax-exempt
bonds, or interests in bonds, secured by student housing or
assisted living developments.
The Company may from time to time make taxable equity
investments for its own account in income-producing real estate
operating partnerships. To date, the Company’s equity
investments have been made in partnership with CAPREIT, Inc. and
its affiliates (“CAPREIT”).
The Company’s sources of capital to fund its investing
activities include proceeds from equity and debt offerings,
securitizations, loans from warehousing facilities with various
pension funds and commercial banks and draws on lines of credit.
The Company earns interest income from its investments in
tax-exempt bonds and taxable loans. The Company also earns
origination, construction administration and servicing fees,
through subsidiaries classified as corporations for Federal
income tax purposes, for originating and servicing the bonds.
General Terms of Tax-Exempt Bonds
The Company’s rights under the bonds it holds are defined
by the contractual terms of the underlying mortgage loans, which
are pledged to the bond issuer and assigned to a trustee for the
benefit of bondholders to secure the payment of principal and
interest under the bonds. The mortgage loans are first mortgage
or subordinate loans on multifamily housing developments and are
generally nonrecourse, except upon the occurrence of certain
events. The mortgage loans bear interest at rates determined by
arms’-length negotiations that reflect market conditions
existing at the time the bonds were acquired or originated by
the Company. Non-participating bonds, which account for the
great majority of the Company’s tax-exempt bonds (see
Note 3), provide for payment of a fixed or variable rate of
interest. Participating bonds have additional interest features
that allow the Company to receive additional interest through
certain increases in available cash flow from the property in
addition to the base interest. The terms of the additional
interest to be received on a bond are specific to that bond.
Certain participating and non-participating bonds are
subordinate bonds, as the payment of interest and principal on
the bonds occurs only after payment of principal and interest on
a bond that has priority to the cash flow of the underlying
collateral.
The CDD bonds which the Company acquires finance the development
of community infrastructure supporting single-family housing,
mixed use and commercial developments and are secured by
specific payments or assessments pledged by the local
improvement district that issues the bonds.
Principal payments on the bonds, if any, are received in
accordance with amortization tables set forth in the bond
documents. If no principal amortization is required during the
bond term, the outstanding principal balance will be required to
be repaid or refinanced in a lump sum payment at the end of the
holding period or at such earlier time as the Company may
require. The mortgage loans are non-assumable except with the
consent of the Company. The bonds typically contain provisions
that prohibit prepayment of the bond for a specified period of
time.
Securitization Programs
The Company securitizes assets in order to enhance the overall
return on its investments and to generate proceeds that, along
with other sources of capital, facilitate the acquisition of
additional investments. The Company uses various programs to
facilitate the securitization and credit enhancement of its bond
investments.
74
Summary of Major Securitization Programs
To date, the Company has securitized mortgage bonds in its
portfolio primarily through six programs: (1) the Merrill
Lynch, Pierce, Fenner & Smith Incorporated (“Merrill
Lynch”) Puttable Floating Option Tax-Exempt Receipts
(“P-FLOATsSM”)
program, (2) a tender option bond program with the Federal
Home Loan Mortgage Corporation (“Freddie Mac”),
(3) a securitization program utilizing MBIA Insurance
Corporation (“MBIA”) credit enhancement,
(4) a securitization program for CDD bonds utilizing
various financial institutions as credit enhancement providers,
(5) a long-term securitization program (“Term
Securitization Facility”), and (6) a
securitization program utilizing Financial Security Assurance,
Inc. (“FSA”) as the credit enhancement
provider. At times the Company securitizes a single bond
investment with a new counterparty other than those listed
above. With the exception of the FSA securitization program, the
Company securitizes assets by depositing bonds into a trust or
structuring a transaction whereby a third party deposits bonds
into a trust. The trust issues senior and subordinate
certificates and the Company receives cash proceeds from the
sale of the senior certificates and retains the subordinate
certificates. The interest rate on the senior certificates may
be fixed or variable. If the interest rate is variable, a
remarketing agent typically resets the rate on the senior
certificates weekly. To increase the attractiveness of the
senior certificates to investors, the credit of the senior
certificates is enhanced, or the credit of the bond underlying
the senior certificates is enhanced. The residual interests
retained by the Company are subordinate securities and receive
the residual interest on the bonds after the payment of all fees
and the senior certificate interest. For certain programs, a
counterparty provides liquidity to the senior certificates. In
such programs, liquidity advances would be used to provide
bridge funding for the redemption of senior certificates
tendered upon a failure to remarket senior certificates or in
the event of other mandatory tender events.
The liquidity facilities generally have one-year terms and are
renewable annually by the liquidity providers. If the liquidity
provider does not renew the liquidity facility, the Company
would be forced to find an alternative liquidity provider, sell
the senior interests as fixed-rate securities, repurchase the
underlying bonds, or liquidate the underlying bond and its
investment in the residual interests. Similarly, if the credit
enhancer does not renew the credit enhancement facility, the
Company would be forced to find an alternative credit enhancer,
repurchase the underlying bonds, or liquidate the underlying
bond and its investment in the residual interests. If the
Company is forced to liquidate its investment in the residual
interests and potentially the related interest rate swaps
(discussed above), the Company would recognize gains or losses
on the liquidation, which may be significant depending on market
conditions. As of December 31, 2004, $400.8 million
and $186.4 million of the senior interests in the
Company’s securitization trusts were subject to annual
“rollover” renewal for liquidity and credit
enhancement, respectively. As of December 31, 2003,
$331.2 million and $115.6 million of the senior
interests in the Company’s securitization trusts were
subject to annual “rollover” renewal for liquidity and
credit enhancement, respectively.
Under the FSA Securitization program, the Company refunded bonds
into Series A Bonds and Series B Bonds. The
Series A Bonds, which are senior to the Series B
Bonds, were credit enhanced by FSA and sold to qualified third
party investors. The Series A Bonds bear interest at
various fixed rates and are subject to mandatory sinking fund
redemptions. The Company retained the Series B Bonds. During
February 2005, the Series A Bonds were purchased by Merrill
Lynch and securitized in the
P-FLOATSM
program, and the Company purchased a $55,000 (face amount)
residual interest in the
P-FLOATSM
trust.
The Company also enters into various forms of interest rate
protection in conjunction with these securitization programs.
(See “Financial Risk Management and Derivatives” below
in this Note.)
75
Management of Counterparty Risk
As illustrated by the table below, in establishing and managing
its securitization programs, the Company endeavors to maintain a
diverse array of capital partners.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
December 31, 2004 |
| |
|
|
|
|
|
|
|
|
| (in thousands) |
|
|
|
|
|
|
|
(A) |
|
(B) |
|
(A) - (B) |
|
|
| |
|
|
|
|
|
|
|
|
|
Face |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Amount |
|
|
|
Percentage of |
| |
|
|
|
Provider of |
|
|
|
|
|
of Senior |
|
|
|
Total Senior |
| |
|
Nature of |
|
Credit |
|
Provider of |
|
Fair Value of |
|
Security |
|
|
|
Securities |
| Sponsor |
|
Senior Security |
|
Enhancement |
|
Liquidity |
|
Total Bonds |
|
Outstanding |
|
Difference |
|
Outstanding(1) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch
|
|
short-term, floating rate, weekly reset (2) |
|
Merrill Lynch or Fannie Mae |
|
|
Merrill Lynch |
|
|
$ |
269,535 |
|
|
$ |
262,512 |
|
|
$ |
7,023 |
|
|
|
38.0 |
% |
| |
|
Freddie Mac
|
|
|
fixed |
|
|
|
Freddie Mac |
|
|
|
Freddie Mac |
|
|
|
87,333 |
|
|
|
63,835 |
|
|
|
23,498 |
|
|
|
9.3 |
|
| |
|
MBIA
|
|
short-term,
floating rate,
weekly reset |
|
|
MBIA |
|
|
Bayerische Landesbank (BLB) and Landesbank Baden-Wurttenberg (LBBW) |
|
|
134,486 |
|
|
|
138,315 |
|
|
|
(3,829 |
) |
|
|
20.1 |
|
| |
|
Term
|
|
|
fixed |
|
|
MMA Credit
Enhancement I, LLC through the pledge of additional bonds |
|
|
N/ A |
|
|
|
36,009 |
|
|
|
43,170 |
|
|
|
(7,161 |
) |
|
|
6.3 |
|
| |
|
CDD
|
|
|
fixed |
|
|
|
Compass Bank |
|
|
|
N/ A |
|
|
|
43,807 |
|
|
|
41,616 |
|
|
|
2,191 |
|
|
|
6.0 |
|
| |
|
Other
|
|
weekly reset or
fixed |
|
|
Compass Bank |
|
|
|
Compass Bank |
|
|
|
12,823 |
|
|
|
12,330 |
|
|
|
493 |
|
|
|
1.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
583,993 |
|
|
$ |
561,778 |
|
|
$ |
22,215 |
|
|
|
81.5 |
% |
| |
|
Off Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
FSA Bonds
|
|
|
fixed |
|
|
|
FSA |
|
|
|
N/ A |
|
|
|
121,675 |
|
|
|
66,900 |
|
|
|
54,775 |
|
|
|
9.7 |
|
|
CDD
|
|
|
fixed |
|
|
|
Various |
|
|
|
N/ A |
|
|
|
64,668 |
|
|
|
61,005 |
|
|
|
3,663 |
|
|
|
8.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
186,343 |
|
|
$ |
127,905 |
|
|
$ |
58,438 |
|
|
|
18.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
770,336 |
|
|
$ |
689,683 |
|
|
$ |
80,653 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 |
| |
|
|
| (in thousands) |
|
(A) |
|
(B) |
|
(A) - (B) |
|
|
| |
|
|
|
Face |
|
|
|
|
| |
|
|
|
Amount |
|
|
|
Percentage of |
| |
|
|
|
of Senior |
|
|
|
Total Senior |
| |
|
Fair Value of |
|
Security |
|
|
|
Securities |
| Sponsor |
|
Total Bonds |
|
Outstanding |
|
Difference |
|
Outstanding(1) |
| |
|
|
|
|
|
|
|
|
|
On Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merrill Lynch
|
|
$ |
229,320 |
|
|
$ |
220,641 |
|
|
$ |
8,679 |
|
|
|
37.1 |
% |
| |
|
Freddie Mac
|
|
|
87,060 |
|
|
|
64,085 |
|
|
|
22,975 |
|
|
|
10.8 |
|
| |
|
MBIA
|
|
|
139,266 |
|
|
|
138,910 |
|
|
|
356 |
|
|
|
23.4 |
|
| |
|
Term
|
|
|
38,642 |
|
|
|
44,283 |
|
|
|
(5,641 |
) |
|
|
7.4 |
|
| |
|
CDD
|
|
|
43,019 |
|
|
|
41,946 |
|
|
|
1,073 |
|
|
|
7.1 |
|
| |
|
Other
|
|
|
17,866 |
|
|
|
17,740 |
|
|
|
126 |
|
|
|
3.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
555,173 |
|
|
$ |
527,605 |
|
|
$ |
27,568 |
|
|
|
88.8 |
% |
| |
|
Off Balance Sheet Securitizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
FSA Bonds
|
|
|
117,737 |
|
|
|
67,200 |
|
|
|
50,537 |
|
|
|
11.2 |
|
|
CDD
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$ |
117,737 |
|
|
$ |
67,200 |
|
|
$ |
50,537 |
|
|
|
11.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
672,910 |
|
|
$ |
594,805 |
|
|
$ |
78,105 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
This percentage is calculated by dividing the face amount of the
senior security outstanding from each securitization program by
the total face amount of all senior securities outstanding. |
| |
| (2) |
At December 31, 2004, $15.0 million of senior
securities had a fixed rate for a term of one to three years. |
76
Fannie Mae Credit Enhancement
The Company participates in a structured finance program
developed by Federal National Mortgage Association
(“Fannie Mae”) to facilitate the credit
enhancement of bonds for which risk is shared by Fannie Mae and
the Company. Under this program, Fannie Mae provides credit
enhancement to the assets in a cross-collateralized pool. In
order to obtain the credit enhancement from Fannie Mae for the
bonds secured by this facility, the Company procured a letter of
credit and a bond insurance policy for the benefit of
Fannie Mae that insures the first loss on the
cross-collateralized pool. Prior to 2004, the Company was
required to post collateral as credit support for the bond
insurance policy. In 2004, the Company replaced the
collateral posting obligation with a corporate guarantee. To
date, the Company has credit enhanced $100.0 million in
bonds through this program. This program is open-ended, which
allows the Company to add additional assets to the program and
is not a securitization program.
Collateral
In order to facilitate the securitization of certain assets at
higher leverage ratios than otherwise available to the Company
without posting additional collateral, the Company has pledged
additional bonds, taxable loans and cash and cash equivalents as
collateral for senior interests in certain securitization trusts
and credit enhancement facilities. The following table
summarizes the carrying amount of the bonds, taxable loans and
cash and cash equivalents pledged as collateral for the programs
discussed above.
| |
|
|
|
|
|
|
|
|
| |
|
Carrying Value at | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (in thousands) |
|
| |
|
| |
|
Merrill Lynch P-FLOATs
|
|
$ |
134,361 |
|
|
$ |
170,991 |
|
|
MBIA
|
|
|
95,897 |
|
|
|
90,874 |
|
|
Term Securitization Facility
|
|
|
35,251 |
|
|
|
40,566 |
|
|
Fannie Mae Credit Enhancement
|
|
|
1,330 |
|
|
|
28,684 |
|
|
Guaranteed Funds/ Credit Enhancement
|
|
|
73,809 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total(1)
|
|
$ |
340,648 |
|
|
$ |
331,115 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
This table reflects collateral pledged for the securitization
and credit enhancement facilities discussed above. The Company
has other assets pledged as collateral to secure other programs,
as discussed in Notes 3, 4, 6, 7 and 14. |
The Company’s significant accounting policies that directly
relate to the investment in tax-exempt bonds and interests in
bond securitizations are described below.
Investments in Tax-Exempt Bonds and Interests in Bond
Securitizations
Investments in tax-exempt bonds and interests in bond
securitizations (collectively, “investments in
bonds”) are accounted for under the provisions of
Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities” (“FAS 115”). All investments
in bonds are classified and accounted for as available-for-sale
debt securities and are carried at fair value; unrealized gains
or losses arising during the period are recorded through other
comprehensive income in shareholders’ equity, while
realized gains and losses and other-than-temporary impairments
are recorded through operations. The Company evaluates, on
an ongoing basis, the credit risk exposure associated with these
assets to determine whether any other-than-temporary impairments
exist in accordance with the Company’s policy
discussed in the “Other-Than-Temporary Impairments and
Valuation Allowances on Investments” section of this
Note 1.
In December 2003, as a result of the adoption of the
Financial Accounting Standards Board’s
(“FASB”) Financial Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46”) (discussed further under “New
Accounting Pronouncements” in this Note 1),
the Company determined that its investments in interests in
bond securitizations represented equity interests in VIEs.
The Company
77
further determined the Company was the primary beneficiary
of the VIEs and therefore was required to consolidate its
investments. As a result, the Company made adjustments to
(1) reclassify the Company’s interests in bond
securitizations to investment in tax-exempt bonds,
(2) reflect the senior interests in the bond securitization
trusts in investment in tax-exempt bonds so that the total
investment in tax-exempt bonds reported equals the total assets
in the securitization trusts, (3) reclassify costs of the
securitization transactions to debt issue costs, which are
included in other assets on the Company’s consolidated
balance sheets and (4) record the senior interests in the
securitization trusts as short-term debt. The Company also
recorded a $1.2 million cumulative effect of a change in
accounting principle related to this transaction as a result of
the reversal of gain on sales reported in prior periods on these
investments.
The Company determines the fair value of bonds that participate
in the net cash flow and net capital appreciation of the
underlying properties and/or that are wholly collateral
dependent and for which only a limited market exists by
discounting the underlying collateral’s expected future
cash flows using current estimates of discount rates and
capitalization rates. The Company bases the fair value of
all other bonds and interests in bond securitizations on quotes
from external sources, such as brokers, for these or similar
investments.
The Company recognizes base interest on the bonds as revenue as
it accrues. Interest income in excess of the base interest
(“Participation Interest”) may be available to
the Company through participation features of a bond.
Participation Interest is recognized as income when received.
Delinquent bonds are placed on non-accrual status for financial
reporting purposes when collection of interest is in doubt,
which is generally after 90 days of non-payment. The
Company applies interest payments on non-accrual bonds first to
previously recorded accrued interest and, once previously
accrued interest is satisfied, as interest income when received.
The accrual of interest income is reinstated once a bond’s
ability to perform is adequately demonstrated and all interest
has been paid.
For tax purposes, the Company recognizes base interest as income
as it accrues. For certain investments, in accordance with the
terms of the bond document, the Company may also recognize
Participation Interest as income as it accrues for tax
reporting. Base interest and Participation Interest in certain
bonds is accrued for tax purposes even when the interest income
is not collected. Base interest recognized on the bonds is
exempt for Federal income tax purposes for the shareholders. In
accordance with the terms and conditions of the underlying bond
documents and tax regulations, Participation Interest in certain
bonds may be taxable to the shareholders for Federal income tax
purposes.
Securitization Transactions
For financial reporting purposes, the Company accounts for its
securitization transactions in accordance with Statement of
Financial Accounting Standards No. 140, “Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities” (“FAS
140”) and FIN 46 (discussed under “New Accounting
Pronouncements” in this Note 1). As a result, the Company
accounts for its securitizations as either sales or financing
transactions. If the transfer of the underlying bond is
considered to result in the surrender of control pursuant to FAS
140, then a sale has occurred and a gain or loss is recognized
accordingly. Under financing accounting, the bond securitized is
included in the Company’s investments in tax-exempt bonds
and the senior interest in the securitization trust is recorded
as short-term or long-term debt on the Company’s
consolidated balance sheets.
Premiums and Discounts on Purchased Investments
Premiums and discounts on purchased investments are deferred and
amortized into interest income to approximate a level yield over
the estimated lives of the related investments. Upon the sale or
prepayment of an investment, the unamortized balance of premiums
and discounts is recorded as income.
Origination and Construction Administration Fees
The Company earns origination fees on the origination of
tax-exempt bonds and agency bonds. The Company also earns
construction administration fees in connection with the
servicing of its construction
78
bonds. The origination fees, which are carried on the
Company’s balance sheet, are deferred and amortized into
interest income to approximate a level yield over the estimated
life of the related bonds. Upon sale or prepayment, any
unamortized fees are recorded as income.
Tax Credit Segment
The Company acquires and transfers interests in real estate
project partnerships that receive and distribute to investors
low-income housing tax credits. The Company earns syndication
fees on the placement of these interests with investors. In
conjunction with the sale of these partnership interests, the
Company may provide performance guarantees on the underlying
real estate project partnerships (“Project
Partnerships”) owned by the tax credit equity funds or
guarantees to the fund investors. The Company earns fees for
providing these guarantees. The Company also earns asset
management fees for managing the low-income housing tax credit
equity funds syndicated. The Company also acts as general
partner of the tax credit equity funds and receives a pro rata
share of cash distributions that may be distributed to the tax
credit equity funds’ partners pursuant to a sale of the
Project Partnerships or their assets. The Company’s general
partner interests in tax credit equity funds range from 0.1% to
1.0%. The above-mentioned fees and the Company’s pro rata
share of income and losses from the Company’s general
partnership interests constitute the primary sources of income
or gain and losses from tax credit syndication transactions. All
fees represent normal market rates.
As investor capital is raised and investors are admitted as
limited partners in, or subsequently contribute additional
capital to, the tax credit equity funds, the tax credit equity
funds acquire those Project Partnership limited partner
interests from the Company. The Company evaluates these
transfers as real estate transactions, notwithstanding the fact
that it is acquiring and transferring limited partner interests
and not the underlying real property itself. The Company does
not transfer options or contracts to buy properties in its tax
credit syndication business.
The Company’s sources of capital to fund its syndication
activities include draws on lines of credit, proceeds from debt
and equity offerings and working capital. The Company earns
syndication, asset management and guarantee fees in conjunction
with its syndication transactions.
The Company’s significant accounting policies that directly
relate to the tax credit segment are described below.
Syndication and Guarantee Fees
Syndication fees are earned when third party investors are
admitted as limited partners into the tax credit equity fund
sponsored by the Company. Guarantee fees are earned when the
Company provides certain performance guarantees to the limited
partners of the tax credit equity fund or indemnifies third
party guarantors of the tax credit equity fund with respect to
the projected yield of the limited partnership interests.
Guarantees are only provided with respect to certain of the tax
credit equity funds. Syndication fees are recognized when the
earnings process is complete and collectibility is reasonably
assured. Guarantee fees are recognized ratably over the life of
the guarantee. As an additional stipulation, syndication fees
are considered earned and are recognized as income upon receipt
of the initial cash payment from investors into the syndicated
tax credit equity funds, provided all of the following have
occurred: (1) the investor has made a significant down
payment; (2) the properties for funds have been identified;
(3) a firm contract exists that requires an investor to
fund capital contribution installments; (4) all services
required to earn the fee have been performed to contract
specifications; and (5) all appropriate documents have been
executed. The Company does not receive ownership interests in
lieu of syndication or guarantee fees. Since March 31,
2004, as a result of the consolidation of certain tax credit
equity funds pursuant to Financial Accounting Standards
Board’s Financial Interpretation No. 46 (Revised),
“Consolidation of Variable Interest Entities”
(“FIN 46R”) (see New Accounting
Pronouncements below), certain syndication fees previously
recognized as income have been reclassified as intercompany
transactions and have, accordingly, been eliminated in
consolidation.
79
Asset Management Fees
Asset management fees are earned by the Company for managing the
assets of the tax credit equity funds, including monitoring the
compliance of the properties with tax credit regulations. The
amount of asset management fees due to the Company is outlined
in the tax credit equity fund documents. The Company earns asset
management fees from the tax credit equity funds on an annual
basis calculated based on a percentage of each tax credit equity
fund’s invested capital or number of Project Partnerships.
The asset management fees are paid from available cash from the
tax credit equity funds. The Company records asset management
fees as income when the amount that the Company will receive is
determinable and collection is reasonably assured. These fees
are typically paid to the Company annually in arrears. Upon the
adoption of FIN 46R, the Company was required to eliminate
intercompany asset management fees earned through services
provided to certain tax credit equity funds consolidated by the
Company.
Financing Accounting for Guaranteed Tax Credit Equity
Funds
When the Company provides a guarantee in connection with the
syndication of a tax credit equity fund, the Company is
considered to have continuing involvement with the assets of
that fund and to have effective control over the assets in the
fund. Therefore, the Company accounts for its involvement in
these funds under the financing method. Under the financing
method, no profit is recognized from the sale of interests in
Project Partnerships to tax credit equity funds. The sales value
of the Project Partnership is equal to the Company’s
original cost basis of the investment. There are no fees charged
by the Company to the Project Partnership as part of the
syndication transaction. The Company reports the net assets of
the tax credit equity funds, consisting primarily of restricted
cash and investments in Project Partnerships, in the
Company’s consolidated balance sheet. In addition, the
investor capital contributions to the tax credit equity funds
are reported as a tax credit equity guarantee liability on the
Company’s consolidated balance sheet. The net income
(loss) from the tax credit equity funds is reported in the
appropriate line items of the Company’s consolidated
statement of income.
The Company’s guarantee liability may expire based on the
achievement of certain targets by the underlying Project
Partnership in the tax credit equity fund or may be outstanding
for the life of the tax credit equity fund. When the
Company’s liability is relieved by the achievement of
certain targets, the tax credit guarantee liability is relieved
and the related underlying investment in the Project Partnership
is removed. Any difference between the carrying value of the
de-recognized investment in the Project Partnership and the
guarantee liability is reflected as a gain or loss on sale and
reported in the Company’s consolidated statement of income.
For a tax credit equity fund in which the Company’s
guarantee obligation remains outstanding for the life of the
fund, the guarantee liability is amortized straight line over
the life of the fund, which is estimated to be 15 years,
and the related amortization is reported in guarantee fees in
the Company’s consolidated statement of income.
When a guarantee is provided in connection with a syndication,
the Company reduces syndication fee and guarantee fee
recognition by the amount of estimated losses. The Company
estimates that no losses will be incurred under the guarantees.
The Company has not incurred any losses to date through its
guarantees on limited partnership interests; however, if losses
are projected and estimable, reserves will be provided for
accordingly.
Real Estate Finance Segment
The Company engages in a variety of real estate finance
activities. These activities include the origination, investment
in and servicing of investments in multifamily housing and other
real estate financings, both for its own account and on behalf
of third parties.
The Company’s sources of capital to fund its real estate
finance activities include (1) warehousing facilities and
short-term lines of credit with commercial banks and finance
companies, (2) debt and equity financings, either through
the Midland Affordable Housing Group Trust (the “Group
Trust”) or the Midland Multifamily Equity REIT
(“MMER”) and (3) working capital. The
Company earns income from the difference between the interest
charged on its loans and the interest due under its notes
payable and
80
other funding sources. The Company also earns
(1) origination fees, (2) loan servicing fees, or in
the case of construction loans, construction administration fees
and (3) guarantee and other fees in cases where the Company
provides credit support to the obligations of a borrower to a
third party.
The Company has established relationships with pension funds
through the Group Trust and MMER. The Group Trust was
established by a group of pension funds for the purpose of
investing in real estate debt investments. The Group Trust
provides loans and lines of credit to finance a variety of the
Company’s loan products. MMER is a Maryland real estate
investment trust established by a group of pension funds
including those invested in the Group Trust. MMER provides the
Company short-term lines of credit to finance the Company’s
lending activities, in addition to acquiring equity investments
in income-producing real estate partnerships. From time to time
the pension funds make direct investments in debt or equity
financings originated by the Company. A subsidiary of MMA
Financial Holdings, Inc. (formerly Midland Financial Holdings,
Inc. and, together with its subsidiaries,
“MFH”, except where otherwise indicated), a
wholly owned subsidiary of MuniMae, is the investment manager
for the Group Trust and MMER and receives advisory fees for
these services. The Company also earns brokerage fees on the
placement of permanent loans with the Group Trust and on the
placement of equity interests in real estate partnerships with
MMER.
The Company originates taxable construction, permanent and
supplemental loans and equity financing to the multifamily
housing industry. Supplemental loans include:
|
|
|
| |
• |
Pre-development loans, which are project-specific short-term
loans for qualifying, early stage pre-development expenditures
and are structured to be repaid by the first installments of
equity or construction financing; and |
| |
| |
• |
Bridge and other loans, which have expenditure purposes and
sources of repayment that may or may not be limited to a single
project. Bridge and other loans are repaid with general
operating cash flow of the development or other capital sources
of the borrower, including cash flows from other investments. |
Collateral for the supplemental loans can take many forms,
including a mortgage against land or other real estate,
assignment of syndication proceeds, assignment and pledges of
developer fees, assignment and pledge of cash flows from
properties and corporate and personal guarantees.
The Company conducts real estate finance activities through
certain subsidiaries that originate loans on behalf of or in
conjunction with the following entities and their respective
programs: Fannie Mae — Delegated Underwriting and
Servicing (“DUS”) program; Government National
Mortgage Association (“GNMA”) — GNMA
Mortgage Backed Security program; Federal Housing Administration
(“FHA”); US Department of Housing and Urban
Development (“HUD”) — HUD’s
Multifamily Accelerated Processing program; and Federal Home
Loan Mortgage Corporation (“Freddie
Mac”) — Targeted Affordable Housing program.
These entities’ programs provide an important source of
liquidity to the Company. Typically, the loans originated in
conjunction with these programs are underwritten and structured
in accordance with the terms of these programs. In addition, the
Company’s subsidiaries must meet certain financial
requirements including maintaining a minimum net worth,
liquidity and insurance coverages and holding collateral with a
custodian. At December 31, 2004, the Company was in
compliance with such requirements. As a Fannie Mae DUS lender,
the Company underwrites and originates multifamily housing loans
in accordance with Fannie Mae’s underwriting guidelines and
sells those loans directly to Fannie Mae. Certain programs
require the Company to bear a portion of losses incurred on
underlying loans. In addition, at times the Company retains the
servicing rights attached to the loans. The servicing portfolio
balance originated through these programs was $1.2 billion
and $1.1 billion at December 31, 2004 and 2003,
respectively. For the years ended December 31, 2004, 2003
and 2002, the Company incurred losses on this portfolio of $0,
$0.5 million and $0, respectively.
During 2003, the Company also began originating permanent loans
through other mortgage conduits. These other mortgage conduits
provide an alternative liquidity strategy for the delivery of
permanent loans. These conduits are not contractually obligated
to purchase any loans. The Company
81
originated $15.5 million and $35.9 million through
other conduit relationships for the years ended
December 31, 2004 and 2003, respectively.
The Company’s significant accounting policies that directly
relate to the real estate finance segment are described below.
Loans Receivable
The Company’s loans receivable consist primarily of
construction loans, permanent loans, supplemental loans and
other taxable loans. The Company carries loans receivable at net
realizable value in accordance with Statement of Financial
Accounting Standard No. 114, “Accounting by Creditors
for Impairment of a Loan — an Amendment of FASB
Statements No. 5 and 15”, (“FAS 114”).
The Company evaluates on an ongoing basis the credit risk
exposure associated with these assets to determine whether any
impairment exists in accordance with the Company’s policy
discussed in this Note. When the Company believes that it is
probable that it will not collect all amounts due, including
principal and interest, under the terms of a loan, it records a
valuation allowance.
The Company recognizes interest on loans as revenue as it
accrues. The Company places delinquent loans on non-accrual
status for financial reporting purposes when collection of
interest is in doubt, which is generally after 90 days of
non-payment. The Company applies interest payments on
non-accrual loans first to previously recorded accrued interest
and then, once previously accrued interest has been satisfied,
as interest income when received. The accrual of interest income
is reinstated once a loan’s ability to perform is
adequately demonstrated. Interest income is also recognized for
the portion of any principal payments received in excess of
basis, including payments for previously unaccrued interest.
Loans Receivable Held for Sale
Management classifies loans that are held for sale as loans
receivable held for sale. Loans held for sale are typically held
for a period of less than three months. Loans held for sale are
reported at lower of cost or market value, on a portfolio basis.
Mortgage Servicing Rights
When the Company sells a loan to a third party but retains the
right to service the loan, the Company recognizes as an asset or
liability the right to service the mortgage loan. The Company
accounts for these mortgage servicing rights in accordance with
FAS 140. FAS 140 requires servicing rights retained by the
Company after the origination and sale of the related loan to be
capitalized by allocating the carrying amount between the loan
and the servicing rights based on their relative fair values.
The fair value of the mortgage servicing rights is based on the
expected future net cash flow to be received over the estimated
life of the loan discounted at market discount rates. The
capitalization of the mortgage servicing rights is reported in
the income statement as a gain or loss on sale and results in an
offsetting asset or liability. Mortgage servicing rights are
amortized over the estimated life of the serviced loans. The
amortization expense is included in amortization of intangibles
in the consolidated statements of income.
The Company evaluates all capitalized mortgage servicing rights
for impairment when changes indicate that impairment is
probable, but no less than at each reporting date. The mortgage
servicing rights are considered to be impaired when the carrying
amount exceeds the fair value of the expected future net cash
flows to be received under the servicing contract. Impairment,
if any, is recognized through a valuation allowance.
Loan Servicing, Origination and Construction Administration
Fees
The Company earns fees in connection with the servicing of loans
for third parties. The Company earns construction administration
fees in connection with the servicing of its construction loans.
The Company earns origination fees on the origination of
construction and supplemental loans. The fees on loans held for
the Company’s own account are carried on the Company’s
consolidated balance sheet, are
82
deferred and amortized into interest income to approximate a
level yield over the estimated life of the related loan.
Advisory Fees
The Company earns advisory fees from serving as investment
manager to the Group Trust and MMER. The Group Trust advisory
fees are based on the net asset value of the Group Trust. MMER
advisory fees are based on the greater of subscription proceeds
or net asset value. Advisory fees are recognized into income
over the period in which the Company performs the associated
services.
Brokerage Fees
The Company’s brokerage fees are earned through its
relationship with the Group Trust, Fannie Mae, Freddie Mac and
GNMA. These entities commit to make permanent loans to borrowers
through arrangements originated by the Company. The Company does
not provide permanent loan financing to the borrower. The
Company earns brokerage fees for establishing the meeting of the
borrower and these entities and recognizes revenue when all
significant services have been performed, which typically
coincides with when the permanent lender commits to extend
permanent financing.
Investments in Partnerships
The Company’s investments in partnerships consist of equity
interests in real estate operating partnerships. The
Company’s investments in partnerships are accounted for
using the equity method of accounting. The Company uses the
equity method when the Company owns an interest in a partnership
and can exert significant influence over the partnership’s
operations but cannot control the partnership’s operations.
Under the equity method, the Company’s ownership interest
in the partnership’s capital is reported as an investment
on its consolidated balance sheets and the Company’s
allocable share of the income or loss from the partnership is
reported as income (loss) from equity investments in
partnerships in the consolidated statements of income. The
Company ceases recording losses on an investment in partnership
when the cumulative losses and distributions from the
partnership exceed the carrying amount of the investment and any
advances made by the Company. After the Company’s
investment in such partnership reaches zero, cash distributions
received from these investments are recorded as income.
Guaranteed Tax Credit Equity Funds: Limited Partner
Investments in Real Estate Operating Partnerships
When the Company provides or assumes a guarantee in connection
with the syndication of a tax credit equity fund, the Company is
considered to have continuing involvement with the assets of the
related tax credit equity funds and to have effective control
over the assets in the funds. Therefore, the Company accounts
for its involvement in these funds under the financing method.
Under the financing method, the Company reports the net assets
of the funds, consisting primarily of restricted cash and
investments in partnerships, on the Company’s consolidated
balance sheet.
Tax Credit Equity Funds: Limited Partner Investments in Real
Estate Operating Partnerships
The Company earns revenues from the syndication of low-income
housing tax credits. The Company acquires, through limited
partnership interests, equity interests in Project Partnerships
expected to earn such tax credits and, as and when it has a
sufficient number of such limited partnership interests and has
identified tax credit investors, transfers those interests to a
syndicated tax credit equity fund for the investors’
benefit. The Company typically owns these partnership interests
for three to nine months before they are transferred to a tax
credit equity fund. For those tax credit equity funds
consolidated pursuant to the adoption of FIN 46R, applicable
transferred partnership interests remain on the Company’s
consolidated balance sheet. At times the tax credit equity fund
acquires equity interests in Project Partnerships identified by
the Company directly from the underlying developer.
83
Investments in Income-Producing Real Estate Operating
Partnerships
The Company makes equity investments in income-producing real
estate operating partnerships. To date, the Company’s
equity investments have been made in partnership with CAPREIT.
Tax Credit Equity Funds: General Partner Interests
The Company is also the general partner in most of the
syndicated low-income housing tax credit equity funds it
originates. The Company’s general partner interests
represent 0.1% to 1.0% interest in each such fund. As further
discussed in “New Accounting Pronouncements”, FIN 46R
requires, in some cases, consolidation of these tax credit
equity funds. In other cases, the fund may not be consolidated
but instead record the Company’s general partnership
investment using the equity method. For partnerships in which
the Company is a general partner, the Company recognizes losses
to the extent of its partnership liability, regardless of the
Company’s basis in its partnership interest.
At times, the Company takes ownership of the general partnership
interest in the underlying Project Partnerships in which the tax
credit equity funds hold investments. For those property-level
general partnership interests the Company has discontinued the
equity method of accounting and consolidated the underlying
Project Partnership pursuant to FIN 46R.
Financial Risk Management and Derivatives
Senior interests in securitization trusts, which bear interest
at floating rates and are reported on the Company’s
consolidated balance sheet as short-term debt, expose the
Company to interest rate risk. To reduce the Company’s
exposure to interest rate risks, the Company may enter into
interest rate swaps. Historically, the Company has attempted to
offset substantially all of its floating interest rate exposure
related to securitization trusts; however, a portion of this
floating rate exposure is not fully mitigated by hedging
instruments. As a result, changes in interest rates could result
in either an increase or a decrease in the Company’s
interest income and cash flows associated with these
investments. Under the terms of the Company’s interest rate
swap agreements with counterparties, the Company is required to
maintain cash deposits (“margin call
deposits”). The margin call deposit requirements are
specific to each counterparty. In general, the Company must make
margin call deposits when the total fair value of the
Company’s outstanding swap obligations to any one
counterparty is greater than $1.0 million. In certain cases, the
Company is also required to post an independent amount of
up-front collateral on the swap contracts.
The Company has occasionally entered into put option agreements
with counterparties whereby the counterparty has the right to
sell to the Company, and the Company has the obligation to buy,
an underlying investment at a specified price. Under the put
options, the Company may receive an annual payment for assuming
the purchase obligation and providing asset management services
on the underlying investments.
The Company’s significant accounting policies that directly
relate to the Company’s financial risk management and
derivatives are described below.
Investments in derivative financial instruments are accounted
for under the provisions of Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, Statement of Financial
Accounting Standards No. 138, “Accounting for Certain
Derivative Instruments and Certain Hedging Activities” and
Statement of Financial Accounting Standards No. 149,
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities” (collectively,
“FAS 133”). These statements establish
accounting and reporting standards for derivative financial
instruments, including certain derivative financial instruments
embedded in other contracts, and for hedging activity. FAS 133
requires the Company to recognize all derivatives as either
assets or liabilities in its financial statements and to record
these instruments at their fair values.
In order to achieve hedge accounting treatment, hedging
activities must be appropriately designated, documented and
proven to be effective as a hedge pursuant to the provisions of
FAS 133. The Company has elected, as permitted by FAS 133, not
to prove the hedging effectiveness of its derivative investments
84
due to the cost and administrative burden of complying with FAS
133. As a result, changes in the fair value of derivatives are
recorded through current earnings.
The Company has several types of financial instruments that meet
the definition of a derivative financial instrument under FAS
133, including interest rate swap agreements, total return swaps
and put options. Under FAS 133, the Company’s investment in
these derivative financial instruments is recorded on the
balance sheet with changes in the fair value of these
instruments recorded in current earnings. The Company recognized
an increase in net income of $4.9 million for the year
ended December 31, 2004, an increase in net income of
$6.3 million for the year ended December 31, 2003 and
a decrease in net income of $14.9 million for the year
ended December 31, 2002, due to the change in fair value of
its derivative instruments. These changes are reflected in net
gain (loss) on derivatives in the Company’s
consolidated statements of income.
The Company determines the fair value of its investment in
interest rate swap agreements and total return swaps based on
quotes from external sources, such as brokers, for these or
similar investments. Investments in interest rate swap
agreements with market values below zero are reflected as
liabilities in the accompanying consolidated balance sheets. The
Company recognizes the differential paid or received under these
agreements through net gain (loss) on derivatives. Net swap
payments received by the Company, if any, will be taxable
income, even though the investment being hedged pays tax-exempt
interest.
The Company determines the fair value of certain of its put
option agreements by discounting the underlying
collateral’s expected future cash flows using current
estimates of discount rates and capitalization rates. The
Company determines the fair value of its other put option
agreements based on quotes from external sources, such as
brokers, for these or similar investments. Income received on
put options for assuming the purchase obligation and providing
asset management services on the underlying investment is
recognized ratably over the term of the associated put option
agreements and is included in other income in the consolidated
statements of income.
Cash and Cash Equivalents
Cash and cash equivalents consist principally of investments in
money market mutual funds and short-term marketable securities
with original maturities of 90 days or less, all of which
are readily convertible to known amounts of cash in seven days
or less. Cash equivalents are carried at cost, which
approximates fair value.
Land, Building and Equipment
Land, building and equipment, consisting primarily of land,
buildings, furniture and fixtures, equipment, computer software,
computer hardware and leasehold improvements, is stated at cost.
Leasehold improvements are amortized on a straight line basis
over the estimated life of the lease. Depreciation is provided
on either the declining balance or straight line methods over
the estimated useful
85
lives of the assets. The following table summarizes property and
equipment by type as of December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
|
|
| |
|
| |
|
Useful Life | |
| |
|
2004 | |
|
2003 | |
|
(years) | |
| (in thousands, except useful life) |
|
| |
|
| |
|
| |
|
Land
|
|
$ |
26,495 |
|
|
$ |
— |
|
|
|
N/A |
|
|
Building
|
|
|
207,983 |
|
|
|
— |
|
|
|
27.50 - 40 |
|
|
Furniture and Fixtures
|
|
|
8,448 |
|
|
|
1,897 |
|
|
|
5 - 20 |
|
|
Equipment
|
|
|
267 |
|
|
|
259 |
|
|
|
10 |
|
|
Computer Software
|
|
|
1,806 |
|
|
|
1,497 |
|
|
|
5 |
|
|
Computer Hardware
|
|
|
1,460 |
|
|
|
1,757 |
|
|
|
5 |
|
|
Leasehold Improvements
|
|
|
3,102 |
|
|
|
2,610 |
|
|
|
(A |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
249,561 |
|
|
|
8,020 |
|
|
|
(B |
) |
|
Accumulated Depreciation
|
|
|
(66,788 |
) |
|
|
(2,591 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
182,773 |
|
|
$ |
5,429 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (A) |
Varies based on estimated lease term. |
|
|
| (B) |
$241.1 and $0 represents land, building and furniture applicable
to Project Partnerships for the years ended December 31,
2004 and 2003, respectively. |
The Company recorded depreciation expense of $7.6 million,
$1.0 million and $0.5 million for the years ended
December 31, 2004, 2003 and 2002, respectively.
Other Assets
The Company’s investment in other assets includes prepaid
expenses, other receivables, debt issue costs, deferred tax
assets and certain investments in interest-only securities.
Prepaid expenses and debt issue costs are amortized over the
contract period or the estimated life of the related debt.
The Company holds interest-only securities (see Note 14), which
represent the right to receive the excess interest on certain
mortgage loans sold to Fannie Mae. These rights result from the
contractual right to receive the difference between the interest
paid at the borrower’s loan rate and interest paid to
Fannie Mae at the rate at which the loan was sold to Fannie Mae.
The fair value of the interest-only securities is estimated by
discounting the expected future cash flows. Due to the existence
of a related obligation to pay all or a portion of these cash
flows to the Group Trust, a corresponding liability is reflected
on the balance sheet in other liabilities.
Goodwill
In June 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 141,
“Business Combinations” (“FAS 141”)
and No. 142, “Goodwill and Other Intangible
Assets,” (“FAS 142”), which were effective
July 1, 2001 and January 1, 2002, respectively. FAS
141 requires that the purchase method of accounting be used for
all business combinations consummated after June 30, 2001.
The Company adopted FAS 142 on January 1, 2002. Upon
adoption of FAS 142, amortization of goodwill and indefinitely
lived intangible assets, including goodwill and indefinitely
lived intangible assets recorded in past business combinations,
was discontinued. For the years ended December 31, 2004 and
2003, all goodwill was tested for impairment in accordance with
the provisions of FAS 142 and the Company found no instances of
impairment. The Company determined that none of the intangible
assets recorded by the Company were indefinitely lived,
therefore, amortization of these intangible assets, other than
goodwill, has not ceased.
The Company’s goodwill at December 31, 2004 and
December 31, 2003 represents the excess of cost over market
value of the net assets acquired from the acquisition of
businesses in the Company’s real
86
estate finance segment. The following table shows the activity
for the years ended December 31, 2004 and 2003. See Note 2
for a discussion of acquisitions.
| |
|
|
|
|
| (in thousands) |
|
|
|
January 1, 2003
|
|
$ |
33,500 |
|
|
Goodwill acquired during the period
|
|
|
73,913 |
|
|
Adjustment to previously recorded purchase price
|
|
|
92 |
|
| |
|
|
|
|
December 31, 2003
|
|
|
107,505 |
|
|
Goodwill acquired during the period
|
|
|
— |
|
|
Adjustment to previously recorded purchase price
|
|
|
(896 |
) |
| |
|
|
|
|
December 31, 2004
|
|
$ |
106,609 |
|
| |
|
|
|
Other-than-Temporary Impairments and Valuation Allowances on
Investments
The Company evaluates on an ongoing basis the credit risk
exposure associated with its assets to determine whether
other-than-temporary impairments exist or a valuation allowance
is needed. The Company considers the credit risk exposure of the
investment, the Company’s ability and intent to hold the
investment for a period of time to allow for anticipated
recoveries in market value, the length of time and extent to
which the market value has been less than carrying value, the
financial condition of the underlying collateral including the
payment status of the investment and general economic and other
more specific conditions applicable to the investment, other
collateral available to support the investment and whether the
Company expects to recover all amounts due under its mortgage
obligations on a net present value basis. Third party quotes of
securities with similar characteristics or discounted cash flow
valuations are used to assist in determining if an impairment
exists on investments. If the fair value of the investment is
less than its amortized cost, and after assessing the
above-mentioned factors it is determined that an
other-than-temporary impairment exists, the impairment is
recorded currently in earnings and the cost basis of the
security is adjusted accordingly. Other-than-temporary
impairments and valuation allowances are reported in Note 3 and
Note 4, respectively. The Company measures impairment of a loan
in accordance with the provisions of FAS 114. FAS 114
requires a creditor to base its measure of loan impairment on
the present value of expected future cash flows discounted at
the loan’s effective interest rate or the fair value of the
collateral if the loan is collateral dependent. The Company
provides an allowance for loan losses based upon
management’s evaluation of all loans in the portfolio. In
management’s judgment, consideration has been given to
overall loss experience, loan-to-value ratios, delinquency data,
economic market conditions, debt service coverage,
indemnification agreements, and other factors that warrant
recognition in reviewing the portfolio for impairment. The
Company also evaluates other receivables and advances for
collectibility on an ongoing basis. When the Company believes it
is probable that it will not collect all amounts due, the
balance is written down to its realizable value. For the years
ended December 31, 2004, 2003 and 2002, the Company
recorded other-than-temporary impairments on tax-exempt bonds of
$4.2 million, $3.8 million and $0.4 million,
respectively. For the years ended December 31, 2004, 2003
and 2002, the Company recorded allowances for loan losses of
$1.3 million, $0.6 million and $0.3 million,
respectively. For the year ended December 31, 2003, the
Company recorded an allowance of $2.5 million for other
receivables and advances. No allowance for other receivables and
advances was recorded during 2004 or 2002.
Long-Lived Assets
The Company evaluates its long-lived assets for possible
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of
the undiscounted cash flows expected to result from the use and
eventual disposition of the long-lived asset is less than the
carrying amount at the date of the evaluation, an impairment
loss is recognized. The impairment loss is measured as the
amount by which the carrying amount exceeds the fair value of
the long-lived asset. During the fourth quarter of 2004, it was
determined that long-lived assets of certain Project Partnerships
87
were impaired. As a result, the Company recorded an impairment
of $1.5 million for the year ended December 31, 2004.
The Company recorded no such impairment losses during the years
ended December 31, 2003 and 2002.
Guarantee Fees
The Company earns guarantee fees for providing payment or
performance guarantees on investments. These fees are amortized
into income over the life of the guarantee. The Company also
records guarantee income on guaranteed tax credit equity funds
as discussed above under “Syndication of Low-Income Housing
Tax Credits” in this Note 1.
Net Rental Income
Net rental income in the accompanying consolidated financial
statements relates to the operations of the consolidated Project
Partnerships. Net rental income is recognized as earned and is
recorded when due from residents, generally upon the first day
of the month. Leases are for periods of up to one year, with
rental payments due monthly. Net rental income for the year
ended December 31, 2004 was approximately
$18.0 million including concessions and bad debt of
approximately $0.1 million.
Other Income
The Company’s other income includes income from put
options, loan related fees, market study revenues and other
miscellaneous income. Put option income is recognized ratably
over the term of the associated put option agreements. Loan
related fees include late fees, extension fees, cancellation
fees, prepayment fees and application fees. Market study
revenues include fees for performing market feasibility studies
for proposed investment alternatives. Loan related fees, market
study revenues and other miscellaneous income are recognized as
income when earned and collection of the fees is reasonably
assured.
Stock Compensation Plans
The Company accounts for both the non-employee director share
plans and the employee share incentive plans (see Note 17) under
the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees.” Accordingly, since grants have been
made at fair value no compensation expense has been recognized
for the options issued under the plans during 2004, 2003 or
2002. Statement of Financial Accounting Standards No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure” (“FAS 148”),
requires the Company to make certain disclosures as if the
compensation expense for the Company’s plans had been
determined based on the fair value on the date of grant for
awards under those plans. Using the Black Scholes option-pricing
model, the Company estimated the fair value of each option
awarded in 2004, 2003 and 2002 based on the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based
Compensation” as amended by FAS 148. The estimated fair
values of options awarded under each year were de minimis and
would have no impact on the earnings per share calculation.
Earnings per Share
The Company calculates earnings per share in accordance with the
provisions of Statement of Financial Accounting Standards
No. 128, “Earnings per Share” (“FAS
128”). FAS 128 requires the dual presentation of basic
and diluted earnings per share on the face of the income
statement for all entities with complex capital structures.
Income Taxes
MuniMae is organized as a limited liability company. This
structure allows MuniMae to combine many of the limited
liability, governance and management characteristics of a
corporation with the pass-
88
through income features of a partnership. Therefore, the
distributive share of MuniMae’s income, deductions and
credits is included in each shareholder’s income tax
return. In addition, the tax-exempt income derived from certain
investments remains tax-exempt when it is passed through to the
shareholders. MuniMae records cash dividends received from
subsidiaries organized as corporations as dividend income for
tax purposes. Shareholders’ distributive share of
MuniMae’s income, deductions and credits are reported to
shareholders on Internal Revenue Service Schedule K-1. The
tax returns of the Company are subject to examination by Federal
and state taxing authorities. If such examinations result in
adjustments to distributive shares of taxable income or loss,
the tax liabilities of the partners (the Company’s common
shareholders) could be adjusted accordingly.
The tax attributes of the Company’s net assets flow
directly to each individual shareholder. Since the Company is
taxed as a partnership, and its shareholders are therefore
treated as partners, individual shareholders will have different
investment bases depending upon the timing and prices of
acquisition of partnership units. Further, each
shareholder’s tax accounting, which is partially dependent
upon the shareholder’s individual tax position, may differ
from the accounting followed in the financial statements.
Accordingly, there could be significant differences between each
individual shareholder’s tax basis and the
shareholder’s proportionate share of the net assets
reported in the financial statements. Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes” (“FAS 109”) requires disclosure by
a publicly held partnership of the aggregate difference in the
basis of its net assets for financial and tax reporting
purposes. However, the Company does not have access to
information about each individual shareholder’s tax
attributes in the Company, and the aggregate tax bases cannot be
readily determined. In any event, management does not believe
that, in the Company’s circumstances, the aggregate
difference would be meaningful information.
Tax-exempt bonds make up the majority of MuniMae’s
investments. Historically, these bonds were purchased using
financing sources other than debt. However, the Company may use
debt-funding sources to finance tax-exempt bond acquisitions. As
a result, the associated interest expense incurred in connection
with loans used to finance these acquisitions will be disallowed
as a deduction. While the bulk of the Company’s recurring
interest income is tax-exempt, from time to time the Company may
sell or securitize various assets, which may result in capital
gains and losses for tax purposes. These capital gains and
losses are passed through to shareholders and are reported on
each shareholder’s Schedule K-1.
The Company previously made an election under the relevant
provisions of the federal income tax law to adjust the basis of
its partnership property on the transfer between shareholders of
its common shares by the difference between the transferee
shareholder’s purchase price for the shares and the
transferee shareholder’s proportionate share of the basis
of the Company’s assets. Under this election, the increase
or decrease affected the basis of the Company’s property
only with respect to the transferee shareholder’s shares.
In January 2003, the Company applied to have its election under
Section 754 of the Internal Revenue Code revoked. The
Company applied for this revocation due to the increasing
administrative burden attributable to this election resulting
from the increased numbers of common shareholders and the
increasing frequency of events generating capital gain or loss
and of purchases and sales of common shares. In May 2003, the
Internal Revenue Service approved the Company’s application
to revoke its election under Section 754 effective
beginning with the Company’s tax year ending
December 31, 2003.
In October 2004, new tax legislation was enacted that requires
partnerships that have aggregate built-in losses in all
partnership assets of greater than $250,000 at the time a
shareholder purchases and interest in the Company to make basis
adjustments similar to those described above. Although the
Company does not currently have aggregate built-in losses that
would require such an adjustment, monitoring its assets and
making potential adjustments will eliminate the administrative
savings of having revoked such election. As a result, MuniMae
will attempt to retroactively reinstitute its basis adjustment
election under Section 754 of the Internal Revenue Code
effective January 1, 2003. Accordingly, if such re-election
is successful, the basis adjustment election will apply to all
MuniMae shares acquired after 1995. The procedure for basis
adjustments is complex and there is no assurance that the IRS
will not
89
challenge the accounting conventions the Company uses or the
allocation of the basis step-up among the Company’s assets.
A portion of the Company’s interest income is derived from
private activity bonds that for income tax purposes are
considered tax preference items for purposes of the alternative
minimum tax (“AMT”). AMT is a mechanism within
the Internal Revenue Code to ensure that all taxpayers pay at
least a minimum amount of taxes. All taxpayers are subject to
the AMT calculation requirements although the majority of
taxpayers will not actually pay AMT. As a result of AMT, the
percentage of the Company’s income that is exempt from
Federal income tax may be different for each shareholder
depending on that shareholder’s individual tax situation.
The Company has numerous corporate subsidiaries that are subject
to income taxes. The Company provides for income taxes in
accordance with FAS 109. FAS 109 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 basis of assets and
liabilities.
New Accounting Pronouncements
In January 2003, the FASB approved FIN 46. FIN 46 requires the
consolidation of a company’s equity investment in a VIE if
the company is the primary beneficiary of the VIE and if risks
are not effectively dispersed among the owners of the VIE. The
Company is considered to be the primary beneficiary of the VIE
if the company absorbs the majority of the “expected
losses” of the VIE as defined in the pronouncement. FIN 46
is effective for VIEs created after January 31, 2003. For
any VIE in which the Company held an interest that it acquired
before February 1, 2003, FIN 46 was effective for the first
interim reporting period beginning after June 15, 2003. In
December 2003, FASB approved various amendments to FIN 46 and
released FIN 46R. In addition, FASB extended the effective date
of FIN 46 until the first reporting period ending after
March 15, 2004 for VIEs which are not special purpose
entities, and the Company elected to defer adoption of that
portion of FIN 46 until that time.
The Company’s interests in bond securitizations represent
equity interests in VIEs, and the Company is the primary
beneficiary of those VIEs. The Company determined that its bond
securitization trusts were special purpose entities
(“SPEs”) and did not qualify for the deferral.
Therefore, these securitization trusts were consolidated at
December 31, 2003. The Company examined each of its SPEs to
determine if it meets the definition of a qualified SPE. Certain
of the Company’s SPEs are qualified SPEs and are not
consolidated accordingly. The Company initially measured the
assets and liabilities of the securitization trusts at the
carrying amounts.
The Company has general partnership interests in tax credit
equity funds where the respective funds have one or more limited
partners. The determination of whether the Company is the
primary beneficiary of (and must consequently consolidate) a
given tax credit equity fund depends on a number of factors,
including the number of limited partners and the rights and
obligations of the general and limited partners in that fund.
Upon adoption of FIN 46R in March 2004, the Company determined
that it was the primary beneficiary in certain of the funds it
originated where there are multiple limited partners with
restrictions on their ability to sell, transfer or pledge their
investment. As a result, the Company consolidated these equity
investments at March 31, 2004. The Company’s general
partner interests represent one percent or less interest in each
fund. For those funds which it consolidates, the Company reports
the assets and liabilities of the funds, consisting primarily of
restricted cash, investments in real estate partnerships and
notes payable, in the Company’s consolidated balance sheet.
In addition, the limited partnership interests in the funds,
owned by third party investors, are reported as a minority
interest. The net income (loss) from these tax credit
equity funds is reported in the appropriate line items of the
Company’s consolidated statement of income. An adjustment
for the income (loss) allocable to the limited partners
(investors) in the funds is recorded through minority
interest (expense) income in the Company’s
consolidated statement of income. At March 31, 2004, the
Company recorded net assets of these tax credit equity funds of
$1.2 billion, consisting primarily of $1.4 billion in
investment in partnerships, $129.5 million in restricted
assets and $208.7 million in notes payable, which are
non-recourse to the
90
Company. The Company recorded $1.2 billion in minority
interest in subsidiary companies. As of March 31, 2004, the
Company also recorded a $0.5 million cumulative effect of a
change in accounting principle as a result of recording the net
equity allocable to the Company’s general partner interest
in the funds.
At times, the Company takes ownership of the general partnership
interest in the underlying Project Partnerships in which the tax
credit equity funds hold investments. For those property-level
general partnership interests the Company has discontinued the
equity method of accounting and consolidated the underlying
Project Partnership pursuant to FIN 46R. Such consolidation was
inadvertently not recorded in the first quarter in conjunction
with the adoption of FIN 46R but was recorded in the second
fiscal quarter of 2004 and resulted in an increase in assets of
$172.0 million, an increase in liabilities of
$172.0 million, which are non-recourse to the Company, and
net income of zero. The Company does not believe that the error
in the first quarter was material. At December 31, 2004,
$177.5 million of land, building and equipment is
collateral for the obligations of the underlying Project
Partnership.
The Company also has a general partnership interest in certain
other low-income housing tax credit equity funds where it has
concluded that it is not the primary beneficiary. Accordingly,
funds with assets of $2.1 billion and liabilities of
$263.9 million as of December 31, 2004 have not been
consolidated and continue to be accounted for using the equity
method.
The Company initially measured the assets and liabilities of the
tax credit equity funds at fair value as of July 1, 2003,
the acquisition date of Housing and Community Investing
(“HCI”), which was the point in time that the
Company first met the criteria to be the primary beneficiary of
the VIE. For funds consolidated pursuant to FIN 46R as of
March 31, 2004, the fair value was used to record the net
assets of the tax credit equity funds when the fair value was
less than the carrying amount. For funds where the Company took
ownership of the general partnership interest in the underlying
Project Partnership in which the fund held an investment, the
underlying Project Partnership was recorded at cost in
consolidation. During the quarter ended December 31, 2004,
the Company amended certain of its funds to remove certain
restrictions placed on limited partners’ ability to sell,
transfer or pledge their investments. As a result, funds with
assets of $954.8 million and liabilities of
$134.6 million have been deconsolidated.
In December 2004, the FASB approved Statement of Financial
Accounting Standards No. 123R, “Share-based
Payment” (“FAS 123R”). FAS 123R requires
that the compensation cost relating to share-based payment
transactions be recognized and applies to all outstanding and
unvested share-based payment awards at the adoption date.
Share-based payments result in a cost that will be measured at
fair value on the awards’ grant date, based on the
estimated number of awards that are expected to vest. The
Company will be required to apply FAS 123R as of the first
reporting period that begins after June 15, 2005. The
Company does not anticipate that the adoption of FAS 123R will
have a material effect on the financial statements.
Use of Estimates
The use of estimates is inherent in the preparation of all
financial statements, but is especially important in the case of
the Company, which is required under FAS 115 to carry a
substantial portion of its assets at fair value even though only
a limited market exists for them. Because only a limited market
exists for most of the Company’s investments, fair value is
estimated by the Company in accordance with the Company’s
valuation procedures discussed above. These estimates involve
uncertainties and matters of judgment and therefore cannot be
determined with precision. The assumptions and methodologies
selected by the Company were intended to estimate the amounts at
which the investments could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. Changes in assumptions and market conditions
could significantly affect these estimates. These estimated
values may differ significantly from the values that would have
been used had a ready market for the investments existed, and
the differences could be material.
91
Reclassifications
Certain amounts from prior years have been reclassified to
conform to the 2004 presentation with no effect on previously
reported net income or shareholders’ equity. These
reclassifications include the reclassification of payments on
derivative contracts of $8.8 million and $9.6 million
for the years ended December 31, 2003 and 2002,
respectively, out of interest income and into net loss on
derivatives.
NOTE 2 — Acquisitions
The Company acquired MFH in 1999 for a total purchase price of
$45.0 million ($46.0 million including acquisition costs).
Of this amount, the Company paid approximately
$23.0 million in cash and $12.0 million in common
shares at the closing of the transaction and $10.0 million
in additional common shares paid in three equal installments,
the last of which was paid in December 2002. The acquisition has
been accounted for as a purchase. The cost of the acquisition
was allocated on the basis of the estimated fair value of the
net assets acquired, which totaled $7.7 million. The
results of operations of MFH are included in the consolidated
financial statements of the Company.
On July 1, 2003, the Company acquired the HCI business of
Lend Lease Corporation Limited (“Lend Lease”)
for $102.0 million in cash. HCI is a syndicator of low
income housing tax credit equity investments. The acquisition of
this affordable housing tax credit syndication operation has
enhanced the Company’s competitive position, and as a
result the Company is one of the nation’s leaders in the
affordable housing finance industry. The acquisition, and
related working capital needs, were financed by a
$120.0 million secured term credit facility provided by a
syndicate of banks led by the Royal Bank of Canada. The
$120.0 million secured credit facility was subsequently
repaid by December 31, 2003 with the proceeds from a common
equity offering and a $38.0 million term loan with Merrill Lynch
& Co., Inc. and certain of its subsidiaries including
Merrill Lynch Capital Services, Inc. The HCI business is owned
by MMA Financial TC Corp. (“TC Corp”), a wholly
owned subsidiary of the Company. The Company’s results for
the years ended December 31, 2004 and 2003 reflect a full
year and six months, respectively, of activity from TC Corp. In
connection with this acquisition, the Company’s operating
subsidiary, MuniMae Midland, LLC, was renamed MMA Financial, LLC.
The HCI acquisition has been accounted for as a purchase. The
total purchase price was $105.3 million, which includes
actual acquisition costs and estimated post-acquisition
adjustments. The Company allocated the purchase price of its
acquisition to the tangible assets, liabilities and intangible
assets acquired based on their estimated fair values. The excess
purchase price over those fair values is recorded as goodwill.
Of the total purchase price for HCI, approximately
$73.0 million was allocated to goodwill. The factors
considered in allocating the purchase price, including goodwill,
included: (a) the Company’s valuation, which focused on
HCI’s historical and projected cash flows as well as its
business prospects and strategic value; (b) relatively few
tangible or intangible assets (other than certain asset
management contracts) to which significant value could be
assigned; and (c) not assigning value to HCI’s
customer relationships beyond the asset management contracts
acquired. The total purchase price is subject to adjustments as
the result of finalizing certain post-acquisition adjustments
primarily related to taxes, reimbursement of expenses and
reserves for contingent liabilities. Of the $105.0 million
in goodwill
92
and other intangibles recorded as a result of this acquisition
$75.8 million is expected to be amortized and deductible
for tax purposes over a 15-year period. The purchase price was
allocated as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
Assets
|
|
|
|
|
|
Investments in partnerships
|
|
$ |
113,641 |
|
|
Restricted assets
|
|
|
46,712 |
|
|
Other assets
|
|
|
14,554 |
|
|
Asset management contracts
|
|
|
32,003 |
|
|
Goodwill
|
|
|
73,020 |
|
| |
|
|
|
|
Total assets
|
|
|
279,930 |
|
| |
|
|
|
|
Liabilities
|
|
|
|
|
|
Tax credit syndication guarantee liability
|
|
|
157,960 |
|
|
Accounts payable and accrued expenses
|
|
|
3,572 |
|
|
Unearned revenue and other liabilities
|
|
|
13,061 |
|
| |
|
|
|
|
Total liabilities
|
|
|
174,593 |
|
| |
|
|
|
|
Net cash paid
|
|
$ |
105,337 |
|
| |
|
|
|
Of the total purchase price, approximately $32.0 million
was allocated to asset management contracts. These amortizable
intangible assets represent existing contracts that relate
primarily to monitoring properties underlying the real estate
investment vehicles sponsored or structured by HCI to insure
these properties are producing expected returns with appropriate
risk controls. The fair value assigned to the asset management
contracts is based on a valuation model prepared internally
using estimates and assumptions provided by management. The fair
value of the group of contract intangible assets was allocated
to each individual contract intangible asset at the date of
acquisition. The Company is amortizing the fair value of each
asset on a straight line basis over the contract’s
estimated useful life. The weighted average useful life of all
these assets was 7.7 years at the time of acquisition. The
Company evaluates its intangible assets subject to amortization
for possible impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. If the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the
intangible asset are less than the carrying amount at the date
of the evaluation, a potential impairment loss exists. If the
carrying amount exceeds the fair value of the intangible asset,
an impairment loss is recorded accordingly. For the years ended
December 31, 2004 and 2003, the Company recognized
$4.7 million and $4.8 million of amortization expense,
respectively. The total accumulated amortization of the asset
management contracts was $9.6 million and $4.8 million
at December 31, 2004 and 2003, respectively.
Uncertainties regarding contingent liabilities, several
litigation matters and an IRS audit of a partnership included in
one of the tax credit equity funds sponsored by HCI precluded
the Company from finalizing the purchase price allocation as of
the closing date of July 1, 2003. These uncertainties
included, among other things, judicial determinations on
requests for class action certification, potential changes to
the scope of the IRS audit and similar factors. During the
second and third quarters of 2004, based on evaluation of these
matters by management and the Company’s counsel, the
Company finalized its allocations to these contingent
liabilities and recorded a decrease in goodwill of
$0.9 million.
93
NOTE 3 — Investments in Tax-Exempt Bonds and
Interests in Bond Securitizations
As of December 31, 2004 and 2003, the Company held
$1,275.7 million and $1,044.0 million of tax-exempt
bonds, respectively. The following tables summarize tax-exempt
bonds by type.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
|
|
Amortized | |
|
Unrealized | |
|
|
| |
|
Face Amount | |
|
Cost | |
|
Gain (Loss) | |
|
Fair Value | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
Non-participating bonds
|
|
$ |
1,154,541 |
|
|
$ |
1,129,842 |
|
|
$ |
(13,085 |
) |
|
$ |
1,116,757 |
|
|
Participating bonds
|
|
|
101,234 |
|
|
|
100,565 |
|
|
|
(5,643 |
) |
|
|
94,922 |
|
|
Subordinate non-participating bonds
|
|
|
6,562 |
|
|
|
6,383 |
|
|
|
(752 |
) |
|
|
5,631 |
|
|
Subordinate participating bonds
|
|
|
60,530 |
|
|
|
35,799 |
|
|
|
18,976 |
|
|
|
54,775 |
|
|
Interests in securitization trusts
|
|
|
4,698 |
|
|
|
4,687 |
|
|
|
(1,024 |
) |
|
|
3,663 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,327,565 |
|
|
$ |
1,277,276 |
|
|
$ |
(1,528 |
) |
|
$ |
1,275,748 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
| |
|
| |
| |
|
|
|
Amortized | |
|
Unrealized | |
|
|
| |
|
Face Amount | |
|
Cost | |
|
Gain (Loss) | |
|
Fair Value | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
Non-participating bonds
|
|
$ |
922,544 |
|
|
$ |
897,322 |
|
|
$ |
(22,719 |
) |
|
$ |
874,603 |
|
|
Participating bonds
|
|
|
101,589 |
|
|
|
100,693 |
|
|
|
1,666 |
|
|
|
102,359 |
|
|
Subordinate non-participating bonds
|
|
|
17,642 |
|
|
|
16,417 |
|
|
|
58 |
|
|
|
16,475 |
|
|
Subordinate participating bonds
|
|
|
58,890 |
|
|
|
35,799 |
|
|
|
14,737 |
|
|
|
50,536 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,100,665 |
|
|
$ |
1,050,231 |
|
|
$ |
(6,258 |
) |
|
$ |
1,043,973 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Annual maturities of investments in tax-exempt bonds at
December 31, 2004 that mature on a single maturity date are
as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Face Amount | |
|
Fair Value | |
| (in thousands) |
|
| |
|
| |
|
Due in less than one year
|
|
$ |
— |
|
|
$ |
— |
|
|
Due between one and five years
|
|
|
17,346 |
|
|
|
19,908 |
|
|
Due between five and ten years
|
|
|
29,850 |
|
|
|
29,588 |
|
|
Due after ten years
|
|
|
109,480 |
|
|
|
107,315 |
|
| |
|
|
|
|
|
|
| |
|
$ |
156,676 |
|
|
$ |
156,811 |
|
| |
|
|
|
|
|
|
At December 31, 2004, the Company had 156 tax-exempt bonds
and bond investments with an aggregate face amount of
$1.2 billion that pay principal monthly, semi-annually or
annually with final maturity dates ranging from July 2007 to
January 2049.
2004 Transactions
During 2004, the Company invested $357.2 million in
tax-exempt bonds with a face amount of $363.8 million. Of
the total face amount of $363.8 million, $298.9 million
represents the Company’s new primary investments (bonds
which the Company originated), $57.6 million reflects new
secondary market investments (previously issued bonds purchased
from third parties) and $7.3 million reflects the refunding of a
non-performing bond that the Company had purchased in 2003.
The Company structures some tax-exempt bonds so that the
borrower makes draws on the bonds throughout the construction
period (“draw down bonds”). In the year these
bonds are originated, the total draws for the year are reported
as new primary investments. The Company originated a face amount
of $93.4 million in new draw down bonds during 2004. The Company
also funded an additional $45.5 million of existing
tax-exempt draw down bonds in 2004.
94
Seven tax-exempt bonds with an amortized cost of
$37.7 million were repaid during 2004. One of the bonds was
repaid as a result of a refunding of the bond. The Company
continues to hold the refunded bond. The Company recognized a
gain of $1.2 million on the repayment of the nonrefunded
bonds. In September 2004, the Company both acquired by deed in
lieu of foreclosure and sold a property (see
“Lakeview” in Note 16 — Related Party and
Affiliate Transactions) for net proceeds of $16.2 million.
All activities related to this property have been classified as
discontinued operations in the accompanying consolidated
statements of income (see Note 21).
Five tax-exempt bonds with an amortized cost of
$65.5 million were sold into securitization trusts during
2004. In conjunction with these sales, the Company purchased
four interests in bond securitizations with a face amount of
$4.7 million and recognized a loss of approximately
$0.6 million.
2003 Transactions
During 2003, the Company invested in tax-exempt bonds with a
face amount of $194.4 million for $191.1 million. Of
the total face amount of $194.4 million, $107.4 million
represents the Company’s new primary investments (bonds
which the Company originated), $22.4 million reflects new
secondary market investments (previously issued bonds purchased
from third parties) and $27.3 million reflects the repurchase of
bonds that the Company had previously securitized. From time to
time, the Company may purchase or sell in the open market
interests in bonds that it has securitized depending on the
Company’s capital position and needs.
During 2002, the Company began structuring tax-exempt bonds that
allow the borrower to make draws on the bonds throughout the
construction period. In the year these bonds are originated, the
total draws for the year are reported as new primary
investments. Of the total new primary investments in 2003
discussed above, the total draws on newly originated tax-exempt
draw down bonds represent $33.2 million of the face amount
and $31.4 million of the purchase amount. The unfunded
balance of these tax-exempt draw down bonds totaled
$127.3 million at December 31, 2003 and is expected to
be funded through 2005. In 2003, the Company also funded an
additional $36.5 million of existing tax-exempt draw down
bonds with a face amount of $37.3 million.
In December 2003, as a result of the adoption of FIN 46, the
Company made adjustments to (1) reclassify the
Company’s interests in bond securitizations to investment
in tax-exempt bonds, (2) reflect the senior interests in
the bond securitization trusts in investment in tax-exempt bonds
so that the total investment in tax-exempt bonds reported equals
the total assets in the securitization trusts,
(3) reclassify costs of the securitization transactions to
debt issue costs, which are included in other assets on the
Company’s consolidated balance sheets and (4) record
the senior interests in the securitization trusts as short-term
debt. The Company also recorded a $1.2 million cumulative effect
of a change in accounting principle related to this transaction
as a result of the reversal of gain on sales reported in prior
periods on these investments. The net adjustment to the
Company’s amortized cost of investments in tax-exempt bonds
as a result of the adoption of FIN 46 was $194.2 million.
In 2003, five tax-exempt bonds with an aggregate face amount of
$31.4 million were repaid, sold or partially redeemed resulting
in gain on sales of $2.7 million. Of the total gain
recorded, $2.2 million related to bonds with previously
recorded other-than-temporary impairments. In addition, the
Company acquired a property by deed in lieu of foreclosure in
April 2003. This property previously served as collateral for a
tax-exempt bond held by the Company. The property was sold in
June 2003 and the bond was repaid (see Note 21).
Investments with Unrealized Losses
The following table shows unrealized losses and fair value
aggregated by length of time that the tax-exempt bonds or
interests in bond securitizations have been in a continuous loss
position at December 31, 2004 and 2003.
95
December 31, 2004
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
| |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
$ |
210,880 |
|
|
$ |
(12,862 |
) |
|
$ |
293,147 |
|
|
$ |
(45,547 |
) |
|
$ |
504,027 |
|
|
$ |
(58,409 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
(in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
| |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
$ |
206,947 |
|
|
$ |
(13,820 |
) |
|
$ |
203,352 |
|
|
$ |
(39,757 |
) |
|
$ |
410,299 |
|
|
$ |
(53,577 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 37 and 29 tax-exempt bonds or interests in bond
securitizations in a continuous unrealized loss position for
more than twelve months, and 25 and 28 tax-exempt bonds or
interests in bond securitizations in a continuous unrealized
loss position for less than twelve months at December 31,
2004 and 2003, respectively. As discussed in Note 1, the fair
value of tax-exempt bonds or interests in bond securitizations
is determined by external quotes or a discounted cash flow
analysis. Both methodologies are based on current market
conditions including occupancy and net operating income of the
underlying properties. An other-than-temporary impairment is
only recorded when the Company believes it is possible that it
will not collect all amounts due under the terms of the
tax-exempt bond or interests in bond securitizations. The
Company expects to receive payments in excess of its investment
over the life of the bonds or interests in bond securitizations
in the above table. These bonds or interests in bond
securitizations are not considered to be other-than-temporarily
impaired at December 31, 2004.
Included in the table above there are twelve and nine tax-exempt
bonds as of December 31, 2004 and 2003, respectively, with
other-than-temporary impairment charges in the past.
Other-than-Temporary Impairments
In 2004, the Company recorded other-than-temporary impairments
totaling $4.2 million on five bonds. In 2003, the Company
recorded other-than-temporary impairments totaling
$3.8 million on two bonds.
Investments on Non-Accrual Status
In accordance with the Company’s policy discussed in Note
1, the Company places delinquent bonds on non-accrual status for
financial reporting purposes when collection of interest is in
doubt, which is generally after 90 days of non-payment. At
December 31, 2004, 2003 and 2002, there were
$108.1 million, $102.8 million and $102.9 million
(face value), respectively, of tax-exempt bonds on non-accrual
status. Interest income recognized on these bonds was $5.4
million, $5.0 million and $7.7 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Additional interest income that would have been recognized by
the Company had these bonds been on accrual status was
approximately $3.2 million, $2.4 million and
$1.0 million for the years ended December 31, 2004,
2003 and 2002, respectively.
Tax-Exempt Bonds Pledged
In order to facilitate the securitization of certain assets at
higher leverage ratios than otherwise available to the Company
without the posting of additional collateral, the Company has
pledged additional bonds to various pools that act as collateral
for senior interests in certain securitization trusts. From time
to time, the Company pledges bonds as collateral for letters of
credit, lines of credit, warehouse
96
lending arrangements, CAPREIT investments and other derivative
agreements. In addition, at times the Company pledges collateral
when providing a guarantee in connection with the syndication of
tax credit equity funds. At December 31, 2004 and 2003, the
total carrying amount of the tax-exempt bonds pledged as
collateral was $537.0 million and $452.3 million,
respectively.
Residual Interests in Bond Securitizations Valuation
Analysis
The fair value of residual interests in bond securitizations is
derived from the quote on the underlying bonds reduced by the
outstanding corresponding face amount of senior floating rate
certificates. The Company bases the fair value of the underlying
bond, which has a limited market, on quotes from external
sources, such as brokers, for these or similar bonds. The fair
value of the underlying bond includes a prepayment risk factor.
The prepayment risk factor is reflected in the fair value of the
bond by assuming the bond will prepay at the most adverse time
to the Company given current market rates and estimates of
future market rates. Based on this, an adverse change in
prepayment risk would not have an effect on the fair value of
the Company’s residual interests in bond securitizations.
In addition, the residual interests in bond securitizations are
not subject to prepayment risk as the term of the securitization
trusts is only for a period during which the underlying bond
cannot be prepaid. Based on historical information, credit
losses were estimated to be zero.
At December 31, 2004, a 10% and 20% adverse change in key
assumptions used to estimate the fair value of the
Company’s residual interests in bond securitizations would
have the following impact:
| |
|
|
|
|
| |
|
2004 | |
| (in thousands) |
|
| |
|
Fair value of residual interests in bond securitizations, net
|
|
$ |
3,663 |
|
|
Residual cash flows discount rate (annual rate)
|
|
|
6.3% - 7.3 |
% |
|
Impact on fair value of 10% adverse change
|
|
$ |
(3,958 |
) |
|
Impact on fair value of 20% adverse change
|
|
$ |
(7,534 |
) |
The sensitivity analysis presented above is hypothetical in
nature and presented for information purposes only. The analysis
shows the effect on fair value of a variation in one assumption
and is calculated without considering the effect of changes in
any other assumption. In reality, changes in one assumption may
affect the others, which may magnify or offset the sensitivities.
NOTE 4 — Loans Receivable
The Company’s loans receivable and loans receivable held
for sale consist primarily of construction loans, permanent
loans, taxable supplemental loans and other taxable loans.
Supplemental loans include pre-development loans, bridge and
other loans. The following table summarizes loans receivable by
loan type at December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| (in thousands) |
|
| |
|
| |
|
Loan Type:
|
|
|
|
|
|
|
|
|
|
Construction loans
|
|
$ |
503,745 |
|
|
$ |
396,817 |
|
|
Taxable permanent loans
|
|
|
27,766 |
|
|
|
54,492 |
|
|
Supplemental loans
|
|
|
62,079 |
|
|
|
72,966 |
|
|
Other taxable loans
|
|
|
40,309 |
|
|
|
29,780 |
|
| |
|
|
|
|
|
|
| |
|
|
633,899 |
|
|
|
554,055 |
|
|
Allowance for loan losses
|
|
|
(2,960 |
) |
|
|
(1,679 |
) |
| |
|
|
|
|
|
|
|
Total
|
|
$ |
630,939 |
|
|
$ |
552,376 |
|
| |
|
|
|
|
|
|
97
Loans Receivable Held for Sale
Management classifies loans that are held for sale as loans
receivable held for sale. Loans held for sale are typically held
for a period of less than three months. Loans held for sale are
reported at lower of cost or market value, on a portfolio basis.
Allowance for Loan Losses
The Company’s allowance for loan losses is based on the
Company’s continuing evaluation of the loans receivable and
is intended to maintain an allowance adequate to absorb probable
losses on these loans. The Company assesses individual loans for
impairment based on the Company’s allowance as discussed in
the Other Than Temporary Impairments and Valuation Allowances on
Investments in Note 1. Adjustments to the allowance due to
changes in measurement of impaired loans are recorded in the
provision for loan loss. The allowance for loan losses was
$3.0 million and $1.7 million at December 31,
2004 and 2003, respectively.
Loans on Non-Accrual Status
In accordance with the Company’s policy discussed in Note
1, the Company places delinquent loans on non-accrual status for
financial reporting purposes when collection of interest is in
doubt, which is generally after 90 days of non-payment. At
December 31, 2004, 2003 and 2002, there were
$77.4 million, $33.9 million and $12.6 million
(face value), respectively, of loans on non-accrual status.
Interest income recognized on these loans was $2.4 million,
$1.6 million and $1.3 million for the years ended
December 31, 2004, 2003 and 2002, respectively. Additional
interest income that would have been recognized by the Company
had these loans been on accrual status was approximately $2.8
million, $1.3 million and $0.2 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Loans Receivable Pledged
The Company pledges loans as collateral for the Company’s
notes payable, warehouse lending arrangements and line of credit
borrowings. In addition, in order to facilitate the
securitization of certain assets at higher leverage ratios than
otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional
taxable loans to a pool that acts as collateral for senior
interests in certain securitization trusts and credit
enhancement facilities. At December 31, 2004 and 2003, the
total carrying amount of the loans receivable pledged as
collateral was $557.2 million and $480.1 million,
respectively.
NOTE 5 — Investment in Partnerships
The Company’s investments in partnerships consist of equity
interests in real estate operating partnerships. The
Company’s investments in partnerships are accounted for
using the equity method. The Company ceases recording losses on
an investment in partnership when the cumulative losses and
distributions from the partnership exceed the carrying amount of
the investment and any advances made by the Company. After the
Company’s investment in such partnership reaches zero, cash
distributions received from these investments are recorded as
income. For partnerships in which the Company is a general
partner (for example, the Company’s interests in the tax
credit equity syndication funds which it originates), the
Company recognizes losses to the extent of its partnership
liability, regardless of the
98
Company’s basis in its partnership interest. The following
table summarizes investment in partnerships by major category:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| (in thousands) |
|
| |
|
| |
|
Non-guaranteed tax credit equity funds:
|
|
|
|
|
|
|
|
|
| |
Investment in real estate operating partnerships(1)
|
|
$ |
563,310 |
|
|
$ |
— |
|
|
Guaranteed tax credit equity funds:
|
|
|
|
|
|
|
|
|
| |
Investment in real estate operating partnerships(2)
|
|
|
149,078 |
|
|
|
110,593 |
|
|
Investment in real estate operating partnerships —
warehousing(3)
|
|
|
43,873 |
|
|
|
108,677 |
|
|
Investment in CAPREIT(4)
|
|
|
70,351 |
|
|
|
62,561 |
|
|
Other investments in partnerships
|
|
|
661 |
|
|
|
661 |
|
| |
|
|
|
|
|
|
| |
|
$ |
827,273 |
|
|
$ |
282,492 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
As a result of FIN 46R, the Company must include on its balance
sheet investments by certain non-guaranteed tax credit equity
funds. These funds invest in limited partnership interests in
real estate operating partnerships and have been consolidated as
of March 31, 2004. See Note 1 for a further discussion. |
| |
| (2) |
These investments are real estate operating partnerships owned
by tax credit equity funds where the Company provides a
guarantee or otherwise has continuing involvement in the
underlying assets of the fund. As a result of the guarantee, the
Company includes the assets of the funds in its consolidated
balance sheets until such time as the Company’s guarantee
expires. |
| |
| (3) |
The Company acquires, through limited partnership interests;
equity interests which typically represent a 99.0% interest in
properties expected to earn tax credits. When the Company has a
sufficient number of such limited partnership interests and has
identified tax credit investors, it transfers those interests to
a tax credit equity fund for the investors’ benefit. The
Company typically owns these partnership interests for three to
nine months before they are transferred to a tax credit equity
fund. |
| |
| (4) |
The Company makes equity investments in income-producing real
estate partnerships in joint ventures with CAPREIT, Inc. and its
affiliates. |
NOTE 6 — Investment in Derivative Financial
Instruments
The following table provides certain information with respect to
the derivative financial instruments held by the Company at
December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
|
|
Fair Value(4) | |
|
|
|
Fair Value(4) | |
| |
|
Notional | |
|
| |
|
Notional | |
|
| |
| |
|
Amount | |
|
Assets | |
|
Liabilities(5)(6) | |
|
Amount | |
|
Assets | |
|
Liabilities(5)(6) | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Interest rate swap agreements(1)
|
|
$ |
286,015 |
|
|
$ |
3,102 |
|
|
$ |
(4,878 |
) |
|
$ |
310,975 |
|
|
$ |
2,559 |
|
|
$ |
(15,244 |
) |
|
Total return swaps(2)
|
|
|
38,200 |
|
|
|
— |
|
|
|
— |
|
|
|
38,000 |
|
|
|
— |
|
|
|
— |
|
|
Put option agreements(3)
|
|
|
105,610 |
|
|
|
— |
|
|
|
(45 |
) |
|
|
122,524 |
|
|
|
4 |
|
|
|
(43 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment in derivative financial instruments
|
|
|
|
|
|
$ |
3,102 |
|
|
$ |
(4,923 |
) |
|
|
|
|
|
$ |
2,563 |
|
|
$ |
(15,287 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
For the interest rate swap agreements, notional amount
represents the total amount of the Company’s interest rate
swap contracts ($320,975 and $345,935 as of December 31,
2004 and December 31, 2003, respectively) less the total
amount of the Company’s reverse interest rate swap
contracts ($34,960 and $34,960 as of December 31, 2004 and
December 31, 2003, respectively). |
| |
| (2) |
For the total return swaps, the notional amount represents the
total amount of the Company’s total return swap contracts. |
| |
| (3) |
For put option agreements, the notional amount represents the
Company’s aggregate obligation under the put option
agreements. |
| |
| (4) |
The amounts disclosed represent the net fair values of all the
Company’s derivatives at the reporting date. |
| |
| (5) |
The aggregate negative fair value of the investments is included
in liabilities for financial reporting purposes. |
| |
| (6) |
The negative fair value of these investments is considered
temporary and is not indicative of future earnings on these
investments. |
99
Interest rate swaps
The Company enters into interest rate swap agreements to reduce
its exposure to interest rate risk as more fully discussed in
Note 1. From time to time, the Company may terminate interest
rate swap agreements or enter into interest rate swap contracts
that offset certain of the Company’s existing swaps
(“reverse interest rate swaps”). The Company
may do this for a number of reasons, including in conjunction
with converting portions of the Company’s short-term
floating rate debt to longer-term, fixed-rate facilities.
Under the interest rate swap agreements, the Company is
obligated to pay the counterparty a fixed or floating rate. In
return, the counterparty will pay the Company a floating rate
equivalent to the weekly BMA Municipal Swap Index (an index of
weekly tax-exempt variable rate issues), a fixed rate based on
the BMA index for the specific term of the swap or the London
Interbank Offer Rate. The cash paid and received on an interest
rate swap is settled on a net basis. The average BMA rate for
2004, 2003 and 2002 was approximately 1.22%, 1.03% and 1.38%,
respectively.
During the fourth quarter of 2004, the Company terminated swap
contracts with a total notional amount of $76.4 million.
The Company recorded a net loss of $5.0 million on the
termination of these interest rate swaps. In addition, the
Company entered into new swap contracts with a total notional
amount of $76.4 million.
In 2003, the Company terminated swap contracts with a total
notional amount of $105.8 million ($319.4 million in
swap contracts and $213.6 million in reverse swap
contracts). The Company recorded a net loss on sale of
$11.0 million on the termination of these interest rate
swaps.
Under the terms of certain of the Company’s derivative
agreements, the Company is required to comply with net worth
covenants and other terms and conditions. The Company was in
compliance with its covenants at December 31, 2004.
Total return swaps
The Company occasionally enters into total return swaps that are
intended to replicate the total return on an underlying
investment at a then current market interest rate. The Company
utilizes total return swaps to meet strategic financing and
investment objectives. During the term of the swaps, the Company
receives from or pays to a counterparty the excess of the market
interest rate plus a margin over the underlying investment rate,
which is typically fixed. In addition to the Company’s
settlement receipt or payment, total return swaps may include a
cash settlement at termination, whereby the Company will receive
from or pay to the counterparty an amount equal to the increase
or decrease in the market value of the underlying investment. To
date, when required to post collateral in a total return swap
transaction, the Company has pledged cash, tax-exempt bonds or
common shares of TE Bond Subsidiary, LLC. The Company had two
total return swaps outstanding at December 31, 2004.
Put Options
The Company has occasionally entered into put option agreements
with counterparties whereby the counterparty has the right to
sell to the Company, and the Company has the obligation to buy,
an underlying investment at a specified price. Under the put
options, the Company may receive an annual payment for assuming
the purchase obligation. In general, the Company may either net
settle the put or take possession of the assets underlying the
puts. The Company had four and five put options with a fair
value of ($45,000) and ($39,000) at December 31, 2004 and
2003, respectively. The Company’s aggregate obligation
under these put options was $105.6 million and
$122.5 million at December 31, 2004 and 2003,
respectively. The Company received $2.0 million,
$1.5 million and $0.9 million in income from put
options in 2004, 2003 and 2002, respectively.
100
NOTE 7 — Restricted Assets
Restricted assets includes cash and cash equivalents summarized
by major category in the table below:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| (in thousands) |
|
| |
|
| |
|
Tax credit equity fund cash(1)
|
|
$ |
49,069 |
|
|
$ |
44,192 |
|
|
Margin call deposits(2)
|
|
|
452 |
|
|
|
9,117 |
|
|
CAPREIT total return swaps collateral(3)
|
|
|
— |
|
|
|
19,670 |
|
|
Collateral for securitization programs(4)
|
|
|
17,000 |
|
|
|
— |
|
|
Other collateral(5)
|
|
|
6,284 |
|
|
|
2,546 |
|
| |
|
|
|
|
|
|
| |
|
$ |
72,805 |
|
|
$ |
75,525 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
Under the financing method of accounting for guaranteed tax
credit equity funds and due to the consolidation of certain
other funds in accordance with FIN 46 R, the Company reports the
restricted cash of the funds in the Company’s consolidated
balance sheet. The cash is to be used primarily for investments
by the consolidated funds into partnerships and other approved
uses as set out in the funds’ partnership agreements. (see
further discussion under “Tax Credit Segment” section
of Note 1). |
| |
| (2) |
Under the terms of the Company’s interest rate swap
agreements with counterparties, the Company is required to
maintain cash deposits (“margin call
deposits”). The margin call deposit requirements are
specific to each counterparty. The Company must make margin call
deposits when the total fair value of the Company’s
outstanding swap obligations to any one counterparty is, in most
cases, greater than $1.0 million. |
| |
| (3) |
Under the terms of the Company’s investment with CAPREIT,
the Company is required to post either bond collateral or cash
and cash equivalents collateral for the CAPREIT total return
swaps. |
| |
| (4) |
As discussed in Note 1, in order to facilitate the
securitization of certain assets at higher leverage ratios than
otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional bonds
to a pool that acts as collateral for senior interests in
certain securitization trusts. From time to time, the Company
may also post cash or cash equivalents to this pool. |
| |
| (5) |
From time to time, the Company may elect to pledge collateral in
connection with guarantees, first loss positions and leases or
on behalf of its customers in order to facilitate credit and
other collateral requirements. Collateral posted on behalf of
its customers is considered temporary and the Company expects to
be fully reimbursed. |
NOTE 8 — Mortgage Servicing Rights
At December 31, 2004 and 2003, the Company had capitalized
mortgage servicing rights with a carrying value of
$11.0 million and $10.7 million, respectively, net of
accumulated amortization of $5.0 million and
$4.6 million, respectively. The December 31, 2004
balance of $11.0 million represents $11.4 million in
mortgage servicing right assets offset by $0.4 million in
mortgage servicing rights liabilities (included in other
liabilities). The December 31, 2003 balance of
$10.7 million represents $11.0 million in mortgage
servicing right assets offset by $0.3 million in mortgage
servicing rights liabilities. The following table shows the
activity for the years ended December 31, 2004 and 2003.
| |
|
|
|
|
| (in thousands) |
|
|
|
Balance, December 31, 2002
|
|
$ |
10,861 |
|
|
Change in mortgage servicing rights
|
|
|
1,417 |
|
|
Amortization
|
|
|
(1,541 |
) |
|
Valuation allowance
|
|
|
— |
|
| |
|
|
|
|
Balance, December 31, 2003
|
|
|
10,737 |
|
|
Change in mortgage servicing rights
|
|
|
1,869 |
|
|
Amortization
|
|
|
(1,617 |
) |
|
Valuation allowance
|
|
|
— |
|
| |
|
|
|
|
Balance, December 31, 2004
|
|
$ |
10,989 |
|
| |
|
|
|
At December 31, 2004 and 2003, the fair value of the
mortgage servicing rights approximated the carrying amount. The
fair value of the mortgage servicing rights was estimated by
discounting estimated
101
net servicing income over the future life of the related loan
using a market discount rate. The market discount rate was
estimated to be 12% at December 31, 2004 and 2003. The
estimated lives of the loans were determined by considering
yield maintenance periods and contractual prepayment penalties,
if any. Credit losses were estimated to be zero based on
historical performance of the underlying loans. Using a lower
discount rate of 10% would result in increasing the
recorded asset on the Company’s balance sheet by
approximately $258,000, with an offsetting increase in the
Company’s corresponding gain on sale of loans. Using a
higher discount rate of 14% would result in decreasing the
recorded assets on the Company’s balance sheet by
approximately $224,000, with an offsetting decrease in the
Company’s corresponding gain on sale of loans.
NOTE 9 — Notes Payable and Debt
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, | |
| |
|
Total | |
|
| |
| |
|
of Facilities(a) | |
|
2004 | |
|
2003 | |
| (in thousands) |
|
| |
|
| |
|
| |
|
Short-term notes payable
|
|
|
N/A |
|
|
$ |
193,311 |
|
|
$ |
236,342 |
|
|
Lines of credit — unaffiliated entities
|
|
$ |
562,000 |
(b) |
|
|
307,306 |
|
|
|
266,153 |
|
|
Lines of credit — affiliated entities
|
|
$ |
195,000 |
|
|
|
— |
|
|
|
20,662 |
|
|
Short-term debt
|
|
|
N/A |
|
|
|
413,157 |
|
|
|
371,881 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total short-term notes payable and debt
|
|
|
|
|
|
|
913,774 |
|
|
|
895,038 |
|
| |
|
|
|
|
|
|
|
|
|
|
Lines of credit — unaffiliated entities
|
|
$ |
250,000 |
|
|
|
14,080 |
|
|
|
— |
|
|
Long-term notes payable
|
|
|
N/A |
|
|
|
173,440 |
|
|
|
140,387 |
|
|
Long-term debt
|
|
|
N/A |
|
|
|
164,014 |
|
|
|
172,642 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total long-term notes payable and debt
|
|
|
|
|
|
|
351,534 |
|
|
|
313,029 |
|
| |
|
|
|
|
|
|
|
|
|
|
Factored notes payable
|
|
|
N/A |
|
|
|
192,087 |
|
|
|
— |
|
|
Mortgage notes payable
|
|
|
N/A |
|
|
|
132,237 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total notes payable and debt
|
|
|
|
|
|
$ |
1,589,632 |
|
|
$ |
1,208,067 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
As of December 31, 2004 |
|
|
| (b) |
$39.0 of these facilities are available for letters of credit.
(See Note 14) |
The Company’s notes payable consist primarily of notes
payable and advances under line of credit arrangements, which
are used to: (1) finance lending needs; (2) finance
working capital needs; (3) warehouse real estate operating
partnerships before they are placed into tax credit equity
funds; and (4) warehouse permanent loans before they are
purchased by third parties. As of December 31, 2004, notes
payable also includes factored and mortgage notes payable
reflected on the Company’s balance sheet as a result of
consolidating certain tax credit equity funds upon adoption of
FIN 46R (discussed in Note 1). The factored notes payable are
obligations of the limited partners (investors) of the
tax-credit funds and collateralized by the investors’
subscription receivables. The factored notes payable are
non-recourse and not guaranteed by the Company. The mortgage
notes payable are obligations of Project Partnerships, in which
the Company is the general partner, and are non-recourse and not
guaranteed by the Company. The Company’s short and
long-term debt relates to securitization transactions and other
financing transactions that the Company has recorded as
borrowings. The following table summarizes notes payable and
debt at December 31, 2004 and 2003.
Long-term notes payable consists of amounts borrowed to finance
construction lending activities. These amounts mature at various
times through 2007. Interest rates on long-term notes payable
range from 3.75% to 6.71%.
Long-term debt consists of amounts related to securitization
transactions and other financing transactions recorded as
borrowings. These amounts mature at various times through 2042.
Interest rates
102
on long-term debt range from 3.38% to 13.00%. Annual maturities
of notes payable and debt are as follows:
| |
|
|
|
|
| (in thousands) |
|
|
|
2005
|
|
$ |
913,774 |
|
|
2006
|
|
|
189,130 |
|
|
2007
|
|
|
65,631 |
|
|
2008
|
|
|
27,798 |
|
|
2009
|
|
|
1,205 |
|
|
Thereafter
|
|
|
67,770 |
|
|
Mortgage and factored notes payable
|
|
|
324,324 |
(1) |
| |
|
|
|
|
Total
|
|
$ |
1,589,632 |
|
| |
|
|
|
|
|
| (1) |
Mortgage and factored notes payable are excluded from the annual
maturities table due to the lack of necessary information to
determine the maturities of each Project Partnership’s or
tax credit equity fund’s mortgage or factored notes payable. |
The weighted average interest rate on notes payable and debt due
in one year was 3.59% and 3.30% at December 31, 2004 and
2003, respectively.
Lines of Credit
The Company relies on short-term lines of credit with commercial
banks and finance companies to finance its growth. The Company
had approximately $757.0 million and $642.0 million
available in revolving lines of credit at December 31, 2004 and
2003, respectively. While many of these lines are payable on
demand by the lender, they all mature throughout 2005. Interest
rates on these lines of credit range from 3.3% to 5.3% in 2004
and 2.0% to 4.1% in 2003. These borrowings are used to fund
construction loans, supplemental loans, tax-exempt bonds and
general business needs. The majority of the borrowings are
collateralized by assets owned by the Company. The outstanding
balance on these lines of credit at December 31, 2004 and
2003, respectively, was $307.0 million and $287.0 million,
at a weighted average interest rate on this outstanding balance
of 4.0% and 3.1%. Borrowings under these lines are typically
subject to certain financial covenants and restrictions on
liquidity, indebtedness, consolidated net worth, financial
guarantees and other related items. As of December 31,
2004, the Company was in compliance with all covenants related
to these short-term lines of credit.
Additionally, during the fourth quarter of 2004, the Company
entered into a new $250.0 million long-term line of credit
with Bank of America, N.A. (“Bank of America”), which
will be used to fund tax-exempt bonds and taxable construction
loans. The line of credit expires in November 2006, unless
extended. Borrowings under this line of credit bear interest
(4.41% at December 31, 2004) at either (1) the
Eurodollar rate plus 2% or (2) the higher of the Federal
Funds Rate plus .5% or Bank of America’s prime rate. The
Company’s tax-exempt bonds and taxable construction loans
collateralize these borrowings. The outstanding balance on the
line of credit was $14.0 million as of December 31,
2004. Borrowings under the line of credit are subject to certain
financial covenants and other restrictions on liquidity,
leverage, consolidated net worth and other related items. As of
December 31, 2004, the Company was in compliance with all
covenants.
Covenant Compliance
Under the terms of the various credit facilities, the Company is
required to comply with covenants including net worth, interest
coverage, leverage, collateral and other terms and conditions.
As a result of the consolidation of certain assets and
liabilities relating to the Company’s tax credit equity
syndication business pursuant to FIN 46 as of March 31,
2004, and the reclassification, pursuant to Statement of
Financial Accounting Standards No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both
Liabilities and Equity” (“FAS 150”) as of
September 30, 2003, of the Company’s outstanding
preferred shares in a subsidiary company as liabilities during
the second quarter
103
of 2004, the Company, in the absence of a waiver or amendment,
would have been in default of a financial covenant under a
$200.0 million short-term line of credit. Consequently, the
Company and the lender executed a waiver of this default through
June 30, 2004. While under the waiver of default, the
Company successfully negotiated an amendment to the line of
credit to revise the covenant and cure the default. As of
December 31, 2004, $128.8 million of debt was
outstanding under this line of credit. The debt is included in
lines of credit — unaffiliated entities in the table
above.
During the third quarter of 2004, the Company, in the absence of
a waiver or amendment, would have been in default of a leverage
covenant under a $20.0 million short-term line of credit.
Consequently, the Company and the lender executed a waiver of
this default. The parties are also negotiating an amendment to
the line of credit to address this issue. As of
December 31, 2004, there was not a balance outstanding
under this line of credit.
The Company was in compliance with the covenants in its credit
facilities at December 31, 2004.
NOTE 10 — Subordinate Debentures
A consolidated indirect wholly owned subsidiary of the Company,
MFH, formed MFH Financial Trust I (“MFH Trust”)
in 2003 as a special purpose financing entity. On May 3,
2004, MFH Trust sold to qualified institutional investors
$60.0 million in 9.5% Trust Preferred Securities (the
“Trust Preferred Securities”) having a
liquidation amount of $100 per Trust Preferred Security. In
September 2004, there was a sale of an additional
$24.0 million of Trust Preferred Securities to qualified
institutional investors. The $60.0 million of Trust Preferred
Securities were sold with an underwriters’ discount of
$3.15 per Trust Preferred Security or $1.9 million in the
aggregate. The additional $24.0 million of Trust Preferred
Securities did not include an initial purchasers’ discount.
MFH paid the entire initial purchasers’ discount as well as
offering expenses on behalf of MFH Trust. MFH Trust used the
proceeds from the offering to purchase Junior Subordinated
Debentures (the “Debentures”) issued by MFH.
The Debentures have substantially the same economic terms as the
Trust Preferred Securities. MFH Trust can make distributions to
the Trust Preferred Securities only if MFH makes payments on the
Debentures. The Debentures are unsecured obligations and are
subordinate to all of MFH’s existing and future senior debt.
The Trust Preferred Securities are guaranteed by MFH and
MuniMae. The Trust Preferred Securities bear interest at an
annual rate of 9.5% until May 5, 2014, to be adjusted
thereafter to a rate which is equal to the greater of (a) 9.5%
per annum or (b) the rate per annum which is equal to 6.0%
plus the then current U.S. Treasury Note with a maturity nearest
to May 5, 2024. The Trust Preferred Securities may be
redeemed in whole or in part on May 5, 2014. Cash
distributions on the Trust Preferred Securities are paid
quarterly. MFH loaned the net proceeds from the
$60.0 million offering to one of its subsidiaries, which in
turn used the proceeds to pay off inter-company indebtedness to
MuniMae. MFH used the net proceeds from the $24.0 million
offering to repay a portion of an inter-company loan from
MuniMae. MuniMae used these amounts to repay a portion of its
indebtedness as well as for general corporate purposes.
MFH Trust must redeem the Trust Preferred Securities when and to
the extent the Debentures are paid at maturity or earlier
redeemed. The Debentures are included in the accompanying
condensed consolidated balance sheet as a long-term liability at
the liquidation preference value of $84.0 million. In
addition, net offering costs of $2.3 million related to the
Trust Preferred Securities are recorded as debt issuance costs
and included in other assets in the accompanying condensed
consolidated balance sheet. The offering costs paid by MFH are
amortized to interest expense in the accompanying consolidated
income statement over a 30-year period based on the call option
of the preferred shares.
NOTE 11 — Preferred Shares
In October 2004, a subsidiary of MuniMae, TE Bond Subsidiary,
LLC (“TE Bond Sub”), completed a
$73.0 million private placement of rated tax-exempt
perpetual preferred shares. The net proceeds of
$71.0 million was used to acquire investments that produce
tax-exempt interest income and for general corporate purposes of
TE Bond Sub. As of December 31, 2004, TE Bond Sub had both
preferred shares
104
and mandatorily redeemable preferred shares outstanding. The
following discussion and related tables summarize the
significant terms of each.
Preferred Shareholders’ Equity in a Subsidiary
Company
As of December 31, 2004, TE Bond Sub had five series (A-2,
B-2, C, C-1 and C-2) of preferred shares outstanding
(collectively the “Preferred Shares”),
excluding the mandatorily redeemable preferred shares described
below. The Series A-2 Preferred Shares bear interest at
4.90% per annum, or, if lower, the aggregate net income of TE
Bond Sub. The Series A-2 Preferred Shares have a senior
claim to the income derived from the investments owned by TE
Bond Sub. The Series A-2 Preferred Shares are equal in
priority of payment to the Series A and A-1 Mandatorily
Redeemable Preferred Shares. The Series B-2 Preferred
Shares bear interest at 5.20% per annum, or, if lower, the
aggregate net income of TE Bond Sub, after interest payments to
the Series A and A-1 Mandatorily Redeemable Preferred
Shares and the Series A-2 Preferred Shares. The Series B-2
Preferred Shares are equal in priority of payment to the
Series B and B-1 Mandatorily Redeemable Preferred Shares.
The Series C, C-1 and C-2 Preferred Shares bear interest at
4.70%, 5.40% and 5.80% per annum, respectively, or, if lower,
the aggregate net income of TE Bond Sub, after payments to the
Series A, A-1, B and B-1 Mandatorily Redeemable Preferred
Shares and the Series A-2 and B-2 Preferred Shares. The
Series C-1 and C-2 Preferred Shares are equal in priority
of payment to the Series C Preferred Shares. Any income
from TE Bond Sub available after payment of the cumulative
distributions of the Series C, C-1 and C-2 Preferred Shares
is allocated to the Company, which holds all of the common
equity interest in TE Bond Sub. The initial distribution for the
Preferred Shares, which was for the period from October 19,
2004 to December 31, 2004, was paid on January 31, 2005.
After payment of the initial distribution, distributions on the
Preferred Shares are payable, once declared, on each
January 31, April 30, July 31 and
October 31. The Preferred Shares are subject to remarketing
on specified dates as indicated in the table below. TE Bond
Sub may elect to remarket the Preferred Shares based on the
particular series at varying dates beginning on
September 30, 2009. On the remarketing date, the
remarketing agent will seek to remarket the Preferred Shares at
the lowest distribution rate that would result in a resale of
the Preferred Shares at a price equal to par plus all accrued
but unpaid distributions. The Preferred Shares will not be
redeemable prior to the remarketing dates. TE Bond Sub may elect
to redeem the Preferred Shares at its liquidation preference
plus accrued and unpaid distributions based on the particular
series at varying dates beginning on September 30, 2009.
The following table provides a summary of certain terms of the
Preferred Shares.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Number of | |
|
Par Amount |
|
Dividend | |
|
First Remarketing |
|
Optional |
| |
|
Issue Date |
|
Shares | |
|
per Share |
|
Rate | |
|
Date |
|
Redemption Date |
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
Series A-2 Preferred Shares
|
|
October 19, 2004 |
|
|
10 |
|
|
$2,000,000 |
|
|
4.90% |
|
|
September 30, 2014 |
|
September 30, 2014 |
|
Series B-2 Preferred Shares
|
|
October 19, 2004 |
|
|
7 |
|
|
$2,000,000 |
|
|
5.20% |
|
|
September 30, 2014 |
|
September 30, 2014 |
|
Series C Preferred Shares
|
|
October 19, 2004 |
|
|
13 |
|
|
$1,000,000 |
|
|
4.70% |
|
|
September 30, 2009 |
|
September 30, 2009 |
|
Series C-1 Preferred Shares
|
|
October 19, 2004 |
|
|
13 |
|
|
$1,000,000 |
|
|
5.40% |
|
|
September 30, 2014 |
|
September 30, 2014 |
|
Series C-2 Preferred Shares
|
|
October 19, 2004 |
|
|
13 |
|
|
$1,000,000 |
|
|
5.80% |
|
|
September 30, 2019 |
|
September 30, 2019 |
Preferred Shares Subject to Mandatory Redemption
As a result of the adoption of FAS 150, the Company has
reclassified the liquidation preference value of its preferred
shares subject to mandatory redemption (collectively, the
“Mandatorily Redeemable Preferred Shares”) of
$168.0 million to a separate line in the liability section
of the consolidated balance sheets. In addition, offering costs
of $7.5 million related to the Mandatorily Redeemable
Preferred Shares have been reclassified to other assets and are
being amortized through the mandatory redemption dates
commencing July 1, 2003. Amounts previously classified as income
allocable to preferred shareholders are now recorded as interest
expense.
As of December 31, 2004, TE Bond Sub had four series (A,
A-1, B and B-1) of mandatorily redeemable preferred shares
outstanding. The Series A and A-1 Mandatorily Redeemable
Preferred Shares bear interest at 6.875% and 6.30% per annum,
respectively, or, if lower, the aggregate net income of TE Bond
Sub. The Series A and A-1 Mandatorily Redeemable Preferred
Shares have a senior claim to the
105
income derived from the investments owned by TE Bond Sub. The
Series A-1 Mandatorily Redeemable Preferred Shares are
equal in priority of payment to the Series A Mandatorily
Redeemable Preferred Shares. The Series B and B-1
Mandatorily Redeemable Preferred Shares bear interest at 7.75%
and 6.80% per annum, respectively, or, if lower, the aggregate
net income of TE Bond Sub, after interest payments to the
Series A and Series A-1 Mandatorily Redeemable
Preferred Shares. The Series B-1 Mandatorily Redeemable
Preferred Shares are equal in priority of payment to the
Series B Preferred Shares. Cash distributions on the
Mandatorily Redeemable Preferred Shares are payable, once
declared, on each January 31, April 30, July 31 and
October 31. The Mandatorily Redeemable Preferred Shares are
subject to remarketing on specified dates as indicated in the
table below. On the remarketing date, the remarketing agent will
seek to remarket the shares at the lowest distribution rate that
would result in a resale of the Mandatorily Redeemable Preferred
Shares at a price equal to par plus all accrued but unpaid
distributions. The Mandatorily Redeemable Preferred Shares will
be subject to mandatory tender on specified dates, as indicated
below, and on all subsequent remarketing dates at a price equal
to par plus all accrued but unpaid distributions. The following
table provides a summary of certain terms of the Mandatorily
Redeemable Preferred Shares.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Number of | |
|
Par Amount |
|
Dividend | |
|
First Remarketing |
|
Mandatory Tender |
|
Redemption |
| |
|
Issue Date |
|
Shares | |
|
per Share |
|
Rate | |
|
Date |
|
Date |
|
Date |
| |
|
|
|
| |
|
|
|
| |
|
|
|
|
|
|
|
Series A Mandatorily Redeemable Preferred Shares
|
|
May 27, 1999 |
|
|
42 |
|
|
$2,000,000 |
|
|
6.88% |
|
|
June 30, 2009 |
|
June 30, 2009 |
|
June 30, 2049 |
|
Series A-1 Mandatorily Redeemable Preferred Shares
|
|
October 9, 2001 |
|
|
8 |
|
|
$2,000,000 |
|
|
6.30% |
|
|
June 30, 2009 |
|
June 30, 2009 |
|
June 30, 2049 |
|
Series B Mandatorily Redeemable Preferred Shares
|
|
June 2, 2000 |
|
|
30 |
|
|
$2,000,000 |
|
|
7.75% |
|
|
November 1, 2010 |
|
November 1, 2010 |
|
June 30, 2050 |
|
Series B-1 Mandatorily Redeemable Preferred Shares
|
|
October 9, 2001 |
|
|
4 |
|
|
$2,000,000 |
|
|
6.80% |
|
|
November 1, 2010 |
|
November 1, 2010 |
|
June 30, 2050 |
NOTE 12 — Tax Credit Equity Guarantee Liability
As part of the acquisition of HCI (see Note 2), the Company
provided guarantees to Lend Lease related to certain tax credit
equity syndication funds where Lend Lease is providing a
guarantee to investors or a third party. In addition, subsequent
to the acquisition of HCI, the Company has established new
guaranteed tax credit equity funds whereby the Company provides
a guarantee to a third party or investors. The following table
shows the changes in the tax credit equity guarantee liability:
| |
|
|
|
|
| (in thousands) |
|
|
|
Assumed fund guarantee liability in purchase of HCI
|
|
$ |
157,960 |
|
|
Amortization
|
|
|
(2,151 |
) |
|
Expiration of guarantees
|
|
|
(19,900 |
) |
|
Limited partner’s capital contributions
|
|
|
15,417 |
|
| |
|
|
|
|
Balance at December 31, 2003
|
|
|
151,326 |
|
|
Amortization
|
|
|
(5,843 |
) |
|
Expiration of guarantees
|
|
|
(35,183 |
) |
|
Limited partner’s capital contributions
|
|
|
76,478 |
|
| |
|
|
|
|
Balance, December 31, 2004
|
|
$ |
186,778 |
|
| |
|
|
|
106
NOTE 13 — Income Taxes
Certain subsidiaries of the Company are corporations and are
therefore subject to Federal and state income taxes. The
following table summarizes the provision for income taxes at
December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (in thousands) |
|
| |
|
| |
|
| |
|
Federal income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
(234 |
) |
|
$ |
120 |
|
|
$ |
422 |
|
| |
Deferred
|
|
|
1,254 |
|
|
|
(1,056 |
) |
|
|
625 |
|
|
State income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
1,206 |
|
|
|
921 |
|
|
|
305 |
|
| |
Deferred
|
|
|
511 |
|
|
|
(123 |
) |
|
|
132 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
2,737 |
|
|
$ |
(138 |
) |
|
$ |
1,484 |
|
| |
|
|
|
|
|
|
|
|
|
During 2004, 2003 and 2002 the Company recognized approximately
$0.4 million, $0.2 million and $0.6 million,
respectively, of benefits for deductions associated with the
exercise of employee stock options and vesting of deferred
shares. These benefits were added directly to shareholders’
equity, and are not reflected in income tax expense on the
income statement.
The reconciliation of the difference between the effective
income tax rate and the statutory Federal income tax rate, as
applied to the income of the Company’s subsidiaries, which
are subject to Federal and state taxes, is as follows for the
years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Provision for income taxes computed using the statutory
Federal income tax rate
|
|
|
34.0 |
% |
|
|
-34.0 |
% |
|
|
34.0 |
% |
|
State income taxes, net of Federal tax effect
|
|
|
21.5 |
|
|
|
37.6 |
|
|
|
9.2 |
|
|
Goodwill amortization
|
|
|
0.0 |
|
|
|
2.7 |
|
|
|
-2.4 |
|
|
Minority interest
|
|
|
0.0 |
|
|
|
0.2 |
|
|
|
1.3 |
|
|
Tax credits
|
|
|
-13.8 |
|
|
|
-29.7 |
|
|
|
-3.7 |
|
|
Other
|
|
|
10.3 |
|
|
|
13.8 |
|
|
|
-1.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
52.0 |
% |
|
|
-9.4 |
% |
|
|
37.4 |
% |
| |
|
|
|
|
|
|
|
|
|
107
Components of the Company’s deferred tax assets and
liabilities, included in other assets and liabilities, are as
follows at December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (in thousands) |
|
| |
|
| |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Tax credit carryover
|
|
$ |
1,686 |
|
|
$ |
959 |
|
| |
Net operating loss carryforward
|
|
|
3,147 |
|
|
|
— |
|
| |
Syndication fees
|
|
|
678 |
|
|
|
393 |
|
| |
Asset management fees and contract amortization
|
|
|
4,758 |
|
|
|
3,637 |
|
| |
Loss on advance to tax credit equity fund
|
|
|
775 |
|
|
|
775 |
|
| |
Charitable contribution carryover
|
|
|
961 |
|
|
|
480 |
|
| |
Mortgage servicing rights
|
|
|
152 |
|
|
|
101 |
|
| |
Equity investment market value adjustment
|
|
|
— |
|
|
|
559 |
|
| |
Deferred origination and loan servicing fees
|
|
|
312 |
|
|
|
229 |
|
| |
Construction administration fees
|
|
|
147 |
|
|
|
— |
|
| |
Loan loss reserve
|
|
|
123 |
|
|
|
— |
|
| |
Other
|
|
|
(22 |
) |
|
|
33 |
|
| |
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$ |
12,717 |
|
|
$ |
7,166 |
|
| |
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Depreciable assets
|
|
$ |
95 |
|
|
$ |
— |
|
| |
Mortgage servicing rights
|
|
|
4,387 |
|
|
|
4,223 |
|
| |
Tax amortization
|
|
|
3,026 |
|
|
|
1,027 |
|
| |
Deferred guarantee fees
|
|
|
848 |
|
|
|
390 |
|
| |
Equity investments in partnerships
|
|
|
8,270 |
|
|
|
4,022 |
|
| |
Other
|
|
|
— |
|
|
|
91 |
|
| |
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$ |
16,626 |
|
|
$ |
9,753 |
|
| |
|
|
|
|
|
|
At December 31, 2004 and 2003, the Company had an unused
low-income housing tax credit carryforward for Federal income
tax purposes of approximately $1.7 million and
$1.0 million, respectively, which expire at intervals
through 2024. This credit is subject to recapture based upon a
qualifying disposition. The Company has a qualified disposition
bond to avoid the recapture provisions. Additionally, at
December 31, 2004 and 2003, a component of other deferred
tax assets is a charitable contribution carryforward of
approximately $2.5 million and $1.2 million,
respectively, which expire at intervals through 2009. Included
in the deferred tax asset balance at December 31, 2004 is a
net operating loss carryforward to future years in the amount of
$9.3 million. Unused net operating loss carryforwards will
expire at intervals through 2024.
NOTE 14 — Guarantees, Commitments and
Contingencies
Lease Commitments
The Company has entered into non-cancelable operating leases for
office space and equipment, as well as software hosting
agreements for various information systems initiatives. These
leases expire on various dates through. Rental expense was
approximately $5.2 million, $3.2 million and
$2.1 million for
108
the years ended December 31, 2004, 2003 and 2002,
respectively. At December 31, 2004, the minimum aggregate
rental commitments are as follows:
| |
|
|
|
|
| |
|
Operating Leases | |
| (in thousands) |
|
| |
|
2005
|
|
|
6,401 |
|
|
2006
|
|
|
5,139 |
|
|
2007
|
|
|
3,297 |
|
|
2008
|
|
|
1,558 |
|
|
2009
|
|
|
1,280 |
|
|
Thereafter
|
|
|
4,972 |
|
| |
|
|
|
|
Total
|
|
$ |
22,647 |
|
| |
|
|
|
Letters of Credit
The Company has available letter of credit facilities with
multiple financial institutions. At December 31, 2004, the
Company had outstanding letters of credit of
$159.0 million, which typically provide credit support to
various third parties for real estate activities. These letters
of credit expire at various dates through September 2017. The
unused portion of the letter of credit facilities was
$104.3 million at December 31, 2004.
As disclosed in the guarantee table below, the Company has
provided a guarantee on certain of these letters of credit. The
maximum exposure was $152.5 million as of December 31,
2004.
Unfunded Loan Commitments
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. At December 31, 2004 and 2003,
the aggregate unfunded commitments totaled approximately
$482.5 million and $481.8 million, respectively. The
commitments are not reflected in the financial statements. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments. There are no significant concentrations of credit
risk with any individual counterparty to originate loans.
Unfunded Equity Commitments
As the limited partner in real estate operating partnerships,
the Company has committed to extend equity to real estate
operating partnerships in accordance with the partnership
documents. At December 31, 2004 and 2003, the aggregate
unfunded commitments totaled approximately $463.1 million
and $246.3 million, respectively.
Future Commitment for Minimum Salary Levels Under Employment
Contracts
The Company has employment agreements with several of its
executive officers, the terms of which expire at various times
through December 2007. Such agreements, which have been revised
from time to time, provide for minimum salary levels, as well as
for incentive bonuses that are payable if specified management
goals are attained. The aggregate commitment for future salaries
at December 31, 2004, excluding performance-based bonuses,
was approximately $6.0 million.
Fannie Mae Participation Strips
As of December 31, 2004 and 2003, the Company owned
interest-only securities resulting from participations in a
percentage of interest received on mortgage loans sold to Fannie
Mae with a fair value of $5.8 million and
$5.6 million, respectively. The Company has entered into an
agreement to pay the income received from these assets to the
Group Trust; therefore, a corresponding liability is reflected
on the balance sheet in other liabilities.
109
Guarantees
The Company’s maximum exposure under its guarantee
obligations is not indicative of the likelihood of the expected
loss under the guarantees.
The following table summarizes the Company’s guarantees by
type at December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, 2004 |
|
December 31, 2003 |
| |
|
|
|
|
|
|
| (in millions) |
|
|
|
Maximum | |
|
Carrying | |
|
|
|
Maximum | |
|
Carrying | |
|
|
| Guarantee |
|
Note | |
|
Exposure | |
|
Amount | |
|
Supporting Collateral |
|
Exposure | |
|
Amount | |
|
Supporting Collateral |
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
|
|
Loss-sharing agreements with Fannie Mae and GNMA
|
|
|
(1) |
|
|
$ |
189.1 |
|
|
$ |
— |
|
|
$5.4 million Letter of Credit pledged |
|
$ |
181.4 |
|
|
$ |
— |
|
|
$5.2 million letter of credit pledged |
|
Bank line of credit guarantees
|
|
|
(2) |
|
|
|
187.1 |
|
|
|
187.1 |
|
|
Investment in partnership, loans and tax-exempt bonds totaling
$202.9 million |
|
|
256.4 |
|
|
|
256.4 |
|
|
Investment in partnership and loans totaling $258.9 million |
|
Tax credit related guarantees
|
|
|
(3) |
|
|
|
417.0 |
|
|
|
187.6 |
|
|
$24.3 million of tax- exempt bonds and cash |
|
|
293.8 |
|
|
|
151.3 |
|
|
$1.3 million of cash |
|
Other financial/payment guarantees
|
|
|
(4) |
|
|
|
295.2 |
|
|
|
166.1 |
|
|
$336.6 million of cash, equity and tax-exempt bonds |
|
|
177.0 |
|
|
|
13.3 |
|
|
$3.8 million of cash and tax-exempt bonds |
|
Put options
|
|
|
(5) |
|
|
|
105.6 |
|
|
|
— |
|
|
$55.6 million of tax- exempt bonds |
|
|
122.5 |
|
|
|
— |
|
|
$70.1 million of loans and tax-exempt bonds |
|
Letter of credit guarantees
|
|
|
(6) |
|
|
|
152.5 |
|
|
|
76.6 |
|
|
$2.4 million of cash |
|
|
54.0 |
|
|
|
40.0 |
|
|
$1.1 million letter of credit pledged |
|
Indemnification contracts
|
|
|
(7) |
|
|
|
32.0 |
|
|
|
11.1 |
|
|
None |
|
|
73.3 |
|
|
|
56.5 |
|
|
None |
|
Trust preferred guarantee
|
|
|
(8) |
|
|
|
85.3 |
|
|
|
85.3 |
|
|
None |
|
|
— |
|
|
|
— |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
1,463.8 |
|
|
$ |
713.8 |
|
|
|
|
$ |
1,158.4 |
|
|
$ |
517.5 |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
| (1) |
As a Fannie Mae DUS lender and GNMA loan servicer, the Company
may share in losses relating to underperforming real estate
mortgage loans delivered to Fannie Mae and GNMA. More
specifically, if the borrower fails to make a payment on a DUS
loan originated by the Company and sold to Fannie Mae, of
principal, interest, taxes or insurance premiums, the Company
may be required to make servicing advances to Fannie Mae. Also,
the Company may participate in a deficiency after foreclosure on
Fannie Mae DUS and GNMA loans. The term of the loss sharing
agreement is based on the contractual requirements of the
underlying loans delivered to Fannie Mae and GNMA, which varies
to a maximum of 40 years. |
| |
| (2) |
The Company provides payment or performance guarantees for
certain borrowings under line of credit facilities. The amount
outstanding under these lines of credit is $185.9 million
at December 31, 2004. This amount is included in notes
payable in the Company’s consolidated balance sheet. |
| |
| (3) |
The Company acquires and sells interests in partnerships that
provide low-income housing tax credits for investors. In
conjunction with the sale of these partnership interests, the
Company may provide performance guarantees on the underlying
properties owned by the partnerships or guarantees to the fund
investors. These guarantees have various expirations to a
maximum term of 18 years. |
| |
| (4) |
The Company has entered into arrangements that require the
Company to make payments in the event a specified third party
fails to perform on its financial obligation. The Company
typically provides these guarantees in conjunction with the sale
of an asset to a third party or the Company’s investment in
equity ventures. The term of the guarantee varies based on loan
payoff schedules or Company divestitures. |
| |
| (5) |
The Company has entered into put option agreements with
counterparties whereby the counterparty has the right to sell to
the Company, and the Company has the obligation to buy, an
underlying investment at a specified price. These put option
agreements expire at various dates through April 1, 2007. |
| |
| (6) |
The Company provides a guarantee of the repayment on losses
incurred under letters of credit issued by third parties or to
provide substitute letters of credit at a predetermined future
date. In addition, the Company may provide a payment guarantee
for certain assets in securitization programs. These guarantees
expire at various dates through September 1, 2007. |
| |
| (7) |
The Company has entered into indemnification contracts, which
require the guarantor to make payments to the guaranteed party
based on changes in an underlying investment that is related to
an asset or liability of the guaranteed party. These agreements
typically require the Company to reimburse the guaranteed party
for legal and other costs in the event of an adverse |
110
|
|
|
judgment in a lawsuit or the
imposition of additional taxes due to a change in the tax law or
an adverse interpretation of the tax law. The term of the
indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the
underlying contracts, the maximum exposure amount only includes
amounts that can be reasonably estimated at this time. The
actual exposure amount could vary significantly.
|
| |
| (8) |
The Company provides a payment
guarantee of the underlying trust preferred securities issued in
May and September 2004. The guarantee obligation is unsecured
and subordinated to the Company’s existing and future debt
and liabilities except for debt and liabilities which by their
terms are specifically subordinated to the guarantee obligations
and the rights of the holders of various classes of existing and
future preferred shares of the Company.
|
Litigation
At December 31, 2004 and 2003, the Company had a litigation
reserve of $2.0 million and $1.1 million,
respectively, for routine litigation and administrative
proceedings arising in the ordinary course of business. This
litigation reserve was established in conjunction with the
purchase of HCI (discussed in Note 2).
NOTE 15 — Shareholders’ Equity
Since March 2002, the common shares have been MuniMae’s
only outstanding shares. The Company’s current policy is to
maximize shareholder value through increases in cash
distributions to shareholders. The Company’s Board of
Directors declares quarterly dividends based on
management’s recommendation, which itself is based on
evaluation of a number of factors, including the Company’s
retained earnings, business prospects and available cash. The
common shares have no par value. At December 31, 2004,
39,471,099 common shares were authorized.
Prior to March 2002, MuniMae had four types of shares: preferred
shares, preferred capital distribution shares
(“preferred cd shares”), term growth shares and
common shares. MuniMae’s preferred shares, preferred cd
shares, term growth shares and common shares differed
principally with respect to allocation of income and cash
distributions, as provided by the terms of the MuniMae’s
Operating Agreement. MuniMae was required to distribute to the
holders of preferred shares and preferred cd shares cash flow
attributable to such shares as defined in the MuniMae’s
Operating Agreement. MuniMae was required to distribute to the
holders of term growth shares 2.0% of the net cash flow after
payment of distributions to holders of preferred shares and
preferred cd shares. The balance of the MuniMae’s cash flow
was available for distribution to holders of common shares.
MuniMae’s Operating Agreement provided that the preferred
shares and the preferred cd shares were subject to partial
redemption when any bond attributable to the shares was sold, or
beginning in the year 2000, when any bond attributable to the
shares reached par value based on an appraisal.
2004 Transactions
In March 2004, the Company sold to the public 2.0 million
common shares at a price of $25.55 per share and granted the
underwriters an option to purchase up to an aggregate of 195,000
common shares to cover overallotments at the same price. Net
proceeds on the 2.0 million shares approximated
$47.7 million. On March 8, 2004, the underwriters
exercised their option to purchase 195,000 common shares,
generating additional net proceeds of approximately $4.8
million. The net proceeds from this offering have been used for
general corporate purposes, including funding of new
investments, paying down debt and working capital.
2003 Transactions
In February 2003, the Company sold to the public
2.8 million common shares at a price of $23.60 per
share and granted the underwriters an option to purchase up to
an aggregate of 420,000 common shares to cover over-allotments
at the same price. Net proceeds on the 2.8 million shares
approximated $62.5 million. On February 11, 2003, the
underwriters exercised their option to purchase
420,000 common shares, generating net proceeds of
approximately $9.4 million. The net proceeds from
111
this offering were used for general corporate purposes,
including funding of new investments, paying down debt and
working capital.
In October 2003, the Company sold to the public 3.2 million
common shares at a price of $24.40 per share and granted
the underwriters an option to purchase up to an aggregate of
472,500 common shares to cover over-allotments at the same
price. Net proceeds on the 3.2 million shares approximated
$72.6 million. On October 15, 2003, the underwriters
exercised their option to purchase 472,500 common shares,
generating net proceeds of approximately $11.0 million. The
majority of the $83.6 million net proceeds was used to
repay debt incurred in connection with the acquisition of HCI.
The balance of the net proceeds was used for general corporate
purposes.
2002 Transactions
Between December 2000 and January 2002, all of the bonds
attributable to preferred shares and preferred cd shares were
either paid off, sold and/or reached par value. As a result, in
March 2002, the Company redeemed the last outstanding preferred
shares and preferred cd shares. The Operating Agreement also
required that the term growth shares be redeemed after the last
preferred share was redeemed. As a result, the term growth
shares, which had no residual value, were also redeemed in 2002.
Earnings per Share
A dual presentation of basic and diluted earnings per share
(“EPS”) is presented for common shares. Basic
EPS is calculated by dividing net income allocable to common
shares by the weighted average number of common shares
outstanding. The calculation of diluted EPS is similar to that
of basic EPS except that the denominator is increased to include
the number of additional shares that would have been outstanding
if the deferred shares had vested and the options granted had
been exercised. The diluted EPS calculation does not include
shares that would have an anti-dilutive effect on EPS. The
tables at the end of this note reconcile the numerators and
denominators in the basic and diluted EPS calculations for 2004,
2003 and 2002.
112
No options to purchase common shares were excluded from the
computation of diluted EPS at December 31, 2004, 2003 and
2002.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Municipal Mortgage & Equity, LLC | |
| |
|
Statement of Computation Earnings per Share | |
| |
|
| |
| |
|
For the year ended December 31, 2004 | |
|
For the year ended December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Income | |
|
Shares | |
|
Per Share | |
|
Income | |
|
Shares | |
|
Per Share | |
| (In thousands, except share and |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| per share data) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of a change in accounting
principle and discontinued operations
|
|
$ |
15,437 |
|
|
|
|
|
|
$ |
0.44 |
|
|
$ |
47,975 |
|
|
|
|
|
|
$ |
1.63 |
|
|
Discontinued operations
|
|
|
11,080 |
|
|
|
|
|
|
|
0.32 |
|
|
|
25,748 |
|
|
|
|
|
|
|
0.88 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
520 |
|
|
|
|
|
|
|
0.02 |
|
|
|
(1,228 |
) |
|
|
|
|
|
|
(0.04 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocable to common shares
|
|
$ |
27,037 |
|
|
|
34,521,842 |
|
|
$ |
0.78 |
|
|
$ |
72,495 |
|
|
|
29,397,521 |
|
|
$ |
2.47 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and deferred shares
|
|
|
— |
|
|
|
262,046 |
|
|
|
|
|
|
|
— |
|
|
|
368,511 |
|
|
|
|
|
|
Earnings contingency
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocable to common shares plus assumed conversions
|
|
$ |
27,037 |
|
|
|
34,783,888 |
|
|
$ |
0.78 |
|
|
$ |
72,495 |
|
|
|
29,766,032 |
|
|
$ |
2.44 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Municipal Mortgage & Equity, LLC | |
| |
|
Statement of Computation Earnings per Share | |
| |
|
| |
| |
|
For the year ended December 31, 2002 | |
| |
|
| |
| |
|
Income | |
|
Shares | |
|
Per Share | |
| (In thousands, except share and |
|
(Numerator) | |
|
(Denominator) | |
|
Amount | |
| per share data) |
|
| |
|
| |
|
| |
|
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of a change in accounting
principle and discontinued operations
|
|
$ |
28,796 |
|
|
|
|
|
|
$ |
1.16 |
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Cumulative effect of a change in accounting principle
|
|
|
— |
|
|
|
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Income allocable to common shares
|
|
$ |
28,796 |
|
|
|
24,904,437 |
|
|
$ |
1.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and deferred shares
|
|
|
— |
|
|
|
447,594 |
|
|
|
|
|
|
Earnings contingency
|
|
|
— |
|
|
|
121,784 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income allocable to common shares plus assumed conversions
|
|
$ |
28,796 |
|
|
|
25,473,815 |
|
|
$ |
1.13 |
|
| |
|
|
|
|
|
|
|
|
|
NOTE 16 — Related Party Transactions And
Transactions with Affiliates And Non-Profit Entities
Related Party Transactions
Transactions with Mr. Joseph and the Shelter Group
Mr. Mark K. Joseph, the Company’s Chairman of its
Board of Directors and, through December 31, 2004, its
Chief Executive Officer, controls and is an officer of Shelter
Development Holdings, Inc. and of Shelter Property Holdings,
Inc. (collectively “Shelter Holdings”), which own a
34.7% interest in Shelter Development, LLC and Shelter
Properties, LLC respectively (collectively, the “Shelter
Group”). The Shelter Group is a real estate developer and
provides property management services primarily to multifamily
residential properties.
It is the policy of the Company that Mr. Joseph abstains
from any involvement in the structuring or review of any
contracts or transactions between the Shelter Group and the
Company in both his capacity as a partner and officer in various
entities of the Shelter Group and as a director and, previously,
as an officer of the Company.
Property Management Contracts
The Shelter Group provides management services for certain
properties that serve as collateral for the Company’s
tax-exempt bond investments. The Shelter Group receives fees
under management contracts for properties that it manages.
During 2004, 2003, and 2002, the Shelter Group had property
management contracts for eight, eight and ten properties,
respectively, that collateralize the Company’s investments.
113
In accordance with the Company’s Operating Agreement, the
disinterested members of the Company’s Board of Directors
review and approve these property management contracts on an
annual basis. Their review is based on information that compares
the proposed fees and services of the Shelter Group and fees and
services of similar property management companies in the market
areas of the properties. The fees charged under these contracts
were determined to be equal to or below market rates. During the
years ended December 31, 2004, 2003 and 2002, these fees
were approximately $0.8 million, $1.0 million, and
$1.1 million, respectively.
Related Party Transactions resulting from Acquisition of Tax
Credit Business from Lend Lease
During the 15 years prior to the July 2003 acquisition of
the Lend Lease HCI business, Lend Lease and its predecessors
made and syndicated tax credit equity investments in affordable
housing projects sponsored by the Shelter Group. Prior to 1996,
the Shelter Group participated in these projects directly
through Shelter Holdings, of which Mr. Joseph, and certain
family interests, owned 100% of the equity. Since 1996, the
Shelter Group has participated in these transactions through
Shelter Development, LLC, in which Mr. Joseph and his
family, acting through Shelter Holdings, have at all times owned
less than a majority interest (presently 34.7%).
Since the HCI acquisition, the Company’s tax credit
operating subsidiaries have closed three transactions with the
Shelter Group and expect to close additional deals in the
future. Consistent with Company policy, Mr. Joseph has not
participated, and will not participate, in the structuring or
negotiation of these transactions. Future transactions are
expected to be consistent with the terms offered by Lend Lease
to the Shelter Group prior to the acquisition of the HCI
business as well as terms offered by the Company to other
comparable quality developers with whom the Company has similar
long-standing relationships. The Shelter Group receives
development fees in connection with these transactions.
In accordance with the Company’s Operating Agreement, the
Board, acting through the disinterested directors, has
authorized the continued investment in and syndication of tax
credit equity investments in affordable housing projects
sponsored by The Shelter Group without the need for further
Board approval and approved and ratified all prior tax credit
transactions with The Shelter Group.
Investments/ Loans by Tax Credit Equity Business
It is customary in the tax credit industry for syndicators to
provide development loans to certain high caliber developers
with whom they have long-standing relationships. As part of its
growth plan, Shelter Development, LLC requested that the Company
provide a pre-development loan facility. In 2004, pursuant to
the Company’s Operating Agreement, the disinterested
Directors of the Board approved such a facility in an amount not
to exceed $1,500,000. The facility is evidenced by an umbrella
loan agreement and note with the Shelter Group together with
individual notes beneath it for each property on which a loan is
made, signed by the relevant property partnership. Loans for
individual transactions will be subject to the Company’s
normal due diligence requirements and are expected to include a
pledge of both the developer fees as well as the general partner
interest in the partnership that owns the property.
The transactions are being made on the usual and customary terms
upon which the Company’s tax credit business would make
loans to high caliber developers and upon which other similarly
situated tax credit businesses would make development loans to
developers like Shelter Development, LLC. Mr. Joseph did
not and will not participate in, or influence, the structuring
of this facility in any way and will not personally receive any
of the proceeds of these Loans.
The Company has previously made individual pre-development loans
to Shelter Group prior to the approval of the facility. In 2004
a pre-development loan was made to and repaid by the borrower on
the Shelter Group’s Woodbridge Commons transaction.
114
Southgate Crossing Partnership
Through its subsidiary, MMA Mortgage Investment Corporation
(“MMIC”), formerly Midland Mortgage Investment
Corporation (“Midland”), the Company has provided a
supplemental loan through the Fannie Mae DUS program to the
Southgate Crossing apartment project partnership, which is
located in Columbia, Maryland. The supplemental loan was a part
of a debt restructuring of the project. Due to the debt
restructuring, which consisted of the infusion of new equity
from outside parties and the supplemental loan from Midland, all
of the partnership interests in this project partnership were
sold to new owners in 2003. Mr. Joseph indirectly held a 1.5%
limited partnership interest in the borrowing entity for the
project. He also owned interests in two of the three general
partners of the same entity, which gave him a 0.67% general
partner interest in the borrowing entity. Shelter Development,
LLC. now owns an 80.36% interest in the new general partner of
the borrowing entity. This new general partner owns a 10%
interest in the borrowing entity. As a result of the sale of the
partnership interests to new owners, a company that is owned
100% by Mr. Joseph received approximately $22,000 in
distributions for its prior equity interest in Southgate
Crossing and $151,000 in repayment of a loan. The Shelter Group
also receives fees in connection with this transaction.
Mr. Joseph will benefit from these fees by virtue of his
investment in Shelter Group, but will not directly receive any
fees. In accordance with approval procedures mandated by the
Company’s Operating Agreement, the disinterested directors
of the Company reviewed and approved this transaction and found
it fair to the Company based upon management’s evaluation
of the supplemental loan, the sale terms of the project
partnerships and other terms of the transactions, which included
a review of property valuations and an internally prepared
valuation analysis indicating that the purchase price paid by
the new owners represented fair market value.
The Company has held a first mortgage bond on the Southgate
Crossing property since 1998. As of December 31, 2004, the
outstanding amount of this loan was $10.2 million. The
first mortgage loan on Southgate Crossing was made at market
rate. Payment of principal and interest on the related bond is
credit enhanced by Fannie Mae.
Lakeview Gardens Transaction
With respect to the defaulted Lakeview Bonds (as defined below),
the Company, through a newly created and wholly owned
subsidiary, took title to a defaulted property by a deed in lieu
of foreclosure, sold the subsidiary that took title to the
property, and used the sale proceeds to retire the defaulted
tax-exempt bonds. While the Company owned the subsidiary, the
Company earned a de minimis amount of taxable income.
The Company owned approximately $9.0 million in aggregate
principal amount of mortgage revenue bonds (the “Lakeview
Bonds”) and parity working capital loans related to the
Lakeview Bonds in an aggregate principal amount of $305,000 (the
“Lakeview Loans”) secured by the Lakeview Garden
Apartments Project (“Lakeview”). A limited partnership
in which Mr. Joseph indirectly owned 100% of the general
partner interest and a lesser percentage of the limited partner
interests, was the owner of Lakeview and was the borrower under
the bond documents (the “Lakeview Borrower”).
The Lakeview Borrower has been in monetary default under the
bond documents since the original borrower defaulted, which was
not a related party.
On September 29, 2004, the Company (i) exercised its
rights under the bond documents as a result of the default and
took title to Lakeview by a deed in lieu of foreclosure through
an entity formed to hold the deed, and (ii) subsequently sold
that entity to an unrelated third party for a purchase price of
approximately $16.2 million, of which approximately
$11.2 million was used to retire all of the outstanding
principal and deferred interest on the Lakeview Bonds and the
Lakeview Loans. The remainder was a gain to the Company.
No partner in the Lakeview Borrower or the entities owning the
Lakeview Borrower (including Mr. Joseph or entities of
which he is an owner (other than the Company)) received any
distributions resulting from these transactions. The
disinterested members of the Company’s Board of Directors,
in
115
accordance with the Company’s Operating Agreement, approved
these transactions. Mr. Joseph did not participate in, or
influence, the structuring or the approval of these transactions.
Mr. Joseph’s ownership interest in partnerships
holding “defaulted assets”
Certain transactions with affiliates are described below under
the heading “Affiliate and Non-Profit Management and
Control of Defaulted Assets.” One of these transactions is
the creation by the Company of certain partnerships that hold
defaulted or previously defaulted assets. In connection with
these partnerships, Mr. Joseph controls direct and indirect
membership interests in the aggregate of 69.12% in what the
Company calls an “umbrella” limited liability company
(“LLC”) holding certain defaulted or previously
defaulted assets as described in more detail below. The umbrella
LLC holds a 99% limited partnership interest in the borrowing
for these defaulted or previously defaulted assets. In addition,
Mr. Joseph controls and is a 56% indirect owner in the 1%
general partnership interest in the borrowing partnerships
partnership (or, in the case of the Creekside project
partnership, is a 56% indirect owner in a 0.5% general
partnership interest) for these defaulted or previously
defaulted assets. In addition, an entity wholly owned by
Mr. Joseph is the manager of this LLC. While the purpose of
this paragraph is to discuss Mr. Joseph’s interest in
these transactions, the section entitled “Affiliate and
Non-Profit Management and Control of Defaulted Assets”
describes the nature and the impact of these transactions on the
Company.
Refinancing of FSA Portfolio
In February 1995, the Company’s predecessor by merger, as
bondholder, and various property-owning partnerships indirectly
controlled by Mr. Joseph, as borrowers, participated in the
refunding of 11 tax-exempt bonds with an aggregate principal
balance of $126.6 million into senior Series A
tax-exempt bonds and subordinate Series B tax-exempt bonds
with aggregate principal balances of $67.7 million and
$58.9 million, respectively. The borrowing partnerships are
currently owned by general partners controlled by
Mr. Joseph and by the umbrella LLC described above under
“Mr. Joseph’s ownership interest in partnerships
holding ’defaulted assets’.” The Series B
bonds are held by a subsidiary of the Company. The Series A
bonds were deposited, at the direction of the Company, into a
custody arrangement wherein payments of principal and interest
on the Series A bonds were credit enhanced by insurance
policies issued by Financial Security Assurance, Inc
(“FSA”), and custodial receipts were issued to
third-party investors evidencing beneficial ownership interests
in the FSA-enhanced Series A bonds (the “Custodial
Receipts”).
Although the Series A bonds could have been redeemed and
refunded at the direction of the borrowing partnerships
beginning in early 2005, the Company avoided the cost and time
involved in refunding by keeping the Series A bonds and the
Custodial Receipts outstanding and by causing a subsidiary to
direct the purchase of the Custodial Receipts in lieu of
redemption in February 2005. The subsidiary then caused the
Custodial Receipts to be deposited into a securitization
vehicle, whereby new receipts, benefiting from FSA’s
underlying credit enhancement, were issued to third-party
investors and the subsidiary purchased certificates representing
residual beneficial interests in the Custodial Receipts. This
residual beneficial interest will indirectly produce tax-exempt
income for the Company.
The transaction does not affect the obligations of the borrowing
partnerships in connection with the Series A bonds.
Pursuant to the Company’s Operating Agreement, the
transaction was approved by the disinterested members of the
Company’s Board of Directors. Mr. Joseph did not
participate in, or influence, the structuring or the approval of
the transaction.
Special Shareholder
Shelter Holdings is personally liable for the obligations and
liabilities of the Company under the Company’s Amended and
Restated Certificate of Formation and Operating Agreement as the
“Special Shareholder.” Under the terms of the
Operating Agreement, if a business combination or change in
control occurs, and the Special Shareholder does not approve the
transaction, the Special Shareholder can
116
terminate its status as the Special Shareholder. In this case,
the Company would be obligated to pay $1.0 million to
Shelter Holdings, as the Special Shareholder.
Transactions with Outside Directors
Richard O. Berndt, Esq., a member of the Company’s Board of
Directors, is the managing partner of the law firm Gallagher,
Evelius & Jones LLP (“GEJ”). Mr. Berndt owns
6% of GEJ’s equity interest. GEJ provides legal services to
the Company. Some of GEJ’s legal services are provided as
part of real estate transactions and the fees charged are billed
to and paid for by the borrowers. For the year ended
December 31, 2004, GEJ received $1.0 million in legal
fees for these transactions. For the year ended
December 31, 2004, GEJ received $1.7 million in legal
fees directly from the Company. The fees paid by the Company
represented 11.5% of GEJ’s total revenues for 2004. It is
anticipated that the Company will transact an equal or greater
amount of business with GEJ during 2005.
In 2004, the Company appointed Stephen A. Goldberg as its
General Counsel. Mr. Goldberg remains a partner at GEJ and
the firm bills the Company its standard hourly rates for
Mr. Goldberg’s services.
Fred N. Pratt, Jr., a member of the Company’s Board of
Directors, was a founder and chief executive officer of The
Boston Financial Group, the predecessor to the Lend Lease HCI
business. As a result of this prior role, Mr. Pratt owns certain
limited partnership and other interests in entities related to
the Company’s affordable housing investment business. Most
of these interests were granted to Mr. Pratt prior to 1986
and relate to pre-tax credit properties. MMA serves as asset
manager to these properties, and Mr. Pratt does not
influence their management. Most of these properties are
expected to be sold over the next few years, and besides asset
management and disposition fees, the Company has no economic
interest in them. It is expected that Mr. Pratt will receive
payments from his interests in these properties when they are
sold, but this will not represent payments to Mr. Pratt by
the Company.
Transactions with Management Directors And Executive
Officers
Charles M. Pinckney is an Executive Vice President with the
Company. Through the end of 2010, the Company will pay
Mr. Pinckney $32,500 per year for consulting fees earned,
but deferred, prior to his becoming an employee of the Company.
The Company also distributes to Mr. Pinckney approximately
$7,000 per year, to the extent received by the Company, as an
annuity on certain assets that the Company acquired from
Whitehawk Capital LLC, a company owned by Mr. Pinckney and
acquired by the Company in 2002. The Company is obligated to pay
Mr. Pinckney these amounts as a part of the agreement under
which the Company acquired Whitehawk Capital, LLC.
On January 1, 2000, Shelter Holdings made personal loans to
Mr. Michael L. Falcone, President of the Company and, since
January 1, 2005, Chief Executive Officer, and Mr. Gary
A. Mentesana, Executive Vice President of the Company.
Mr. Falcone’s original loan amount was approximately
$542,000 with an interest rate of LIBOR plus 1.85%. The unpaid
balance on this loan, as of December 31, 2004, is
approximately $399,087. Mr. Mentesana’s original loan
amount was $132,000 with an interest rate of LIBOR plus 1.85%.
The unpaid balance on this loan, as of December 31, 2004,
is approximately $83,627. The purpose of these loans was to
allow Messrs. Falcone and Mentesana to purchase the
Company’s common shares.
Prior to the Company’s acquisition of the Midland Companies
by the Company in 1999, Mr. Robert J. Banks, an employee of
the Company and Vice Chairman of the Board of Directors through
the end of 2004, and Mr. Keith J. Gloeckl, Executive Vice
President of the Company, assumed interests in various real
estate properties related to transactions in which the Midland
Companies participated that had defaulted on their financing
obligations. Messrs. Banks and Gloeckl undertook the
responsibility of replacing the defaulted general partners in
order to protect and preserve the investments for the benefit of
the tax credit investors who had participated in low-income
housing tax credit funds syndicated and managed by the Midland
Companies. These properties generated tax credits that were sold
to, and benefited, third party investors. These properties are
no longer in default. Messrs. Banks and Gloeckl’s
interests derived from the ownership of shares in four
corporations that are investors in the partnerships
117
that control them as operating general partners. In one of the
partnerships, Mr. Gloeckl acts as the managing general
partner. It is very unlikely that either Mr. Banks or
Mr. Gloeckl will personally profit from these transactions.
Mr. Robert J. Banks, an employee of the Company and Vice
Chairman of the Board of Directors through the end of 2004,
serves on the Board of Directors of United Bank and Trust
Company, an affiliate of Synovus Financial Holdings. Through
various subsidiaries, United Bank has extended to the Company a
$50.0 million line of credit and $10.0 million letter of
credit facility and the Company currently has deposits with
United Bank of approximately $39.3 million.
Transactions with Affiliates and Non-Profit Entities
Affiliate and Non-Profit Management and Control of Defaulted
Assets
From time to time, borrowers have defaulted on their debt
obligations to the Company. Some of these obligations were
incurred in connection with the development of properties that
collateralize the Company’s tax-exempt bonds. These
properties are sometimes referred to as “defaulted
assets.” In a number of these circumstances the Company
has, after evaluating its options, chosen not to foreclose on
the property. Instead and in lieu of foreclosure, the Company
has negotiated the transfer of a property’s deed in lieu of
foreclosure to, or replaced the general partner of an original
borrowing partnership with, an entity controlled by and
affiliated with certain officers of the Company. The Company has
taken this action to preserve the value of the original
tax-exempt bond obligations and to maximize cash flow from the
defaulted assets. Following the transfer of a property to, or
the replacement of the general partner with, an affiliated
entity, that entity controls the defaulted or previously
defaulted asset, which serves as collateral for the debt to the
Company. The Company will refer to all transferees as
“affiliated entities” for purposes of this discussion.
These affiliated entities include partnerships in which
Mr. Joseph has interests, for purposes of this discussion,
affiliate entities also include a 501(c)(3) corporation and a
non-501(c)(3) corporation that have Board members and
officers who are also executive officers of the Company. These
officers acting as Board members and officers of the affiliated
entities do not have a personal financial interest in the
entities. Only Mr. Joseph has a personal financial interest
in these partnerships, as described above in the section
entitled “Related Party Transactions.” A portion of
the defaulted assets subsequently ceased to be in default.
This result is consistent with the Company’s goal of
providing tax-exempt income to its shareholders. The following
table outlines these affiliate relationships at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Carrying Value | |
| |
|
Number of | |
|
of Company’s | |
| |
|
Properties Owned | |
|
Investment at | |
| Affiliate or Non-Profit Entity |
|
(directly or indirectly) | |
|
December 31, 2004 | |
| |
|
| |
|
| |
|
SCA Successor, Inc.(1)
|
|
|
2 |
|
|
$ |
39,781,869 |
|
|
SCA Successor II, Inc.(1)
|
|
|
12 |
|
|
|
65,339,156 |
|
|
MMA Affordable Housing, Inc. and MMA Successor I, Inc.(2)
|
|
|
1 |
|
|
|
5,991,217 |
|
|
MuniMae Foundation, Inc.(3)
|
|
|
3 |
|
|
|
52,178,159 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
|
18 |
|
|
$ |
163,290,401 |
|
| |
|
|
|
|
|
|
|
|
| (1) |
These corporations are general partners of the operating
partnerships whose property collateralizes the Company’s
investments. All of these general partner investments, except
for the Company’s Creekside project, are 1% interests in
the related operating partnerships. See above for a discussion
of Mr. Joseph’s interest in these general partners.
The property partnerships in which the SCA Successor entities
are the general partners include the partnerships in which the
umbrella LLC described above is the limited partner. |
| |
| (2) |
MuniMae Affordable Housing, Inc. (“MMAH”), formerly
known as MuniMae Foundation, Inc., is a private non-profit
entity organized to promote affordable housing. No part of its
earnings inures to the benefit of any individual or for-profit
entity. Executive officers of the Company serve as directors of
MMAH. MMA Successor I, Inc. is a for profit entity owned and
controlled by Mr. Joseph. MMAH and MMA Successor I,
Inc. are, respectively, the 99% limited partner and the 1%
general partner in a partnership whose property collateralizes
one of the Company’s investments. |
118
|
|
| (3) |
MuniMae Foundation, Inc. (“MMF”), formerly known as
MMA Affordable Housing Corp. (“MMAHC”), is a 501(c)(3)
non-profit entity organized to provide affordable housing. No
part of its earnings inures to the benefit of any individual or
for-profit entity. Executive officers of the Company serve as
directors of MMF. |
The affiliated entities that own and operate the defaulted or
previously defaulted assets could have interests that do not
fully coincide with, or could even be adverse to, the interests
of the Company’s tax-exempt bond business. If any of these
entities chose to act solely in accordance with their ownership
interest in the defaulted or previously defaulted assets, such
as selling a property or filing a bankruptcy, the interests of
the tax-exempt bondholders could be adversely impacted. In
making decisions relating to the defaulted or previously
defaulted assets, the Company, by direction to its affiliates
and officers, has, consistent with its overall strategy of
providing largely tax-exempt income to its shareholders, elected
to manage the defaulted or previously defaulted assets in such a
manner that maximizes the tax-exempt cash flow from the
projects. The Company could, therefore, make a decision to defer
the capital needs of a defaulted or previously defaulted asset
in favor of paying the debt service, which could adversely
impact the value of the Company’s collateral.
As part of the sale of certain taxable notes in 1998 and 1999,
the Company provided a guarantee on behalf of the operating
partnerships that hold these defaulted assets for the full and
punctual payment of interest and principal due under the taxable
notes. The face amount of these notes at December 31, 2004
was $16.2 million. The Company’s obligation under this
guarantee is included in the summary of the Company’s
guarantees in Note 14 in these Notes to the Consolidated
Financial Statements.
501(c)(3) Organization
Some of the Company’s properties are financed by tax-exempt
bonds issued on behalf of borrowers that are tax-exempt
organizations under Section 501(c)(3) of the Internal Revenue
Code. For such bonds to remain tax-exempt, the property at all
times must be owned by a 501(c)(3) organization. Accordingly,
whenever one of these properties requires a workout or
restructuring where a change in ownership is desirable, the
Company seeks to find a qualified 501(c)(3) organization to act
as owner. In order to assure that a 501(c)(3) organization will
always be available, the Company helped organize and remains
closely associated with MMF, a 501(c)(3) organization devoted to
the ownership and operation of affordable housing for all
citizens. MMF owns several of the Company’s bond financed
properties and may in the future own more of such properties.
This ownership accomplishes both the preservation of affordable
housing and the preservation of the tax-exempt status of the
Company’s bonds. The Company’s valuation, workout and
other policies are the same for these properties and bonds as
for all other 501(c)(3) bonds in the Company’s portfolio.
The Company may from time to time make additional loans
available to its 501(c)(3) borrowers or may make charitable
contributions to such entities, including MMF. Such loans and
grants must be used for the recipient’s charitable
purposes, which may include payment of debt service on bonds
held by the Company. Because the Company’s 501(c)(3) bonds,
like most of the Company’s loans, are non-recourse, the
Company values these bonds by reference to the underlying
property and therefore such loans or contributions by the
Company do not change the value of the bonds on the
Company’s books, which is determined by reference to the
underlying property.
On April 1, 2004, a wholly owned subsidiary of MMF, took
title to the Peaks at Conyers property by a deed in lieu of
foreclosure, assuming the obligations of the previous borrower
under the 501(c)(3) tax-exempt bond documents. The subsidiary
was and still is called MMA Affordable Housing Corp.
— Conyers, LLC.
On October 13, 2004, the entire membership interest in MMA
Affordable Housing Corp. — Conyers, LLC was assigned
by MMF to a newly created for-profit corporation, Peaks at
Conyers Corp., a Maryland corporation, which is owned 100% by
MMAH. On the same day, the 501(c)(3) tax-exempt bonds were
redeemed in whole, and MMA Affordable Housing Corp. —
Conyers, LLC issued taxable corporate bonds that are guaranteed
by an insurance policy issued by QBE International Insurance
Limited. The proceeds from the sale of the new taxable bonds
were used to pay off the existing 501(c)(3) bonds. The Company
has no interest in the new bonds.
119
On December 14, 2004, MMF took control of the defaulted
borrower under the Cool Springs bond documents by receiving an
assignment of the entire membership interest in this borrower,
which is called ASF of Franklin, LLC, a Tennessee limited
liability company. The 501(c)(3) Cool Springs bonds remain
outstanding.
By acquiring the entire membership interest in the existing
borrower, MMF was able to avoid the transfer taxes that would
have been assessed if the property itself had been conveyed by a
deed in lieu of foreclosure to MMF or a subsidiary.
Winter Oaks Partners, Ltd., (L.P.), a Georgia limited
partnership (the “Borrower”), is the owner of the
Winter Oaks Apartments project in Winterhaven, Florida. Until
May 12, 2004, the Borrower was owned by MMA Successor I,
Inc., an entity owned and controlled by Mr. Joseph, as the
1% general partner and by Winter Oaks, L.P., a Delaware limited
partnership, as the 99% limited partner. Winter Oaks, L.P. is
owned 1% by MMA Successor I, Inc. and 99% by MMAH. The Borrower
was the borrower under bond documents related to two subordinate
bonds and a related junior mortgage owned by MuniMae TE Bond
Subsidiary, LLC. The Borrower was also the borrower under a
taxable loan from the Company. A senior mortgage loan was held
by Fannie Mae.
On May 12, 2004, MMA Successor I, Inc. assigned its 1%
general partner interest in the Borrower to a third party, and
Winter Oaks, L.P. assigned its 99% limited partner interest to a
third party. On the same day, the proceeds of the sale were used
to redeem the two subordinate bonds and to pay off the taxable
loan from the Company. The senior bond and first-lien mortgage
remained outstanding and the new partners in the Borrower
assumed the obligations related thereto. There were insufficient
proceeds from the sale to pay off all the deferred interest owed
under the most junior bond. As a result, MuniMae TE Bond
Subsidiary, LLC waived its right to receive full payment of the
deferred interest and permitted the redemption to take place.
Neither the assignors, MMA Successor I, Inc. and Winter Oaks,
L.P., nor Mr. Joseph, received any proceeds from the
assignments.
Fees Paid to the Company from Unconsolidated Entities
Pension Funds
The Company, through its subsidiary MMA Advisory Services, Inc.
(“MAS”), formerly Midland Advisory Services, Inc.,
receives fee income from two pooled investment vehicles, Group
Trust and MMER. The Group Trust invests primarily in real estate
backed debt investments, and MMER makes equity investments in
real estate. Both are owned by and comprised exclusively of a
select group of institutional investors. To date, the Group
Trust and MMER engage in business transactions only with the
Company. The Group Trust invests in loans originated by the
Company and, on occasion, provides short-term financing to the
Company through a market rate credit facility. MMER invests in
income-producing real estate partnerships originated by the
Company and provides short-term lines of credit to the Company
also through a market rate credit facility.
MAS earns fee income for investment management services provided
to MMER. In addition, the Company receives origination fees for
investments placed with MMER. Collectively these fees totaled
$1.5 million, $1.4 million, and $1.6 million for the
years ended December 31, 2004, 2003, and 2002 respectively.
The Company, directly and through MAS, receives fee income from
the Group Trust for providing investment management services,
originating Group Trust loans, and servicing individual Group
Trust investments. The Company receives these fees on both Group
Trust direct investments and investments funded through lines of
credit backed by Group Trust assets. For the years ended
December 31, 2004, 2003, and 2002, these fees amounted to
$4.5 million, $4.1 million, and $2.5 million
respectively.
120
Contributions to Tax-Exempt Entities in which the
Company’s Officers Are Directors
For the year ended December 31, 2004, the Company made a
$1.0 million charitable contribution to MMF.
NOTE 17 — Non-Employee Directors’ Share Plans
And Employee Share Incentive Plans
Non-Employee Directors’ Share Plans
At December 31, 2004, a total of 650,000 shares were
authorized to be granted under the non-employee directors’
share plans. The non-employee directors’ plans provide a
means to attract and retain highly qualified persons to serve as
non-employee directors of the Company. Under the directors’
plans, an option to purchase 7,000 common shares is granted to
each director when first elected or appointed to the Board of
Directors. The exercise price of such options will be equal to
100% of the fair market value of the common shares on the date
of grant. Options expire at the earlier of ten years after the
date of grant or one year after the date a director ceases to
serve as such. The options vest in three equal annual
installments commencing at the earlier of: (a) the next
anniversary of the director’s initial election or
appointment or (b) the next annual meeting of shareholders.
Such options are subject to earlier vesting in the event of
death, disability, or a change in control. Except as otherwise
determined by the Board, options will become fully exercisable
after the participant ceases to serve as a director for any
reason other than death or disability only to the extent that
the options are vested at the date he or she ceased to be a
director or has vested within two months after the date he or
she ceased to be a director.
In addition, the Company will grant the directors restricted
shares on the date of each annual meeting of shareholders. The
plan also entitles each director to elect to receive shares or
deferred shares in lieu of restricted shares. The restricted
shares granted will vest at the earlier of: (a) the next
anniversary of the grant of such restricted shares, or
(b) the next annual meeting of shareholders. Such
restricted shares are subject to earlier vesting in the event of
death, disability, or a change in control as defined in the 2004
Directors’ Plans. Except as otherwise determined by the
Board, a participant’s restricted shares will become fully
vested after the participant ceases to serve as a director for
any reason other than death or disability only to the extent
that the restricted shares are vested at the date he or she
ceased to be a director or has vested within two months after
the date he or she ceased to be a director. Restricted shares
that, at the time the participant ceases to be a director,
remain subject to restriction will be forfeited and reacquired
by the Company.
At December 31, 2004, 152,000 options were outstanding
under the directors’ plans with exercise prices of $14.88
to $25.52. The weighted average remaining contractual life for
these outstanding options
121
was 6.6 years at December 31, 2004. The following
table summarizes the activity relating to options issued under
the directors’ plans for the years ended December 31,
2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Weighted Average | |
| |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Options outstanding at December 31, 2001
|
|
|
107,500 |
|
|
$ |
20.28 |
|
|
Granted
|
|
|
30,000 |
|
|
$ |
24.74 |
|
|
Exercised
|
|
|
(1,500 |
) |
|
|
19.38 |
|
|
Expired/ Forfeited
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2002
|
|
|
136,000 |
|
|
$ |
21.28 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
44,000 |
|
|
$ |
24.23 |
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
Expired/ Forfeited
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2003
|
|
|
180,000 |
|
|
$ |
22.00 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
7,000 |
|
|
$ |
25.52 |
|
|
Exercised
|
|
|
(10,000 |
) |
|
|
15.84 |
|
|
Expired/ Forfeited
|
|
|
(25,000 |
) |
|
|
20.88 |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2004
|
|
|
152,000 |
|
|
$ |
22.75 |
|
| |
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
| |
December 31, 2002
|
|
|
106,000 |
|
|
$ |
20.29 |
|
| |
December 31, 2003
|
|
|
136,000 |
|
|
$ |
21.28 |
|
| |
December 31, 2004
|
|
|
145,000 |
|
|
$ |
22.62 |
|
The directors’ plans also entitle each director to elect to
receive payment of director’s fees in the form of common
shares, based on their fair market value on the date of payment,
in lieu of cash payment of such fees. Such shares may also be
paid on a deferred basis, whereby the shares payable are
credited to the account of the director, and future
distributions payable with respect thereto are paid in the form
of additional share credits based upon the fair market value of
the common shares on the record date of the distribution
payment. As of December 31, 2004, 9,970 common shares, 490
restricted shares and 58,118 deferred shares had been issued to
directors in lieu of cash payments for director fees. As of
December 31, 2004, there were 412,922 shares available
under the directors’ plans.
Employee Share Incentive Plans
At December 31, 2004, 3,622,033 shares were authorized to
be issued under the share incentive plans. The Company’s
share incentive plans provide a means to attract, retain and
reward executive officers and other key employees of the
Company, to link employee compensation to measures of the
Company’s performance and to promote ownership of a greater
proprietary interest in the Company. The plans authorize grants
of a broad variety of awards, including non-qualified stock
options, share appreciation rights, restricted shares, deferred
shares and shares granted as a bonus or in lieu of other awards.
Shares issued as restricted shares and as awards, other than
options (including restricted shares), may not exceed 20% and
40%, respectively, of the total reserved under the plans. As of
December 31, 2004, there were 1,683,222 shares available
under the plans.
Common Share Options
The exercise price of common share options granted under the
plans is equal to 100% of the fair market value of the common
shares on the date of grant. The options vest over three to four
years. In the event of a change in control of the Company (as
defined in the plans), the options shall become immediately and
fully exercisable. In addition, the Company may, at any time,
accelerate the exercisability
122
of all or a specified portion of the options. Generally, the
options expire ten years from the date of grant. However,
options will expire immediately upon the termination of
employment for cause and three months after termination of
employment for reasons other than death, disability or normal or
early retirement. In the event of death, disability or
retirement, the options will expire one year after the date of
such event. At December 31, 2004, 438,935 options were
outstanding under the plans with exercise prices of $16.88 to
$21.95. The weighted average remaining contractual life for
these outstanding options was 3.10 years at
December 31, 2004. The following table summarizes the
activity relating to options issued under the plans for the
years ended December 31, 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
Weighted Average | |
| |
|
Shares | |
|
Exercise Price | |
| |
|
| |
|
| |
|
Options outstanding at December 31, 2001
|
|
|
996,970 |
|
|
$ |
18.25 |
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
Exercised
|
|
|
(190,531 |
) |
|
|
18.44 |
|
|
Expired/ Forfeited
|
|
|
(10,000 |
) |
|
|
18.75 |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2002
|
|
|
796,439 |
|
|
$ |
18.19 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
$ |
— |
|
|
Exercised
|
|
|
(64,250 |
) |
|
|
18.37 |
|
|
Expired/ Forfeited
|
|
|
(19,500 |
) |
|
|
18.75 |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2003
|
|
|
712,689 |
|
|
$ |
18.16 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
$ |
— |
|
|
Exercised
|
|
|
(273,754 |
) |
|
|
19.08 |
|
|
Expired/ Forfeited
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Options outstanding at December 31, 2004
|
|
|
438,935 |
|
|
$ |
17.59 |
|
| |
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
| |
December 31, 2002
|
|
|
622,389 |
|
|
$ |
17.91 |
|
| |
December 31, 2003
|
|
|
654,252 |
|
|
$ |
18.11 |
|
| |
December 31, 2004
|
|
|
438,935 |
|
|
$ |
17.59 |
|
Common Share Appreciation Rights
On November 11, 1997, 3,000 common share appreciation
rights (“SARs”) were awarded to certain
employees under the plans. The exercise price of the SARs was
equal to 100% of the fair market value of the common shares
($19.00 per share) on the date of grant and are exercisable for
cash only. The SARs vest over three years and generally expire
ten years from the date of grant. In the event of a change in
control of the Company (as defined in the plans), the SARs shall
become immediately and fully exercisable. In addition, the
Company may, at any time, accelerate the exercisability of all
or a specified portion of the SARs. However, the SARs will
expire immediately upon the termination of employment for cause
and three months after termination of employment for reasons
other than death, disability or normal or early retirement. In
the event of death, disability or retirement, the SARs will
expire one year after such event. As of December 31, 2004,
all 3,000 SARs had vested and all 3,000 have been exercised.
Deferred Shares
The Company granted 158,803, 146,160 and 32,870 deferred share
awards with a total fair value of $3.9 million,
$3.5 million and $0.8 million for the years ended
December 31, 2004, 2003 and 2002, respectively. The
deferred shares vest over one to ten years, as outlined in the
individual award agreements. The deferred share awards also
provide for acceleration of vesting on a discretionary basis,
upon a change in control and death or disability. As of
December 31, 2004, 545,418 deferred shares had vested. The
Company recorded unearned compensation equal to the fair market
value of the awards,
123
which is shown as a separate component of shareholders’
equity. Unearned compensation is being amortized into expense
over the vesting period. For the years ended December 31,
2004, 2003 and 2002, the Company recognized compensation expense
of $3.8 million, $2.5 million and $1.7 million,
respectively, relating to the deferred shares.
NOTE 18 — Servicing Portfolio
Trust and Escrow Funds
The Company maintains certain escrow accounts and trust accounts
related to principal and interest payments and to escrow funds
received but not yet remitted to investors or others on loans
serviced by the Company. These accounts are segregated into
special accounts and are excluded from the Company’s assets
and liabilities.
Loans and Bonds Serviced
The Company serviced loans and bonds totaling $3.5 billion,
$2.8 billion and $2.5 billion in outstanding principal
at December 31, 2004, 2003 and 2002, respectively. The fees
earned by the Company for servicing these loans are based on a
percentage of the unpaid principal balance of the loans. These
loans include approximately $1.1 billion in loans where the
Company has a risk-sharing agreement with certain lenders at
December 31, 2004 and 2003. Under the risk-sharing
agreements, the Company is responsible for losses on individual
loans at varying percentages, in no case greater than 40% of the
original unpaid principal balance of the loan on loans covered
by the agreement (see Guarantee table in Note 14).
NOTE 19 — Fair Value of Financial Instruments
The estimated fair values of the Company’s financial
instruments are included in the table at the end of this note.
The carrying amounts in the table correspond to amounts included
in the accompanying balance sheets. The following methods or
assumptions were used by the Company to estimate the fair values
of financial instruments:
Investment in tax-exempt bonds, net, interests in bond
securitizations, investment in derivative financial instruments,
cash and cash equivalents, restricted assets, mortgage servicing
rights — The carrying amounts reported in the balance
sheet approximate the fair value of these assets.
Loans receivable and loans receivable held for sale —
The fair value of the Company’s fixed rate loans was
calculated by discounting the expected cash flows. The discount
rates are based on the interest rate charged to current
customers for comparable loans. The Company’s adjustable
rate loans reprice frequently at current market rates.
Therefore, the fair value of these loans has been estimated to
approximate their carrying value.
Interest-only securities — The estimated fair value of
the interest-only securities was calculated by discounting
contractual cash flows adjusted for current prepayment estimates
using a market discount rate.
Notes payable — The estimated fair value of the
Company’s fixed rate notes payable was calculated by
discounting contractual cash flows. The discount rates were
based on the interest rates paid to current lenders for
comparable notes payable. The Company’s adjustable rate
notes payable reprice frequently at current market rates.
Therefore, the fair value of these notes payable has been
estimated to approximate their carrying value.
Mortgage and factored notes payable — Mortgage and
factored notes payable are excluded from the fair value
disclosure of financial instruments due to the lack of necessary
information to determine the fair value. Factored notes payable
are classified as notes payable on the consolidated balance
sheet. At
124
December 31, 2004 and 2003, the balance of factored notes
payable was $192.1 million and $0, respectively.
Short- and Long-term debt — The fair value of
short-term debt has been estimated to approximate carrying value
due to the frequent reset of interest rates paid. The fair value
of long-term debt has been calculated using the quote on the
associated tax-exempt bond or by pricing the debt using a
comparison of the fixed rate of the debt to current market rates.
Subordinate debentures and preferred shares subject to mandatory
redemption — The estimated fair value of the
subordinate debentures and preferred shares was calculated by
determining the price for these instruments based on the current
level of interest rates on comparable investments.
Limitations
The fair value estimates are made at a discrete point in time
based on relevant market information and information about the
financial instrument. Because no or limited markets exist for a
significant portion of the Company’s financial instruments
fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates. In addition, the fair
value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Carrying | |
|
|
|
Carrying | |
|
|
| |
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
| (in thousands) |
|
| |
|
| |
|
| |
|
| |
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in tax-exempt bonds and interests in bond
securitizations, net
|
|
$ |
1,275,748 |
|
|
$ |
1,275,748 |
|
|
$ |
1,043,973 |
|
|
$ |
1,043,973 |
|
|
Loans receivable, net — fixed
|
|
|
269,870 |
|
|
|
266,600 |
|
|
|
523,051 |
|
|
|
517,360 |
|
|
Loans receivable, net — adjustable
|
|
|
361,069 |
|
|
|
361,069 |
|
|
|
29,325 |
|
|
|
29,325 |
|
|
Investment in derivative financial instruments
|
|
|
3,102 |
|
|
|
3,102 |
|
|
|
2,563 |
|
|
|
2,563 |
|
|
Cash and cash equivalents
|
|
|
92,881 |
|
|
|
92,881 |
|
|
|
50,826 |
|
|
|
50,826 |
|
|
Restricted assets
|
|
|
72,805 |
|
|
|
72,805 |
|
|
|
75,525 |
|
|
|
75,525 |
|
|
Interest-only securities
|
|
|
5,768 |
|
|
|
5,768 |
|
|
|
5,551 |
|
|
|
5,551 |
|
|
Mortgage servicing rights, net
|
|
|
11,349 |
|
|
|
11,349 |
|
|
|
10,967 |
|
|
|
10,967 |
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable — fixed
|
|
|
160,423 |
|
|
|
158,103 |
|
|
|
361,287 |
|
|
|
374,544 |
|
|
Notes payable — adjustable
|
|
|
527,714 |
|
|
|
527,714 |
|
|
|
302,257 |
|
|
|
302,257 |
|
|
Short-term debt
|
|
|
413,157 |
|
|
|
413,157 |
|
|
|
371,881 |
|
|
|
371,881 |
|
|
Long-term debt
|
|
|
164,014 |
|
|
|
165,245 |
|
|
|
172,642 |
|
|
|
177,275 |
|
|
Subordinate debentures
|
|
|
84,000 |
|
|
|
85,852 |
|
|
|
— |
|
|
|
— |
|
|
Preferred shares subject to mandatory redemption
|
|
|
168,000 |
|
|
|
182,392 |
|
|
|
168,000 |
|
|
|
175,387 |
|
|
Investment in derivative financial instruments
|
|
|
4,923 |
|
|
|
4,923 |
|
|
|
15,287 |
|
|
|
15,287 |
|
NOTE 20 — Business Segment Reporting
The Company has three reportable business segments: (1) an
investing segment consisting primarily of subsidiaries producing
tax-exempt interest income through investments in tax-exempt
bonds, interests
125
in bond securitizations, taxable loans and derivative financial
instruments; (2) a tax credit equity segment consisting of
subsidiaries that primarily generate fees by providing tax
credit equity syndication and asset management services; and
(3) a real estate finance segment consisting of
subsidiaries that primarily generate taxable fee income by
providing loan servicing, loan origination, advisory and other
related services. Prior to the acquisition of HCI, the tax
credit equity and real estate finance segments were combined and
reported as one segment called the operating segment. The
accounting policies of the segments are the same as those
described in the summary of significant accounting policies in
Note 1. Segment results include all direct revenues and expenses
of each segment and allocations of indirect expenses based on
specific methodologies. The Company’s reportable segments
are strategic business units that primarily generate different
income streams and are managed separately.
126
The following table reflects the results of the Company’s
business segments for the years ended December 31, 2004,
2003 and 2002.
Municipal Mortgage & Equity, LLC
Segment Reporting for the twelve months ended
December 31, 2004, 2003 and 2002 (in thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
|
|
Real Estate | |
|
Tax | |
|
|
|
Total | |
| |
|
Investing | |
|
Finance | |
|
Credit | |
|
Adjustments | |
|
Consolidated | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
108,057 |
|
|
$ |
38,674 |
|
|
$ |
6,372 |
|
|
$ |
(18,704 |
) (1) |
|
$ |
134,399 |
|
|
Total fee income
|
|
|
1,279 |
|
|
|
20,113 |
|
|
|
47,149 |
|
|
|
(2,493 |
) (2) |
|
|
66,048 |
|
|
Total rental income
|
|
|
— |
|
|
|
— |
|
|
|
17,959 |
|
|
|
— |
|
|
|
17,959 |
|
|
Total operating income
|
|
|
109,336 |
|
|
|
58,787 |
|
|
|
71,480 |
|
|
|
(21,197 |
) |
|
|
218,406 |
|
|
Net income (loss)
|
|
|
63,431 |
|
|
|
(9,271 |
) |
|
|
(24,630 |
) |
|
|
(2,493 |
) |
|
|
27,037 |
|
|
Depreciation and amortization
|
|
|
159 |
|
|
|
2,113 |
|
|
|
11,887 |
|
|
|
— |
|
|
|
14,159 |
|
|
Net loss from equity investments in partnerships
|
|
|
3,391 |
|
|
|
— |
|
|
|
(172,795 |
) |
|
|
— |
|
|
|
(169,404 |
) |
|
Discontinued operations
|
|
|
11,080 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,080 |
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,688,233 |
|
|
$ |
760,713 |
|
|
$ |
1,129,345 |
|
|
$ |
(267,961 |
) (3) |
|
$ |
3,310,330 |
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
|
|
Real Estate | |
|
Tax | |
|
|
|
Total | |
| |
|
Investing | |
|
Finance | |
|
Credit | |
|
Adjustments | |
|
Consolidated | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
88,135 |
|
|
$ |
33,732 |
|
|
$ |
1,936 |
|
|
$ |
(12,798 |
) (1) |
|
$ |
111,005 |
|
|
Total fee income
|
|
|
4,830 |
|
|
|
15,601 |
|
|
|
42,659 |
|
|
|
(2,610 |
) (2) |
|
|
60,480 |
|
|
Total rental income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total operating income
|
|
|
92,965 |
|
|
|
49,333 |
|
|
|
44,595 |
|
|
|
(15,408 |
) |
|
|
171,485 |
|
|
Net income (loss)
|
|
|
78,930 |
|
|
|
(495 |
) |
|
|
(3,330 |
) |
|
|
(2,610 |
) |
|
|
72,495 |
|
|
Depreciation and amortization
|
|
|
118 |
|
|
|
2,087 |
|
|
|
5,287 |
|
|
|
— |
|
|
|
7,492 |
|
|
Net loss from equity investments in partnerships
|
|
|
2,318 |
|
|
|
— |
|
|
|
(5,491 |
) |
|
|
— |
|
|
|
(3,173 |
) |
|
Discontinued operations
|
|
|
25,748 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,748 |
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,476,420 |
|
|
$ |
601,618 |
|
|
$ |
424,854 |
|
|
$ |
(253,273 |
) (3) |
|
$ |
2,249,619 |
|
[Additional columns below]
[Continued from above table, first column(s) repeated]
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 | |
| |
|
| |
| |
|
|
|
Real Estate | |
|
Tax | |
|
|
|
Total | |
| |
|
Investing | |
|
Finance | |
|
Credit | |
|
Adjustments | |
|
Consolidated | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
INCOME STATEMENT DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
$ |
80,150 |
|
|
$ |
29,299 |
|
|
$ |
768 |
|
|
$ |
(1,620 |
) (1) |
|
$ |
108,597 |
|
|
Total fee income
|
|
|
1,364 |
|
|
|
14,107 |
|
|
|
11,615 |
|
|
|
(1,029 |
) (2) |
|
|
26,057 |
|
|
Total rental income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total operating income
|
|
|
81,514 |
|
|
|
43,406 |
|
|
|
12,383 |
|
|
|
(2,649 |
) |
|
|
134,654 |
|
|
Net income (loss)
|
|
|
23,826 |
|
|
|
6,589 |
|
|
|
(437 |
) |
|
|
(1,029 |
) |
|
|
28,949 |
|
|
Depreciation and amortization
|
|
|
46 |
|
|
|
1,783 |
|
|
|
28 |
|
|
|
— |
|
|
|
1,857 |
|
|
Net loss from equity investments in partnerships
|
|
|
(2,677 |
) |
|
|
— |
|
|
|
(380 |
) |
|
|
— |
|
|
|
(3,057 |
) |
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
BALANCE SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,072,414 |
|
|
$ |
406,006 |
|
|
$ |
74,498 |
|
|
$ |
— |
|
|
$ |
1,552,918 |
|
|
|
| (1) |
Adjustments represent intercompany interest and expense that are
eliminated in consolidation. |
| |
| (2) |
Adjustments represent origination fees on purchased investments
which are deferred and amortized into income over the life of
the investment. |
| |
| (3) |
Adjustments represent intercompany receivables and payables that
are eliminated in consolidation. |
127
NOTE 21 — Discontinued Operations
In September 2004, the Company both acquired a property by deed
in lieu of foreclosure and sold the property for net proceeds of
$16.2 million. In April 2003, the Company
acquired a property by deed in lieu of foreclosure. In
June 2003, the Company sold the property for net
proceeds of $38.1 million. Both properties previously
served as collateral for a tax-exempt bond and taxable loan held
by the Company. All activities related to these properties have
been classified as discontinued operations in the consolidated
statements of income. The following table summarizes the
components of discontinued operations.
| |
|
|
|
|
|
|
|
|
| |
|
For the year ended |
| |
|
December 31, |
| |
|
|
| |
|
2004 |
|
2003 |
| (in thousands) |
|
|
|
|
|
Loss from operations of property
|
|
$ |
— |
|
|
$ |
(1,015 |
) |
|
Gain on disposal of property
|
|
|
11,080 |
|
|
|
26,763 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
11,080 |
|
|
$ |
25,748 |
|
| |
|
|
|
|
|
|
|
|
The net assets of the property as of the date of sale were as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
2003 |
| (in thousands) |
|
|
|
|
|
Fixed assets
|
|
$ |
5,551 |
|
|
$ |
12,553 |
|
|
Other assets
|
|
|
366 |
|
|
|
252 |
|
|
Other liabilities
|
|
|
(784 |
) |
|
|
(446 |
) |
| |
|
|
|
|
|
|
|
|
|
Net assets of discontinued operations
|
|
$ |
5,133 |
|
|
$ |
12,359 |
|
| |
|
|
|
|
|
|
|
|
NOTE 22 — Subsequent Events
Acquisition
On February 18, 2005, the Company completed the
acquisition of MONY Realty Capital Inc.
(“MRC”), a subsidiary of AXA Financial, Inc.
(“AXA”). MRC originates and manages real
estate investments primarily in commercial debt for
MONY Life Insurance Company, an AXA subsidiary, and
third parties. These investments include high yielding or
structured transactions.
The purchase price for MRC was approximately
$8.5 million in cash. In connection with the acquisition,
the Company has agreed to commit approximately
$25.0 million in capital to invest in a commercial real
estate investment fund. In addition, the Company will
assume MRC’s capital position in two existing commercial
real estate investment funds.
Common Share Offering
In February 2005, the Company sold to the public
2.6 million common shares at a price of $26.51 per
share and granted underwriters an option, which was not
exercised, to purchase up to an aggregate of 386,250 common
shares to cover over allotments at the same price. Net proceeds
of the offering approximated $65.0 million. The net
proceeds from this offering were used for general corporate
purposes, including funding of new investments, paying down debt
and working capital.
128
NOTE 23 — Quarterly Results (unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
| (in thousands, except per share data) |
|
|
|
|
|
|
|
|
| |
|
(Restated - |
|
(Restated - |
|
|
|
|
| |
|
See Note (1)) |
|
See Note (1)) |
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
31,030 |
|
|
$ |
34,587 |
|
|
$ |
34,978 |
|
|
$ |
33,804 |
|
|
Fee income
|
|
|
15,643 |
|
|
|
13,355 |
|
|
|
14,670 |
|
|
|
22,380 |
|
|
Net rental income
|
|
|
— |
|
|
|
5,496 |
|
|
|
5,520 |
|
|
|
6,943 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
46,673 |
|
|
|
53,438 |
|
|
|
55,168 |
|
|
|
63,127 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
13,904 |
|
|
|
18,651 |
|
|
|
17,122 |
|
|
|
20,207 |
|
|
Interest expense on debentures and preferred shares
|
|
|
3,046 |
|
|
|
4,004 |
|
|
|
4,769 |
|
|
|
5,499 |
|
|
Operating expenses
|
|
|
20,776 |
|
|
|
29,844 |
|
|
|
27,578 |
|
|
|
28,905 |
|
|
Depreciation and amortization
|
|
|
1,939 |
|
|
|
3,936 |
|
|
|
3,825 |
|
|
|
4,459 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
39,665 |
|
|
|
56,435 |
|
|
|
53,294 |
|
|
|
59,070 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans
|
|
|
680 |
|
|
|
1,730 |
|
|
|
406 |
|
|
|
577 |
|
|
Net gain (loss) on sale of tax-exempt investments
|
|
|
192 |
|
|
|
1,013 |
|
|
|
(660 |
) |
|
|
(241 |
) |
|
Net gain on sale of investments in tax credit equity partnerships
|
|
|
2,435 |
|
|
|
379 |
|
|
|
125 |
|
|
|
80 |
|
|
Net gain (loss) on derivatives
|
|
|
(3,915 |
) |
|
|
6,194 |
|
|
|
(3,742 |
) |
|
|
1,244 |
|
|
Impairments and valuations allowances related to investments
|
|
|
(300 |
) |
|
|
(430 |
) |
|
|
(2,646 |
) |
|
|
(3,765 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit,
net income allocable to minority interest, net losses from
equity investments in partnerships, discontinued operations and
cumulative effect of a change in accounting principle
|
|
|
6,100 |
|
|
|
5,889 |
|
|
|
(4,643 |
) |
|
|
1,952 |
|
|
Income tax (expense) benefit
|
|
|
2,510 |
|
|
|
(173 |
) |
|
|
(73 |
) |
|
|
(5,001 |
) |
|
Net income allocable to minority interest
|
|
|
105 |
|
|
|
76,659 |
|
|
|
51,663 |
|
|
|
49,853 |
|
|
Net losses from equity investments in partnerships
|
|
|
(10,511 |
) |
|
|
(71,224 |
) |
|
|
(46,250 |
) |
|
|
(41,419 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(1,796 |
) |
|
|
11,151 |
|
|
|
697 |
|
|
|
5,385 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
— |
|
|
|
10,865 |
|
|
|
215 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before cumulative effect of a change in
accounting principle
|
|
|
(1,796 |
) |
|
|
11,151 |
|
|
|
11,562 |
|
|
|
5,600 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
520 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$ |
(1,276 |
) |
|
$ |
11,151 |
|
|
$ |
11,562 |
|
|
$ |
5,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.05 |
) |
|
$ |
0.32 |
|
|
$ |
0.02 |
|
|
$ |
0.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.05 |
) |
|
$ |
0.32 |
|
|
$ |
0.02 |
|
|
$ |
0.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.04 |
) |
|
$ |
0.32 |
|
|
$ |
0.33 |
|
|
$ |
0.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.04 |
) |
|
$ |
0.32 |
|
|
$ |
0.33 |
|
|
$ |
0.16 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Subsequent to the filing of the Company’s Quarterly Reports
on Form 10-Q for the quarters ended March 31, and
June 30, 2004, management determined that the Company had
not properly accounted for certain compensation costs associated
with an employee compensation arrangement entered into during
the first quarter of 2004. Accordingly, the Company
restated the financial information presented in those
Form 10-Qs to recognize the appropriate amount of
compensation cost within salaries and benefits in the income
statement and accounts payable and accrued expenses in the
balance sheet. Corresponding adjustments were made to
shareholders’ equity, earnings (loss) per share and
cash flows. This restatement had no effect on the Company’s
income tax benefit (expense). No other types of adjustments to
the Company’s consolidated financial statements were made
in association with the restatement. |
129
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
1st Quarter | |
|
2nd Quarter | |
|
3rd Quarter | |
|
4th Quarter | |
| (in thousands, except per share data) |
|
| |
|
| |
|
| |
|
| |
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$ |
29,079 |
|
|
$ |
25,037 |
|
|
$ |
28,373 |
|
|
$ |
28,516 |
|
|
Fee income
|
|
|
6,513 |
|
|
|
9,623 |
|
|
|
14,450 |
|
|
|
29,894 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
|
|
|
35,592 |
|
|
|
34,660 |
|
|
|
42,823 |
|
|
|
58,410 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
10,368 |
|
|
|
8,724 |
|
|
|
13,103 |
|
|
|
12,333 |
|
|
Interest expense on preferred shares
|
|
|
— |
|
|
|
— |
|
|
|
2,994 |
|
|
|
3,195 |
|
|
Operating expenses
|
|
|
8,639 |
|
|
|
11,520 |
|
|
|
16,442 |
|
|
|
20,475 |
|
|
Depreciation and amortization
|
|
|
530 |
|
|
|
554 |
|
|
|
3,108 |
|
|
|
3,300 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19,537 |
|
|
|
20,798 |
|
|
|
35,647 |
|
|
|
39,303 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of loans
|
|
|
1,180 |
|
|
|
540 |
|
|
|
1,623 |
|
|
|
1,521 |
|
|
Net gain (loss) on sale of tax-exempt investments
|
|
|
— |
|
|
|
(6 |
) |
|
|
2,194 |
|
|
|
(55 |
) |
|
Net gain (loss) on sale of investments in tax credit equity
partnerships
|
|
|
98 |
|
|
|
178 |
|
|
|
4,471 |
|
|
|
(2,000 |
) |
|
Net gain (loss) on derivatives
|
|
|
252 |
|
|
|
(4,156 |
) |
|
|
1,525 |
|
|
|
460 |
|
|
Impairments and valuations allowances related to investments
|
|
|
— |
|
|
|
(1,144 |
) |
|
|
— |
|
|
|
(5,839 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax (expense) benefit, net
(expense) income allocable to minority interest, net
(losses) gains from equity investments in partnerships,
discontinued operations and cumulative effect of a change in
accounting principle
|
|
|
17,585 |
|
|
|
9,274 |
|
|
|
16,989 |
|
|
|
13,194 |
|
|
Income tax (expense) benefit
|
|
|
(68 |
) |
|
|
540 |
|
|
|
2,622 |
|
|
|
(2,956 |
) |
|
Net (expense) income allocable to minority interest
|
|
|
(2,825 |
) |
|
|
(2,854 |
) |
|
|
132 |
|
|
|
(485 |
) |
|
Net (losses) gains from equity investments in partnerships
|
|
|
(747 |
) |
|
|
(1,606 |
) |
|
|
(1,608 |
) |
|
|
788 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
13,945 |
|
|
|
5,354 |
|
|
|
18,135 |
|
|
|
10,541 |
|
|
Discontinued operations
|
|
|
— |
|
|
|
25,748 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in accounting
principle
|
|
|
13,945 |
|
|
|
31,102 |
|
|
|
18,135 |
|
|
|
10,541 |
|
|
Cumulative effect of a change in accounting principle
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,228 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
13,945 |
|
|
$ |
31,102 |
|
|
$ |
18,135 |
|
|
$ |
9,313 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.51 |
|
|
$ |
0.19 |
|
|
$ |
0.63 |
|
|
$ |
0.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.50 |
|
|
$ |
0.18 |
|
|
$ |
0.62 |
|
|
$ |
0.32 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.51 |
|
|
$ |
1.08 |
|
|
$ |
0.63 |
|
|
$ |
0.29 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.50 |
|
|
$ |
1.06 |
|
|
$ |
0.62 |
|
|
$ |
0.28 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
130
EXHIBIT INDEX
| |
|
|
|
3.1
|
|
Amended and Restated Certificate of Formation and Operating
Agreement of the Company dated as of August 12, 2002 (filed
as part of the Company’s Form 10-K for the fiscal year
ended December 31, 2002 and incorporated by reference
herein). |
|
3.2
|
|
Amended and Restated Bylaws (filed as part of the Company’s
Form 10-K for the fiscal year ended December 31, 2003 and
incorporated by reference herein). |
|
10.1
|
|
Amended and Restated Master Recourse Agreement among Fannie Mae,
Municipal Mortgage & Equity, LLC and MMACAP, LLC dated
as of December 1, 2000. |
|
10.2
|
|
Registration Rights Agreement among the Registrant and Messrs.
Robert J. Banks, Keith J. Gloeckl and Ray F. Mathis
dated October 20, 1999 (filed as Item 16
Exhibit 2.2 to the Company’s report on Form S-3,
File No. 333-56049, filed with the Commission on
January 25, 2000 and incorporated by reference herein). |
|
10.3
|
|
Employment Agreement between the Company and Mark K. Joseph
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.4
|
|
Amendment to Employment Agreement between the Company and Mark
K. Joseph dated as of January 1, 2005. |
|
10.5
|
|
Employment Agreement between the Company and Michael L. Falcone
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.6
|
|
Employment Agreement between the Company and Michael L. Falcone
dated as of January 1, 2005. |
|
10.7
|
|
Employment Agreement between the Company and Earl W.
Cole, III dated as of July 1, 2003 (filed as part of
the Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.8
|
|
Employment Agreement between the Company and Keith J. Gloeckl
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.9
|
|
Employment Agreement between the Company and Gary A. Mentesana
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.10
|
|
Employment Agreement between the Company and Jenny Netzer dated
as of July 1, 2003 (filed as part of the Company’s
Form 10-K for the fiscal year ended December 31, 2003 and
incorporated by reference herein). |
|
10.11
|
|
Employment Agreement between the Company and Charles M. Pinckney
dated as of July 1, 2003 (filed as part of the
Company’s Form 10-K for the fiscal year ended
December 31, 2003 and incorporated by reference herein). |
|
10.12
|
|
Employment Agreement between the Company and Frank G. Creamer,
Jr. dated as of August 1, 2004 (filed as part of the
Company’s Form 10-Q/A for the quarter ended June 30,
2004 and incorporated by reference herein). |
|
10.13
|
|
Warehousing Credit and Security Agreement, Residential Funding
Corporation dated May 23, 2003. |
|
10.14
|
|
Credit Agreement with Bank of America dated November 12,
2004 (filed as part of the Company’s Form 8-K filed on
November 17, 2004 and incorporated by reference herein). |
|
10.15
|
|
Municipal Mortgage Equity, LLC 2004 Non-Employee Directors’
Share Plan (filed as part of the Company’s form 10-Q
for the quarter ended September 30, 2004 and incorporated
by reference herein). |
131
| |
|
|
|
10.16
|
|
Municipal Mortgage & Equity, LLC Amended and Restated
2004 Share Incentive Plan and Form of Deferred Share
Agreement (filed as part of the Company’s Form 10-Q for the
quarter ended September 30, 2004 and incorporated by
reference herein). |
|
10.17
|
|
Form of Municipal Mortgage & Equity, L.L.C.
2001 Share Incentive Plan (filed as Appendix A of the
Company’s Definitive Proxy Statement filed on
April 12, 2001 and incorporated by reference herein). |
|
10.18
|
|
Form of Municipal Mortgage & Equity, L.L.C. 2001
Non-Employee Directors’ Share Incentive Plan (filed as
Appendix B of the Company’s Definitive Proxy Statement
filed on April 12, 2001 and incorporated by reference
herein). |
|
10.19
|
|
Form of Municipal Mortgage & Equity, L.L.C.
1998 Share Incentive Plan (filed as Appendix A of the
Company’s Definitive Proxy Statement filed on
April 29, 1998 and incorporated by reference herein). |
|
10.20
|
|
Form of Municipal Mortgage & Equity, L.L.C. 1998
Non-Employee Directors’ Share Incentive Plan (filed as
Appendix B of the Company’s Definitive Proxy Statement
filed on April 29, 1998 and incorporated by reference
herein). |
|
10.21
|
|
Indenture between Midland Financial Holdings, Inc. and
Wilmington Trust Company, dated as of May 3, 2004. |
|
11.1
|
|
Statement of Computation of Earnings Per Share. |
|
14.1
|
|
Code of Ethics. |
|
21.1
|
|
List of Subsidiaries. |
|
23.1
|
|
Consent of PricewaterhouseCoopers LLP, the Registrant’s
Independent Registered Public Accounting Firm. |
|
31.1
|
|
Certification of Michael L. Falcone, Chief Executive Officer and
President of Municipal Mortgage & Equity, LLC, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2
|
|
Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1
|
|
Certification of Michael L. Falcone, Chief Executive Officer and
President of Municipal Mortgage & Equity, LLC, pursuant to
18 U.S.C. Section 1350, as Adopted, Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2
|
|
Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC, pursuant to 18 U.S.C.
Section 1350, as Adopted, Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
132