Attached files
file | filename |
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EX-31.1 - SECTION 302 CERTIFICATION - CENTERLINE HOLDING CO | exhibit31-1.htm |
EX-32.1 - SECTION 906 CERTIFICATION - CENTERLINE HOLDING CO | exhibit32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
(Mark One)
þ
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2011
OR
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission File Number 1-13237
______________
CENTERLINE HOLDING COMPANY
(Exact name of registrant as specified in its charter)
______________
Delaware
|
13-3949418
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
625 Madison Avenue, New York, New York
|
10022
|
|
(Address of principal executive offices)
|
(Zip Code)
|
(212) 317-5700
Registrant’s telephone number
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
|
o
|
Accelerated filer
|
o
|
||
Non-accelerated filer
|
o
|
(Do not check if a smaller reporting company)
|
Smaller reporting company
|
þ
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 6, 2011, there were 349.2 million outstanding shares of the registrant’s common shares of beneficial interest.
Table of Contents
CENTERLINE HOLDING COMPANY
FORM 10-Q
PART I – Financial Information
|
Page
|
||
Item 1
|
Financial Statements
|
||
Condensed Consolidated Balance Sheets
|
3
|
||
Condensed Consolidated Statements of Operations
|
4
|
||
Condensed Consolidated Statement of Changes in Equity
|
5
|
||
Condensed Consolidated Statements of Cash Flows
|
6
|
||
Notes to Condensed Consolidated Financial Statements
|
|||
Note 1 – Description of Business and Basis of Presentation
|
8
|
||
Note 2 – Discontinued operations
|
9
|
||
Note 3 – Fair Value Disclosures
|
10
|
||
Note 4 – Assets Pledged as Collateral
|
15
|
||
Note 5 – Available-for-Sale Investments
|
16
|
||
Note 6 – Equity Method Investments
|
19
|
||
Note 7 – Mortgage Loans Held for Sale and Other Assets
|
20
|
||
Note 8 – Intangible Assets, Net
|
21
|
||
Note 9 – Mortgage Servicing Rights, Net
|
21
|
||
Note 10 – Deferred Costs and Other Assets, Net
|
23
|
||
Note 11 – Assets of Consolidated Partnerships
|
23
|
||
Note 12 – Notes Payable and Other Borrowings
|
24
|
||
Note 13 – Financing Arrangements and Secured Financing
|
26
|
||
Note 14 – Accounts Payable, Accrued Expenses and Other Liabilities
|
26
|
||
Note 15 – Liabilities of Consolidated Partnerships
|
27
|
||
Note 16 – Redeemable Securities
|
28
|
||
Note 17 – Non-Controlling Interests
|
28
|
||
Note 18 – General and Administrative Expenses and (Recovery) Provision for Losses
|
29
|
||
Note 19 – Loss on Impairment of Assets
|
30
|
||
Note 20 – Revenues and Expenses of Consolidated Partnerships
|
31
|
||
Note 21 – Earnings per Share
|
32
|
||
Note 22 – Financial Risk Management and Derivatives
|
33
|
||
Note 23 – Related Party Transactions
|
34
|
||
Note 24 – Business Segments
|
36
|
||
Note 25 – Commitments and Contingencies
|
37
|
||
Item 2
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
43
|
|
Item 3
|
Quantitative and Qualitative Disclosures about Market Risk
|
71
|
|
Item 4
|
Controls and Procedures
|
71
|
|
PART II – Other Information
|
|||
Item 1
|
Legal Proceedings
|
72
|
|
Item 1A
|
Risk Factors
|
72
|
|
Item 2
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
73
|
|
Item 3
|
Defaults Upon Senior Securities
|
73
|
|
Item 4
|
Removed and Reserved
|
73
|
|
Item 5
|
Other Information
|
73
|
|
Item 6
|
Exhibits
|
73
|
|
SIGNATURES
|
- 2 -
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTERLINE HOLDING COMPANY
(in thousands)
March 31,
2011 |
December 31,
2010 |
||||||
(Unaudited)
|
|||||||
ASSETS
|
|||||||
Cash and cash equivalents
|
$
|
121,638
|
$
|
119,598
|
|||
Restricted cash
|
13,538
|
13,231
|
|||||
Investments:
|
|||||||
Available-for-sale (Note 5)
|
448,118
|
485,280
|
|||||
Equity method (Note 6)
|
6,998
|
5,635
|
|||||
Mortgage loans held for sale and other assets (Note 7)
|
81,912
|
77,287
|
|||||
Investments in and loans to affiliates, net (Note 23)
|
4,345
|
510
|
|||||
Intangible assets, net (Note 8)
|
9,317
|
9,494
|
|||||
Mortgage servicing rights, net (Note 9)
|
66,488
|
65,614
|
|||||
Deferred costs and other assets, net (Note 10)
|
73,680
|
76,686
|
|||||
Consolidated partnerships (Note 11):
|
|||||||
Investments:
|
|||||||
Equity method
|
3,272,843
|
3,302,667
|
|||||
Land, buildings and improvements, net
|
575,201
|
567,073
|
|||||
Other assets
|
299,529
|
282,665
|
|||||
Assets of discontinued operations
|
--
|
18
|
|||||
Total assets
|
$
|
4,973,607
|
$
|
5,005,758
|
|||
Liabilities:
|
|||||||
Notes payable and other borrowings (Note 12)
|
$
|
240,854
|
$
|
231,374
|
|||
Financing arrangements and secured financing (Note 13)
|
651,545
|
665,875
|
|||||
Accounts payable, accrued expenses and other liabilities (Note 14)
|
228,705
|
237,804
|
|||||
Preferred shares of subsidiary (subject to mandatory repurchase)
|
55,000
|
55,000
|
|||||
Consolidated partnerships (Note 15):
|
|||||||
Notes payable
|
128,928
|
137,054
|
|||||
Due to property partnerships
|
116,213
|
86,642
|
|||||
Other liabilities
|
290,635
|
273,409
|
|||||
Total liabilities
|
1,711,880
|
1,687,158
|
|||||
Redeemable securities (Note 16)
|
10,658
|
12,462
|
|||||
Commitments and contingencies (Note 25)
|
|||||||
Equity:
|
|||||||
Centerline Holding Company beneficial owners’ equity (deficit):
|
|||||||
Special preferred voting shares; no par value; 11,867 shares issued and outstanding in 2011 and 12,731 shares issued and outstanding in 2010
|
119
|
127
|
|||||
Common shares; no par value; 800,000 shares authorized; 356,226 issued and 349,166 outstanding in 2011 and 355,362 issued and 348,302 outstanding in 2010
|
155,904
|
148,110
|
|||||
Treasury shares of beneficial interest – common, at cost; 7,060 shares in 2011 and 2010
|
(65,764
|
)
|
(65,764
|
)
|
|||
Accumulated other comprehensive income
|
82,497
|
78,831
|
|||||
Centerline Holding Company total
|
172,756
|
161,304
|
|||||
Non-controlling interests (Note 17)
|
3,078,313
|
3,144,834
|
|||||
Total equity
|
3,251,069
|
3,306,138
|
|||||
Total liabilities and equity
|
$
|
4,973,607
|
$
|
5,005,758
|
See accompanying notes to condensed consolidated financial statements.
- 3 -
CENTERLINE HOLDING COMPANY
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
|
|||||||
2011
|
2010
|
||||||
Revenues:
|
|||||||
Interest income
|
$
|
7,827
|
$
|
12,608
|
|||
Fee income
|
7,930
|
7,133
|
|||||
Gain on sale of mortgage loans
|
5,723
|
4,412
|
|||||
Other
|
971
|
542
|
|||||
Consolidated partnerships (Note 20):
|
|||||||
Interest income
|
245
|
419
|
|||||
Rental income
|
25,923
|
26,426
|
|||||
Other
|
90
|
1,072
|
|||||
Total revenues
|
48,709
|
52,612
|
|||||
Expenses:
|
|||||||
General and administrative (Note 18)
|
23,578
|
64,143
|
|||||
Recovery of losses, net (Note 18)
|
(2,789
|
)
|
(112,496
|
)
|
|||
Interest
|
13,499
|
12,788
|
|||||
Interest – distributions to preferred shareholders of subsidiary
|
960
|
2,320
|
|||||
Depreciation and amortization
|
3,546
|
6,465
|
|||||
Loss on impairment of assets (Note 19)
|
--
|
22,409
|
|||||
Consolidated partnerships (Note 20):
|
|||||||
Interest
|
4,661
|
6,319
|
|||||
Other expenses
|
45,833
|
53,303
|
|||||
Total expenses
|
89,288
|
55,251
|
|||||
Loss before other income
|
(40,579
|
)
|
(2,639
|
)
|
|||
Other (loss) income:
|
|||||||
Equity and other loss, net
|
--
|
(134
|
)
|
||||
Gain on settlement of liabilities
|
1,756
|
25,253
|
|||||
Gain from repayment or sale of investments
|
--
|
2,191
|
|||||
Other losses from consolidated partnerships (Note 20)
|
(61,441
|
)
|
(90,806
|
)
|
|||
Loss from continuing operations before income tax provision
|
(100,264
|
)
|
(66,135
|
)
|
|||
Income tax provision – continuing operations
|
(193
|
)
|
(393
|
)
|
|||
Net loss from continuing operations
|
(100,457
|
)
|
(66,528
|
)
|
|||
Discontinued operations (Note 2):
|
|||||||
Income from discontinued operations before income taxes
|
253
|
140,293
|
|||||
Gain on sale of discontinued operations, net
|
--
|
20,500
|
|||||
Income tax provision – discontinued operations
|
--
|
(531
|
)
|
||||
Net income from discontinued operations
|
253
|
160,262
|
|||||
Net (loss) income
|
(100,204
|
)
|
93,734
|
||||
Net loss attributable to non-controlling interests (Note 17)
|
100,966
|
45,977
|
|||||
Net income attributable to Centerline Holding Company shareholders
|
$
|
762
|
$
|
139,711
|
|||
Net income per share (Note 21):
|
|||||||
Basic
|
|||||||
Income from continuing operations
|
$
|
--
|
(1)
|
$
|
2.68
|
||
Income from discontinued operations
|
$
|
--
|
(1)
|
$
|
0.49
|
||
Diluted
|
|||||||
Income from continuing operations
|
$
|
--
|
(1)
|
$
|
2.63
|
||
Income from discontinued operations
|
$
|
--
|
(1)
|
$
|
0.48
|
||
Weighted average shares outstanding (Note 21):
|
|||||||
Basic
|
348,647
|
140,603
|
|||||
Diluted
|
349,268
|
143,500
|
|||||
(1) Amount calculates to less than one cent per share.
|
See accompanying notes to condensed consolidated financial statements.
- 4 -
CENTERLINE HOLDING COMPANY
(in thousands)
(Unaudited)
Convertible
CRA Shares
|
Special
Preferred
Voting Shares
|
Special Series A Shares
|
Common Shares
|
Treasury Shares
|
Accumulated
Other
Comprehensive
Income
|
Non-
Controlling Interests
|
Total
|
Comprehensive
Income (loss)
|
Redeemable
Securities
|
|||||||||||||||||||||||||||||
Shares
|
Shares
|
|||||||||||||||||||||||||||||||||||||
January 1, 2011
|
$
|
--
|
$
|
127
|
--
|
$
|
--
|
348,302
|
$
|
148,110
|
$
|
(65,764
|
)
|
$
|
78,831
|
$
|
3,144,834
|
$
|
3,306,138
|
--
|
$
|
12,462
|
||||||||||||||||
Net income (loss)
|
--
|
--
|
--
|
--
|
--
|
762
|
--
|
--
|
(100,966
|
)
|
(100,204
|
)
|
$
|
(100,204
|
)
|
--
|
||||||||||||||||||||||
Unrealized gains (losses), net
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
3,666
|
(12
|
)
|
3,654
|
3,654
|
--
|
|||||||||||||||||||||||||
Share-based compensation
|
--
|
--
|
--
|
--
|
--
|
20
|
--
|
--
|
--
|
20
|
--
|
--
|
||||||||||||||||||||||||||
Conversions or redemptions
|
--
|
(8
|
)
|
--
|
--
|
864
|
7,114
|
--
|
--
|
(7,102
|
)
|
4
|
--
|
--
|
||||||||||||||||||||||||
Fair value accretion
|
--
|
--
|
--
|
--
|
--
|
(113
|
)
|
--
|
--
|
--
|
(113
|
)
|
--
|
113
|
||||||||||||||||||||||||
Contributions
|
--
|
--
|
--
|
--
|
--
|
11
|
--
|
--
|
40,174
|
40,185
|
--
|
--
|
||||||||||||||||||||||||||
Exchange of Convertible Special Common Units to Common Shares
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(1,917
|
)
|
|||||||||||||||||||||||||
Net decrease due to newly consolidated general partnerships
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
2,953
|
2,953
|
--
|
--
|
||||||||||||||||||||||||||
Distributions
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(1,568
|
)
|
(1,568
|
)
|
--
|
--
|
||||||||||||||||||||||||
March 31, 2011
|
$
|
--
|
$
|
119
|
--
|
$
|
--
|
349,166
|
$
|
155,904
|
$
|
(65,764
|
)
|
$
|
82,497
|
$
|
3,078,313
|
$
|
3,251,069
|
$
|
(96,550
|
)
|
$
|
10,658
|
||||||||||||||
Convertible
CRA Shares
|
Special
Preferred
Voting Shares
|
Special Series A Shares
|
Common Shares
|
Treasury Shares
|
Accumulated
Other
Comprehensive
Income (loss)
|
Non-
Controlling Interests
|
Total
|
Comprehensive
Income
|
Redeemable
Securities
|
|||||||||||||||||||||||||||||
Shares
|
Shares
|
|||||||||||||||||||||||||||||||||||||
January 1, 2010
|
$
|
(1,235
|
)
|
$
|
127
|
--
|
$
|
--
|
53,820
|
$
|
(104,054
|
)
|
$
|
(65,351
|
)
|
$
|
(1,007,837
|
)
|
$
|
3,361,785
|
$
|
2,183,435
|
--
|
$
|
332,480
|
|||||||||||||
Net income (loss)
|
--
|
--
|
--
|
--
|
--
|
139,711
|
--
|
--
|
(45,977
|
)
|
93,734
|
$
|
93,734
|
--
|
||||||||||||||||||||||||
Allocation of earnings
|
32
|
--
|
--
|
83,212
|
--
|
(83,244
|
)
|
--
|
--
|
--
|
--
|
--
|
--
|
|||||||||||||||||||||||||
Unrealized gains, net
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
41,471
|
16,699
|
58,170
|
58,170
|
--
|
||||||||||||||||||||||||||
Share-based compensation
|
--
|
--
|
--
|
--
|
7,343
|
2,220
|
--
|
--
|
--
|
2,220
|
--
|
--
|
||||||||||||||||||||||||||
Conversions or redemptions
|
--
|
--
|
--
|
--
|
258
|
305
|
--
|
--
|
(385
|
)
|
(80
|
)
|
--
|
--
|
||||||||||||||||||||||||
Fair value accretion
|
--
|
--
|
--
|
--
|
--
|
(1,064
|
)
|
--
|
--
|
--
|
(1,064
|
)
|
--
|
1,064
|
||||||||||||||||||||||||
Contributions
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
28,152
|
28,152
|
--
|
--
|
||||||||||||||||||||||||||
Issuance of and conversion to Special Series A Shares
|
1,203
|
--
|
19,325
|
46,480
|
--
|
286,231
|
--
|
--
|
--
|
333,914
|
--
|
(321,484
|
)
|
|||||||||||||||||||||||||
Adoption of ASU 2009-17
|
--
|
--
|
--
|
--
|
--
|
(55,120
|
)
|
--
|
994,594
|
(323,315
|
)
|
616,159
|
--
|
--
|
||||||||||||||||||||||||
Treasury shares
|
--
|
--
|
--
|
--
|
(2,999
|
)
|
--
|
(413
|
)
|
--
|
--
|
(413
|
)
|
--
|
--
|
|||||||||||||||||||||||
Net increase due to deconsolidation
|
--
|
--
|
--
|
--
|
--
|
(1,756
|
)
|
--
|
(16,383
|
)
|
446,873
|
428,734
|
--
|
--
|
||||||||||||||||||||||||
Net decrease due to newly consolidated general partnerships
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(9,230
|
)
|
(9,230
|
)
|
--
|
--
|
||||||||||||||||||||||||
Distributions
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
--
|
(11,135
|
)
|
(11,135
|
)
|
--
|
--
|
||||||||||||||||||||||||
March 31, 2010
|
$
|
--
|
$
|
127
|
19,325
|
$
|
129,692
|
58,422
|
$
|
183,229
|
$
|
(65,764
|
)
|
$
|
11,845
|
$
|
3,463,467
|
$
|
3,722,596
|
$
|
151,904
|
$
|
12,060
|
See accompanying notes to condensed consolidated financial statements.
- 5 -
CENTERLINE HOLDING COMPANY
(in thousands)
(Unaudited)
Three Months Ended
March 31,
|
|||||||
2011
|
2010
|
||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net (loss) income
|
$
|
(100,204
|
)
|
$
|
93,734
|
||
Adjustments to reconcile net income (loss) to cash flows from operating activities:
|
|||||||
Non-cash (income) loss from consolidated partnerships
|
102,780
|
(1,689
|
)
|
||||
Gain from repayment or sale of investments
|
--
|
(2,191
|
)
|
||||
Gain on sale of discontinued operations
|
--
|
(20,500
|
)
|
||||
Gain on settlement of liabilities
|
(1,756
|
)
|
(25,253
|
)
|
|||
Lease termination costs
|
--
|
(48,044
|
)
|
||||
Assumption fees
|
1,397
|
27,623
|
|||||
Reserves for bad debts, net of reversals
|
2,711
|
(3,542
|
)
|
||||
Affordable Housing loss reserve
|
(5,500
|
)
|
(62,000
|
)
|
|||
Loss on impairment of assets
|
--
|
22,409
|
|||||
Depreciation and amortization
|
3,546
|
6,465
|
|||||
Equity in losses of unconsolidated entities, net
|
--
|
134
|
|||||
Share-based compensation expense
|
20
|
2,220
|
|||||
Non-cash expenses relating to issuance of Special Series A Shares
|
--
|
2,842
|
|||||
Non-cash impact of derivatives
|
(703
|
)
|
(1,471
|
)
|
|||
Non-cash interest expense, net
|
4,671
|
2,523
|
|||||
Other non-cash expense, net
|
1,034
|
2,035
|
|||||
Capitalization of mortgage servicing rights
|
(3,634
|
)
|
(2,715
|
)
|
|||
Changes in operating assets and liabilities:
|
|||||||
Mortgage loans held for sale
|
(4,790
|
)
|
(10,389
|
)
|
|||
Deferred revenues
|
1,295
|
(5,004
|
)
|
||||
Receivables
|
972
|
3,410
|
|||||
Other assets
|
(772
|
)
|
(1,287
|
)
|
|||
Loan loss reserve
|
(238
|
)
|
231
|
||||
Accounts payable, accrued expenses and other liabilities
|
(4,300
|
)
|
(10,555
|
)
|
|||
Changes in operating assets and liabilities of discontinued operations
|
--
|
1,251
|
|||||
Net cash flow used in operating activities
|
(3,471
|
)
|
(29,763
|
)
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Sale and repayment of available-for-sale securities
|
(54
|
)
|
65
|
||||
Sale and repayments of mortgage loans held for investment
|
11
|
340
|
|||||
Proceeds from sale of discontinued operations
|
--
|
37,795
|
|||||
Decrease (increase) in restricted cash, escrows and other cash collateral
|
612
|
(8,224
|
)
|
||||
Return of capital from equity investees
|
--
|
11
|
|||||
Acquisition of furniture, fixtures and leasehold improvements
|
(76
|
)
|
(151
|
)
|
|||
Equity investments and other investing activities
|
(2,221
|
)
|
509
|
||||
Net cash flow (used in) provided by investing activities
|
(1,728
|
)
|
30,345
|
See accompanying notes to condensed consolidated financial statements.
- 6 -
CENTERLINE HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
|
||||||||
2011
|
2010
|
|||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Distributions to equity holders
|
(1,556 | ) | (1,556 | ) | ||||
Repayments of term loan
|
-- | (14,308 | ) | |||||
Proceeds from Centerline Financial Holdings Credit Facility
|
-- | 20,000 | ||||||
Increase in mortgage loan warehouse facilities
|
4,938 | 10,298 | ||||||
Increase (decrease) in other notes payable
|
4,000 | (2,500 | ) | |||||
Proceeds from Special Series A Preferred Shares, net of offering costs
|
-- | 9,558 | ||||||
Redemption of Convertible Redeemable CRA Shares
|
(161 | ) | -- | |||||
Net cash flow provided by financing activities
|
7,221 | 21,492 | ||||||
Net increase in cash and cash equivalents
|
2,022 | 22,074 | ||||||
Cash and cash equivalents at the beginning of the period
|
119,616 | 95,728 | ||||||
Cash and cash equivalents at the end of the period
|
121,638 | 117,802 | ||||||
Less cash and cash equivalents of discontinued operations
|
-- | 129 | ||||||
Cash and cash equivalents of continuing operations at end of period
|
$ | 121,638 | $ | 117,673 | ||||
Non-cash investing and financing activities:
|
||||||||
Net change in re-securitized mortgage revenue bonds:
|
||||||||
Secured financing liability
|
$ | 14,330 | $ | (27,802 | ) | |||
Mortgage revenue bonds
|
$ | (16,020 | ) | $ | 34,421 | |||
Increase in Series B Freddie Mac Certificates
|
$ | 1,683 | $ | (7,535 | ) | |||
Decrease in Series A-1 Freddie Mac Certificates
|
$ | 6 | $ | 916 | ||||
Exchange of Convertible Special Common Units to Common Shares
|
$ | 7,102 | $ | -- | ||||
Conversion of redeemable securities to Special Series A Shares
|
$ | -- | $ | 321,483 | ||||
Treasury stock purchase via employee withholding
|
$ | -- | $ | 413 | ||||
Debt assumed by third parties
|
$ | -- | $ | 65,000 | ||||
Issuance of Special Series A Shares
|
$ | -- | $ | 2,842 |
See accompanying notes to condensed consolidated financial statements.
- 7 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
|
Description of Business
|
Centerline Holding Company, through its subsidiaries, provides real estate financial and asset management services to the affordable and conventional multifamily housing industry. We offer a range of debt and equity financing and investment products to developers, owners, and investors. As of March 31, 2011, the Company had $9.4 billion of investor equity under management and $8.7 billion of loans in its mortgage servicing portfolio. A substantial portion of our business is conducted through our subsidiaries, generally under the designation Centerline Capital Group (“CCG”). The term “we” (“us”, “our” or “the Company”) as used throughout this document may refer to a subsidiary or the business as a whole, while the term “parent trust” refers only to Centerline Holding Company as a stand-alone entity.
We manage our operations through four reportable segments, including two segments not involved in direct operations. Our two operating segments are:
Affordable Housing, which offers fund management services to investors in affordable multifamily equity and affordable debt underwriting, pricing, origination and servicing, as well as managing our retained interests from the December 2007 re-securitization of our mortgage revenue bond portfolio with Federal Home Loan Mortgage Corporation (“Freddie Mac”);
Mortgage Banking, which provides a broad spectrum of financing products for multifamily housing, manufactured housing, senior housing and student housing, including loan underwriting, pricing, origination and servicing.
Our Corporate segment, comprising Finance and Accounting, Treasury, Legal, Corporate Communications, Operations and Risk Management departments, supports our two operating segments and also generates revenue, primarily from the results of the Treasury operation.
Consolidated Partnerships comprise certain funds we control, regardless of the fact that we have virtually no economic interest in such entities. Consolidated Partnerships include the LIHTC investment fund partnerships we originate and manage through the Affordable Housing segment and certain other property partnerships, all of which we are required to consolidate.
B.
|
Basis of Presentation
|
The accompanying unaudited condensed consolidated financial statements have been prepared consistent with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, the condensed consolidated financial statements contain all adjustments (only normal recurring adjustments) necessary to present fairly the financial statements of interim periods. Given that our Affordable Housing businesses may have a higher volume of transactions in the fourth quarterly period, the operating results for interim periods may not be indicative of the results for the full year.
These unaudited condensed consolidated financial statements are intended to be read in conjunction with the audited consolidated financial statements and notes included in our Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”), which contains a summary of our significant accounting policies. Certain footnote detail is omitted from the condensed consolidated financial statements unless there is a material change from the information included in the 2010 Form 10-K.
C.
|
Recently Issued Accounting Pronouncements
|
·
|
In January 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. Under the existing effective date in ASU 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in ASU 2010-20. ASU 2011-01 is effective upon issuance. The adoption of ASU 2010-20 and ASU 2011-01 have no material impact on our consolidated financial statements.
|
- 8 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
|
In April 2011, The FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The update is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption for public companies. We do not expect the adoption of ASU 2011-02 to have an impact on our consolidated financial statements.
|
NOTE 2 – Discontinued Operations
On March 5, 2010, we completed a comprehensive restructuring of the Company (the “March 2010 Restructuring”), whereby we:
·
|
sold our Portfolio Management business and the portion of the Commercial Real Estate Group that was not affiliated with loan originations;
|
·
|
amended and restructured our senior credit facility;
|
·
|
restructured various components of our equity and issued a new series of shares;
|
·
|
restructured our credit intermediation agreements (see Note 25); and
|
·
|
settled the majority of our unsecured liabilities.
|
As a result of the March 2010 Restructuring, the Company exited in its entirety the Commercial Real Estate Fund Management and Portfolio Management business, and has no continuing involvement in such operations subsequent to the transaction. Accordingly, for all periods presented, the operating results, assets and liabilities, and certain operating cash flows of the Commercial Real Estate Fund Management and Portfolio Management segments are presented separately in discontinued operations in our condensed consolidated financial statements. The notes to the condensed consolidated financial statements, unless otherwise noted, have been adjusted to exclude discontinued operations.
- 9 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Results from discontinued operations for the three months ended March 31, were as follows:
(in thousands)
|
2011
|
2010
|
|||||
Operating revenues
|
$
|
--
|
$
|
1,096,318
|
|||
Operating expenses
|
(253
|
)
|
1,047,789
|
||||
Operating income from discontinued operations before income tax provision
|
253
|
48,529
|
(1)
|
||||
Gain from liquidation of fund partnership
|
--
|
91,764
|
(2)
|
||||
253
|
140,293
|
||||||
Gain on sale of discontinued operations
|
--
|
20,500
|
|||||
Income tax provision
|
--
|
(531
|
)
|
||||
Net income from discontinued operations
|
253
|
160,262
|
|||||
Net income attributed to non-controlling interests – discontinued operations
|
--
|
(89,918
|
)
|
||||
Net income attributed to Centerline Holding Company shareholders – discontinued operations
|
$
|
253
|
$
|
70,344
|
|||
(1) Comprised of an approximately $64.0 million reversal of loan loss reserves due to the March 2010 Restructuring, established pursuant to our adoption of ASU 2009-17, which revised the consolidation model with respect to Variable Interest Entities (“VIEs”), offset by losses from operating activity.
(2) Principally comprised of non-cash reversals of impairments recorded on liquidated CMBS investments due to the March 2010 Restructuring.
|
NOTE 3 – Fair Value Disclosures
A.
|
General
|
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy specified by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). The levels of fair value hierarchy are as follows:
·
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
|
·
|
Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
|
·
|
Level 3 inputs are unobservable and typically based on our own assumptions, including situations where there is little, if any, market activity.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize those financial assets or liabilities based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability that a market participant would use.
- 10 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in historical company data) inputs.
B.
|
Financial Assets and Liabilities of Operating Groups
|
Certain assets are “marked to market” every reporting period (i.e., on a recurring basis) in accordance with GAAP. Other assets are carried at amortized cost (e.g. mortgage loans held for investment), are initially recorded at fair value and amortized (e.g. mortgage servicing rights (“MSRs”) and other intangible assets), or are carried at the lower of cost or fair value (mortgage loans held for sale); these are tested for impairment periodically and would be adjusted to fair value if impaired (i.e., measured on a non-recurring basis).
The following tables present the information about our assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques we utilize to determine fair value:
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Balance
as of
March 31,
2011
|
||||||||||||
Measured on a recurring basis:
|
||||||||||||||||
Assets
|
||||||||||||||||
Available-for-sale investments:
|
||||||||||||||||
Freddie Mac Certificates:
|
||||||||||||||||
Series A-1
|
$ | -- | $ | -- | $ | 129,225 | $ | 129,225 | ||||||||
Series B
|
-- | -- | 63,179 | 63,179 | ||||||||||||
Mortgage revenue bonds
|
-- | -- | 255,714 | 255,714 | ||||||||||||
Total available-for-sale investments
|
$ | -- | $ | -- | $ | 448,118 | $ | 448,118 | ||||||||
Interest rate swaps and derivatives
|
$ | -- | $ | 891 | $ | -- | $ | 891 | ||||||||
Liabilities
|
||||||||||||||||
Interest rate swaps and derivatives
|
$ | -- | $ | 18,162 | $ | -- | $ | 18,162 | ||||||||
Measured on a non-recurring basis:
|
||||||||||||||||
Assets
|
||||||||||||||||
Mortgage loans held-for-sale
|
$ | -- | $ | 80,154 | $ | -- | $ | 80,154 | ||||||||
Mortgage servicing rights
|
-- | -- | 66,488 | 66,488 | ||||||||||||
$ | -- | $ | 80,154 | $ | 66,488 | $ | 146,642 |
- 11 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(in thousands)
|
Level 1
|
Level 2
|
Level 3
|
Balance
as of
December 31,
2010
|
||||||||||||
Measured on a recurring basis:
|
||||||||||||||||
Assets
|
||||||||||||||||
Available-for-sale investments:
|
||||||||||||||||
Freddie Mac Certificates:
|
||||||||||||||||
Series A-1
|
$ | -- | $ | -- | $ | 129,406 | $ | 129,406 | ||||||||
Series B
|
-- | -- | 63,215 | 63,215 | ||||||||||||
Mortgage revenue bonds
|
-- | -- | 292,659 | 292,659 | ||||||||||||
Total available-for-sale investments
|
$ | -- | $ | -- | $ | 485,280 | $ | 485,280 | ||||||||
Interest rate swaps and derivatives
|
$ | -- | $ | 979 | $ | -- | $ | 979 | ||||||||
Liabilities
|
||||||||||||||||
Interest rate swaps and derivatives
|
$ | -- | $ | 18,953 | $ | -- | $ | 18,953 | ||||||||
Measured on a non-recurring basis:
|
||||||||||||||||
Assets
|
||||||||||||||||
Mortgage loans held-for-sale
|
$ | -- | $ | 75,365 | $ | -- | $ | 75,365 | ||||||||
Mortgage servicing rights
|
-- | -- | 65,614 | 65,614 | ||||||||||||
$ | -- | $ | 75,365 | $ | 65,614 | $ | 140,979 |
- 12 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents additional information about assets measured at fair value on a recurring basis and for which we utilized Level 3 inputs to determine fair value:
Three Months Ended March 31, 2011
|
|||||||||||||
(in thousands)
|
Series A-1
Freddie Mac
Certificates
|
Series B
Freddie Mac
Certificates
|
Mortgage
revenue bonds
|
Total
|
|||||||||
Balance at January 1, 2011
|
$
|
129,406
|
$
|
63,215
|
$
|
292,659
|
$
|
485,280
|
|||||
Total realized and unrealized gains or (losses):
|
|||||||||||||
Realized gain (losses) recorded in Condensed Consolidated Statement of Operations
|
--
|
--
|
--
|
--
|
|||||||||
Unrealized (loss) gain recorded in other comprehensive income
|
(2,022
|
)
|
4,412
|
(1,326
|
)
|
1,064
|
|||||||
Amortization or accretion
|
(3
|
)
|
(4,454
|
)
|
49
|
(4,408
|
)
|
||||||
Purchases, issuances, settlements and other adjustments(1)
|
1,844
|
6
|
(35,668
|
)(2)
|
(33,818
|
)
|
|||||||
Net transfers in and/or out of Level 3
|
--
|
--
|
--
|
--
|
|||||||||
Balance at March 31, 2011
|
$
|
129,225
|
$
|
63,179
|
$
|
255,714
|
$
|
448,118
|
|||||
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2011
|
$
|
--
|
$
|
--
|
$
|
--
|
$
|
--
|
(1)
|
No purchases, issuances or settlements occurred during the reporting period.
|
(2)
|
Reflects the elimination of certain mortgage revenue bonds as a result of the consolidation of the underlying properties upon obtaining control of the related property partnerships, as well as a bond that received sale treatment during the period (see Note 5).
|
Three Months Ended March 31, 2010
|
|||||||||||||
(in thousands)
|
Series A-1
Freddie Mac
Certificates
|
Series B
Freddie Mac
Certificates
|
Mortgage
revenue bonds
|
Total
|
|||||||||
Balance at January 1, 2010
|
$
|
183,093
|
$
|
61,003
|
$
|
245,671
|
$
|
489,767
|
|||||
Total realized and unrealized gains or (losses):
|
|||||||||||||
Realized (loss) gain recorded in Condensed Consolidated Statement of Operations
|
--
|
(22,649
|
)(1)
|
11
|
(2)
|
(22,638
|
)
|
||||||
Unrealized gain recorded in other comprehensive income (loss)
|
963
|
24,296
|
1,692
|
26,951
|
|||||||||
Amortization or accretion
|
--
|
(2,740
|
)
|
92
|
(2,648
|
)
|
|||||||
Purchases, issuances, settlements and other adjustments(3)
|
(7,535
|
)
|
1,035
|
27,582
|
(4)
|
21,082
|
|||||||
Net transfers in and/or out of Level 3
|
--
|
--
|
--
|
--
|
|||||||||
Balance at March 31, 2010
|
$
|
176,521
|
$
|
60,945
|
$
|
275,048
|
$
|
512,514
|
|||||
Amount of total (losses) gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2010
|
$
|
--
|
$
|
(22,649
|
)(1)
|
$
|
6
|
$
|
(22,643
|
)
|
(1)
|
Includes amounts recorded in “Loss on impairment of assets” and in “Gain from repayment or sale of investments, net” in the Condensed Consolidated Statement of Operations.
|
(2)
|
Recorded in “Gain from repayment or sale of investments, net” in the Condensed Consolidated Statement of Operations.
|
(3)
|
No purchases, issuances or settlements occurred during the reporting period.
|
(4)
|
Reflects re-recognition of mortgage revenue bonds in the 2007 re-securitization as assets, net of bonds that were foreclosed and sold by the securitization trust during the period (see Note 5).
|
- 13 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
C.
|
Assets and Liabilities Not Measured at Fair Value
|
For cash and cash equivalents, restricted cash, accounts receivable, stabilization escrow, accounts payable, accrued expenses and other liabilities as well as variable-rate notes payable and financing arrangements, recorded values approximate fair value due to their terms, or their liquid or short-term nature. Centerline Financial Holdings Credit Facility is a fixed rate loan repaid from operating cash flows (see Note 12). Due to the uncertainty of future cash flows available to repay the loan, we are unable to determine the fair value of the credit facility. In accordance with GAAP, certain financial assets and liabilities are included on our Condensed Consolidated Balance Sheets at amounts other than fair value. Following are the descriptions of those assets and liabilities:
Mortgage loans held for investment and other investments
|
Fair value is determined as described in Note 2 to the 2010 Form 10-K.
|
Financing arrangements and secured financing
|
Fair value is estimated using either quoted market prices or discounted cash flow analyses based on our current borrowing rates for similar types of borrowing arrangements, which reflect our current credit standing.
|
Preferred shares of subsidiary (subject to mandatory repurchase)
|
Fair value is determined as described for Series A-1 Freddie Mac certificates in Note 2 to the 2010 Form 10-K as the preferred shares are economically defeased by those investments.
|
Fixed rate notes payable
|
Fair value is estimated by utilizing the present value of the expected cash flows discounted at a rate for comparable tax-exempt investments.
|
The following table presents information about our financial assets and liabilities that are not carried at fair value:
March 31, 2011
|
December 31, 2010
|
|||||||||||||||
(in thousands)
|
Carrying
Value
|
Fair Value
|
Carrying
Value
|
Fair Value
|
||||||||||||
Mortgage loans held for investment
|
$ | 1,394 | $ | 1,394 | $ | 1,405 | $ | 1,405 | ||||||||
Other investments
|
364 | 96 | 502 | 191 | ||||||||||||
Financing arrangements and secured financing
|
651,545 | 555,906 | 665,875 | 595,163 | ||||||||||||
Preferred shares of subsidiary (subject to mandatory repurchase)
|
55,000 | 62,193 | 55,000 | 62,744 | ||||||||||||
Consolidated Partnerships:
|
||||||||||||||||
Fixed-rate notes payable
|
128,928 | 79,744 | 137,054 | 88,126 |
- 14 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with our Term Loan and Revolving Credit Facility (Note 12), the stock of substantially all of our subsidiaries is pledged as collateral. In addition, substantially all of our other assets are pledged as collateral to our Term Loan and Revolving Credit Facility subject to the liens detailed below. The following table details assets we have specifically pledged as collateral for various debt facilities or other contractual arrangements that provide first liens ahead of the Term Loan and Revolving Credit Facility:
Collateral
|
Balance Sheet Classification
|
Carrying
Amount of
Collateral at
March 31,
2011
(in thousands)
|
Associated Debt Facility/Liability
|
||||
Cash at Centerline Mortgage Capital Inc. (“CMC”)
|
Restricted cash
|
$
|
10,908
|
Mortgage loan loss sharing agreements (Note 25)
|
|||
Cash at Centerline Financial LLC
|
Cash and cash equivalents
|
$
|
66,740
|
Affordable Housing Yield transactions (Note 25) and Centerline Financial undrawn credit facility (Note 12)(1)
|
|||
Cash at Centerline Financial Holdings (“CFin Holdings”)
|
Cash and cash equivalents
|
$
|
27,675
|
CFin Holdings credit facility (Note 12)(2)
|
|||
Cash at Centerline Guaranteed Holdings
|
Cash and cash equivalents
|
$
|
12
|
Affordable Housing Yield transactions (Note 25)
|
|||
Series A-1 Freddie Mac certificates at Centerline Equity Issuer Trust
|
Investments – available-for-sale – Freddie Mac certificates
(Note 5) |
$
|
111,207
|
Preferred shares of subsidiary(3)
|
|||
Series A-1 Freddie Mac Certificates at Centerline Guaranteed Holdings
|
Investments – available-for-sale – Freddie Mac certificates
(Note 5) |
$
|
18,018
|
Affordable Housing Yield transactions (Note 25)
|
|||
Mortgage loans at CMC and Centerline Mortgage Partners Inc. (“CMP”)
|
Other investments – mortgage loans held for sale (Note 7)
|
$
|
80,154
|
Mortgage Banking warehouse facilities
|
|||
Collateral posted with counterparties at Centerline Guaranteed Holdings
|
Deferred costs and other assets (Note 10)
|
$
|
45,408
|
Affordable Housing Yield transactions (Note 25)
|
(1)
|
These assets are subject to a priority lien related to certain of the Affordable Housing Yield transactions and a subordinated lien related to the Centerline Financial LLC undrawn credit facility.
|
(2)
|
Borrowings under the CFin Holdings’ Credit Facilities are secured by a first priority lien on substantially all of CFin Holdings’ assets including its investment in subsidiaries, fee receivable and derivative instruments.
|
(3)
|
While not collateral, these assets economically defease the preferred shares of subsidiary.
|
We are required by our mortgage loan loss sharing agreements with Freddie Mac to provide security for payment of the reimbursement obligation. The collateral can include a combination of the net worth of one of our Mortgage Banking subsidiaries, a letter of credit and/or cash. To meet this collateral requirement, we have provided to Freddie Mac letters of credit totaling $12.0 million issued by Bank of America as a part of our Revolving Credit Facility (see Note 25).
In accordance with the requirements of its operating agreement, Centerline Financial LLC (“CFin” or “Centerline Financial”) has a cash balance of $66.7 million as of March 31, 2011 in order to maintain its minimum capital requirements. In addition, in accordance with the requirements of the Centerline Financial operating agreement, one of our subsidiaries pledged two taxable bonds with an aggregate notional amount of $3.3 million and the associated cash received on these bonds to Centerline Financial in order to maintain its minimum capital requirements. As these assets are pledged between two of our subsidiaries they were excluded from the table above.
- 15 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Available-for-sale investments consisted of:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Freddie Mac Certificates:
|
||||||||
Series A-1
|
$ | 129,225 | $ | 129,406 | ||||
Series B
|
63,179 | 63,215 | ||||||
Mortgage revenue bonds
|
255,714 | 292,659 | ||||||
Total
|
$ | 448,118 | $ | 485,280 |
A.
|
Freddie Mac Certificates
|
We retained Series A-1 and Series B Freddie Mac Certificates in connection with the December 2007 re-securitization of the mortgage revenue bond portfolio with Freddie Mac. The Series A-1 Freddie Mac Certificates are fixed rate securities, whereas the Series B Freddie Mac Certificates are residual interests of the re-securitization trust.
Series A-1
Information with respect to the Series A-1 Freddie Mac Certificates is as follows:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Amortized cost basis
|
$ | 177,589 | $ | 177,592 | ||||
Gross unrealized gains
|
14,929 | 17,865 | ||||||
Fair value
|
192,518 | 195,457 | ||||||
Less: eliminations(1)
|
(63,293 | ) | (66,051 | ) | ||||
Consolidated fair value
|
$ | 129,225 | $ | 129,406 | ||||
(1) A portion of the Series A-1 Certificates relate to re-securitized mortgage revenue bonds that are not reflected as sold for GAAP purposes. Accordingly, that portion is eliminated in consolidation. The change from December 31, 2010 resulted from the sale treatment of one mortgage revenue bond, and fluctuations due to changes in the fair value of the asset.
|
During the three months ended March 31, 2011 and 2010, we received $2.7 million and $3.9 million in cash, respectively, in interest from the Series A-1 Freddie Mac Certificates.
- 16 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Series B
Information with respect to the Series B Freddie Mac Certificates is as follows:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
|||||
Amortized cost basis(1)
|
$
|
36,484
|
$
|
42,021
|
|||
Gross unrealized gains (losses)(1)
|
24,192
|
(6,067
|
)
|
||||
Subtotal/fair value
|
60,676
|
35,954
|
|||||
Less: eliminations(2)
|
2,503
|
27,261
|
|||||
Consolidated fair value
|
$
|
63,179
|
$
|
63,215
|
|||
(1) The unrealized gains (losses) presented above do not include cumulative impairments of $130.8 million as of March 31, 2011 which reflect losses due to credit deterioration of the underlying assets. Amortized cost is shown net of these amounts.
|
|||||||
(2) A portion of the Series B Certificates relates to re-securitized mortgage revenue bonds that were not reflected as sold. Accordingly, that portion is eliminated in consolidation. The change from December 31, 2010 resulted from the fluctuations due to changes in the fair value of the asset.
|
During the three months ended March 31, 2011 and 2010, we received $6.5 million and $7.7 million in cash, respectively, in interest from the Series B Freddie Mac Certificates.
Delinquent collateral loans underlying the certificates had an unpaid principal balance of $192.6 million and $190.0 million at March 31, 2011 and December 31, 2010, respectively; projected remaining losses are estimated at 4.09% or $70.5 million of the underlying securitization. During the first quarter of 2011, there were no actual losses in the underlying securitization. Due to projections of declining cash flows (including the projected impact of a restructuring of the underlying mortgage revenue bonds as discussed in Note 19), we recorded other-than-temporary impairments (“OTTI”) of $22.8 million on these investments for the three months ended March 31, 2010. No impairments were recorded for the three months ended March 31, 2011.
During the first quarter of 2010, two of the underlying mortgage revenue bonds which were in foreclosure were sold out of the securitization trust to third parties at a value below the bonds’ outstanding principal balance. One of the bonds was included in the stabilized escrow pool. In order to fully pay down the bond’s outstanding principal, plus accrued interest, to the Class A Certificate Holders of the 2007 re-securitization as required per the securitization agreements, a release of $4.4 million was made from the stabilization escrow. The loss of $4.8 million for the other mortgage revenue bond will be absorbed by the principal of the Series B Freddie Mac Certificates.
Key fair value assumptions used in measuring the Series B Freddie Mac Certificates are provided in the table below:
March 31,
2011
|
December 31,
2010
|
||||
Weighted average discount rate
|
26.0
|
%
|
26.0
|
%
|
|
Constant prepayment rate
|
90.0
|
%
|
90.0
|
%
|
|
Weighted average life
|
8.9
|
years
|
9.1
|
years
|
|
Constant default rate
|
2.0
|
%
|
2.0
|
%
|
|
Default severity rate
|
21.0
|
%
|
21.0
|
%
|
The weighted average life of the assets in the pool that can be prepaid was 8.6 years as of March 31, 2011 and 8.8 years as of December 31, 2010.
- 17 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value and the sensitivity of the fair value to immediate adverse changes in those assumptions are as follows:
(in thousands)
|
March 31,
2011
|
|||
Fair value of Freddie Mac B Certificates
|
$ | 63,179 | ||
Constant prepayment rate:
|
||||
Fair value after impact of 5% increase
|
62,936 | |||
Fair value after impact of 10% increase
|
62,137 | |||
Discount rate:
|
||||
Fair value after impact of 10% increase
|
48,296 | |||
Fair value after impact of 20% increase
|
39,107 | |||
Constant default rate:
|
||||
Fair value after impact of 1% increase
|
57,135 | |||
Fair value after impact of 2% increase
|
51,368 | |||
Default severity rate:
|
||||
Fair value after impact of 5% increase
|
61,507 | |||
Fair value after impact of 10% increase
|
60,114 |
These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.
B.
|
Mortgage Revenue Bonds
|
The following table summarizes our mortgage revenue bond portfolio:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Securitized:
|
||||||||
Included in December 2007 re-securitization transaction and accounted for as financed
|
$ | 252,794 | $ | 289,614 | ||||
Not securitized
|
2,920 | 3,045 | ||||||
Total at fair value
|
$ | 255,714 | $ | 292,659 |
During the first quarter 2011, our mortgage revenue bond portfolio decreased from 48 bonds (as of December 31, 2010) to 44 bonds (as of March 31, 2011). The decrease is attributable to (i) the transfer out of special servicing and the de-recognition of one bond and (ii) the elimination in consolidation of three additional bonds as a result of the consolidation of the underlying properties upon obtaining control of the related property partnerships in 2011.
- 18 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amortized cost basis of our portfolio of mortgage revenue bonds and the related unrealized gains and losses are as follows:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Amortized cost basis
|
$ | 255,144 | $ | 293,203 | ||||
Gross unrealized gains
|
19,132 | 16,650 | ||||||
Gross unrealized losses
|
(18,562 | ) | (17,194 | ) | ||||
Fair value
|
$ | 255,714 | $ | 292,659 |
For mortgage revenue bonds in an unrealized loss position as of the dates presented, the fair value and gross unrealized losses, aggregated by length of time that individual bonds have been in a continuous unrealized loss position, is summarized in the table below:
(dollars in thousands)
|
Less than
12 Months
|
12 Months
or More
|
Total
|
|||||||||
March 31, 2011
|
||||||||||||
Number
|
18 | 4 | 22 | |||||||||
Fair value
|
$ | 66,597 | $ | 24,999 | $ | 91,596 | ||||||
Gross unrealized losses
|
$ | 10,369 | $ | 8,193 | $ | 18,562 | ||||||
December 31, 2010
|
||||||||||||
Number
|
17 | 4 | 21 | |||||||||
Fair value
|
$ | 73,396 | $ | 25,292 | $ | 98,688 | ||||||
Gross unrealized losses
|
$ | 9,230 | $ | 7,964 | $ | 17,194 |
We have evaluated the nature of the unrealized losses above and have concluded that they are temporary and should not be realized at this time as de-recognition of these bonds, should it occur, would not result in a loss.
The table below provides the components of equity method investments as of:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Equity interests in tax credit partnerships
|
$ | 6,998 | $ | 5,635 |
We acquire interests in entities that own tax credit properties. We hold these investments on a short-term basis for inclusion in future Affordable Housing Group investment fund offerings. We expect to recapture our costs in such investments from the proceeds when the investment fund has closed. During February 2011, we recaptured our cost in our December 31, 2010 equity method investments upon the closing of the $119.3 million multi-investor LIHTC fund. In addition, during the first quarter of 2011, we acquired interests in entities toward future fund offerings.
- 19 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents the components of other investments as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Mortgage loans held for sale(1)
|
$ | 80,154 | $ | 75,365 | ||||
Mortgage loans held for investment(2)
|
1,394 | 1,405 | ||||||
Stabilization escrow
|
-- | 15 | ||||||
Other investments
|
364 | 502 | ||||||
Total
|
$ | 81,912 | $ | 77,287 | ||||
(1) Net of deferred origination fees of $0.3 million.
(2) Net of cumulative impairment of $3.0 million.
|
A.
|
Mortgage Loans Held for Sale
|
Mortgage loans held for sale include originated loans either pre-sold to Government Sponsored Enterprises (“GSEs”), such as Fannie Mae and Freddie Mac or to the Government National Mortgage Association (“Ginnie Mae”) under contractual sale obligations that normally settle within 30 days of origination, or pre-sold to buyers of GSE guarantee securities backed by mortgage loans. Mortgage loans held for sale can differ widely from period to period depending on the timing and size of originated mortgages and variances in holding periods prior to sale. Loans closed and funded during the three months ended March 31, 2011 were $179.5 million. Loans sold and settled during the three months ended March 31, 2011 were $174.5 million.
B.
|
Mortgage Loans Held for Investments
|
Mortgage loans held for investments are made up primarily of promissory notes that we hold net of any reserve for uncollectibility.
C.
|
Stabilization Escrow
|
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Cash balance
|
$ | 41,235 | $ | 41,242 | ||||
Reserve for non-recovery
|
(41,235 | ) | (41,227 | ) | ||||
Total
|
$ | -- | $ | 15 |
During the three months ended March 31, 2011, we received $15.0 thousand from interest income, as compared to $2.0 million for the three months ended March 31, 2010, primarily as a result of escrow releases (due to construction completion and/or stabilization of the underlying properties).
In connection with management’s strategy to manage the risks arising from the operations of certain property partnerships (see Affordable Housing Transactions in Note 25), we expect the remaining cash balance to be used to restructure the debt of those property partnerships. Accordingly, we recorded a reserve to reflect the impairment of the non-recoverable cash balance.
- 20 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The components of intangible assets, net are as follows as of March 31, 2011 and December 31, 2010:
(dollars in thousands)
|
Estimated
Useful
Life
(in Years)
|
Gross
Carrying Amount
|
Accumulated
Amortization(1)
|
Net
|
|||||||||||||||||
March 31,
2011
|
December 31,
2010
|
March 31,
2011
|
December 31,
2010
|
March 31,
2011
|
December 31,
2010
|
||||||||||||||||
Amortized intangible assets:
|
|||||||||||||||||||||
Transactional relationships
|
5.0
|
$
|
73,400
|
$
|
73,400
|
$
|
73,253
|
$
|
73,217
|
$
|
147
|
$
|
183
|
||||||||
Partnership service contracts
|
9.0
|
26,521
|
26,521
|
26,521
|
26,521
|
--
|
--
|
||||||||||||||
General partner interests
|
9.0
|
5,100
|
5,100
|
4,176
|
4,035
|
924
|
1,065
|
||||||||||||||
Mortgage Banking broker relationships
|
4.0
|
1,632
|
1,632
|
1,632
|
1,632
|
--
|
--
|
||||||||||||||
Weighted average life/subtotal
|
6.2
|
106,653
|
106,653
|
105,582
|
105,405
|
1,071
|
1,248
|
||||||||||||||
Unamortized intangible assets:
|
|||||||||||||||||||||
Mortgage Banking licenses and approvals with no expiration
|
8,246
|
8,246
|
--
|
--
|
8,246
|
8,246
|
|||||||||||||||
Total
|
$
|
114,899
|
$
|
114,899
|
$
|
105,582
|
$
|
105,405
|
$
|
9,317
|
$
|
9,494
|
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Amortization expense
|
$ | 177 | $ | 1,988 |
The components of the change in MSRs and related reserves were as follows:
(in thousands)
|
||||
Balance at January 1, 2010
|
$
|
60,423
|
||
MSRs capitalized
|
2,521
|
|||
Amortization
|
(2,281
|
)
|
||
Balance at March 31, 2010
|
$
|
60,663
|
||
Balance at January 1, 2011
|
$
|
65,614
|
||
MSRs capitalized
|
3,634
|
|||
Amortization
|
(2,760
|
)
|
||
Balance at March 31, 2011
|
$
|
66,488
|
- 21 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
While the balances above reflect our policy to record MSRs initially at fair value and amortize those amounts, presented below is information regarding the fair value of the MSRs. The fair value and significant assumptions used in estimating it are as follows:
March 31,
2011
|
December 31,
2010
|
|||||||
Fair value of MSRs
|
$ | 74,342 | $ | 72,566 | ||||
Weighted average discount rate
|
17.64 | % | 17.64 | % | ||||
Weighted average pre-pay speed
|
9.27 | % | 9.24 | % | ||||
Weighted average lockout period (years)
|
4.0 | 4.1 | ||||||
Weighted average default rate
|
0.61 | % | 0.62 | % | ||||
Cost to service loans
|
$ | 2,259 | $ | 2,219 | ||||
Acquisition cost (per loan)
|
$ | 1,480 | $ | 1,477 |
The table below illustrates hypothetical fair values of MSRs, caused by assumed immediate changes to key assumptions that are used to determine fair value.
(in thousands)
|
March 31,
2011
|
|||
Fair value of MSRs
|
$
|
74,342
|
||
Prepayment speed:
|
||||
Fair value after impact of 10% adverse change
|
73,657
|
|||
Fair value after impact of 20% adverse change
|
72,975
|
|||
Discount rate:
|
||||
Fair value after impact of 10% adverse change
|
70,720
|
|||
Fair value after impact of 20% adverse change
|
67,446
|
|||
Default rate:
|
||||
Fair value after impact of 10% adverse change
|
74,242
|
|||
Fair value after impact of 20% adverse change
|
74,139
|
These sensitivities are hypothetical changes in fair value and cannot be extrapolated because the relationship of the changes in assumption to the changes in fair value may not be linear. Also, the effect of a variation in a particular assumption is calculated without changing any other assumption, whereas change in one factor may result in changes to another. Accordingly, no assurance can be given that actual results would be consistent with the results of these estimates.
Servicing fees we earned as well as those received with respect to the December 2007 re-securitization transaction (all of which are included in “Fee Income” in our Condensed Consolidated Statements of Operations) are as follows for the periods presented:
(in thousands)
|
Total
Servicing
Fees
|
Servicing
Fees from
Securitized
Assets
(included in
Total
Servicing
Fees)
|
||||||
Three months ended March 31:
|
||||||||
2011
|
$ | 5,880 | $ | 540 | ||||
2010
|
$ | 5,575 | $ | 493 |
- 22 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below provides the components of deferred costs and other assets, net as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Deferred financing and other costs
|
$ | 12,022 | $ | 12,317 | ||||
Less: Accumulated amortization
|
(4,282 | ) | (3,984 | ) | ||||
Net deferred costs
|
7,740 | 8,333 | ||||||
Collateral posted with counterparties
|
45,408 | 46,327 | ||||||
Interest and fees receivable, net
|
1,266 | 4,749 | ||||||
Other receivables
|
9,084 | 9,165 | ||||||
Furniture, fixtures and leasehold improvements, net
|
1,409 | 1,643 | ||||||
Other
|
8,773 | 6,469 | ||||||
Total
|
$ | 73,680 | $ | 76,686 |
Consolidated partnerships comprise the following:
·
|
Funds our Affordable Housing Group originates and manages (“Tax Credit Fund Partnerships”); and
|
·
|
Property-level partnerships for which we have assumed the role of the general partner and for which we have foreclosed upon the property (“Tax Credit Property Partnerships”).
|
Financial information presented for March 31, 2011 for certain of the Tax Credit Fund Partnerships and Tax Credit Property Partnerships is as of December 31, 2010, the most recent date for which information is available. Similarly, the financial information presented for December 31, 2010 for those partnerships is as of September 30, 2010.
Assets of consolidated partnerships consist of the following:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Equity interests in tax credit properties
|
$ | 3,272,843 | $ | 3,302,667 | ||||
Land, buildings and improvements, net
|
575,201 | 567,073 | ||||||
Other assets
|
299,529 | 282,665 | ||||||
Total assets
|
$ | 4,147,573 | $ | 4,152,405 |
A.
|
Equity Interests in Tax Credit Properties
|
The Tax Credit Fund Partnerships invest in low-income housing property-level partnerships that generate tax credits and tax losses. Neither we nor the Tax Credit Fund Partnerships control these property-level partnerships and, therefore, we do not consolidate them in our financial statements. “Equity interests in tax credit properties” represents the limited partner investments in those property level partnerships, which the Tax Credit Fund Partnerships carry on the equity method of accounting.
The reduction for the current period is due primarily to equity losses of $71.7 million recognized in the current period, the sale of Tax Credit Property Partnerships of $4.1 million, and cash distributions of $7.1 million, partially offset by an increase in investment in new Tax Credit Property Partnerships of $54.3 million.
- 23 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B.
|
Land, Buildings and Improvements, Net
|
Land, buildings and improvements are attributable to the property partnerships we consolidate as a result of gaining significant control over their general partner. Land, buildings and improvements to be held and used are carried at cost which includes the purchase price, acquisition fees and expenses, construction period interest and any other costs incurred in acquiring and developing the properties. The cost of property and equipment is depreciated over their estimated useful lives using primarily straight-line methods. Expenditures for repairs and maintenance are charged to expense as incurred; major renewals and betterments are capitalized. At the time property and equipment are retired and otherwise disposed of, the cost net of accumulated depreciation and related liabilities are eliminated and the profit or loss on such disposition is reflected in earnings.
The increase for the current period is due primarily to an increase of $21.7 million due to additional properties consolidated during 2011 and fixed asset additions of $7.5 million for certain properties. This was partially offset by properties that were sold or foreclosed upon for $2.0 million, current period depreciation of $7.1 million and a reduction in the carrying basis of land, buildings and improvements relating to equity investments and receivable impairments of $11.0 million between the property partnerships and the Tax Credit Fund Partnerships as a result of an increase in impairments recognized on equity investments and receivables due from the property partnerships.
C.
|
Other Assets
|
Assets other than those discussed above include cash, fees and interest receivable, prepaid expenses and operating receivables of the funds.
The table below provides the components of notes payable and other borrowings as of the dates presented:
(in thousands)
|
Interest Rate
at March 31,
2011
|
March 31,
2011
|
December 31,
2010
|
|||||||||
Term loan
|
3.25 | % | $ | 127,990 | $ | 127,990 | ||||||
Revolving credit facility
|
3.25 | 10,000 | 6,000 | |||||||||
Mortgage Banking warehouse facility
|
2.74 | 41,798 | 26,415 | |||||||||
Mortgage Banking repurchase facilities
|
4.00 | 20,900 | -- | |||||||||
Multifamily ASAP facility
|
1.20 | 17,931 | 49,276 | |||||||||
CFin Holdings credit facility
|
10.00 | 22,235 | 21,693 | |||||||||
Total
|
$ | 240,854 | $ | 231,374 |
A.
|
Term Loan and Revolving Credit Facility
|
The Term Loan matures in March 2017 with an interest rate of 3.0% over either the prime rate or LIBOR. Scheduled repayments of principal on the Term Loan begin in December 2011. At that time, we must repay $3.0 million in principal per quarter until maturity, at which time the remaining principal is due.
The Revolving Credit Facility has a total capacity of $37.0 million. The Revolving Credit Facility matures in March 2015 and bears interest at 3.0% over either the prime rate or LIBOR at our election. The Revolving Credit Facility is to be used for LIHTC property investments or for working capital purposes. As of March 31, 2011, $10.0 million was drawn and $12.0 million in letters of credit were issued under the Revolving Credit Facility. Once terminated, the amount of the Revolving Credit Facility associated with these letters of credit cannot be redrawn. At March 31, 2011, the undrawn balance of the Revolving Credit Facility was $15.0 million.
B.
|
Mortgage Banking Warehouse Facilities
|
We have four warehouse facilities we use to fund our loan originations. Our warehouse facilities are as follows:
- 24 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
|
We have a $100 million committed warehouse facility that matures in September 2011 and bears interest at LIBOR plus 2.50% that we utilize as our primary warehouse facility. Mortgages financed by such facility (see Note 7), as well as the related servicing and other rights (see Note 9) have been pledged as security under the warehouse facility. The interest rate on the warehouse facility was 2.74% as of March 31, 2011 and 2.76% as of December 31, 2010. All loans securing this facility have firm sale commitments with GSEs.
|
·
|
We have two uncommitted warehouse repurchase facilities that we entered into on November 22, 2010, in order to provide us with additional resources for warehousing of mortgage loans with Freddie Mac and Fannie Mae. These agreements are scheduled to mature in November 2011 and bear an interest of LIBOR plus 3.5% with a minimum of 4.5% for all Fannie Mae loans and 4% for all Freddie Mac loans. The outstanding balance under these facilities as of March 31, 2011 was $20.9 million. There was no outstanding balance at December 31, 2010. All loans securing these facilities have firm sale commitments with GSEs.
|
·
|
We have an uncommitted facility with Fannie Mae under its Multifamily As Soon As Pooled (“ASAP”) Facility funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay our primary warehouse facility. Subsequently, Fannie Mae funds approximately 99% of the loan and Centerline Mortgage Capital Inc. (“CMC”) funds the remaining 1%. CMC is later reimbursed by Fannie Mae when the assets are sold. Interest on this facility accrues at a rate of LIBOR plus 0.85% with a minimum rate of 1.20%. The interest rate on this facility was 1.20% as of March 31, 2011 and December 31, 2010.
|
C.
|
CFin Holdings Credit Facility
|
On March 5, 2010, CFin Holdings entered into a Senior Secured Credit Agreement (the “CFin Holdings Credit Agreement”). Under the terms of the CFin Holdings Credit Agreement, we are permitted to borrow up to $20.0 million (the “Initial Loan”), plus, under certain conditions, up to an additional $1.0 million in each calendar year until March 5, 2037. The Initial Loan was required by the lender to be fully drawn at its closing. Borrowings under the CFin Holdings Credit Agreement are secured by a first priority lien on substantially all of CFin Holdings’ existing and future assets. Borrowings under the CFin Holdings Credit Agreement bear interest at a rate of 10% per annum, which is paid-in-kind and capitalized to the outstanding principal balance on the last business day of March, June, September and December of each year. As of March 31, 2011, we had borrowed the full $20.0 million under this credit facility. CFin Holdings’ outstanding balance under the Credit Facility as of March 31, 2011 was $22.2 million, which includes $2.2 million of accrued interest that has been capitalized. Neither Centerline Holding Company nor its subsidiaries are guarantors of this facility. During the fourth quarter of 2010, we did not complete the restructuring of certain bonds by the date required in the Master Novation, Stabilization, Assignment, Allocation, Servicing and Asset Management Agreement with Natixis (the “Natixis Master Agreement”), which resulted in a cash freeze event under the terms of the agreement. As a result of the cash freeze event, we must obtain consent from Natixis prior to any usage of available cash at CFin Holdings. This event is an event of default under our CFin Holdings Credit Agreement. Among other remedies, upon this event of default Natixis can call this loan balance due but had not done so as of March 31, 2011. As of March 31, 2011, CFin Holdings had sufficient available cash to repay this loan in full.
D.
|
Centerline Financial Credit Facility
|
In June 2006, Centerline Financial LLC entered into a senior credit agreement. Under the terms of the agreement, Centerline Financial LLC is permitted to borrow up to $30.0 million until its maturity in June 2036. Borrowings under the agreement will bear interest at our election of either:
·
|
LIBOR plus 0.4% or;
|
·
|
1.40% plus the higher of the prime rate or the federal funds effective rate plus 0.5%.
|
As of March 31, 2011, no amounts were borrowed under this facility and as a result we did not make an election. Neither Centerline Holding Company nor its subsidiaries are guarantors of this facility. Due to a wind-down event caused by a capital deficiency under the Centerline Financial LLC operating agreement that occurred in 2010, the Centerline Financial senior credit facility is in default as of March 31, 2011. Amounts under the Centerline Financial senior credit facility are still available to be drawn, and we do not believe this default has a material impact on our consolidated financial statements or operations.
Also as a result of the wind-down event, Centerline Financial is restricted from making any member distribution and is also restricted from engaging in any new business.
- 25 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
E.
|
Covenants
|
We are subject to customary covenants with respect to our various notes payable and warehouse facilities. Other than the Centerline Financial senior loan and the CFin Holdings Credit Agreement being in default as stated above, as of March 31, 2011, we believe we are in compliance with all such covenants.
The table below provides the components of financing arrangements and secured financing as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Freddie Mac secured financing
|
$ | 651,545 | $ | 665,875 |
Freddie Mac Secured Financing
The Freddie Mac secured financing liability relates to mortgage revenue bonds that we re-securitized with Freddie Mac but for which the transaction was not recognized as a sale and relates to bonds that are within our “effective control” and, therefore, we may remove the bond from the securitization even if we do not intend to do so. Such “effective control” may result when a subsidiary controls the general partner of the underlying property partnership or may exercise the right to assume such control, or our role as servicer of the bonds would allow us to foreclose on a bond in default or special servicing. The liability represents the fair value of the mortgage revenue bonds at the time at which sale treatment was precluded and the bonds were recorded on our balance sheet.
The decrease in this balance during the three months ended March 31, 2011 corresponds with the changes described under Mortgage Revenue Bonds in Note 5.
Accounts payable, accrued expenses and other liabilities consisted of the following:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Deferred revenues
|
$ | 39,135 | $ | 37,840 | ||||
Allowance for risk-sharing obligations (Note 25)
|
29,693 | 29,924 | ||||||
Affordable Housing loss reserve
|
83,900 | 89,400 | ||||||
Accrued expenses
|
6,825 | 7,062 | ||||||
Accounts payable
|
913 | 551 | ||||||
Accrued assumption fees
|
27,145 | 25,748 | ||||||
Interest rate swaps at fair value (Note 22)
|
18,110 | 18,831 | ||||||
Salaries and benefits payable
|
6,134 | 11,332 | ||||||
Accrued interest payable
|
4,534 | 4,475 | ||||||
Other
|
12,316 | 12,641 | ||||||
Total
|
$ | 228,705 | $ | 237,804 |
A.
|
Deferred Revenues
|
In connection with our Affordable Housing tax credit fund origination and management businesses, we receive revenues at the time a fund closes associated with origination, property acquisitions, partnership management services and credit intermediation. These fees are deferred and recognized over various periods. The increase in deferred revenue in 2011 is the result of the deferred fees we received as a result of a new investment fund origination.
- 26 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B.
|
Affordable Housing Loss Reserve
|
The reduction in our Affordable Housing loss reserve during 2011 is a result of a reduction in Centerline Guaranteed Holdings commitment to fund required buy-downs relating to assets in certain guaranteed funds for which we have associated credit intermediation agreements (see Note 25).
C.
|
Accrued Assumption Fees
|
The accrued assumption fees of $27.1 million relates to the restructuring of certain credit intermediation agreements (see Note 25).
Financial information presented for March 31, 2011 for certain of the Tax Credit Fund Partnerships and Tax Credit Property Partnerships is as of December 31, 2010, the most recent date for which information is available. Similarly, the financial information presented for December 31, 2010 for those partnerships is as of September 30, 2010.
The table below provides the components of liabilities of our Tax Credit Fund Partnerships and Tax Credit Property Partnerships that we consolidated as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Notes payable
|
$ | 128,928 | $ | 137,054 | ||||
Due to property partnerships
|
116,213 | 86,642 | ||||||
Other liabilities
|
290,635 | 273,409 | ||||||
Total liabilities of consolidated partnerships
|
$ | 535,776 | $ | 497,105 |
Notes Payable
Notes payable pertain to borrowings that bridge the time between when subscribed investments are received and when the funds deploy capital (“Bridge Loans”) for Tax Credit Fund Partnerships, as well as mortgages and notes held at the Tax Credit Property Partnerships.
The decrease is due primarily to repayments of mortgages of $4.8 million and the sale of properties reducing mortgages by $5.0 million which is partially offset by an increase of $1.5 million of additional proceeds borrowed by Tax Credit Property Partnerships.
Due to Property Partnerships
The partnership agreements of the property level partnerships stipulate the amount of capital to be funded and the timing of payments of that capital. “Due to property partnerships” represents the unfunded portion of those capital commitments. The increase during 2011 pertains primarily to additional commitments for the acquisition of new Tax Credit Property Partnerships of $54.3 million during the first quarter, partially offset by the funding of capital commitments by the Tax Credit Fund Partnerships.
Other Liabilities
The increase in other liabilities is primarily due to fees accrued for the current period as well as a decrease in the elimination of other liabilities between Tax Credit Fund Partnerships and Centerline.
- 27 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below provides the components of redeemable securities as of the dates presented:
(in thousands)
|
March 31, 2011
|
December 31, 2010
|
|||||||||||||
Series
|
Carrying
Value
|
Number of
Shares
|
Number of
common
shares if
converted
|
Carrying
Value
|
Number of
Shares
|
Number of
common
shares if
converted
|
|||||||||
Convertible Redeemable CRA Shares
|
$
|
10,658
|
588
|
588
|
$
|
12,462
|
695
|
695
|
In January 2011, we signed a redemption agreement with a holder of 107,123 Convertible Redeemable CRA Shares according to which the shares and their rights were cancelled in exchange for $0.2 million resulting in a $1.8 million gain on settlement of liability. The aggregate gross issuance price for the Convertible Redeemable CRA Shares due on or after January 1, 2012 is $11.0 million as of March 31, 2011.
The table below provides the components of non-controlling interests as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Limited partners interests in consolidated partnerships
|
$ | 3,065,078 | $ | 3,124,755 | ||||
Preferred shares of a subsidiary (not subject to mandatory repurchase)(1)
|
104,000 | 104,000 | ||||||
Convertible Special Common Units (“SCUs”) of a subsidiary; 11,867 outstanding in 2011 and 12,731 outstanding in 2010
|
(95,401 | ) | (88,300 | ) | ||||
Other(2)
|
4,636 | 4,379 | ||||||
Total
|
$ | 3,078,313 | $ | 3,144,834 | ||||
(1) For detail of the terms of these securities (as well as Preferred shares of a subsidiary (subject to mandatory repurchase)) refer to the 2010 Form 10-K.
(2) “Other” non-controlling interests primarily represent the 10.0% interest in CFin Holdings owned by Natixis.
|
During the first quarter of 2011, 864,229 SCUs and their respective special preferred voting shares were exchanged for the same amount of Common Shares.
Loss allocated to non-controlling interests was as follows:
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Limited partners interests in consolidated partnerships
|
$ | 102,780 | $ | 47,796 | ||||
Preferred shares of a subsidiary (not subject to mandatory repurchase)
|
(1,556 | ) | (1,556 | ) | ||||
SCUs
|
-- | (1,075 | ) | |||||
SCIs
|
-- | (9 | ) | |||||
Other
|
(258 | ) | 821 | |||||
Total loss allocated to non-controlling interests
|
$ | 100,966 | $ | 45,977 |
- 28 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
|
General and Administrative Expenses
|
The table below provides the components of general and administrative expenses for the periods presented:
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Salaries and benefits
|
$ | 10,868 | $ | 13,507 | ||||
Other:
|
||||||||
Professional fees
|
2,579 | 13,696 | ||||||
Other fees
|
1,450 | 30,465 | ||||||
Rent expense
|
1,352 | 1,548 | ||||||
Site visits and acquisition fees
|
1,297 | 204 | ||||||
Advisory fees
|
1,250 | 361 | ||||||
Subservicing fees
|
1,690 | 688 | ||||||
Miscellaneous
|
3,092 | 3,674 | ||||||
Total
|
$ | 23,578 | $ | 64,143 |
1.
|
Professional fees
|
The decrease in professional fees in 2011 is due primarily to legal and consulting fees we incurred in connection with the March 2010 Restructuring.
2.
|
Other fees
|
Other fees include assumption fees of $27.6 million in 2010 and $1.4 million in 2011 relating to the restructuring of certain credit intermediation agreements with Merrill Lynch in 2010, as well as other expenses of $2.8 million in 2010 relating to the issuance of Special Series A Shares to Natixis as part of the restructuring of certain credit intermediation agreements (see Note 25).
3.
|
Site Visits and Acquisition Fees
|
The increase in site visits and acquisition costs in 2011 is related to $0.4 million of broker fees and deferred originations that were not incurred in 2010. The remaining $0.7 million increase is attributable to 8 property closings in 2011.
4.
|
Advisory Fees
|
In connection with the March 2010 Restructuring, we entered into an advisory agreement with Island Centerline Manager LLC, whereby they will provide us with strategic and general advisory services. Pursuant to the agreement, we are paying a $5.0 million annual base advisory fee, payable in quarterly installments of $1.25 million (see also Note 23).
5.
|
Subservicing Fees
|
We pay fees for the servicing and administering of loans on our behalf. These fees amounted to $1.7 million and $0.7 million for the three months ended March 31, 2011 and 2010, respectively.
- 29 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
B.
|
(Recovery) Provision For Losses
|
The table below provides the components of the (recovery) provision for losses for the periods presented:
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Affordable Housing loss reserve (see Note 25)
|
$ | (5,500 | ) | $ | (62,000 | ) | ||
Mortgage Banking loan loss reserve (see Note 25)
|
-- | 935 | ||||||
Lease termination costs
|
-- | (48,044 | ) | |||||
Bad debt reserves
|
2,473 | (3,387 | ) | |||||
DUI provision for risk-sharing obligations
|
238 | -- | ||||||
Total
|
$ | (2,789 | ) | $ | (112,496 | ) |
1.
|
Affordable Housing loss reserve
|
During the first quarter of 2010, we recorded a $62.0 million reduction in loss reserves, primarily the result of restructuring of our credit intermediation agreements. The reduction in our Affordable Housing loss reserve during 2011 is primarily the result of a reduction in our commitment to fund the required buy-downs relating to assets in certain guaranteed funds for which we have associated credit intermediation agreements.
2.
|
Lease termination costs
|
In connection with the March 2010 Restructuring, we settled a liability for obligations on two office spaces no longer in use. As part of the settlement, we paid a total of $5.2 million, resulting in a net reduction of $48 million in lease termination costs in 2010.
3.
|
Bad debt reserves
|
We advance funds to Tax Credit Fund Partnerships to allow them to make supplemental loans for property partnerships in which they invest. During the first quarter of 2010, based on assessment of collectability, we reduced bad debt reserves relating to such advances by $3.4 million. In the first quarter of 2011, a reserve of $2.5 million was recorded against these advances to Tax Credit Fund Partnerships.
The table below provides the components of loss on impairment of assets for the periods presented:
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Available-for-sale investments (see Note 5):
|
||||||||
Series B Freddie Mac certificates
|
$ | -- | $ | 22,814 | ||||
Stabilization escrow
|
-- | (405 | ) | |||||
|
$ | -- | $ | 22,409 |
A.
|
Series B Freddie Mac Certificates
|
In the first quarter of 2010, as a result of our expectation at that time of increased severity of credit losses in the mortgage revenue bonds underlying the Series B Freddie Mac certificates, as well as agreements reached with Merrill Lynch and Natixis regarding our credit intermediation agreements (see Note 25), we reduced the projected cash flows we expect to receive over the life of the investment and recognized an impairment of $22.8 million.
- 30 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information presented for the three months ended March 31, 2011 and 2010 for certain of the Tax Credit Fund Partnerships and Tax Credit Property Partnerships is for the three months ended December 31, 2010 and 2009, the most recent date for which information is available. Similarly, the financial information presented for December 31, 2010 for those partnerships is as of September 30, 2010.
Revenues and expenses of consolidated partnerships consisted of the following:
Three Months Ended
March 31, |
||||||||
2011
|
2010
|
|||||||
(in thousands)
|
Tax Credit
Fund and
Property
Partnerships
|
Tax Credit
Fund and
Property
Partnerships
|
||||||
Interest income
|
$ | 245 | $ | 419 | ||||
Rental income
|
25,923 | 26,426 | ||||||
Other
|
90 | 1,072 | ||||||
Total revenues
|
$ | 26,258 | $ | 27,917 | ||||
Interest expense
|
$ | 4,661 | $ | 6,319 | ||||
Asset management fees
|
10,378 | 14,378 | ||||||
Property operating expenses
|
9,703 | 11,639 | ||||||
General and administrative expenses
|
8,987 | 10,750 | ||||||
Depreciation and amortization
|
12,364 | 13,355 | ||||||
Other expenses
|
4,401 | 3,181 | ||||||
Subtotal
|
45,833 | 53,303 | ||||||
Total expenses
|
$ | 50,494 | $ | 59,622 | ||||
Other losses from consolidated partnerships, net
|
$ | 61,441 | $ | 90,806 |
Consolidated Partnerships for the period ended March 31, 2011, as compared to the period ended March 31, 2010, experienced a net decrease in Property Partnerships of 12 properties due to the sale or foreclosure of 21 properties and 9 additional properties we consolidate as a result of gaining control of the general partner as well as an additional Tax Credit Fund Partnership we consolidate which was originated in the first quarter of 2011.
Other losses principally represent the equity losses that Tax Credit Fund Partnerships recognize in connection with their investments in non-consolidated property partnerships. The decrease in losses during the three-month period ended March 31, 2011 primarily resulted from gains recognized at the Property Partnerships which were sold during the period of approximately $10.1 million, a reduction of $5.9 million related to suspended losses for Tax Credit Fund Partnerships whose investment balances in certain Property Partnerships have reached zero as well as an increase of $15.7 million due to net gains on the sale of properties partnership investments in the Fund Partnerships due to the increased volume of sales in the current period. First Quarter 2011 net gains of such sales amounted to $10.2 million while the same period last year amounted to net losses of $5.5 million.
- 31 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The calculation of basic and diluted net loss per share is as follows:
Three Months Ended March 31,
|
|||||||||||||
2011
|
2010
|
||||||||||||
(in thousands, except per share amounts)
|
Continuing
Operations
|
Discontinued
Operations
|
Continuing
Operations
|
Discontinued
Operations
|
|||||||||
Numerator:
|
|||||||||||||
Net income attributable to Centerline Holding Company shareholders
|
$
|
509
|
$
|
253
|
$
|
69,367
|
$
|
70,344
|
|||||
Preferred dividends
|
--
|
--
|
25,043
|
(1)
|
--
|
||||||||
Undistributed loss attributable to Centerline Holding Company shareholders
|
509
|
253
|
94,410
|
70,344
|
|||||||||
Undistributed earnings attributable to redeemable securities
|
(1
|
)
|
--
|
(2,735
|
)
|
(2,038
|
)
|
||||||
Effect of redeemable share conversions(2)
|
(113
|
)
|
--
|
285,167
|
--
|
||||||||
Net income attributable to Centerline Holding Company shareholders used for EPS calculations – basic
|
$
|
395
|
$
|
253
|
$
|
376,842
|
$
|
68,306
|
|||||
Undistributed earnings allocated to redeemable securities on a dilution basis
|
--
|
--
|
54
|
40
|
|||||||||
Net income attributable to Centerline Holding Company shareholders used for EPS calculations – diluted
|
$
|
395
|
$
|
253
|
$
|
376,896
|
$
|
68,346
|
|||||
Denominator:
|
|||||||||||||
Weighted average shares outstanding
|
|||||||||||||
Basic
|
348,647
|
348,647
|
140,603
|
140,603
|
|||||||||
Effect of dilutive shares
|
621
|
621
|
2,897
|
2,897
|
|||||||||
Diluted
|
349,268
|
349,268
|
143,500
|
143,500
|
|||||||||
Calculation of EPS:
|
|||||||||||||
Net income attributable to Centerline Holding Company shareholders
|
$
|
395
|
$
|
253
|
$
|
376,842
|
$
|
68,306
|
|||||
Weighted average shares outstanding – basic
|
348,647
|
348,647
|
140,603
|
140,603
|
|||||||||
Net income attributable to Centerline Holding Company shareholders – basic
|
$
|
--
|
(3)
|
$
|
--
|
(3)
|
$
|
2.68
|
$
|
0.49
|
|||
Net income attributable to Centerline Holding Company shareholders
|
$
|
395
|
$
|
253
|
$
|
376,896
|
$
|
68,346
|
|||||
Weighted average shares outstanding –diluted
|
349,268
|
349,268
|
143,500
|
143,500
|
|||||||||
Net income per share attributable to Centerline Holding Company shareholders – diluted
|
$
|
--
|
(3)
|
$
|
--
|
(3)
|
$
|
2.63
|
$
|
0.48
|
|||
(1) 2010 reflects a reversal of all preferred dividends in arrears upon conversion of the preferred CRA shares into Special Series A Shares.
(2) Effect of redeemable share conversions includes in 2010 the increase to common shareholder’s equity of $285.2 million, representing the difference between the carrying value of the redeemable securities at conversion and the fair value of the Special Series A Shares issued. See Note 26to our 2010 Form 10-K.
(3) Amount calculates to less than one cent per share.
|
- 32 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A.
|
General
|
Centerline is exposed to financial risks arising from our business operations and economic conditions. We manage interest-rate risk by hedging. We evaluate our interest-rate risk on an ongoing basis to determine if it would be advantageous to engage in any additional derivative transactions. We do not use derivatives for speculative purposes. We manage liquidity risk by extending term and maturity on debt, by reducing the amount of debt outstanding, and by producing cash flow from operations. We manage credit risk by developing and implementing strong credit and underwriting procedures.
We record all derivatives on the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability (for a fair value hedge) or the earnings effect of the hedged forecasted transactions (for a cash flow hedge). We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply it.
B.
|
Derivative Positions
|
As of March 31, 2011, we held the following derivative positions:
·
|
Developers of Properties: We were party to 17 interest-rate swap agreements with the developers of properties relating to certain mortgage revenue bonds we previously owned. We entered into these swap agreements to effectively convert the fixed rate of interest (per the terms of the mortgage revenue bond) to a variable rate. Under the terms of these agreements, we pay fixed interest rates equal to those of the related bonds and receive interest at a variable rate (based on the Securities Industry and Financial Markets Association (“SIFMA”) index). Since the December 2007 re-securitization transaction, these swaps are now deemed to be free-standing derivatives. At March 31, 2011, these swaps had an aggregate notional amount of $159.3 million, a weighted average interest rate of 5.82% and a weighted average remaining term of 11.73 years.
|
·
|
Our Affordable Housing business segment is party to an interest-rate swap whereby we pay a variable rate of interest (based on the SIFMA index) and receive interest at a fixed rate of 3.83%. At March 31, 2011, the swap had a notional amount of $9.5 million, with a variable interest rate of 0.53% payable to a third party and remaining term of 12.2 years.
|
Quantitative information regarding the swaps to which we are or were a party (including those agreements on behalf of consolidated partnerships) is detailed in section C below.
C.
|
Financial Statement Impact
|
Interest-rate swaps and forward transactions (see Note 25) in a net liability position (“out of the money”) are recorded in accounts payable, accrued expenses and other liabilities and those in a net asset position (“in the money”) are recorded in deferred costs and other assets. None of the swaps were designated as hedges as of the dates presented. The amounts recorded are as follows:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
|||||
Net liability position
|
$
|
18,162
|
$
|
18,953
|
|||
Net asset position
|
891
|
979
|
- 33 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Presented below are amounts included in Interest expense in the Condensed Consolidated Statements of Operations related to the swaps described above:
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Not designated as hedges:
|
||||||||
Interest payments
|
$ | 2,519 | $ | 2,544 | ||||
Interest receipts
|
(981 | ) | (967 | ) | ||||
Change in fair value
|
(703 | ) | 581 | |||||
Subtotal
|
835 | 2,158 | ||||||
Terminated swap contracts:
|
||||||||
Gain on termination of free-standing derivatives
|
-- | (2,052 | ) | |||||
Included in interest expense
|
$ | 835 | $ | 106 |
As of March 31, 2011 and December 31, 2010, we had no accumulated other comprehensive losses (exclusive of the tax impact) relating to the swaps described above.
Investments in and Loans to Affiliates
The table below provides the components of investments in and loans to affiliates as of the dates presented:
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Fund advances related to property partnerships, net(1)
|
$ | 56,631 | $ | 55,003 | ||||
Other receivables from partnerships, net
|
1,295 | 982 | ||||||
Fees receivable and other, net
|
19,188 | 22,835 | ||||||
Subtotal
|
77,114 | 78,820 | ||||||
Less: Eliminations(2)
|
(72,769 | ) | (78,310 | ) | ||||
Total
|
$ | 4,345 | $ | 510 | ||||
(1) Net of reserves of $33.7 million at March 31, 2011 and $32.0 million at December 31, 2010.
(2) For management purposes, we treat consolidated partnerships as equity investments in evaluating our results. As we consolidate the funds, we eliminate the investments for presentation in the consolidated financial statements. In addition, any fees or advances receivable from consolidated partnerships are eliminated in consolidation.
|
- 34 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Impact to Statements of Operations
Our Condensed Consolidated Statements of Operations included the following amounts pertaining to related party transactions:
(in thousands)
|
Included in following line item on
Condensed Consolidated
Statements of Operations
|
Three Months Ended
March 31,
|
|||||||
2011
|
2010
|
||||||||
Expenses for advisory services provided by Island and procedures review payments made to Island
|
General and Administrative
|
$
|
2,137
|
$
|
724
|
||||
Expenses for subservicing of and net referral fees for mortgage loans by C-III
|
General and Administrative
|
1,863
|
651
|
||||||
Transition services charged to C-III, net
|
General and Administrative
|
(37
|
)
|
--
|
|||||
Sublease charges to C-III
|
General and Administrative
|
(410
|
)
|
(112
|
)
|
||||
Expenses for consulting and advisory services provided by The Related Companies LP
|
General and Administrative
|
$
|
40
|
$
|
12
|
||||
Expenses for property management services provided by TRCLP
|
Other Losses from Consolidated Partnerships, Net
|
$
|
1,480
|
$
|
1,468
|
||||
Net interest rate swap payments to property developers controlled by TRCLP
|
Interest Expense
|
$
|
630
|
$
|
644
|
A.
|
Island Centerline Manager LLC (the “Manager”)
|
In connection with the March 2010 Restructuring, we entered into an advisory agreement with Island Centerline Manager LLC, an entity owned and operated by a subsidiary of Island Capital (collectively, “Island”). The agreement provides for an initial 5-year term and, subject to a fairness review of advisory fees, for successive 1-year renewal terms. Pursuant to the agreement:
·
|
Island will provide strategic and general advisory services to us; and
|
·
|
we paid $5.0 million of advisory fees over a 12-month period from the date of the agreement for certain fund management review services and have paid and will pay a $5.0 million annual base advisory fee and an annual incentive fee if certain EBITDA thresholds are met (as defined in the agreement).
|
The agreement provides each party with various rights of termination, which in our case under certain circumstances would require the payment of a termination fee in an amount equal to three times the base and incentive fee earned during the previous year.
In connection with the March 2010 Restructuring, we entered into a subservicing agreement with C-III pursuant to which C-III agreed to service and administer mortgage loans on our behalf. During the three-month period ending March 31, 2011 and 2010, we paid a total amount of $1.7 million and $0.7 million, respectively, for these services.
In connection with the March 2010 Restructuring, we entered into a sublease agreement with C-III for the leased space in Irving, Texas that we occupied prior to the March 2010 Restructuring and which has been used by C-III following the March 2010 Restructuring. In addition, we entered into a transition services agreement with C-III.
B.
|
The Related Companies L.P.
|
A subsidiary of TRCLP earned fees for performing property management services for various properties held in Tax Credit Fund Partnerships we manage.
In addition, as part of the March 2010 Restructuring, another affiliate of TRCLP entered into a loan agreement with our lenders (the “TRCLP Loan Agreement”) pursuant to which it assumed $5.0 million of our debt outstanding immediately prior to the March 2010 Restructuring under our Term Loan and Revolving Credit Facility (the “TRCLP Indebtedness”) in connection with CCG’s entering into a consulting and advisory agreement with the TRCLP affiliate (the “TRCLP Consultant”).
- 35 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consulting and advisory agreement is terminable by CCG and the TRCLP Consultant by mutual consent as specified in the consulting and advisory agreement. If the consulting and advisory agreement is terminated by CCG due to a change of control of the Company, CCG is obligated to pay the TRCLP Consultant a termination fee in the amount of the fair market value of the TRCLP Consultant’s remaining rights under the consulting and advisory agreement determined in accordance with procedures specified in the agreement. If the consulting and advisory agreement is terminated by CCG because the TRCLP Consultant or any of its affiliates engaged in a specified competitive business, the Company or CCG would assume all obligations under the TRCLP Loan Agreement and indemnify the TRCLP Consultant and its affiliates for any loss, cost and expense incurred from and after the date of such assumption.
If CCG and the TRCLP Consultant mutually agree to terminate the consulting and advisory agreement, each party (and certain of their respective affiliates) would be obligated to pay 50% of the outstanding obligations under the TRCLP Indebtedness. If the TRCLP Consultant terminates the consulting and advisory agreement by prior written notice to CCG absent a continuing default by CCG, the TRCLP Consultant and certain of its affiliates would be obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If the TRCLP Consultant terminates the consulting and advisory agreement in the event of a continuing default under the agreement by CCG, the Company and CCG would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If CCG terminates the consulting and advisory agreement in the event of a continuing default under the agreement by the TRCLP Consultant or in the event the TRCLP Consultant has not reasonably performed its duties under the agreement, the TRCLP Consultant and certain of its affiliates would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement. If CCG terminates the consulting and advisory agreement in the event of a change in control of the Company or in the event the TRCLP Consultant or any of its affiliates enters into specified competitive businesses, the Company and CCG would be jointly and severally obligated to pay the outstanding obligations under the TRCLP Loan Agreement.
The $5.0 million of debt assumed by TRCLP was recorded as an extinguishment of debt for which we deferred a $5.0 million-gain. The deferred gain will be recognized into income over the life of the consulting agreement. As of March 31, 2011 and December 31, 2010, the unrecognized balance was $5.0 million.
C.
|
Fund Advances Related to Property Partnerships, Net
|
Fund advances related to property partnerships represent monies we loaned to certain Tax Credit Fund Partnerships to allow them to provide financial support to property partnerships in which they invest. We expect the Tax Credit Fund Partnerships will repay those loans from the release of reserves, proceeds from asset sales and other operating sources. Loans we made (net of recoveries) were $3.3 million in the first quarter of 2011 and $15.0 million in 2010. In connection with the restructuring of certain credit intermediation agreements in 2010, certain of these fund advances were contributed to our Centerline Guaranteed Holdings LLC (“Guaranteed Holdings”) and CFin Holdings subsidiaries. See Affordable Housing Transactions – Property Partnerships in Note 25).
D.
|
Other
|
Substantially all fund origination revenues in the Affordable Housing Group are received from Tax Credit Fund Partnerships we have originated and manage, many of which comprise the partnerships that we consolidate. While our affiliates hold equity interests in the investment funds’ general partner and/or managing member/advisor, we have no direct investments in these entities and we do not guarantee their obligations. We have agreements with these entities to provide ongoing services on behalf of the general partners and/or managing members/advisors and we receive all fee income to which these entities are entitled.
Business segment results include all direct and contractual revenues and expenses of each business segment and allocations of certain indirect expenses based on specific methodologies. These reportable business segments are strategic business units that primarily generate revenue streams that are distinctly different from one another and are generally managed separately. Transactions between business segments are accounted for as third-party arrangements for the purposes of presenting business segment results of operations. Typical intersegment eliminations include fees earned from Consolidated Partnerships and intercompany interest.
- 36 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Revenue
|
||||||||
Affordable Housing
|
$ | 28,093 | $ | 30,404 | ||||
Mortgage Banking
|
11,705 | 10,093 | ||||||
Corporate
|
118 | 354 | ||||||
Consolidated Partnerships
|
26,258 | 27,917 | ||||||
Eliminations
|
(17,465 | ) | (16,156 | ) | ||||
Consolidated Revenues
|
$ | 48,709 | $ | 52,612 | ||||
Depreciation and amortization
|
||||||||
Affordable Housing
|
$ | 414 | $ | 868 | ||||
Mortgage Banking
|
2,717 | 2,529 | ||||||
Corporate
|
415 | 3,063 | ||||||
Eliminations and adjustments
|
-- | 5 | ||||||
Consolidated Depreciation and Amortization
|
$ | 3,546 | $ | 6,465 | ||||
Depreciation and Amortization of Consolidated Partnerships
|
$ | 12,364 | $ | 13,355 | ||||
Net income (loss) attributable to Centerline Holding Company Shareholders
|
||||||||
Affordable Housing
|
$ | 219 | $ | 14,330 | ||||
Mortgage Banking
|
741 | (3,186 | ) | |||||
Corporate
|
(649 | ) | 55,298 | |||||
Consolidated Partnerships
|
(501 | ) | (167 | ) | ||||
Eliminations
|
699 | 3,092 | ||||||
Total net income attributable to Centerline Holding Company shareholders – continuing operations
|
$ | 509 | $ | 69,367 |
A.
|
Affordable Housing Transactions
|
Yield Transactions
Via the isolated special purpose entities described below, we have entered into several credit intermediation agreements with either Natixis or Merrill Lynch (each a “Primary Intermediator”) to provide agreed-upon rates of return to third-party investors for pools of multifamily properties in certain Tax Credit Fund Partnerships. In return, we have received or will receive fees generally at the start of each credit intermediation period. There are a total of 20 outstanding agreements to provide the specified returns through the construction and lease-up phases and through the operating phase of the properties.
Total potential exposure pursuant to these credit intermediation agreements at March 31, 2011 is $1.3 billion, assuming the funds achieve no return whatsoever beyond the March 31, 2011 measurement date (assuming all underlying properties fail and are foreclosed upon, causing us to invoke the “calamity call” provision in each fund on March 31, 2011). Of these totals:
·
|
Five of the agreements (comprising $538.5 million of the total potential exposure) are transacted by our subsidiary, Centerline Financial, an isolated special purpose entity wholly owned by CFin Holdings.
|
- 37 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
|
Seven of the agreements (comprising $403.4 million of the total potential exposure) are with our subsidiary, CFin Holdings, an isolated special purpose entity owned 90% by CCG and 10% by Natixis.
|
·
|
Eight of the credit intermediation agreements (comprising $330.2 million of the total potential exposure) are with Centerline Guaranteed Holdings LLC, an isolated special purpose entity and wholly owned subsidiary of CCG.
|
In connection with the Natixis Master Agreement, all current and future voluntary loans, receivables, and Special Limited Partner (“SLP”) fees associated with all Natixis Credit Enhanced Funds were assigned to CFin Holdings (see Property Partnerships below). As part of the Natixis Master Agreement, if certain conditions are met, we and Natixis have agreed to terms for the restructuring of certain bonds that were part of the Freddie Mac Re-securitization and Natixis has agreed to allow certain assets of CFin Holdings to be used for these bond restructurings. In connection with the Natixis Master Agreement, we issued Natixis 1.2 million Special Series A Shares and recorded an expense of $2.8 million in “Other Fees” within “General and Administrative Expenses” on our Condensed Consolidated Statements of Operations for the three months ended March 31, 2010.
In connection with the March 5, 2010 Master Assignment, Stabilization, Assignment Allocation and Asset Management Agreement with Merrill Lynch (the “Merrill Transaction Assignment Agreement”), CHC entered into a Reaffirmation of Guarantee in favor of Merrill Lynch whereby under certain circumstances CHC will indemnify Merrill Lynch for losses incurred under the yield transactions to the extent these losses are caused by events that occurred prior to the execution of the Merrill Transaction Assignment Agreement. As part of the Merrill Transaction Assignment Agreement, if certain conditions are met, we have agreed to terms for the restructuring of certain bonds that were part of the December 2007 re-securitization and Merrill Lynch has agreed to allow certain assets of Guaranteed Holdings to be used for these bond restructurings. In connection with the Merrill Transaction Assignment Agreement, we accrued $25.7 million and $1.4 million in assumption fees in the three-month periods ended March 31, 2010 and 2011, respectively, in “Other Fees” within “General and Administrative Expenses” on our Consolidated Statements of Operations. The fee is due upon the termination of certain yield transactions and is calculated as 50% of the value of the collateral securing Guaranteed Holdings’ obligations under these yield transactions but not to exceed $42.0 million.
The carrying value of all the above obligations under credit intermediation agreements, representing the deferral of the fee income over the obligation periods, was $22.6 million as of March 31, 2011 and $23.7 million as of December 31, 2010. This amount is included in “Deferred revenues” within “Accounts payable, accrued expense and other liabilities” on our Consolidated Balance Sheets.
Loss Reserve Relating to Yield Transactions
During 2009, we developed a strategy to address a marked decline in the operating performance of many of the non-stabilized properties underlying our Affordable Housing investments, to manage our exposure under the yield transactions described above, and to address the declining cash flows to our Series B Freddie Mac Certificates. To address these matters and their potential impact on our interests, we expect to restructure many of the mortgage revenue bonds to allow the bonds secured by these properties to stabilize. In connection with the Natixis Master Agreement and the Merrill Transaction Assignment Agreement, we have agreed to terms for the restructuring of certain of the mortgage revenue bonds. This strategy, including the terms agreed to in the Natixis Master Agreement and the Merrill Transaction Assignment Agreement, entails cash infusions, which could approximate $249.9 million, from us and other parties with an economic interest in the properties, or may result in a reduction in the principal balance of our Series B Freddie Mac Certificates.
For many of the properties in the pools associated with the credit intermediation agreements described under “Yield Transactions” above, mortgage revenue bonds were included in the December 2007 re-securitization transaction. Certain credit intermediated funds have equity investments in the properties underlying some of the bonds that require restructuring. If the required principal buy-downs are not made for these bonds, the underlying properties can be foreclosed upon, which could cause a substantial recapture of LIHTCs thereby reducing the rate of return earned by the limited partners of the funds. A reduction in the rate of return below the rate specified at inception of the investment fund would trigger a default event that could require a payment to be made by the Primary Intermediators to the limited partners of the funds.
Should the Primary Intermediators expend cash to execute these restructurings, CFin Holdings, CFin or Guaranteed Holdings may have to reimburse them or they may have to forfeit cash that we have deposited as collateral. Should the Primary Intermediators not expend cash to the extent we have projected, we could incur additional impairments of our Series B Freddie Mac Certificates. We have analyzed the expected operations of the underlying properties and, as of March 31, 2011, maintain a reserve for possible losses of $83.9 million, principally related to potential payments to reduce the principal balance of mortgage debt on specified properties in order to reduce exposure under the Yield Transactions. As of December 31, 2010, the reserve for possible losses was $89.4 million. In addition, the impact of the assumed restructuring led to a $22.8 million impairment of our Series B Freddie Mac Certificates for the three-month period ended March 31, 2010 (see Notes 5 and 19).
- 38 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have not yet been called upon to make payments under the yield transaction obligations. However, certain cash and other assets were pledged as collateral to Merrill Lynch and Natixis by CFin, CFin Holdings, and Guaranteed Holdings. Potential additional collateral will be posted by Guaranteed Holdings from the future sale proceeds of three properties in the Merrill Lynch Credit Enhanced portfolio. As of March 31, 2011, Guaranteed Holdings maintained collateral to satisfy Merrill Lynch’s collateral requirements, consisting of cash deposits of $45.4 million which are included in “Deferred costs and other assets, net” on our Condensed Consolidated Balance Sheets and $18.5 million in investments in Series A-1 Freddie Mac Certificates included in available-for-sale investments on our Condensed Consolidated Balance Sheets. In addition, as of March 31, 2011, Centerline Financial and Guaranteed Holdings maintained a cash balance of $66.8 million, included in “Cash and cash equivalents” as a capital requirement in support of their exposure under their credit intermediation agreements.
Property Partnerships
To manage our exposure to risk of loss, we have assumed the general partner interests in certain Tax Credit Property Partnerships from non-performing general partners as part of various settlement agreements. We assumed these general partnership interests to preserve our direct or indirect investments in mortgage revenue bonds or the equity investments in property partnerships on behalf of Tax Credit Fund Partnerships that we manage.
We have hired qualified property managers for each of the property partnerships in order to improve the performances of these partnerships. During our holding period, we may need to support the property partnerships if they have not yet reached stabilization or we may choose to fund deficits as needed, to protect our interests. The assets continue to be actively managed to minimize the necessary cash flow outlays and maximize the performance of each asset. Due to the uncertain nature of cash needs at these property partnerships, we cannot estimate how much may ultimately be advanced while we own the general partner and co-general partner interests.
In addition, we may advance funds to Tax Credit Fund Partnerships to allow them to make supplemental loans for property partnerships in which they invest. These advances are then repaid to us from cash flows, if any, at the Tax Credit Fund Partnership level. Under the terms of our Term Loan and Revolving Credit Facility, we are, in certain cases, limited in the amount of advances that can be made.
As of March 31, 2011, we had a $56.6 million receivable for advances as described above, net of a $33.7 million reserve for bad debt (see Note 23). This includes $19.8 million (net of a $9.2 million reserve) recorded in CAHA’s books and $36.8 million (net of a $24.5 million reserve) recorded in our isolated special purpose entities’ CFin Holdings and Guaranteed Holdings financial statements, including $25.1 million net receivables that were assigned by CAHA to these entities on March 5, 2010 in connection with the restructuring of the Yield Transactions as part of Receivables Assignment and Assumption Agreements with both Natixis and Merrill.
B.
|
Forward Transactions
|
At March 31, 2011, we had a forward commitment to originate one loan under a Freddie Mac program in the amount of $13.9 million. This forward commitment expires in June 2011 at which date, it is expected to be funded. This lending commitment has an associated purchase commitment from Freddie Mac.
In addition, as of March 31, 2011, we had commitments to sell mortgages that have already been funded to GSEs totaling $80.6 million, which are included in “Investments – Other” as “Mortgage loans held for sale” on the Condensed Consolidated Balance Sheets.
C.
|
Mortgage Loan Loss Sharing Agreements
|
Under the Delegated Underwriting Service (“DUS”) program, we originate loans through one of our subsidiaries that are thereafter purchased or credit enhanced by Fannie Mae and sold to third-party investors. Pursuant to a master loss sharing agreement with Fannie Mae, we retain a first loss position with respect to the loans that we originate and sell under this program. For these loss sharing loans, we assume responsibility for a portion of any loss that may result from borrower defaults, based on the Fannie Mae loss sharing formulas, and Fannie Mae risk Levels I, II or III. All of the 982 loss sharing loans in this program as of March 31, 2011, were Level I loans. For a majority of these loans, if a default occurs, we are responsible for the first 5% of the unpaid principal balance and a portion of any additional losses to a maximum of 20% of the original principal balance; any remaining loss is borne by Fannie Mae. A modified risk sharing arrangement is applied to 95 loans in which our risk share is reduced to 0% to 75% of our overall share of the loss. Pursuant to this agreement, we are responsible for funding 100% of mortgagor delinquency (principal and interest) and servicing advances (taxes, insurance and foreclosure costs) until the amounts advanced exceed 5% of the unpaid principal balance at the date of default. Thereafter, for Level I loans, we may request interim loss sharing adjustments that allow us to fund 25% of such advances until final settlement under the master loss sharing agreement.
- 39 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our maximum exposure at March 31, 2011, pursuant to these agreements, was $860.1 million (representing what we would owe in accordance with the loss sharing percentages with Fannie Mae and Freddie Mac described above if every loan defaulted and losses were incurred in amounts equal to or greater than these levels for which we are responsible), although we believe this amount is not indicative of our actual potential losses. We maintain an allowance for risk-sharing obligations for loans originated under these product lines at a level that, in management’s judgment, is adequate to provide for estimated losses. At March 31, 2011 and December 31, 2010, that reserve was $29.7 million and $29.9 million, respectively. The reserve is recorded in “Accounts payable, accrued expenses and other liabilities” (see Note 14) on our Condensed Consolidated Balance Sheet.
The components of the change in the allowance for risk-sharing obligations were as follows:
(in thousands)
|
||||
Balance at January 1, 2010
|
$
|
24,219
|
||
Additional provision recorded during the period
|
935
|
|||
Realized losses on risk-sharing obligations
|
(704
|
)
|
||
Balance at March 31, 2010
|
$
|
24,450
|
||
Balance at January 1, 2011
|
29,924
|
|||
Additional provision recorded during the period
|
238
|
|||
Realized losses on risk-sharing obligations
|
(469
|
)
|
||
Balance at March 31, 2011
|
$
|
29,693
|
As of March 31, 2011, we maintained collateral consisting of money market and short-term investments of $10.9 million, which is included in “Restricted cash” on our Condensed Consolidated Balance Sheet, to satisfy the Fannie Mae collateral requirements of which we were in compliance with at March 31, 2011. In addition, we maintain cash in excess of program requirements. At March 31, 2011, we had $9.2 million excess cash.
We are also required by the master agreement with Freddie Mac to provide collateral as security for payment of the reimbursement obligation. The collateral can include a combination of the net worth of one of our Mortgage Banking subsidiaries, a letter of credit and/or cash. To meet this collateral requirement, we have a letter of credit arrangement with Bank of America as a part of our Revolving Credit Facility (see Note 12). At March 31, 2011, commitments under this agreement totaled $12.0 million.
D.
|
Legal Contingencies
|
We are subject to routine litigation and administrative proceedings arising in the ordinary course of business. In addition, we are party to the following actions:
·
|
On or about March 6, 2009, Regions Bank, as Trustee under a Trust Indenture dated April 1, 2005 respecting the Walton Trail Apartments, commenced an action, entitled Regions Bank v. Deickman, et al., Civil Action No. 2009-CV-165607-MJW, in the Superior Court of Fulton County, Georgia, against guarantors of the bond indebtedness of Walton Trails, Stephen R. Dieckman, Arthur Dickson Cannon, Jr. and Arthur Dickson Cannon, III (the “Defendants”) seeking to collect money owed under a certain Guaranty and Suretyship Agreement dated as of May 1, 2005. On or about May 28, 2009, the Defendants filed a Third-Party Complaint in that action against CCG and Caswyck Trail, LLC (“Caswyck”). Defendants thereafter amended their Third-Party Complaint. Caswyck is a Georgia limited liability company, which owns the Walton Trail affordable housing apartment complex in Georgia and in which indirect subsidiaries of CCG and an investment fund sponsored by CCG are members. The Amended Third-Party Complaint alleges that CCG misled and defrauded the Defendants and acted in bad faith in connection with certain unsuccessful and unconsummated negotiations to restructure the finances of Caswyck. The Amended Third-Party Complaint asserts a claim for common law fraud against CCG and claims for subrogation, indemnification, unjust enrichment and declaratory judgment against Caswyck for any liability that Defendants may have to the Trustee. The Defendants seek unspecified amounts of damages, attorney’s fees and costs. On or about August 10, 2009, CCG and Caswyck each separately moved to dismiss the claims then asserted against it. In accordance with Georgia procedures, each also answered the Third-Party Complaint on or about August 10, 2009 and asserted counterclaims against the Third-Party Plaintiffs. In two written orders each dated December 14, 2009, the Court granted CCG’s and Caswyck’s motions to dismiss and dismissed the subrogation and contribution claims against Caswyck and the fraud claim against Centerline. After Caswyck moved to dismiss the subrogation and contribution claims, but prior to the Court ruling on that motion, the third-party plaintiffs amended their Third-Party Complaint to assert their claims for indemnification and unjust enrichment against Caswyck. After the entry of the Court’s December 14, 2009 dismissal orders, the third-party plaintiffs moved for reconsideration of the Court’s decision to dismiss the fraud claim against CCG and for permission to take an immediate appeal of that decision. The Court has not yet ruled on those two motions by the third-party plaintiffs. On or about July 9, 2010, the Court entered a Case Scheduling Order requiring, among other pretrial deadlines and procedures, that all discovery be completed by August 15, 2011, dispositive motions must be made by September 30, 2011 and the case will be set on a trial calendar in early 2012. After entry of the Court’s Case Scheduling Order, the parties engaged in settlement discussions, which were unsuccessful in resolving the litigation. CCG and Caswyck intend to continue to defend vigorously against the claims asserted against them.
|
- 40 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
·
|
On or about July 23, 2010, Locust Street Lofts, LP, (“Lofts”), Locust Street Tenant, LP, (“Tenant”), Elias Haus Partners, LLC, Elias Tenant, LLC, Bill L. Bruce and Richard Yackey commenced an action in the Circuit Court of the City of St. Louis, Missouri, entitled Locust Street Lofts, LP, et al v. CCL Locust Street Owner LLC, et al., Cause No. 1022-CC10087, against certain subsidiaries of the Company and investment funds managed by the Company’s subsidiaries (the “Centerline Locust Street Defendants” ). The plaintiffs, however, did not immediately serve the summons and complaint on the Centerline Locust Street Defendants. On or about September 20, 2010, the Centerline Locust Street Defendants served their answer and counterclaim and filed certain motions in the action, including one for a preliminary injunction or the appointment of a receiver.
|
The complaint asserts claims that certain of the investment funds managed by the Company’s subsidiaries breached certain contracts by not paying a total of approximately $1.2 million in capital contributions to Lofts and Tenant, which are project partnerships in which certain of the Centerline Locust Street Defendants are limited partners. The complaint also alleges that the Centerline Locust Street Defendants that serve as the special limited partner for Lofts and Tenant improperly removed certain plaintiffs from their positions as the general partners of Lofts and Tenant. The complaint seeks money damages of approximately $1.2 million, interest, costs, attorneys’ fees and declaratory relief. The court conducted an evidentiary hearing on the motion for a preliminary injunction or a receiver on October 13 and 14, 2010 and in a memorandum and order dated January 13, 2011 denied that motion. The Centerline Locust Street Defendants intend to defend the claims asserted against them and to prosecute their counterclaims vigorously.
E.
|
Other Contingent Liabilities
|
We have entered into several transactions pursuant to the terms of which we will provide credit support to construction lenders for project completion and Fannie Mae conversion. In some instances, we have also agreed to acquire subordinated bonds to the extent the construction period bonds do not fully convert. In some instances, we also provide payment, operating deficit, recapture and replacement reserve guarantees as business requirements for developers to obtain construction financing. Our maximum aggregate exposure relating to these transactions was $185.8 million as of March 31, 2011. To date, we have had minimal exposure to losses under these transactions and anticipate no material liquidity requirements in satisfaction of any guarantee issued.
In addition, we have entered into a number of indemnification agreements whereby we will indemnify a purchaser of the general partner (“GP”) interests for losses they may incur as a result of certain acts, including those that occurred while we served as the GP. Although the indemnification agreements do not explicitly provide a cap on our exposure, to date we have had minimal exposure to losses under these transactions and anticipate no material liquidity requirements in satisfaction of any indemnities issued.
- 41 -
CENTERLINE HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Centerline Financial has two credit intermediation agreements to provide for monthly principal and interest debt service payments for debt owed by property partnerships owned by third parties, to the extent there is a shortfall in payment from the underlying property. In return, we receive fees monthly based on a fixed rate until the expiration of the agreements that occur in 2023 and 2025. Total potential exposure pursuant to these transactions is $33.7 million as well as monthly interest obligations, assuming the bonds default and cannot be sold. The recourse upon default would be to acquire the bond and foreclose on the underlying property at which point the property would be rehabilitated or sold. The fair value of the obligations, representing the deferral of the fee income over the obligation period, was $0.9 million as of March 31, 2011. This amount is included in “Deferred revenues” within “Accounts payable, accrued expenses and other liabilities” on our Condensed Consolidated Balance Sheets.
As indicated in Note 23, an affiliate of TRCLP assumed $5.0 million of the debt under our Term Loan and Revolving Credit Facility in connection with a consulting and advisory agreement we entered into with the TRCLP affiliate. Under the consulting agreement, we are obligated to pay fees to the TRCLP affiliate equal to the interest payable on the TRCLP Loan.
Under the terms of the agreement and as detailed in Note 23, in some cases, if we terminate the agreement we may be obligated to immediately repay the remaining principal balance of the TRCLP loan
- 42 -
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to explain the results of operations and financial condition of Centerline Holding Company. MD&A is provided as a supplement to, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the accompanying notes.
This MD&A contains forward-looking statements; please see page 69 for more information.
Page
|
||
Significant components of the MD&A section include:
|
||
SECTION 1 – Overview
The overview section provides a summary of Centerline and our reportable business groups. We also include a discussion of factors affecting our consolidated results of operations as well as items specific to each business group.
|
44
|
|
The consolidated results of operations section provides an analysis of our consolidated results on a reportable segment basis for the three months ended March 31, 2011, against the comparable prior year period. Significant subsections within this section are as follows:
|
45
|
|
Comparability of Results
|
45
|
|
Summary Consolidated Results
|
46
|
|
Affordable Housing
|
48
|
|
Mortgage Banking
|
54
|
|
Corporate
|
58
|
|
Consolidated Partnerships
|
60
|
|
Income Taxes
|
62
|
|
Accounting Developments
|
62
|
|
Inflation
|
63
|
|
SECTION 3 – Liquidity and Capital Resources
The liquidity and capital resources section discusses our ability to generate adequate amounts of cash to meet our current and future needs. Significant subsections within this section are as follows:
|
63
|
|
Liquidity
|
63
|
|
Cash Flows
|
65
|
|
Liquidity Requirements after March 31, 2011
|
65
|
|
Fair Value Disclosures
|
66
|
|
Capital Resources
|
67
|
|
Commitments and Contingencies
|
69
|
|
SECTION 4 – Forward Looking Statements
|
70
|
- 43 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
SECTION 1 – OVERVIEW
Centerline Holding Company (OTC: CLNH), through its subsidiaries, provides real estate financial and asset management services for affordable and conventional multifamily housing. We offer a range of debt and equity financing and investment products to developers, owners, and investors. We originate debt and equity products for affordable and market-rate multifamily properties, sponsor and manage 136 public and private real estate investment funds and the assets within these funds for institutional and retail investors, and service and manage mortgage loans on behalf of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), known collectively as Government-Sponsored Enterprises (“GSEs”), as well as the Government National Mortgage Association (“Ginnie Mae”), and the Federal Housing Administration (“FHA”). Centerline Holding Company, or its predecessor entities, has been in continuous operation since 1972; it became a public company in 1997. Organized as a statutory trust created under the laws of Delaware, we conduct substantially all of our business through our subsidiaries, generally under the designation Centerline Capital Group. The terms “we”, “us”, “our” or “the Company” as used throughout this document refer to the business as a whole, or a subsidiary, while the term “parent trust” refers only to Centerline Holding Company as a stand-alone entity.
We operate through two core business groups: Affordable Housing and Mortgage Banking. Our Corporate Group, comprising the Finance and Accounting, Treasury, Legal, Corporate Communications, Operations and Risk Management departments, supports our two business groups. We also consolidate certain funds we control, notwithstanding the fact that we may have only a minority, and in most cases negligible, economic interest. These funds are included in our Consolidated Partnership Group.
Our team of professionals comprises a unique blend of capital markets and real estate expertise, experience, and creativity to provide highly practical, customized solutions for real estate investors, developers, and owners. We pride ourselves on strong underwriting protocols, solid credit processes and procedures, a superior asset management platform, creativity, flexibility, and the ability to react quickly to our customers’ needs. We have built a growing debt origination platform, with strong sponsor relationships, access to a variety of capital sources, and a stable fund management business with deep investor relationships. Most important, we have retained and recruited the best and the brightest professionals to manage, run, and build our businesses.
Disruption in worldwide credit markets that began in 2007 and continued into 2010 adversely affected all of our businesses. Ongoing lack of market liquidity severely limited capital available for investment. The economy depressed asset values, limited our ability to raise equity capital to grow assets under management, lowered origination volumes, led to increased default rates within our portfolios, and, in our credit risk products businesses, led to business dormancy. These factors significantly reduced our earnings power and negatively affected our own liquidity.
Our business was further constrained by the instability of our balance sheet and by the terms of our Term Loan and Revolving Credit Facility and other debt agreements. Loan terms that included higher interest rates and rapid amortization of debt balances limited our ability to engage in specified kinds of transactions, including certain types of fund originations, without lender approval.
As a result of the struggling economy and a capital structure that was difficult to support, in March 2010 we completed a comprehensive restructuring of the Company (the “March 2010 Restructuring”), whereby we:
·
|
sold our Portfolio Management Group and the portion of the Commercial Real Estate Group that did not relate to loan originations to affiliates of Island Capital;
|
·
|
amended and restructured our senior credit facility;
|
·
|
restructured various components of our equity and issued a new series of shares;
|
·
|
restructured our credit intermediation agreements by assigning obligations of Centerline Holding Company (“CHC”) and Centerline Capital Group (“CCG”) under credit intermediation agreements to certain isolated special purpose entities; and
|
·
|
settled a majority of our unsecured liabilities and restructured many of our contingent liabilities.
|
The March 2010 Restructuring has positioned us for potential growth in our remaining core businesses of Low-Income Housing Tax Credit (“LIHTC”) fund origination, asset management, and affordable and conventional multifamily lending.
- 44 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Prior period segment results were adjusted retrospectively to reflect the Company’s 2011 decision to allocate certain Corporate overhead, such as Human Resources, Information Technology, and Finance and Accounting to the Affordable Housing and Mortgage Banking segments.
- 45 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Our summary consolidated results of operations are presented below for the three months ended March 31, 2011 and 2010:
Three Months Ended March 31,
|
||||||||||||||||||||||||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||||||||||||||||||||||||
(in thousands)
|
Affordable Housing
|
Mortgage Banking
|
Corporate
|
Consolidated Partnerships
|
Eliminations and Adjustments
|
Total
|
% of Revenues
|
Affordable Housing
|
Mortgage Banking
|
Corporate
|
Consolidated Partnerships
|
Eliminations and Adjustments
|
Total
|
% of Revenues
|
% Change
|
|||||||||||||||||||||||||||||||
Revenues
|
||||||||||||||||||||||||||||||||||||||||||||||
Mortgage revenue bonds
|
$ | 12,378 | $ | -- | $ | -- | $ | -- | $ | (8,240 | ) | $ | 4,138 | 8.5 | % | $ | 12,939 | $ | -- | $ | -- | $ | -- | $ | (7,104 | ) | $ | 5,835 | 11.1 | % | (29.1 | )% | ||||||||||||||
Other interest income
|
2,896 | 808 | 17 | -- | (32 | ) | 3,689 | 7.6 | 6,239 | 559 | 4 | -- | (29 | ) | 6,773 | 12.9 | (45.5 | ) | ||||||||||||||||||||||||||||
Interest income
|
15,274 | 808 | 17 | -- | (8,272 | ) | 7,827 | 16.1 | 19,178 | 559 | 4 | -- | (7,133 | ) | 12,608 | 24.0 | (37.9 | ) | ||||||||||||||||||||||||||||
Fund sponsorship
|
7,326 | -- | -- | -- | (6,168 | ) | 1,158 | 2.4 | 6,079 | -- | -- | -- | (5,277 | ) | 802 | 1.5 | 44.4 | |||||||||||||||||||||||||||||
Mortgage origination fees
|
230 | 823 | -- | -- | 0 | 1,053 | 2.2 | 173 | 454 | -- | -- | -- | 627 | 1.2 | 67.9 | |||||||||||||||||||||||||||||||
Mortgage servicing fees
|
894 | 4,879 | -- | -- | 14 | 5,787 | 11.9 | 568 | 4,781 | -- | -- | 130 | 5,479 | 10.4 | 5.6 | |||||||||||||||||||||||||||||||
Credit intermediation fees
|
1,169 | -- | -- | -- | (1,139 | ) | 30 | 0.1 | 1,785 | -- | -- | -- | (1,565 | ) | 220 | 0.4 | (86.4 | ) | ||||||||||||||||||||||||||||
Other fee income
|
-- | 120 | -- | -- | (218 | ) | (98 | ) | (0.2 | ) | -- | 30 | -- | -- | (25 | ) | 5 | -- | N/M | |||||||||||||||||||||||||||
Fee income
|
9,619 | 5,822 | -- | -- | (7,511 | ) | 7,930 | 16.3 | 8,605 | 5,265 | -- | -- | (6,737 | ) | 7,133 | 13.6 | 11.2 | |||||||||||||||||||||||||||||
Gain on sale of mortgage loans
|
880 | 4,843 | -- | -- | -- | 5,723 | 11.7 | 200 | 4,212 | -- | -- | -- | 4,412 | 8.4 | 29.7 | |||||||||||||||||||||||||||||||
Prepayment penalties
|
-- | 39 | -- | -- | -- | 39 | 0.1 | -- | 20 | -- | -- | -- | 20 | -- | 95.0 | |||||||||||||||||||||||||||||||
Expense reimbursements
|
2,251 | -- | 100 | -- | (1,681 | ) | 670 | 1.4 | 2,184 | -- | 100 | -- | (2,284 | ) | -- | -- | N/A | |||||||||||||||||||||||||||||
Miscellaneous
|
69 | 193 | 1 | -- | (1 | ) | 262 | 0.5 | 237 | 37 | 250 | -- | (2 | ) | 522 | 1.0 | (49.8 | ) | ||||||||||||||||||||||||||||
Other revenues
|
3,200 | 5,075 | 101 | -- | (1,682 | ) | 6,694 | 13.7 | 2,621 | 4,269 | 350 | -- | (2,286 | ) | 4,954 | 9.4 | 35.1 | |||||||||||||||||||||||||||||
Revenues – consolidated partnerships
|
-- | -- | -- | 26,258 | -- | 26,258 | 53.9 | -- | -- | -- | 27,917 | -- | 27,917 | 53.1 | (5.9 | ) | ||||||||||||||||||||||||||||||
Total revenues
|
$ | 28,093 | $ | 11,705 | $ | 118 | $ | 26,258 | $ | (17,465 | ) | $ | 48,709 | 100.0 | % | $ | 30,404 | $ | 10,093 | $ | 354 | $ | 27,917 | $ | (16,156 | ) | $ | 52,612 | 100 | % | (7.4 | )% | ||||||||||||||
Expenses
|
||||||||||||||||||||||||||||||||||||||||||||||
Salary
|
$ | 4,993 | $ | 3,032 | $ | 2,843 | $ | -- | $ | -- | $ | 10,868 | 22.3 | % | $ | 5,137 | $ | 2,708 | $ | 5,578 | $ | -- | $ | (14 | ) | $ | 13,409 | 25.5 | % | (18.9 | )% | |||||||||||||||
Other general and administrative
|
4,161 | 2,359 | 6,526 | -- | (336 | ) | 12,710 | 26.1 | 29,467 | 1,677 | 21,103 | -- | (1,513 | ) | 50,734 | 96.4 | (74.9 | ) | ||||||||||||||||||||||||||||
General and administrative
|
9,154 | 5,391 | 9,369 | -- | (336 | ) | 23,578 | 48.4 | 34,604 | 4,385 | 26,681 | -- | (1,527 | ) | 64,143 | 121.9 | (63.2 | ) | ||||||||||||||||||||||||||||
Affordable Housing loss reserve
|
(5,500 | ) | -- | -- | -- | -- | (5,500 | ) | (11.3 | ) | (62,000 | ) | 935 | (48,044 | ) | -- | -- | (109,109 | ) | (207.4 | ) | (95.0 | ) | |||||||||||||||||||||||
Bad debt expense
|
2,471 | -- | -- | -- | 2 | 2,473 | 5.1 | (3,387 | ) | -- | -- | -- | -- | (3,387 | ) | (6.4 | ) | (173.0 | ) | |||||||||||||||||||||||||||
Provision for risk-sharing obligations
|
238 | -- | -- | -- | -- | 238 | 0.5 | -- | -- | -- | -- | -- | -- | -- | N/A | |||||||||||||||||||||||||||||||
Recovery (Provision) for Losses
|
(2,791 | ) | -- | -- | -- | 2 | (2,789 | ) | (5.7 | ) | (65,387 | ) | 935 | (48,044 | ) | -- | -- | (112,496 | ) | (213.8 | ) | (97.5 | ) | |||||||||||||||||||||||
Borrowing and Financing
|
12,882 | 249 | 1,297 | -- | (226 | ) | 14,202 | 29.2 | 10,953 | 133 | 3,634 | -- | (461 | ) | 14,259 | 27.1 | (0.4 | ) | ||||||||||||||||||||||||||||
Derivatives – non-cash impact
|
(703 | ) | -- | -- | -- | -- | (703 | ) | (1.4 | ) | (1,471 | ) | -- | -- | -- | -- | (1,471 | ) | (2.8 | ) | (52.2 | ) | ||||||||||||||||||||||||
Preferred shares of subsidiary
|
960 | -- | -- | -- | -- | 960 | 2.0 | 2,320 | -- | -- | -- | -- | 2,320 | 4.4 | (58.6 | ) | ||||||||||||||||||||||||||||||
Interest expense
|
13,139 | 249 | 1,297 | -- | (226 | ) | 14,459 | 29.7 | 11,802 | 133 | 3,634 | -- | (461 | ) | 15,108 | 28.7 | (4.3 | ) | ||||||||||||||||||||||||||||
Depreciation and amortization
|
414 | 2,717 | 415 | -- | -- | 3,546 | 7.3 | 868 | 2,529 | 3,063 | -- | 5 | 6,465 | 12.3 | (45.2 | ) | ||||||||||||||||||||||||||||||
Loss on impairment of assets
|
-- | -- | -- | -- | -- | -- | -- | 22,409 | -- | -- | -- | -- | 22,409 | 42.6 | (100.0 | ) | ||||||||||||||||||||||||||||||
Interest expense – consolidated partnerships
|
-- | -- | -- | 12,916 | (8,255 | ) | 4,661 | 9.6 | -- | -- | -- | 13,453 | (7,134 | ) | 6,319 | 12.0 | (26.2 | ) | ||||||||||||||||||||||||||||
Other expense – consolidated partnerships
|
-- | -- | -- | 55,182 | (9,349 | ) | 45,833 | 94.1 | -- | -- | -- | 62,270 | (8,967 | ) | 53,303 | 101.3 | (14.0 | ) | ||||||||||||||||||||||||||||
Total expenses
|
$ | 19,916 | $ | 8,357 | $ | 11,081 | $ | 68,098 | $ | (18,164 | ) | $ | 89,288 | 183.3 | % | $ | 4,296 | $ | 7,982 | $ | (14,666 | ) | $ | 75,723 | $ | (18,084 | ) | $ | 55,251 | 105.0 | % | 61.6 | % | |||||||||||||
- 46 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Three Months Ended March 31,
|
||||||||||||||||||||||||||||||||||||||||||||||
2011
|
2010
|
|||||||||||||||||||||||||||||||||||||||||||||
(in thousands)
|
Affordable Housing
|
Mortgage Banking
|
Corporate
|
Consolidated Partnerships
|
Eliminations and Adjustments
|
Total
|
% of Revenues
|
Affordable Housing
|
Mortgage Banking
|
Corporate
|
Consolidated Partnerships
|
Eliminations and Adjustments
|
Total
|
% of Revenues
|
% Change
|
Equity and other income (loss)
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | -- | % | $ | (134 | ) | $ | -- | $ | -- | $ | -- | $ | -- | $ | (134 | ) | (0.3 | )% | (100.0 | )% | ||||||||||||||
Gain on settlement of liability
|
-- | -- | 1,756 | -- | -- | 1,756 | 3.6 | -- | -- | 25,253 | -- | -- | 25,253 | 48.0 | (93.0 | ) | ||||||||||||||||||||||||||||||
Repayment of bonds/sales of assets
|
-- | -- | -- | -- | -- | -- | -- | 2,191 | -- | -- | -- | -- | 2,191 | 4.2 | (100.0 | ) | ||||||||||||||||||||||||||||||
Loss on investments – consolidated partnerships
|
-- | -- | -- | (61,441 | ) | -- | (61,441 | ) | (126.1 | ) | -- | -- | -- | (90,806 | ) | -- | (90,806 | ) | (172.6 | ) | (32.3 | ) | ||||||||||||||||||||||||
Other (loss) income
|
-- | -- | 1,756 | (61,441 | ) | -- | (59,685 | ) | (122.5 | ) | 2,057 | -- | 25,253 | (90,806 | ) | -- | (63,496 | ) | (120.7 | ) | (6.0 | ) | ||||||||||||||||||||||||
Income tax provision/benefit – continuing operations
|
-- | -- | (193 | ) | -- | -- | (193 | ) | (0.4 | ) | -- | -- | (393 | ) | -- | -- | (393 | ) | (0.7 | ) | (50.9 | ) | ||||||||||||||||||||||||
Net income (loss) – continuing operations
|
8,177 | 3,348 | (9,400 | ) | (103,281 | ) | 699 | (100,457 | ) | (206.2 | ) | 28,165 | 2,111 | 39,880 | (138,612 | ) | 1,928 | (66,528 | ) | (126.5 | ) | 51.0 | ||||||||||||||||||||||||
Allocation – preferred shares
|
(1,556 | ) | -- | -- | -- | -- | (1,556 | ) | (3.2 | ) | (1,556 | ) | -- | -- | -- | -- | (1,556 | ) | (3.0 | ) | -- | |||||||||||||||||||||||||
Allocation – non-controlling interests
|
(671 | ) | -- | 413 | -- | -- | (258 | ) | (0.5 | ) | 90 | -- | (1,084 | ) | -- | -- | (994 | ) | (1.9 | ) | (74.0 | ) | ||||||||||||||||||||||||
Allocation – consolidated partnerships
|
-- | -- | -- | 102,780 | -- | 102,780 | 211.0 | -- | -- | -- | 138,445 | -- | 138,445 | 263.1 | (25.8 | ) | ||||||||||||||||||||||||||||||
Net (income) loss attributable to non-controlling interests – continuing operations
|
(2,227 | ) | -- | 413 | 102,780 | -- | 100,966 | 207.3 | (1,466 | ) | -- | (1,084 | ) | 138,445 | -- | 135,895 | 258.3 | (25.7 | ) | |||||||||||||||||||||||||||
Net income (loss) attributable to Centerline Holding Company shareholders – continuing operations, pre-allocation
|
5,950 | 3,348 | (8,987 | ) | (501 | ) | 699 | 509 | 1.0 | 26,699 | 2,111 | 38,796 | (167 | ) | 1,928 | 69,367 | 131.8 | (99.3 | ) | |||||||||||||||||||||||||||
Inter-segments expense allocation
|
5,731 | 2,607 | (8,338 | ) | -- | -- | -- | -- | 12,369 | 5,297 | (16,502 | ) | -- | (1,164 | ) | -- | -- | N/A | ||||||||||||||||||||||||||||
Net income (loss) attributable to Centerline Holding Company shareholders – continuing operations
|
$ | 219 | $ | 741 | $ | (649 | ) | $ | (501 | ) | $ | 699 | $ | 509 | 1.0 | $ | 14,330 | $ | (3,186 | ) | $ | 55,298 | $ | (167 | ) | $ | 3,092 | $ | 69,367 | 131.8 | (99.3 | ) | ||||||||||||||
Net income – discontinued operations
|
253 | 0.5 | 160,262 | 304.6 | (99.8 | ) | ||||||||||||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests – discontinued operations
|
-- | -- | (89,918 | ) | (170.9 | ) | (100.0 | ) | ||||||||||||||||||||||||||||||||||||||
Net income attributable to Centerline Holding Company shareholders – discontinued operations
|
253 | 0.5 | 70,344 | 133.7 | (99.6 | ) | ||||||||||||||||||||||||||||||||||||||||
Total income attributable to Centerline Holding Company shareholders
|
$ | 762 | 1.6 | % | $ | 139,711 | 265.5 | % | (99.5 | ) |
N/M – Not meaningful.
- 47 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Net income or loss is defined as the net result of total company operations, prior to allocation of income or loss to non-controlling interests. As the Tax Credit Fund Partnerships (by design) always generate operating losses, we expect to record net losses for the foreseeable future as they represent a significant portion of our consolidated operations. After allocation of income or loss to non-controlling interests, we recorded net income allocable to our shareholders for the 2011 and for the 2010 periods. For the periods presented, those items that are principally non-cash in nature and impact the comparability of results from period-to-period are highlighted in the table below. Such items are shown prior to any adjustments for tax and allocations to non-controlling interests:
Three Months Ended
March 31,
|
|||||||
(dollars in thousands)
|
2011
|
2010
|
|||||
Reduction/(increase) to net income:
|
|||||||
Asset impairments (excluding equity investments):
|
|||||||
Affordable Housing Group:
|
|||||||
Series B Freddie Mac Certificates
|
$
|
--
|
$
|
22,814
|
|||
Stabilization escrow
|
--
|
(405
|
)
|
||||
Corporate Group:
|
|||||||
Professional fees related to the March 2010 Restructuring
|
--
|
11,793
|
|||||
Other items:
|
|||||||
Affordable Housing Group:
|
|||||||
Affordable Housing loss reserve
|
(5,500
|
)
|
(62,000
|
)
|
|||
Provision for risk-sharing obligations
|
238
|
--
|
|||||
Mortgage Banking Group:
|
|||||||
Provision for risk-sharing obligations
|
--
|
935
|
|||||
Corporate Group:
|
|||||||
Gain on sale of discontinued operations
|
--
|
(20,500
|
)
|
||||
Gain on settlement of liability
|
(1,756
|
)
|
(25,253
|
)
|
|||
Assumption fee relating to restructuring of credit intermediation agreements
|
1,396
|
27,623
|
|||||
Expense for Series A shares issued in connection with restructuring of credit intermediation agreements
|
--
|
2,842
|
|||||
Reversal of lease termination costs
|
--
|
(48,044
|
)
|
||||
Non-cash impact of derivatives
|
(703
|
)
|
(1,471
|
)(1)
|
|||
Severance costs
|
--
|
226
|
|||||
(1) Includes gains on termination of two derivative contracts.
|
Affordable Housing
Our Affordable Housing Group provides equity and debt financing to properties that benefit from the LIHTC or other financial structures (collectively “Tax Credit”) intended to promote development of affordable multifamily housing properties. We sponsor and manage funds for institutional and retail investors that invest in affordable housing properties nationwide. We also originate and service affordable housing multifamily loans under GSE, Ginnie Mae and FHA programs. Over the last two years, due to the economic environment and the financial uncertainty we were facing prior to the March 2010 Restructuring, we experienced little fund origination activity, which contributed to a reduction in fees earned. During this time, our focus has been on asset management and administration of our existing funds and properties, for which we have been receiving fees. Asset Management includes managing construction risk throughout the construction process, monitoring specially serviced assets, which includes assets where an affiliate of ours has taken over the General Partner (“GP”) interest, assets that have gone into default or are in workout, or assets that have been foreclosed on. During 2010 and into 2011, corporate investors have shown a renewed interest in the low-income housing tax credit equity market. That and the March 2010 Restructuring provided us with the financial stability we needed to become more active in pursuing new fund originations. In the fourth quarter of 2010, we also began acquiring limited partnerships interests in entities that own tax credit properties in anticipation of holding these investments on a short-term basis for inclusion in future investment fund offerings. In the first quarter of 2011 we raised $119.3 million of gross equity for a new fund origination, of which we invested $62.2 million in new property acquisitions. We will continue to actively pursue new fund originations going forward. We also anticipate expanding our affordable debt platform through organic growth, improved cross-selling, strategic hiring, and improved mining of our existing tax credit equity portfolio.
- 48 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
A description of the revenue streams for our Affordable Housing operations can be found in our 2010 Form 10-K.
Three Months Ended March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
Interest income:
|
||||||||||||
Mortgage revenue bond interest income
|
$ | 12,378 | $ | 12,939 | (4.3 | )% | ||||||
Other interest income
|
2,896 | 6,239 | (53.6 | ) | ||||||||
Fee income:
|
||||||||||||
Fund sponsorship
|
7,326 | 6,079 | 20.5 | |||||||||
Mortgage origination fees
|
230 | 173 | 32.9 | |||||||||
Mortgage servicing fees
|
894 | 568 | 57.4 | |||||||||
Credit intermediation fees
|
1,169 | 1,785 | (34.5 | ) | ||||||||
Other:
|
||||||||||||
Gain on sale of mortgage loans
|
880 | 200 | 340.0 | |||||||||
Expense reimbursements
|
2,251 | 2,184 | 3.1 | |||||||||
Miscellaneous
|
69 | 237 | (70.9 | ) | ||||||||
Total revenues
|
$ | 28,093 | $ | 30,404 | (7.6 | )% |
Interest Income
Mortgage Revenue Bond Interest Income
The decrease is primarily due to two properties in default that were sold in the first quarter of 2010 whose proceeds were applied to interest previously reserved for in the amount of $1.6 million. This was partially offset by the increase in the average principal balance of the mortgage revenue bonds of 14.9% (as shown in the table below). Because our role as special servicer of the mortgage revenue bonds allows us to repurchase those bonds (although we do not intend to), we re-recognize bonds as assets when transferring them into special servicing and de-recognize bonds when transferring them out of special servicing.
The following table presents information related to our mortgage revenue bond interest income:
Three Months Ended March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
Average number of bonds on the balance sheet not receiving sale recognition
|
96 | 85 | 12.9 | % | ||||||||
Average balance (unpaid principal balance)
|
$ | 862,779 | $ | 750,604 | 14.9 | |||||||
Weighted average yield
|
6.56 | % | 6.57 | % |
Other Interest Income
Other interest income includes the interest earned on retained interests from the 2007 re-securitization transaction (specifically the Series A-1 and Series B Freddie Mac Certificates) and interest on the stabilization escrow account established at the time of the re-securitization. $1.7 million of the overall decrease of $3.3 million in revenue in the first quarter of 2011 is the result of a decrease in the average cost basis of the Series B Freddie Mac Certificates as well as the decrease in the average effective interest rate from 10.5% in 2010 to 9.6% in 2011 due to a reduction in the projected future cash flows throughout 2010 of the Series B Freddie Mac Certificates resulting in other-than-temporary impairments. Also contributing to the overall decrease was a $1.4 million decrease relating to the sale of $55.0 million of Series A-1 Freddie Mac certificates which occurred in December 2010.
- 49 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Fee Income
Fee income in Affordable Housing includes income generated from Consolidated Partnerships that are eliminated upon consolidation. The following table reflects total fee income and the fees from consolidated partnerships that are eliminated upon consolidation.
Three Months Ended
March 31, |
||||||||
(dollars in thousands)
|
2011
|
2010
|
||||||
Total fee income
|
$ | 9,619 | $ | 8,605 | ||||
Fee income generated from Consolidated Partnerships
|
(7,511 | ) | (6,737 | ) | ||||
Total fee income included in consolidated results
|
$ | 2,108 | $ | 1,868 |
Fund Sponsorship
Three Months Ended
March 31, |
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
Fees based on equity invested
|
||||||||||||
Property acquisition fees
|
$ | 1,400 | $ | -- | N/A | |||||||
Organization, offering and acquisition allowance fees
|
1,244 | -- | N/A | |||||||||
Fees based on management of sponsored funds
|
||||||||||||
Partnership management fees
|
1,340 | 1,917 | (30.1 | )% | ||||||||
Asset management fees
|
1,917 | 2,905 | (34.0 | ) | ||||||||
Other fee income
|
1,425 | 1,257 | 13.4 | |||||||||
Total fund sponsorship fee income
|
$ | 7,326 | $ | 6,079 | 20.5 | % | ||||||
Assets under management – tax credit funds
|
$ | 9,410,437 | $ | 9,286,110 | 1.3 | % | ||||||
Equity raised by tax credit funds
|
$ | 119,250 | $ | 7,849 | N/M | |||||||
Equity invested by tax credit funds(1)
|
$ | 62,220 | $ | 7,849 | N/M | |||||||
N/A – Not applicable.
N/M – Not meaningful.
|
||||||||||||
(1) Excludes warehoused properties that have not yet closed into an investment fund.
|
Fees Based on Equity Invested
While we may acquire properties on an ongoing basis throughout the year, we do not recognize property acquisition fees until we place the property into a sponsored fund. Therefore, a change in timing of a fund closure may impact the level of revenues we recognize in a given period. Additionally, the type of funds originated (whether for a single investor, or one with multiple investors) can affect the level of revenues as the fee rate for each varies. Fees based on equity invested of $2.6 million recorded during the first quarter of 2011 pertained to eight property closings following the new fund origination in February 2011, whereas, during the first quarter of 2010, there were no property closings.
Fees Based on Management of Sponsored Funds
We collect partnership management fees at the time a fund closes and recognize them over the first five years of a fund’s life. Due to the expiration of the 5-year service period for certain funds, these fees, have decreased throughout 2010 and in the first quarter of 2011. This decrease was partially offset in the first quarter of 2011 due to the new fund origination for which we collect partnership management fees.
- 50 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Asset management fees are collected over the life of a fund and recognized as earned to the extent that the investment funds have available cash flow. The decrease in asset management fees in the first quarter of 2011 primarily was related to a reduction in the cash reserve balances of certain funds causing an uncertainty as to the collectability of fees for these funds as well as a portion of the prepaid asset management fees for certain funds becoming fully amortized as of March 31, 2011.
Mortgage Origination Fees
Affordable Housing mortgage loan originations for the three months ended March 31, 2011 and 2010 are as follows:
Three Months Ended March 31,
|
|||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
||||||||
Total mortgage origination activity(1)
|
$
|
8,545
|
$
|
15,940
|
(46.4
|
)%
|
|||||
Mortgages originated in prior periods and sold during the period
|
17,000
|
--
|
|||||||||
Less: mortgages originated but not yet sold(2)
|
(4,203
|
)
|
--
|
||||||||
Total mortgage origination activity recognized for GAAP and for which revenue is recognized
|
$
|
21,342
|
$
|
15,940
|
33.9
|
%
|
|||||
% of Total
|
% of Total
|
||||||||||
Loan Purchasers
|
|||||||||||
Fannie Mae
|
$
|
21,342
|
100.0
|
%
|
$
|
5,820
|
36.5
|
%
|
|||
Freddie Mac
|
--
|
--
|
10,120
|
63.5
|
|||||||
Total
|
$
|
21,342
|
100.0
|
%
|
$
|
15,940
|
100.0
|
%
|
|||
(1) Includes all mortgages funded during the period.
(2) Included in Other Investments – mortgage loans held for sale.
|
During the first quarter of 2011, mortgage origination fee revenues increased as compared to the same period in 2010 as mortgage origination activity recognized for GAAP and for which revenue is recognized were higher as a result of an increase in mortgage originations from prior periods that were sold during this quarter.
Mortgage Servicing Fees
Mortgage servicing fees increased in the first quarter of 2011 due to an increase in the Affordable Housing loan servicing portfolio year-over-year. Our portfolio of loans increased at March 31, 2011 as compared to March 31, 2010 due to the origination volume that we experienced throughout 2010, more than sufficiently replacing loan maturities and payoffs in the portfolio.
March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Primary servicing portfolio
|
$ | 467,676 | $ | 413,198 | 13.2 | % |
Credit Intermediation Fees
We collect credit intermediation fees at the time a fund closes and recognize them over a fund’s life based on risk-weighted periods on a straight-line basis. Because the Affordable Housing Group no longer provides credit intermediation for new funds or products, the fee stream will continue to decline as the amortization period ends for certain funds.
- 51 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Other Revenues
The increase in expense reimbursements was due primarily to an increase in the number of funds with available cash flow to pay expense reimbursements as a result of the increased volume of asset dispositions from the first quarter of 2010 to the first quarter of 2011.
The increase in gain on sale of mortgage loans is due to more favorable loan pricing resulting in higher trading premium revenue for Fannie Mae agency products, primarily due to a higher demand for affordable debt products in 2011 than in 2010 and an increase in gains we recorded in connection with recognizing mortgage servicing rights.
Expenses
Expenses for the three months ended March 31, 2011 and 2010 were as follows:
Three Months Ended March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
General and administrative expenses
|
||||||||||||
Salaries and benefits
|
$ | 4,993 | $ | 5,137 | (2.8 | )% | ||||||
Other
|
4,161 | 29,467 | (85.9 | ) | ||||||||
Total general and administrative
|
9,154 | 34,604 | ||||||||||
Recovery of losses
|
(2,791 | ) | (65,387 | ) | (95.7 | ) | ||||||
Interest expense:
|
||||||||||||
Borrowings and financings
|
12,882 | 10,953 | 17.6 | |||||||||
Derivatives – non-cash impact
|
(703 | ) | (1,471 | ) | (52.2 | ) | ||||||
Preferred shares of subsidiary
|
960 | 2,320 | (58.6 | ) | ||||||||
Depreciation and amortization
|
414 | 868 | (52.3 | ) | ||||||||
Loss on impairment of assets
|
-- | 22,409 | (100.0 | ) | ||||||||
Total expenses
|
$ | 19,916 | $ | 4,296 | 363.6 | % | ||||||
Average borrowing rate
|
6.33 | % | 6.09 | % | ||||||||
Average Securities Industry and Financial Markets Association (“SIFMA”) rate
|
0.26 | % | 0.21 | % |
General and Administrative
Salaries and benefits
Salaries and benefits decreased by $0.1 million during the first quarter of 2011. This decrease was due mainly to the decrease in the number of employees partially offset by a $0.4 million increase in our bonus expense in the first quarter of 2011.
Other
Other general and administrative expenses decreased by $25.3 million in the first quarter of 2011 as compared to the same period in 2010. This decrease is attributed to the $27.6 million in assumption fees that were recorded in the first quarter of 2010 resulting from the restructuring of certain credit intermediation agreements as compared to $1.4 million recorded during the first quarter of 2011.
- 52 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
(Recovery) provision for Losses
Three Months Ended March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
Affordable Housing loss (recovery)
|
$ | (5,500 | ) | $ | (62,000 | ) | (91.1 | )% | ||||
Bad debt expense (recovery)
|
2,471 | (3,387 | ) | (173.0 | ) | |||||||
DUI provision for risk-sharing obligations
|
238 | -- | N/A | |||||||||
Total recovery of losses
|
$ | (2,791 | ) | $ | (65,387 | ) | (95.7 | )% | ||||
N/A – Not applicable.
|
Recovery of losses decreased by $62.6 million during the first quarter of 2011 as compared to the same period in 2010 mainly due to the following:
·
|
Affordable Housing loss reserves pertain to our commitment to fund the required buy-downs relating to assets in certain guaranteed funds for which we have associated credit intermediation agreements in order to allow them to stabilize and avoid foreclosure. Our commitments were reduced in the first quarter of 2011 due to the restructuring of certain assets. During the first quarter of 2010, we recorded a reduction of $62.0 million in loss reserves, due to the restructuring of certain assets which reduced the required buy-downs relating to the March 2010 Restructuring.
|
·
|
A $5.9 million increase in bad debt expense primarily due to an increase in the reserves against property advances to Tax Credit Fund Partnerships of approximately $5.2 million and an additional $0.7 million in 2010 relating to cash recoveries during the first quarter of 2010 from receivables previously reserved.
|
Interest Expense
Interest expense represents direct financing costs, including on-balance sheet securitizations of mortgage revenue bonds, distributions on preferred shares of Equity Issuer and intercompany interest expense on cash we borrow from our corporate credit facility to warehouse investments in entities that own tax credit partnerships prior to them being included into investment fund offerings.
The primary drivers of the change in interest expense were:
·
|
A $1.9 million increase pertaining to borrowing and financings in the first quarter of 2011, as compared to the same period in 2010, is due primarily to an increase of $1.6 million related to the Freddie Mac secured financing attributable to an $87.4 million increase in the average bond principal balance, to $663.7 million. The increase also includes an increase in the weighted-average interest rate from 6.11% at March 31, 2010 to 6.29% at March 31, 2011. The increase in the average bond principal balance is a result of an increase in bonds in the December 2007 re-securitization that have been re-recognized as a result of default, placement in special servicing, or for which we made commitments to fund operating deficits to the underlying property partnerships. An additional $0.5 million increase in interest expense is due to the $20.0 million loan CFin Holdings took from Natixis as part of the March 2010 Restructuring.
|
·
|
A $0.8 million increase in 2011 in non-cash interest expense on derivatives primarily due to unfavorable changes in the fair value of our free-standing derivatives contributing $0.6 million as well as the termination of two swap agreements during 2010 that were not included in the 2011 amounts that resulted in a gain of $1.9 million. Also contributing to the increase is a $2.1 million reduction on the gains on termination of the developer swaps in the first quarter of 2010. There were no developer swaps terminated during the first quarter of 2011. As of March 31, 2011, we are party to 17 interest rate swap agreements with the developers of properties underlying certain mortgage revenue bonds we previously owned. Where able, we plan to continue terminating these developer swaps. As the swaps are all out-of-the-money, we would record additional gains upon termination.
|
·
|
A $1.4 million decrease pertaining to interest on preferred shares of subsidiary due to the sale of certain Series A-1 Freddie Mac Certificates in December 2010 which resulted in the redemption of the related preferred shares. We experienced a comparable decrease in revenues related to the Series A-1 Freddie Mac Certificates.
|
- 53 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Depreciation and Amortization
Depreciation and amortization expenses decreased by $0.5 million in the first quarter of 2011 compared to the same period in 2010. This is mainly attributable to the redemption of Preferred Shares Series B and B-1 in December 2010 which reduced the average monthly amortization for the deferred origination costs. The deferred origination costs are being recognized over the term of the preferred shares.
Loss on Impairment of Assets
The loss on impairment of assets in 2010 resulted principally from the declining performance of properties that underlie the mortgage revenue bonds we re-securitized in 2007 and the anticipated use of the escrow to buy down or restructure bonds. For detailed discussion, see Notes 19 and 25 to the condensed consolidated financial statements.
Other Income
Other income for the Affordable Housing Group for the three months ended March 31, 2011 and 2010 are as follows:
Three Months Ended March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Equity and other loss
|
$ | -- | $ | (134 | ) | (100.0 | )% | |||
Gain from repayment or sales of investments, net
|
-- | 2,191 | (100.0 | ) | ||||||
Total other income
|
$ | -- | $ | 2,057 | (100.0 | )% |
Profitability
Three Months Ended March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Income before other allocations
|
$ | 8,177 | $ | 28,165 | (71.0 | )% | ||||
Net income
|
5,950 | 26,699 | (77.7 | ) |
The change in income before other allocations reflects the revenues and expense changes discussed above. Incremental costs incorporated in net loss include allocations to the perpetual Equity Issuer preferred shares.
The primary business function of the Mortgage Banking Group is to underwrite, originate, and service multifamily loans under GSE, Ginnie Mae and FHA programs. Once loans we originate are closed, they are sold shortly afterward; we retain only the servicing rights. We earn origination fees and trading-premium revenues. We also recognize Mortgage Servicing Right (“MSR”) revenues on loan we originate. Trading premiums and MSR values are recorded as gains on sale of mortgage loans on our consolidated statements of operations. During the first quarter of 2011, as compared to the same period in 2010, we experienced an increase in origination volume due to more favorable market conditions and the increase in our origination capabilities that includes the growth of our small loan business and the increase in our loan origination teams distributed in seven offices nationwide. As a result, origination fees, trading-premium revenues and MSR revenues have increased during 2011.
We also earn mortgage-servicing fees on our servicing portfolio of over 1,300 loans. Our servicing fees provide a stable revenue stream. Servicing fees are based on contractual terms and earned over the life of a loan. In addition, we earn interest income from escrow deposits held on behalf of borrowers and on loans while they are being financed by our warehouse line, as well as late charges, prepayments of loans and other ancillary fees.
We have risk-sharing obligations on most loans we originate under the Fannie Mae DUS program and the Freddie Mac Delegated Underwriting Initiative (“DUI”) program. Under the DUS program we retain a first loss position with respect to the loans that we originate and sell under this program. For a majority of such loans, we absorb the first 5% of any losses on the unpaid principal balance of a loan if a default occurs; above 5% we share a percentage of the loss with Fannie Mae, with our maximum loss capped at 20% of the unpaid principal balance of a loan. For loans that we originate under the DUI program, we are obligated to reimburse Freddie Mac for a portion of any loss that may result from borrower defaults in DUI transactions. For such loans, our share of the standard loss will be the first 5% of the unpaid principal balance and 25% of the next 20% of the remaining unpaid principal balance to a maximum of 10% of the unpaid principal balance if a default occurs.
- 54 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Our servicing fees for risk-sharing loans include compensation for the risk-sharing obligations and are larger than the servicing fees we receive for loans with no risk-sharing obligations. We receive a lower servicing fee for loans with modified risk-sharing than for loans with full risk-sharing. While our origination volume increased in 2010 and 2011, these increases were offset by loan maturities and payoffs so our portfolio size remained relatively unchanged. However, because our risk-sharing product increased in recent years, we have experienced a slight increase in our servicing fees in the first quarter of 2011 as compared to the same period in 2010.
Revenues
For a description of our revenue recognition policies, see Note 2 to our 2010 Form 10-K.
Three Months Ende3d March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
Interest income
|
$ | 808 | $ | 559 | 44.5 | % | ||||||
Fee income:
|
||||||||||||
Mortgage origination fees
|
823 | 454 | 81.3 | |||||||||
Mortgage servicing fees
|
4,879 | 4,781 | 2.0 | |||||||||
Other fee income
|
120 | 30 | 300.0 | |||||||||
Other:
|
||||||||||||
Gain on sale of mortgage loans
|
4,843 | 4,212 | 15.0 | |||||||||
Prepayment penalties
|
39 | 20 | 95.0 | |||||||||
Other revenues
|
193 | 37 | N/M | |||||||||
Total revenues
|
$ | 11,705 | $ | 10,093 | 16.0 | % | ||||||
N/M – Not meaningful.
|
Interest Income
The increase in interest income in the first quarter of 2011 is attributable primarily to the increase in the interest earned on loans during 2011 while being financed on the warehouse line. Although average interest rates on multifamily mortgage loans are lower in the first quarter of 2011 as compared to the first quarter of 2010, interest income earned during these periods increased due to the increase in origination volume achieved during 2011 as compared to 2010.
- 55 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Fee Income
Mortgage Origination Fees
Mortgage originations for the three months ended March 31, 2011 and 2010 are as follows:
Three Months Ended March 31,
|
|||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
||||||||
Total mortgage origination activity(1)
|
$
|
170,993
|
$
|
135,207
|
26.5
|
%
|
|||||
Mortgages originated in prior periods and sold during the period
|
58,460
|
28,520
|
|||||||||
Less: mortgages originated but not yet sold(2)
|
(76,274
|
)
|
(60,528
|
)
|
|||||||
Total mortgage origination activity recognized for GAAP and for which revenue is recognized
|
$
|
153,179
|
$
|
103,199
|
48.4
|
%
|
|||||
% of Total
|
% of Total
|
||||||||||
Loan Purchasers
|
|||||||||||
Fannie Mae
|
$
|
142,179
|
92.8
|
%
|
$
|
103,199
|
100.0
|
%
|
|||
Freddie Mac
|
11,000
|
7.2
|
--
|
--
|
|||||||
Total
|
$
|
153,179
|
100.0
|
%
|
$
|
103,199
|
100.0
|
%
|
|||
(1) Includes all mortgages funded during the period.
(2) Included in Other Investments – mortgage loans held for sale.
|
During the first quarter of 2011, our mortgage origination volume recognized for GAAP purposes increased by 48.4% as compared to the same period in 2010 primarily due to more favorable market conditions and the increase in our origination capabilities. The improved market conditions resulted in a significant increase in the volume of property acquisitions requiring financing, causing an overall increase in activity. The increase in our origination capabilities includes our small loans initiative, begun in the fourth quarter of 2009, to underwrite and originate smaller loans under our Fannie Mae DUS program. The Small Loan Group division accounted for 30.4% of our total originations for the first quarter in 2011 compared to and 28.6% for the same period in 2010.
We also experienced an increase in gain on sales of loans due to the value of MSRs retained on each loan. We recorded $3.0 million of revenue resulting from the valuation of MSR in the first quarter of 2011 as compared to $2.4 million in 2010 primarily as the result of an overall increase in origination volume in the first quarter of 2011, as compared to the same period in 2010. Premium revenue has remained rather constant period-over-period, although the origination volume has increased. This is due to the increase in competition, which effectively decreases the margins earned on loans.
Mortgage Servicing Fees
As mentioned above, mortgage servicing fees are a significant source of revenue for us. Our portfolio of loans has remained relatively unchanged at March 31, 2011 as compared to March 31, 2010 due to an increase in origination volume throughout 2010 and into 2011 that effectively replaced reductions in the portfolio from principal paydowns, maturities and refinancings.
- 56 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Our portfolio balances at March 31, 2011 and 2010 were as follows:
March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Primary servicing portfolio
|
$ | 8,256,253 | $ | 8,383,413 | (1.5 | )% |
Although the portfolio has remained relatively unchanged in the first quarter of 2011 as compared to the same period in 2010, we experienced an increase in servicing fees earned from the portfolio due to the nature of more recent originations. We currently earn higher servicing fees because we are originating more shared-risk product than in the past. Loans that are currently being paid off are those with lower servicing fee rates, resulting in a higher weighted-average servicing fee being earned on the portfolio in 2011 than in 2010. Weighted-average servicing rates increased by more than two basis points for the first quarter of 2011 as compared to the first quarter of 2010 servicing rates.
Expenses
Interest expense in the Mortgage Banking segment represents direct financing costs, including asset-backed warehouse lines (used for mortgage loans we originate). Other major expenses include amortization of MSRs, salaries and other costs of employees working directly in this business as well as allocations of certain corporate costs.
Three Months Ended March, 31
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
General and administrative
|
$ | 5,391 | $ | 4,385 | 22.9 | % | ||||
Provision for losses
|
-- | 935 | (100.0 | ) | ||||||
Interest expenses
|
249 | 133 | 87.2 | |||||||
Depreciation and amortization
|
2,717 | 2,529 | 7.4 | |||||||
Total expenses
|
$ | 8,357 | $ | 7,982 | 4.7 | % |
General and Administrative
General and administrative expense increased by $1.0 million for the first quarter of 2011 as compared to 2010 primarily due to a $0.3 million increase in salaries and benefit related costs of our Mortgage Banking Group. The number of employees in our Mortgage Banking Group increased from 38 at March 31, 2010 to 49 at March 31, 2011. This is due to the initiatives made throughout 2010 and into 2011 to increase origination activity by adding origination teams in certain geographical locations nationwide, as well as continued growth in the team supporting our small loan group. We also experienced an increase of $0.2 million in broker fees and $0.2 million in loan referral fees in the first quarter of 2011 as compared to 2010, directly related to the increased volume of mortgage loan originations. The remaining variance of $0.3 million can be attributed to the expense of a servicing group that was established during March of 2010 to provide special servicing to certain of our assets.
Provision for Losses
The decrease of $0.9 million in the first quarter of 2011, as compared to the same period in 2010, is for risk-sharing obligations for DUS loans in our loss sharing program with Fannie Mae (see Note 25 to the condensed consolidated financial statements). During the first quarter of 2010, we recorded provision for risk-sharing obligations due to anticipated losses on loans in the DUS portfolios resulting from continued deterioration in the underlying property performance. As we do not continue to see decline in property performance data, no additional provision was recorded in the first quarter of 2011.
- 57 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Profitability
Three Months Ended March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Income before other allocations
|
$ | 3,348 | $ | 2,111 | 58.6 | % | ||||
Net income
|
3,348 | 2,111 | 58.6 |
The change in income before other allocations reflects the revenues and expense changes discussed above.
As part of our March 2010 Restructuring, we restructured our Term and Revolving Credit Facility. This included an aggregate $65.0 million assumption of debt by C-III Capital Partners LLC and an affiliate of the Related Companies L.P. and a total repayment of $22.1 million of principal balance on our Term and Revolving Credit Facility since the first quarter of 2010. In addition, the interest rate paid on the facility was reduced, decreasing our overall weighted average borrowing rate. The restructuring of our Term and Revolving Credit Facility contributed to the significant decrease in our interest expense in 2011 as compared to 2010 and provides us with operating flexibility going forward.
Lease termination charges related to office space that we no longer use for operations and the settlement of our unsecured liabilities, were recorded in our Corporate segment in the recovery of losses and other income accounts.
Revenues
For a description of our revenue recognition policies, see Note 2 to our 2010 Form 10-K.
Three Months Ended March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Interest income
|
$ | 17 | $ | 4 | N/M | |||||
Other revenue
|
101 | 350 | (71.1 | )% | ||||||
Total revenue
|
$ | 118 | $ | 354 | (66.7 | )% | ||||
N/M – Not meaningful.
|
Expenses
Expenses in our Corporate Group include central business functions such as executive, finance, human resources, information technology and legal as well as costs related to general corporate debt. Because we consider all acquisition-related intangible assets to be Corporate assets, the related amortization, impairment and write-offs are also included in this group.
- 58 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Three Months Ended March 31,
|
||||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||||
General and administrative expenses:
|
||||||||||||
Salaries and benefits
|
$ | 2,843 | $ | 5,578 | (49.0 | )% | ||||||
Other
|
6,526 | 21,103 | (69.1 | ) | ||||||||
Total general and administrative
|
9,369 | 26,681 | (64.9 | ) | ||||||||
Recovery of losses
|
-- | (48,044 | ) | (100.0 | ) | |||||||
InInterest expense – borrowings and financings
|
1,297 | 3,634 | (64.3 | ) | ||||||||
Depreciation and amortization
|
415 | 3,063 | (86.5 | )% | ||||||||
Total expenses
|
$ | 11,081 | $ | (14,666 | ) | N/M | ||||||
N/M – Not meaningful.
|
General and Administrative:
Salaries and benefits
Contributing to the decrease in salaries and benefits was a reduction in the Corporate Group employee base from an average of 92 employees during the first quarter of 2010 to an average of 61 employees during the same period in 2011 for a $2.1 million decrease in salaries, payroll taxes and other employees benefits during 2011. Lower stock-based compensation expense, a result of full vesting of restricted shares during 2010 and no new employee grants issued during 2010 and 2011 contributed to an additional $0.7 million decrease.
Other
Other general and administrative expenses decreased by $14.6 million during 2011 due to:
·
|
An $11.1 million decrease in professional fees including legal and consulting recorded in 2010 related to the March 2010 Restructuring;
|
·
|
A $2.8 million decrease relating to expenses recorded in 2010 on the issuance of Special Series A Shares to Natixis as part of the restructuring of certain intermediation agreements (see Note 25 to the consolidated financial statements);
|
·
|
A $0.5 million decrease in insurance expenses due to a full amortization of residual premium balance on insurance policies that were cancelled at the time of the March 2010 Restructuring, and the decrease in insurance premiums following the March 2010 Restructuring;
|
·
|
A $0.3 million decrease in rent expense because of the increase in sublease income for office space sublet to C-III, which offsets rent expense; and
|
·
|
A $0.3 million decrease in office expenses and computer expenses due to a general effort to reduce expenses, and the reduction of office space.
|
Expenses were offset by a $1.4 million increase for advisory services fees and procedures review of payments made to Island Capital (see Note 23 to the consolidated financial statements).
Recovery of Losses
Recovery of losses of $48.0 million in 2010 reflects a settlement of a liability for lease obligations for two office spaces no longer in use resulting in a reversal of previously expensed lease termination costs.
- 59 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Interest Expense
Interest expense decreased by $2.3 million in 2011 due to the following:
·
|
A $1.6 million decrease due to reduced principal balances on our Term Loan and Revolving Credit Facility as a result of the assumption of $65.0 million in principal on our Term Loan and Revolving Credit Facility by related parties in connection with the March 2010 Restructuring, $22.1 million in net principal repayments since the first quarter of 2010, as well as decreased interest rates for both our restructured Term Loan and Revolving Credit Facility; and
|
·
|
A $0.7 million decrease in other interest expenses from settling a transaction-cost payable with Morgan Stanley in connection with the March 2010 Restructuring.
|
Depreciation and Amortization
Depreciation and amortization expenses decreased by $2.6 million in 2011 due to the following:
·
|
A $1.7 million decrease related to certain intangible assets that fully amortized in 2010; and
|
·
|
A $0.7 million decrease related to a reduction in amortization expenses on the deferred financing costs related to the revolver loan extension that was fully amortized in March 2010 as part of the March 2010 Restructuring.
|
Other income
Three Months Ended March 31,
|
||||||||||
(dollars in thousands)
|
2011
|
2010
|
% Change
|
|||||||
Gain on settlement of liabilities
|
$ | 1,756 | $ | 25,253 | (93.0 | )% |
As part of the March 2010 Restructuring, we settled the liability for transaction costs payable in connection with the December 2007 re-securitization, resulting in a $23.3 million gain on settlement of liabilities, as well as another liability with a vendor associated with the office space to which one of the lease terminations related, resulting in an additional $2.0 million gain on settlement of liabilities. In 2011, 107,123 Convertible Redeemable CRA Shares were redeemed for cash. The cash payment was less than the fair value of the convertible shares resulting in a $1.8 million gain on settlement of such liabilities.
Consolidated Partnerships include entities in which we have a substantive controlling general partner or managing member interest or in which we have concluded we are the primary beneficiary of a variable interest entity (“VIE”). With respect to the Tax Credit Fund Partnerships and Tax Credit Property Partnerships, we have, in most cases, little or no equity interest.
A summary of the impact the Tax Credit Fund Partnerships and Property Partnerships have on our Consolidated Statements of Operations is as follows:
Three Months Ended
March 31, |
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Revenues
|
$ | 26,258 | $ | 27,917 | ||||
Interest expense
|
(12,916 | ) | (13,453 | ) | ||||
Other expenses
|
(55,182 | ) | (62,270 | ) | ||||
Other loss
|
(61,441 | ) | (90,806 | ) | ||||
Allocations to limited partners
|
102,780 | 138,445 | ||||||
Net impact
|
$ | (501 | ) | $ | (167 | ) |
- 60 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
The following table summarizes the number of Consolidated Partnerships at March 31, 2011 and 2010:
2011
|
2010
|
|||||||
Tax Credit Fund Partnerships
|
141 | 140 | ||||||
Tax Credit Property Partnerships
|
96 | 108 |
Our Affordable Housing Group earns fees from the Tax Credit Fund Partnerships and interest on mortgage revenue bonds for which Tax Credit Property Partnerships are the obligors. The Tax Credit Fund Partnerships are tax credit equity investment funds we sponsor and manage. The Tax Credit Property Partnerships are partnerships for which we have assumed the role of general partner of the property-owning partnership.
Our revenue from consolidated partnerships is from assets held in funds that we manage as well as rental income from properties in partnerships we consolidated. The decrease in revenues for the first quarter 2011 is due to the decrease in Property Partnerships that reduced rental income by $3.8 million because the sale of Property Partnership. Revenue decreases were offset by an increase in rental income resulting from the additional Tax Credit Property Partnerships we consolidated since the first quarter of 2010.
Interest expense is from borrowings to bridge timing differences between when funds deploy capital and when subscribed investments are received for Tax Credit Fund Partnerships (“Bridge Loans”), as well as mortgages and notes held at the Tax Credit Property Partnerships. The decrease for first quarter of 2011 as compared to the same period of 2010 is due to a reduction in the outstanding principal balance from Property Partnership sales and repayments.
Other expenses decreased in 2010 due to a net decrease in Property Partnerships consolidated in the first quarter of 2011 from sales during this period.
Other losses represent equity losses that Tax Credit Fund Partnerships recognize in connection with their investments in non-consolidated property partnerships. The decrease in losses during the 3 month period ended March 31, 2011 resulted from gains recognized by Property Partnerships sold during this period (approximately $10.1 million), a reduction of $5.9 million from suspended losses for Tax Credit Fund Partnerships whose investment balances in certain Property Partnerships reached zero. Additional decreases in losses were the result of an increase of $15.7 million from net gains on the sale of properties partnership investments in the Fund Partnerships due to the increased volume of sales. First quarter 2011 net gains amounted to $10.2 million, while in the same period last year net losses were $5.5 million.
Because third-party investors hold essentially all the equity interests in most of these entities, we allocate results of operations of these partnerships to third-party investors except for the amounts shown in the table above, which represent our nominal ownership. Net impact represents the equity income (loss) we earn on our co-investments that is included in our net income (loss).
Expense Allocation
As previously indicated, the Company made a decision in 2011 to allocate certain corporate overhead expenses such as Human Resources, Information Technology, and Finance and Accounting to the Affordable Housing and Mortgage Banking segments. Corporate expense allocations are presented separately from the direct results of each segment.
Eliminations and Adjustments
Transactions between business segments are accounted for as third-party arrangements for the purposes of presenting business segment results of operations. Inter-segment eliminations include fee income and expense reimbursement for fund management activities that are recorded in our Affordable Housing segment and earned from Consolidated Partnerships; interest on mortgage revenue bonds that are not reflected as sold in Affordable Housing and for which Tax Credit Property Partnerships within Consolidated Partnerships are the obligors; interest charges on outstanding intercompany balances; overhead and other operational charges between segments; and prior to the March 2010 Restructuring, subservicing charges.
- 61 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Income Taxes
The following table details the taxable and non-taxable components of our reported income for the three months ended March 31, 2011 and 2010:
Three Months Ended March 31,
|
|||||||||||||
(dollars in thousands)
|
2011
|
% of
Revenues
|
2010
|
% of
Revenues
|
% Change
|
||||||||
Within continuing operations:
Gain subject to tax
|
$
|
714
|
1.5
|
%
|
$
|
139,002
|
264.2
|
%
|
(99.5
|
)%
|
|||
Loss not subject to tax
|
$
|
(100,978
|
)
|
(207.3
|
)%
|
$
|
(205,137
|
)
|
(389.9
|
)%
|
(50.8
|
)%
|
|
Loss before income taxes
|
$
|
(100,264
|
)
|
(205.8
|
)%
|
$
|
(66,135
|
)
|
(125.7
|
)%
|
51.6
|
%
|
|
Income tax provision
|
$
|
193
|
0.4
|
%
|
$
|
393
|
0.7
|
%
|
(50.9
|
)%
|
|||
Effective tax rate – consolidated basis
|
(0.19
|
)%
|
(0.59
|
)%
|
|||||||||
Effective tax rate for corporate subsidiaries subject to tax
|
27.1
|
%
|
0.28
|
%
|
|||||||||
Within discontinued operations:
Income subject to tax
|
$
|
253
|
N/M
|
$
|
15,084
|
N/M
|
|||||||
Income (loss) not subject to tax
|
$
|
--
|
N/M
|
$
|
145,709
|
N/M
|
|||||||
Income before taxes
|
$
|
253
|
N/M
|
$
|
160,793
|
N/M
|
|||||||
Income tax provision
|
$
|
--
|
N/M
|
$
|
531
|
N/M
|
|||||||
Effective tax rate – consolidated basis
|
0.0
|
%
|
0.3
|
%
|
|||||||||
Effective tax rate for corporate subsidiaries subject to tax
|
0.0
|
%
|
3.5
|
%
|
|||||||||
N/M – Not meaningful.
|
Some of our pre-tax income is derived from our tax-exempt investments included in our Affordable Housing Group that are held within flow-through entities.
Tax credit fund management is conducted in pass-through entities, the income from which is ultimately recorded by a corporation and subject to corporate tax. Mortgage Banking Group operations are conducted in corporations and are also subject to income taxes. Our Corporate Group is also housed in a corporate entity subject to taxation.
Management has determined that in light of projected taxable losses in the corporate subsidiaries for the foreseeable future any benefit from current losses and deferred tax assets likely will not be realized; hence, a full valuation allowance has been recorded.
·
|
In January 2011, the FASB issued ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. Under the existing effective date in ASU 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this update temporarily defer that effective date, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in ASU 2010-20. ASU 2011-01 is effective upon issuance. The adoption of ASU 2010-20 and ASU 2011-01 have no material impact on our consolidated financial statements.
|
- 62 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
·
|
In April 2011, The FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The update is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption for public companies. We do not expect the adoption of ASU 2011-02 to have an impact on our consolidated financial statements.
|
Inflation
Inflation did not have a material effect on our results of operations for the periods presented.
SECTION 3 – LIQUIDITY AND CAPITAL RESOURCES
The primary objective of managing our liquidity is to ensure that we have adequate resources to accommodate growth of assets under management within our respective businesses, fund and maintain investments as needed, meet all ongoing funding commitments and contractual payment obligations, and pay compensation and general operating expenses. Liquidity management involves forecasting funding requirements and maintaining sufficient capital to meet the fluctuating needs inherent in our business operations and ensure adequate capital resources to meet unanticipated events.
Our primary short term business needs include payment of compensation and general business expenses, facilitating debt and equity originations, fund management and asset management activities within our Affordable Housing and Mortgage Banking businesses, and funding commitments and contractual payment obligations including debt amortization. We fund these short-term business needs primarily with cash provided by operations, revolving credit facilities and asset-backed warehouse credit facilities. Our long term liquidity needs include capital needed for potential strategic acquisitions or the development of new businesses, increased financing capacity to meet growth in our businesses, and the repayment of long-term debt. Our primary sources of capital to meet long-term liquidity needs include cash provided by operations, and warehousing and revolver debt. We are unable to project with certainty whether our long term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If this cash flow is insufficient, then we may need to refinance such debt or otherwise amend its terms to extend the maturity dates. We cannot make any assurances that such refinancing or amendments would be available at attractive terms, if at all. Recent economic events have limited the sources of liquidity in two key areas:
·
|
a sharp decline in our Common Share price has made obtaining equity capital through equity offerings extremely difficult and uneconomical for us; and
|
·
|
the lower level of debt financing available in the marketplace.
|
We are seeing a renewed interest from corporate investors in the low-income housing tax credit equity market. In the first quarter of 2011, we raised $119.3 million of gross equity in a new Affordable Housing fund and continue to actively pursue new fund originations that will generate additional liquidity in the form of fee income for us. With the closing of the new fund, we received $6.6 million in fees, which improved our cash flow and liquidity.
During the fourth quarter of 2010, we did not complete the restructuring of certain bonds by the date required in the Master Novation, Stabilization, Assignment, Allocation, Servicing and Asset Management Agreement with Natixis Capital Markets North America Inc. (“Natixis”), which resulted in a cash freeze event under the terms of the agreement. As a result of the cash freeze event, we must obtain consent from Natixis prior to any usage of available cash at CFin Holdings. This event is also an event of default under our CFin Holdings Credit Agreement. Among other remedies, upon this event of default, Natixis can call the loan balance under the CFin Holdings Credit Agreement due but had not done so as of March 31, 2011. As of March 31, 2011, the loan balance was $22.2 million. CFin Holdings has sufficient available cash to repay this loan in full.
- 63 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
We use asset-backed warehouse facilities to fund Fannie Mae and Freddie Mac mortgage loans we originate in our Mortgage Banking and Affordable Housing groups. Mortgage loans we originate are closed in our name, using cash borrowed from a warehouse lender, and sold to the GSEs or to the market with a GSE credit enhancement from one week to three months following the loan closing. We use the cash received from the sale to repay the warehouse borrowings. During the fourth quarter of 2010, in order to provide us with additional resources for warehousing of mortgage loans with Freddie Mac and Fannie Mae, we entered into two uncommitted warehousing financing agreements in addition to the existing committed warehouse facility and the Multifamily ASAP Facility. At March 31, 2011 we had an outstanding balance of $80.6 million in our warehouse facilities, which bear an average interest rate of 2.72%.
On November 2, 2010, Fannie Mae issued changes to the DUS Capital Standards that became effective January 1, 2011. Among other provisions, the revised DUS Capital Standards raised the Restricted Liquidity Requirement by 25 basis points on Tier 2 mortgage loans and will be phased-in quarterly through the first quarter of 2014. The implementation of the revised DUS Capital Standards by the Company through the first quarter of 2014 would increase the collateral required for our existing DUS portfolio by approximately $9.0 million assuming the full 25 basis point increase in the collateral requirement was applied to our current portfolio balance.
As of March 31, 2011, we had 588 Convertible Redeemable CRA shares outstanding. If we do not repurchase these Convertible Redeemable CRA shares by January 1, 2012, the shareholders will have the option to require us to purchase the shares for the original gross issuance price per share (plus accumulated and unpaid distributions). As of March 31, 2011 the aggregate gross issuance price of these shares due on or after January 1, 2012 was $11.0 million. We are exploring with the shareholders various ways to mitigate the above repurchase risk.
Management continues to actively pursue strategies to maintain and improve our cash flow from operations, including:
·
|
increasing revenues through increased volume of mortgage originations, fund originations, and growth of assets under management;
|
·
|
instituting measures to reduce general and administrative expenses;
|
·
|
continuing to sell and/or monetize investments that do not meet our long-term investment criteria;
|
·
|
reducing our risk of loss by continuing to improve our Asset Management infrastructure;
|
·
|
increasing access to asset-backed warehouse facilities;
|
·
|
improving collection of Affordable Housing fund fees through improved monitoring and asset disposition; and
|
·
|
restructuring and execution of agreements to increase cash flow from our Freddie Mac B Certificates.
|
Notwithstanding current market conditions, management believes cash flows from operations, amounts available to be borrowed under our Revolving Credit Facility, and capacity available under our warehouse facilities are sufficient to meet our current liquidity needs.
- 64 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Cash Flows
Three Months Ended
March 31,
|
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Cash flow used in operating activities
|
$ | (3,471 | ) | $ | (29,763 | ) | ||
Cash flow (used in) from investing activities
|
(1,728 | ) | 30,345 | |||||
Cash flow from financing activities
|
7,221 | 21,492 | ||||||
Net increase in cash and cash equivalents
|
$ | 2,022 | $ | 22,074 |
Operating Activities
Operating cash flows include the warehousing of mortgage loans that we originate and sell to Fannie Mae and Freddie Mac, each of which has an associated sale commitment that allows us to recoup the full amount expended. Excluding these amounts from both periods, operating cash flows were $1.3 million in the first quarter of 2011 as compared to $(19.4) million in the same quarter in 2010. The increase in operating cash flows was driven in large part by one-time costs paid in the first quarter of 2010, comprising professional services fees incurred from the March 2010 Restructuring, by approximately $13.1 million in cash payments that were made by the Company in the first quarter of 2010 to settle certain unsecured liabilities and the $6.6 million that we collected during the first quarter of 2011 upon closing of the new LIHTC fund.
Investing Activities
Investing cash flows in the first quarter of 2011 were lower than in the first quarter of 2010. The decrease was driven in large part by the one-time $37.8 million from the cash proceeds received in the first quarter of 2010 relating to the sale, as part of the March 2010 Restructuring, of our Portfolio Management business and the portions of the Commercial Real Estate Group that was not affiliated with loan originations. Partially offsetting in 2010 the positive investing cash flows was the $8.2 million increase in restricted cash, escrow and other cash collateral balance resulting from the $10.0 million in escrow withheld in the March 2010 Restructuring. The negative cash flows in the first quarter of 2011 are mainly the result of the $2.2 million net cash used to buy interest in entities that will be included in future Affordable Housing Group investment fund offerings.
Financing Activities
Financing cash flows in the first quarter of 2011 were lower than in the first quarter of 2010. The level of financing inflows and outflows will vary with the level of mortgage originations, which also impacts operating cash flows as described above. We finance those originations with warehouse lines that are repaid as the loans are sold. Excluding the financing of mortgage loan originations discussed in Operating Activities above, financing cash flows in the first quarter of 2011 was $2.3 million as compared to $11.2 million in the first quarter of 2010. Our lower cash flow in the first quarter of 2011 is due, in part, to the $9.6 million proceeds attributed to the sale of Special Series A shares to Island Capital as part of the March 2010 Restructuring.
Equity distributions declared through April 30, 2011 to be paid through May 16, 2011 are as follows:
(in thousands)
|
||||
Equity Issuer preferred shares
|
$
|
839
|
Funding for distributions on the Equity Issuer preferred shares is offset by an equal amount of income received from our investment in Series A-1 Freddie Mac Certificates.
Management is not aware of any trends or events, commitments or uncertainties that have not otherwise been disclosed, or that will or are likely to impact liquidity in a material way (see also Commitments and Contingencies below).
- 65 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Fair Value Disclosures
In accordance with GAAP, we have categorized our assets and liabilities recorded at fair value into a three-level hierarchy based on the ability to observe the inputs to valuation techniques used to measure fair value. More information regarding the fair value hierarchy is provided in Note 3 to the condensed consolidated financial statements.
In liquid markets, readily available or observable prices are used in valuing mortgage-related positions. In less liquid markets, such as those since the second half of 2007, we may be required to utilize other available information and modeling techniques to estimate the fair value for our positions.
Similar to other market participants, we are confronted by valuation-related issues particularly since the second half of 2008. These include:
·
|
significant increase in dependence on model-related assumptions and/or unobservable inputs;
|
·
|
doubts about the quality of the market information utilized as inputs; and
|
·
|
changing expectations of default levels.
|
As defined, “Level 3” assets are those for which inputs to valuation techniques used to measure fair value are not observable in the marketplace and, therefore, require significant judgment in determining fair value. Provided below is the percentage of Level 3 assets as compared to total assets measured at fair value. We had no Level 3 financial liabilities for the periods presented. Additional information, including a discussion of the related valuation techniques for Level 3 assets, can be found in our 2010 Form 10-K and in Note 3 to the condensed consolidated financial statements.
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
||||||
Level 3 assets:
|
||||||||
Series A-1 Freddie Mac Certificates
|
$ | 129,225 | $ | 129,406 | ||||
Series B Freddie Mac Certificates
|
63,179 | 63,215 | ||||||
Mortgage revenue bonds
|
255,714 | 292,659 | ||||||
Mortgage servicing rights(1)
|
66,488 | 65,614 | ||||||
Total Level 3 assets
|
$ | 514,606 | $ | 550,894 | ||||
Level 3 assets as a percentage of total fair value assets
|
86.4 | % | 87.8 | % | ||||
(1) Financial asset fair valued on a non-recurring basis.
|
As noted above, while we have the intent to hold most of our assets until maturity or recovery, we have recorded impairment charges for certain assets for which we either do not have such intent, or for which the underlying credit quality has deteriorated and, therefore, we may not recover our full investment.
We recorded the following impairments of Level 3 assets for the periods presented (see Notes 3 and 19 to the condensed consolidated financial statements):
Three Months Ended
March 31, |
||||||||
(in thousands)
|
2011
|
2010
|
||||||
Series B Freddie Mac certificates
|
$ | -- | $ | 22,814 |
- 66 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Capital Resources
Financing Obligations
The table below reflects our financing obligations at the dates presented:
March 31, 2011
|
|||||||||||||
(in thousands)
|
March 31,
2011
|
December 31,
2010
|
Available to
Borrow
|
Maximum
Commitment
|
|||||||||
Credit Facility:
|
|||||||||||||
Term loan
|
$
|
127,990
|
$
|
127,990
|
$
|
--
|
$
|
127,990
|
|||||
Revolving credit facility
|
10,000
|
6,000
|
15,000
|
(1)
|
37,000
|
||||||||
Other Notes Payable:
|
|||||||||||||
Mortgage Banking committed warehouse facility
|
41,798
|
26,415
|
58,202
|
(2)
|
100,000
|
||||||||
Mortgage Banking repurchase facility
|
20,900
|
--
|
N/A
|
(2)
|
N/A
|
||||||||
Multifamily ASAP facility
|
17,931
|
49,276
|
N/A
|
(2)
|
N/A
|
||||||||
CFin Holdings credit facility(3)
|
22,235
|
21,693
|
--
|
20,000
|
|||||||||
Centerline Financial credit facility
|
--
|
--
|
30,000
|
30,000
|
|||||||||
Subtotal
|
240,854
|
231,374
|
103,202
|
||||||||||
Freddie Mac Secured Financing(4)
|
651,545
|
665,875
|
N/A
|
N/A
|
|||||||||
Subtotal (excluding Consolidated Partnerships)
|
892,399
|
897,249
|
103,202
|
||||||||||
Consolidated Partnerships
|
128,928
|
137,054
|
N/A
|
N/A
|
|||||||||
Total
|
$
|
1,021,327
|
$
|
1,034,303
|
$
|
103,202
|
|||||||
(1) Availability reduced by an outstanding letter of credit in the amount of $12.0 million.
(2) Borrowings under these facilities are limited to qualified mortgage loans, which serve as collateral.
(3) Balance includes interest that has been capitalized.
(4) Relates to mortgage revenue bonds that we re-securitized but have not been accounted for as sold for accounting purposes (see Note 13 to the consolidated financial statements).
|
Credit Facility
The Term Loan matures in March 2017 and has an interest rate of 3.0% over either the prime rate or LIBOR (at our election, which currently is LIBOR). Scheduled repayments of principal on the Term Loan begin in December 2011. At that time, we must repay $3.0 million in principal per quarter until maturity, at which time the remaining principal is due.
The Revolving Credit Facility has a total capacity of $37.0 million. The Revolving Credit Facility matures in March 2015 and bears interest at 3.0% over either the prime rate or LIBOR at our election (which currently is LIBOR). The Revolving Credit Facility is to be used for LIHTC property investments or for working capital purposes. As of March 31, 2011, $10.0 million was drawn and $12.0 million in letters of credit were issued under the Revolving Credit Facility. Once terminated, the amount of the Revolving Credit Facility associated with these letters of credit cannot be redrawn. At March 31, 2011, the undrawn balance of the Revolving Credit Facility was $15.0 million.
The new Term Loan and Revolving Credit Facility agreement contains restrictions on distributions. Under the agreement, we generally are not permitted to make any distributions except for certain cases such as to the holders of the Equity Issuer preferred shares.
- 67 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Mortgage Banking Warehouse Facilities
|
We have four warehouse facilities we use to fund our loan originations, including :
·
|
A $100 million committed warehouse facility that matures in September 2011 and bears interest at LIBOR plus 2.50% that we utilize as our primary warehouse facility. Mortgages financed by such facility (see Note 4 to the condensed consolidated financial statements), as well as the related servicing and other rights (see Note 9 to the condensed consolidated financial statements) have been pledged as security under the warehouse facility. The interest rate on the warehouse facility was 2.74% as of March 31, 2011 and 2.76% as of December 31, 2010. All loans securing this facility have firm sale commitments with GSEs.
|
·
|
Two uncommitted warehouse repurchase facilities that we entered into on November 22, 2010 in order to provide additional resources for warehousing of mortgage loans with Freddie Mac and Fannie Mae. These agreements are scheduled to mature in November 2011 and bear an interest of LIBOR plus 3.5% with a minimum of 4.5% for all Fannie Mae loans and 4% for all Freddie Mac loans. The outstanding balance under these facilities as of March 31, 2011 was $20.9 million. There was no outstanding balance at December 31, 2010. All loans securing these facilities have firm sale commitments with GSEs.
|
·
|
An uncommitted facility with Fannie Mae under its Multifamily As Soon As Pooled (“ASAP”) Facility funding program. After approval of certain loan documents, Fannie Mae will fund loans after closing and the advances are used to repay our primary warehouse facility. Subsequently, Fannie Mae funds approximately 99% of the loan and Centerline Mortgage Capital Inc. (“CMC”) funds the remaining 1%. CMC is later reimbursed by Fannie Mae when the assets are sold. Interest on this facility accrues at a rate of LIBOR plus 0.85%, with a minimum rate of 1.20%. The interest rate on this facility was 1.20% as of March 31, 2011 and 1.20% as of December 31, 2010.
|
CFin Holdings Credit Facility
|
On March 5, 2010, CFin Holdings entered into a Senior Secured Credit Agreement (the “CFin Holdings Credit Agreement”). Under the terms of the CFin Holdings Credit Agreement, we are permitted to borrow up to $20.0 million (the “Initial Loan”), plus, under certain conditions, up to an additional $1.0 million in each calendar year until March 5, 2037. The Initial Loan was required by the lender to be fully drawn at its closing. Borrowings under the CFin Holdings Credit Agreement are secured by a first priority lien on substantially all of CFin Holdings’ existing and future assets. Borrowings under the CFin Holdings Credit Agreement bear interest at a rate of 10% per annum, which is paid-in-kind and capitalized to the outstanding principal balance on the last business day of March, June, September and December of each year. As of March 31, 2011, we had borrowed the full $20.0 million under this credit facility. CFin Holdings’ outstanding balance under the Credit Facility as of March 31, 2011 was $22.2 million, which includes $2.2 million of accrued interest that has been capitalized. Neither Centerline Holding Company nor its subsidiaries are guarantors of this facility. During the fourth quarter of 2010, we did not complete the restructuring of certain bonds by the date required in the Master Novation, Stabilization, Assignment, Allocation, Servicing and Asset Management Agreement with Natixis, which resulted in a cash freeze event under the terms of the agreement. As a result of the cash freeze event, we must obtain consent from Natixis prior to any usage of available cash at CFin Holdings. This event is also an event of default under our CFin Holdings Credit Agreement. Among other remedies, upon this event of default Natixis can call this loan balance due but had not done so as of March 31, 2011. As of March 31, 2011, CFin Holdings has sufficient available cash to repay this loan in full.
Centerline Financial Credit Facility
|
In June 2006, Centerline Financial LLC entered into a senior credit agreement. Under the terms of the agreement, Centerline Financial LLC is permitted to borrow up to $30.0 million until its maturity in June 2036. Borrowings under the agreement will bear interest at our election of either:
·
|
LIBOR plus 0.4% or;
|
·
|
1.40% plus the higher of the prime rate or the federal funds effective rate plus 0.5%.
|
As of March 31, 2011, no amounts were borrowed under this facility. As a result, we did not make an election. Neither Centerline Holding Company nor its subsidiaries are guarantors of this facility. Due to a wind-down event caused by a capital deficiency under Centerline Financial LLC’s operating agreement, which occurred in 2010, the Centerline Financial senior credit facility is in default as of March 31, 2011. Amounts under the Centerline Financial senior credit facility are still available to be drawn, and we do not believe this default has a material impact on our financial statements or operations.
- 68 -
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
(continued)
Also as a result of the wind-down event, Centerline Financial is restricted from making any member distribution and is restricted from engaging in any new business.
Consolidated Partnerships
As of March 31, 2011 and December 31, 2010, the capital structure of our Consolidated Partnerships comprised debt facilities that are non-recourse to us, including:
·
|
notes payable by the Tax Credit Fund Partnerships collateralized either by the funds’ limited partners’ equity subscriptions or by the underlying investments of the funds; and
|
·
|
mortgages and notes payable on properties.
|
Further information about our financing obligations is included under Commitments and Contingencies later in this section.
Off-Balance Sheet Arrangements
The following table reflects our maximum exposure and the carrying amounts recorded to accounts payable, accrued expenses and other liabilities as of March 31, 2011 for guarantees we and our subsidiaries have entered into and other contingent liabilities:
(in thousands)
|
Maximum
Exposure
|
Carrying
Amount
|
|||||
Tax Credit Fund Partnerships credit intermediation(1)
|
$
|
1,272,048
|
$
|
22,555
|
|||
Mortgage Banking loss sharing agreements(2)
|
860,134
|
29,693
|
|||||
Credit support to developers(3)
|
185,794
|
--
|
|||||
Centerline Financial credit intermediation(4)
|
33,715
|
903
|
|||||
General Partner property indemnifications
|
1,940
|
--
|
|||||
Contingent liabilities at the Consolidated Partnerships
|
857
|
--
|
|||||
$
|
2,354,488
|
$
|
53,151
|
||||
(1) These transactions were undertaken to expand our Affordable Housing business by offering specified rates of return to customers. We have recorded an $83.9 million reserve for potential losses relating to these transactions but anticipate no material liquidity requirements in satisfaction of any arrangement. The carrying values disclosed above relate to the deferred fees we earn for the transactions that we recognize over the period until maturity of these credit intermediations.
|
|||||||
(2) The loss sharing agreements with Fannie Mae and Freddie Mac are a normal part of the DUS and DUI lender programs. The carrying value disclosed above is our estimate of potential exposure under the guarantees, although any funding requirements for such exposure is based on the contractual requirements of the underlying loans we sell to Fannie Mae and Freddie Mac that vary as to amount and duration, up to a maximum of 30 years. The carrying value disclosed above represents the reserve we have recorded for potential losses under the agreements. Based on current expectations of defaults in the portfolio of loans, we anticipate that we may be required to pay between $4.0 and $6.0 million in the next 12 months.
|
|||||||
(3) Generally relates to business requirements for developers to obtain construction financing. As part of our role as co-developer of certain properties, we issue these guarantees in order to secure properties as assets for the funds we manage. To date, we have had minimal exposure to losses under these guarantees.
|
|||||||
(4) These transactions were undertaken to expand our Credit Risk Products business by offering credit intermediation to third-party customers. To date, we have had minimal exposure to losses and anticipate no material liquidity requirements in satisfaction of any arrangement. The carrying values disclosed above relate to the deferred fees we earn for the transactions that we recognize over the period until maturity of these swaps.
|
The maximum exposure amount is not indicative of our expected losses under the guarantees. For details of these transactions, see Note 25 to the condensed consolidated financial statements.
- 69 -
SECTION 4 – FORWARD LOOKING STATEMENTS
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Certain statements made in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are not historical facts, but rather our beliefs and expectations that are based on our current estimates, projections and assumptions about our Company and industry. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Some of these risks include, among other things:
·
|
business limitations caused by adverse changes in real estate and credit markets and general economic and business conditions;
|
·
|
risks related to the form and structure of our financing arrangements;
|
·
|
our ability to generate new income sources, raise capital for investment funds and maintain business relationships with providers and users of capital;
|
·
|
changes in applicable laws and regulations;
|
·
|
our tax treatment, the tax treatment of our subsidiaries and the tax treatment of our investments;
|
·
|
competition with other companies;
|
·
|
risk of loss associated with mortgage originations;
|
·
|
risks associated with providing credit intermediation; and
|
·
|
risks associated with enforcement by our creditors of any rights or remedies which they may possess.
|
These risks are more fully described in our 2010 Form 10-K. We caution against placing undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We are under no obligation (and expressly disclaim any obligation to) update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions, or circumstances on which any such statement is based.
- 70 -
Not required.
a)
|
Evaluation of Disclosure Controls and Procedures
|
Our President, Chief Financial Officer and Chief Operating Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, he has concluded that our disclosure controls and procedures as of the end of the period covered by this quarterly report were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to our management, including the President, Chief Financial Officer and Chief Operating Officer, as appropriate, to allow timely decisions regarding required disclosure.
b)
|
Internal Control over Financial Reporting
|
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ending March 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
- 71 -
PART II – OTHER INFORMATION
We are subject to routine litigation and administrative proceedings arising in the ordinary course of business. In addition, we are party to the following actions:
·
|
On or about March 6, 2009, Regions Bank, as Trustee under a Trust Indenture dated April 1, 2005 respecting the Walton Trail Apartments, commenced an action, entitled Regions Bank v. Deickman, et al., Civil Action No. 2009-CV-165607-MJW, in the Superior Court of Fulton County, Georgia, against guarantors of the bond indebtedness of Walton Trails, Stephen R. Dieckman, Arthur Dickson Cannon, Jr. and Arthur Dickson Cannon, III (the “Defendants”) seeking to collect money owed under a certain Guaranty and Suretyship Agreement dated as of May 1, 2005. On or about May 28, 2009, the Defendants filed a Third-Party Complaint in that action against CCG and Caswyck Trail, LLC (“Caswyck”). Defendants thereafter amended their Third-Party Complaint. Caswyck is a Georgia limited liability company, which owns the Walton Trail affordable housing apartment complex in Georgia and in which indirect subsidiaries of CCG and an investment fund sponsored by CCG are members. The Amended Third-Party Complaint alleges that CCG misled and defrauded the Defendants and acted in bad faith in connection with certain unsuccessful and unconsummated negotiations to restructure the finances of Caswyck. The Amended Third-Party Complaint asserts a claim for common law fraud against CCG and claims for subrogation, indemnification, unjust enrichment and declaratory judgment against Caswyck for any liability that Defendants may have to the Trustee. The Defendants seek unspecified amounts of damages, attorneys’ fees and costs. On or about August 10, 2009, CCG and Caswyck each separately moved to dismiss the claims then asserted against it. In accordance with Georgia procedures, each also answered the Third-Party Complaint on or about August 10, 2009 and asserted counterclaims against the Third-Party Plaintiffs. In two written orders each dated December 14, 2009, the Court granted CCG’s and Caswyck’s motions to dismiss and dismissed the subrogation and contribution claims against Caswyck and the fraud claim against Centerline. After Caswyck moved to dismiss the subrogation and contribution claims, but prior to the Court ruling on that motion, the third-party plaintiffs amended their Third-Party Complaint to assert their claims for indemnification and unjust enrichment against Caswyck. After the entry of the Court’s December 14, 2009 dismissal orders, the third-party plaintiffs moved for reconsideration of the Court’s decision to dismiss the fraud claim against CCG and for permission to take an immediate appeal of that decision. The Court has not yet ruled on those two motions by the third-party plaintiffs. On or about July 9, 2010, the Court entered a Case Scheduling Order requiring, among other pretrial deadlines and procedures, that all discovery be completed by August 15, 2011, dispositive motions must be made by September 30, 2011 and the case will be set on a trial calendar in early 2012. After entry of the Court’s Case Scheduling Order, the parties in settlement discussions, which were unsuccessful in resolving the litigation. CCG and Caswyck intend to continue to defend vigorously against the claims asserted against them.
|
·
|
On or about July 23, 2010, Locust Street Lofts, LP, (“Lofts”), Locust Street Tenant, LP, (“Tenant”), Elias Haus Partners, LLC, Elias Tenant, LLC, Bill L. Bruce and Richard Yackey commenced an action in the Circuit Court of the City of St. Louis, Missouri, entitled Locust Street Lofts, LP, et al v. CCL Locust Street Owner LLC, et al., Cause No. 1022-CC10087, against certain of our subsidiaries and investment funds managed by our subsidiaries (the “Centerline Locust Street Defendants” ). The plaintiffs, however, did not immediately serve the summons and complaint on the Centerline Locust Street Defendants. On or about September 20, 2010, the Centerline Locust Street Defendants served their answer and counterclaim and filed certain motions in the action, including one for a preliminary injunction or the appointment of a receiver.
|
The complaint asserts claims that certain of the investment funds managed by the Company’s subsidiaries breached certain contracts by not paying a total of approximately $1.2 million in capital contributions to Lofts and Tenant, which are project partnerships in which certain of the Centerline Locust Street Defendants are limited partners. The complaint also alleges that the Centerline Locust Street Defendants that serve as the special limited partner for Lofts and Tenant improperly removed certain plaintiffs from their positions as the general partners of Lofts and Tenant. The complaint seeks money damages of approximately $1.2 million, interest, costs, attorneys’ fees and declaratory relief. The court conducted an evidentiary hearing on the motion for a preliminary injunction or a receiver on October 13 and 14, 2010 and in a memorandum and order dated January 13, 2011 denied that motion. The Centerline Locust Street defendants intend to defend the claims asserted against them and to prosecute their counterclaims vigorously.
There have been no material changes to our risk factors as previously disclosed in our 2010 Form 10-K.
- 72 -
Equity Securities purchased by us
The Board of Trustees has authorized a Common Share repurchase plan, enabling us to repurchase, from time to time, up to 3.0 million Common Shares in the open market; however, under the terms of our Term Loan and Revolving Credit Facility, we were restricted from acquiring capital stock while such facilities were outstanding. The following table presents information related to repurchases of our equity securities during the first quarter of 2011 and other information related to our repurchase program:
Period
|
Total
number of
shares
purchased
|
Weighted
average
price paid
per share
|
Total number
of shares
purchased as
part of
publicly
announced
plans
or program
|
Maximum
number
of shares that
may yet be
purchased
under the
plans or
program
|
||||||
Common Shares
|
||||||||||
January 1 – 31, 2011
|
--
|
$
|
--
|
--
|
--
|
|||||
February 1 – 28, 2011
|
--
|
--
|
--
|
--
|
||||||
March 1 – 31, 2011
|
--
|
--
|
--
|
--
|
||||||
Total
|
--
|
$
|
--
|
--
|
303,854
|
Other information required by this item, as well as information regarding our share repurchase program and share compensation paid to our independent trustees, is included in Note 26 to our 2010 Form 10-K.
During the first quarter of 2011, we did not sell any securities that were not registered under the Securities Act of 1933
Defaults upon Senior Securities. None.
|
||||
Removed and Reserved
|
||||
Other Information. None.
|
||||
Exhibits.
|
||||
31.1
|
||||
32.1
|
||||
*
|
Filed herewith.
|
- 73 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CENTERLINE HOLDING COMPANY
(Registrant)
Date: May 16, 2011
|
By:
|
/s/ Robert L. Levy
|
Robert L. Levy
President, Chief Financial Officer and
Chief Operating Officer
(Principal Financial Officer and Principal Executive Officer)
|
- 74 -