Attached files
| file | filename |
|---|---|
| EX-31.2 - Vestin Realty Mortgage II, Inc | exhibit312.htm |
| EX-31.1 - Vestin Realty Mortgage II, Inc | exhibit311.htm |
| EX-32 - Vestin Realty Mortgage II, Inc | exhibit32.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Vestin Realty Mortgage II, Inc | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
|
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2014
Or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
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SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to _________
Commission File Number: 000-51892
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VESTIN REALTY MORTGAGE II, INC.
|
|
(Exact name of registrant as specified in its charter)
|
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MARYLAND
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61-1502451
|
|
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(State or Other Jurisdiction of
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(I.R.S. Employer
|
|
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Incorporation or Organization)
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Identification No.)
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8880 W. SUNSET ROAD, SUITE 200, LAS VEGAS, NEVADA 89148
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number: 702.227.0965
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 [ X ] No [ ]
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.
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Large accelerated filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [ ]
(Do not check if a smaller reporting company)
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Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 13, 2014, there were 2,625,531 shares of the Company’s Common Stock outstanding.
TABLE OF CONTENTS
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ITEM 1.
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CONSOLIDATED FINANCIAL STATEMENTS
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VESTIN REALTY MORTGAGE II, INC.
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||||||||
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CONSOLIDATED BALANCE SHEETS
|
||||||||
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(UNAUDITED)
|
||||||||
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ASSETS
|
||||||||
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September 30, 2014
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December 31, 2013
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|||||||
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Assets
|
||||||||
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Cash and cash equivalents
|
$ | 5,554,000 | $ | 7,663,000 | ||||
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Investment in marketable securities
|
-- | 5,658,000 | ||||||
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Investment in marketable securities - related party
|
877,000 | 941,000 | ||||||
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Interest and other receivables, net of allowance of $3,679,000 at September 30, 2014 and $3,197,000 at December 31, 2013
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9,000 | 5,000 | ||||||
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Notes receivable, net of allowance of $6,556,000 at September 30, 2014 and $6,091,000 at December 31, 2013
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-- | -- | ||||||
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Real estate owned held for sale
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-- | 1,234,000 | ||||||
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Real estate loans, net of allowance for loan losses of $2,450,000 at September 30, 2014 and December 31, 2013
|
6,476,000 | 7,849,000 | ||||||
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Investment in equity method investee held for sale
|
-- | 1,195,000 | ||||||
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Investment in and note receivable from MVP Realty Advisors, LLC, net of allowance of $7,720,000
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-- | -- | ||||||
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Investments in real estate
|
||||||||
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Land and improvements
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14,272,000 | -- | ||||||
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Building and improvements
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40,739,000 | -- | ||||||
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Furniture and fixtures
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50,000 | -- | ||||||
|
Accumulated depreciation
|
(284,000 | ) | -- | |||||
|
Total investments in real estate, net
|
54,777,000 | -- | ||||||
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Assets held for sale
|
-- | 13,567,000 | ||||||
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Escrow fees
|
350,000 | -- | ||||||
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Deferred rental assets
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94,000 | -- | ||||||
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Other assets
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487,000 | 160,000 | ||||||
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Total assets
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$ | 68,624,000 | $ | 38,272,000 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
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Liabilities
|
||||||||
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Accounts payable and accrued liabilities
|
$ | 844,000 | $ | 853,000 | ||||
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Notes payable
|
31,200,000 | 23,000 | ||||||
|
Liabilities related to assets held for sale
|
-- | 25,000 | ||||||
|
Due to related parties
|
1,379,000 | 228,000 | ||||||
|
Total liabilities
|
33,423,000 | 1,129,000 | ||||||
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Commitments and contingencies
|
||||||||
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Stockholders’ equity
|
||||||||
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Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued
|
-- | -- | ||||||
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Common stock, $0.0001 par value; 100,000,000 shares authorized; 2,625,531 shares issued and outstanding at September 30, 2014 and 2,709,174 shares issued and outstanding at December 31, 2013.
|
-- | -- | ||||||
|
Additional paid-in capital
|
267,317,000 | 267,745,000 | ||||||
|
Accumulated deficit
|
(239,287,000 | ) | (237,059,000 | ) | ||||
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Accumulated other comprehensive income
|
296,000 | 331,000 | ||||||
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Total stockholders’ equity before non-controlling interest
|
28,326,000 | 31,017,000 | ||||||
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Non-controlling interest
|
6,875,000 | 6,126,000 | ||||||
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Total stockholders’ equity
|
35,201,000 | 37,143,000 | ||||||
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Total liabilities and stockholders’ equity
|
$ | 68,624,000 | $ | 38,272,000 | ||||
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VESTIN REALTY MORTGAGE II, INC.
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||||||||||||||||
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
||||||||||||||||
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For The Three Months
Ended September 30,
|
For The Nine Months
Ended September 30,
|
|||||||||||||||
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2014
|
2013
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2014
|
2013
|
|||||||||||||
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Revenues
|
||||||||||||||||
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Interest income from investment in real estate loans
|
$ | 180,000 | $ | 256,000 | $ | 499,000 | $ | 1,026,000 | ||||||||
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Gain related to pay off of real estate loan, including recovery of allowance for loan loss
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-- | -- | -- | 50,000 | ||||||||||||
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Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
|
85,000 | 66,000 | 185,000 | 206,000 | ||||||||||||
|
Advisor fee income
|
78,000 | -- | 327,000 | -- | ||||||||||||
|
Rental revenue
|
985,000 | -- | 1,388,000 | -- | ||||||||||||
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Total revenues
|
1,328,000 | 322,000 | 2,399,000 | 1,282,000 | ||||||||||||
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Operating expenses
|
||||||||||||||||
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Management fees - related party
|
275,000 | 267,000 | 823,000 | 816,000 | ||||||||||||
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Operating and maintenance
|
177,000 | -- | 239,000 | -- | ||||||||||||
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Impairment on MVP Realty Advisors
|
-- | 1,553,000 | 533,000 | 5,131,000 | ||||||||||||
|
Wages and benefits
|
449,000 | -- | 1,156,000 | -- | ||||||||||||
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Interest expense
|
298,000 | 3,000 | 457,000 | 4,000 | ||||||||||||
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Acquisition expense
|
6,000 | 27,000 | 29,000 | 27,000 | ||||||||||||
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Depreciation
|
209,000 | -- | 294,000 | -- | ||||||||||||
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Professional fees
|
280,000 | 171,000 | 939,000 | 661,000 | ||||||||||||
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Consulting
|
73,000 | 30,000 | 320,000 | 148,000 | ||||||||||||
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Insurance
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66,000 | 69,000 | 202,000 | 213,000 | ||||||||||||
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Commissions
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322,000 | -- | 571,000 | -- | ||||||||||||
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Travel
|
184,000 | -- | 482,000 | -- | ||||||||||||
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Rent
|
70,000 | -- | 230,000 | -- | ||||||||||||
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Other
|
111,000 | 25,000 | 428,000 | 176,000 | ||||||||||||
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Total operating expenses
|
2,520,000 | 2,145,000 | 6,703,000 | 7,176,000 | ||||||||||||
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Loss from operations
|
(1,192,000 | ) | (1,823,000 | ) | (4,304,000 | ) | (5,894,000 | ) | ||||||||
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Non-operating income
|
||||||||||||||||
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Gain related to recovery of allowance on –note receivable - related party
|
925,000 | -- | 1,774,000 | -- | ||||||||||||
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Recovery from settlement with loan guarantor
|
-- | 24,000 | 78,000 | 39,000 | ||||||||||||
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Dividend Income
|
-- | 8,000 | -- | 8,000 | ||||||||||||
|
Income (loss) on investment on equity method investee
|
21,000 | (58,000 | ) | 66,000 | (58,000 | ) | ||||||||||
|
Gain (loss) on sale of marketable securities
|
(33,000 | ) | 292,000 | 32,000 | 292,000 | |||||||||||
|
Reversal of settlement reserve
|
-- | -- | -- | 374,000 | ||||||||||||
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Total non-operating income, net
|
913,000 | 266,000 | 1,950,000 | 655,000 | ||||||||||||
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Provision for income taxes
|
-- | -- | -- | -- | ||||||||||||
|
Loss from continuing operations
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(279,000 | ) | (1,557,000 | ) | (2,354,000 | ) | (5,239,000 | ) | ||||||||
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Discontinued operations, net of income taxes
|
||||||||||||||||
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Net gain (loss) on sale of real estate held for sale
|
(32,000 | ) | (2,000 | ) | 838,000 | 40,000 | ||||||||||
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Expenses related to real estate held for sale
|
(251,000 | ) | (24,000 | ) | (614,000 | ) | (278,000 | ) | ||||||||
|
Recovery from 1701 Commerce
|
-- | 221,000 | -- | 221,000 | ||||||||||||
|
Income from investment in equity method investee
|
-- | -- | 20,000 | -- | ||||||||||||
|
Income (loss) from assets held for sale, net of income taxes
|
-- | (85,000 | ) | 70,000 | (85,000 | ) | ||||||||||
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Total income (loss) from discontinued operations
|
(283,000 | ) | 110,000 | 314,000 | (102,000 | ) | ||||||||||
|
Loss before provision for income taxes
|
(562,000 | ) | (1,447,000 | ) | (2,040,000 | ) | (5,341,000 | ) | ||||||||
|
Net loss
|
(562,000 | ) | (1,447,000 | ) | (2,040,000 | ) | (5,341,000 | ) | ||||||||
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Allocation of income to non-controlling interest – related party
|
88,000 | (40,000 | ) | 188,000 | (40,000 | ) | ||||||||||
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Loss attributable to common stockholders
|
$ | (650,000 | ) | $ | (1,407,000 | ) | $ | (2,228,000 | ) | $ | (5,301,000 | ) | ||||
|
Basic and diluted income (loss)per weighted average common share
|
||||||||||||||||
|
Continuing operations
|
(0.11 | ) | (0.14 | ) | (0.88 | ) | (0.45 | ) | ||||||||
|
Discontinued operations
|
(0.14 | ) | (0.02 | ) | 0.05 | -- | ||||||||||
|
Total basic and diluted income (loss) per weighted
|
||||||||||||||||
|
average common share
|
$ | (0.25 | ) | $ | (0.12 | ) | $ | (0.83 | ) | $ | (0.45 | ) | ||||
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Dividends declared per common share
|
$ | -- | $ | -- | $ | -- | $ | -- | ||||||||
|
Weighted average common shares outstanding
|
2,651,597 | 2,841,191 | 2,690,670 | 2,934,067 | ||||||||||||
|
VESTIN REALTY MORTGAGE II, INC.
|
|
STATEMENTS OF OTHER COMPREHENSIVE LOSS
|
|
(UNAUDITED)
|
|
For The Three Months
Ended September 30,
|
For The Nine Months
Ended September 30,
|
|||||||||||||||
|
2014
|
2013
|
2014
|
2013
|
|||||||||||||
|
Net loss
|
$ | (562,000 | ) | $ | (1,447,000 | ) | $ | (2,040,000 | ) | $ | (5,341,000 | ) | ||||
|
Unrealized holding income (loss) on available-for-sale securities – related party
|
203,000 | (16,000 | ) | (35,000 | ) | 338,000 | ||||||||||
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Unrealized holding income on available-for-sale securities
|
-- | 472,000 | -- | 472,000 | ||||||||||||
|
Comprehensive loss
|
(359,000 | ) | (991,000 | ) | (2,075,000 | ) | (4,531,000 | ) | ||||||||
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Net income (loss) attributable to noncontrolling interest
|
88,000 | (40,000 | ) | 188,000 | (40,000 | ) | ||||||||||
|
Comprehensive loss attributable to Vestin Realty Mortgage II, Inc.
|
$ | (447,000 | ) | $ | (951,000 | ) | $ | (2,263,000 | ) | $ | (4,491,000 | ) | ||||
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VESTIN REALTY MORTGAGE II, INC.
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||||||||
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CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
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(UNAUDITED)
|
||||||||
|
For the Nine Months
Ended September 30,
|
||||||||
|
2014
|
2013
|
|||||||
|
Cash flows from operating activities:
|
||||||||
|
Net loss
|
$ | (2,040,000 | ) | $ | (5,341,000 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation
|
294,000 | 22,000 | ||||||
|
Recovery of allowance for doubtful notes receivable
|
(185,000 | ) | (206,000 | ) | ||||
|
Gain related to recovery from settlement with loan guarantor
|
-- | (39,000 | ) | |||||
|
Gain on sale of marketable securities
|
(32,000 | ) | (292,000 | ) | ||||
|
Dividend income
|
-- | (8,000 | ) | |||||
|
Income (loss) on investment in equity method investee
|
(86,000 | ) | 58,000 | |||||
|
Impairment on investment in MVP Realty Advisors
|
533,000 | 5,131,000 | ||||||
|
Gain on sale of real estate owned held for sale
|
(838,000 | ) | (40,000 | ) | ||||
|
Gain related to recovery of allowance for notes receivable – related party
|
(78,000 | ) | -- | |||||
|
Gain related to recovery of allowance for notes payable – related party
|
(1,774,000 | ) | -- | |||||
|
Gain related to recovery of allowance for loan loss
|
-- | (50,000 | ) | |||||
|
Change in operating assets and liabilities:
|
||||||||
|
Interest and other receivables
|
(4,000 | ) | 11,000 | |||||
|
Assets held for sale, net of liabilities
|
120,000 | 21,000 | ||||||
|
Liabilities related to assets held for sale
|
120,000 | -- | ||||||
|
Due to/from related parties, net
|
789,000 | 321,000 | ||||||
|
Accounts receivable
|
60,000 | (15,000 | ) | |||||
|
Prepaid
|
25,000 | -- | ||||||
|
Deferred rental assets
|
(94,000 | ) | -- | |||||
|
Capitalized loan fees
|
(285,000 | ) | -- | |||||
|
Reversal of settlement reserve
|
-- | (374,000 | ) | |||||
|
Other assets
|
170,000 | (74,000 | ) | |||||
|
Accounts payable and accrued liabilities
|
(84,000 | ) | (324,000 | ) | ||||
|
Net cash used in operating activities
|
$ | (3,389,000 | ) | $ | (1,199,000 | ) | ||
|
Cash flows from investing activities:
|
||||||||
|
Investments in real estate loans
|
$ | (14,187,000 | ) | $ | (8,146,000 | ) | ||
|
Purchase of investments in real estate loans from:
|
||||||||
|
VRM I
|
-- | (1,200,000 | ) | |||||
|
Related parties
|
-- | (1,000,000 | ) | |||||
|
Third parties
|
(468,000 | ) | -- | |||||
|
Proceeds from loan payoffs
|
5,145,000 | 12,431,000 | ||||||
|
Sale of investments in real estate loans to:
|
-- | |||||||
|
VRM I
|
2,823,000 | -- | ||||||
|
Related parties
|
-- | 1,500,000 | ||||||
|
Third parties
|
8,060,000 | 6,534,000 | ||||||
|
Proceeds from notes receivable
|
185,000 | 206,000 | ||||||
|
Proceeds from dividend income
|
-- | 8,000 | ||||||
|
Proceeds related to real estate held for sale
|
2,552,000 | -- | ||||||
|
Investment in real estate
|
-- | (5,882,000 | ) | |||||
|
Investment in MVP Realty Advisors
|
-- | (3,597,000 | ) | |||||
|
Investments in asset held for sale
|
-- | (1,595,000 | ) | |||||
|
Payment of noncontrolling interest portion of proceeds related to real estate held for sale
|
(764,000 | ) | -- | |||||
|
Payments on assets transferred, net
|
(958,000 | ) | -- | |||||
|
Purchase of investments in real estate
|
(6,263,000 | ) | -- | |||||
|
Payments on purchase of assets
|
(110,000 | ) | -- | |||||
|
Purchase of marketable securities
|
(1,755,000 | ) | (5,040,000 | ) | ||||
|
Investment in and note receivable from MVP Realty Advisors, LLC
|
(1,065,000 | ) | -- | |||||
|
Investment in equity method investee
|
(3,000,000 | ) | (1,241,000 | ) | ||||
|
Proceeds on nonrefundable earnest money deposit on real estate held for sale
|
-- | 61,000 | ||||||
|
Proceeds from sale of VREO XXV, LLC
|
39,000 | -- | ||||||
|
Proceeds from settlement with loan guarantor
|
78,000 | -- | ||||||
|
Proceeds from notes receivable – related party
|
1,774,000 | -- | ||||||
|
Proceeds from sale of marketable securities
|
7,474,000 | 1,689,000 | ||||||
|
Net cash used in investing activities
|
$ | (440,000 | ) | $ | (5,272,000 | ) | ||
|
Cash flows from financing activities:
|
||||||||
|
Principal payments on notes payable
|
$ | (7,984,000 | ) | $ | (140,000 | ) | ||
|
Purchase of treasury stock
|
(426,000 | ) | (1,465,000 | ) | ||||
|
Proceeds from distribution from real estate held for sale
|
2,000 | 5,000 | ||||||
|
Proceeds from notes payable
|
7,750,000 | -- | ||||||
|
Proceeds from note payable on assets held for sale
|
4,143,000 | -- | ||||||
|
Payment of noncontrolling interest portion of proceeds from note payable
|
(1,763,000 | ) | -- | |||||
|
Other
|
(2,000 | ) | -- | |||||
|
Net cash provided by (used in) financing activities
|
$ | 1,720,000 | $ | (1,600,000 | ) | |||
|
NET CHANGE IN CASH
|
(2,109,000 | ) | (8,071,000 | ) | ||||
|
Cash, beginning of period
|
7,663,000 | 10,098,000 | ||||||
|
Cash, end of period
|
$ | 5,554,000 | $ | 2,027,000 | ||||
|
Supplemental disclosures of cash flows information:
|
||||||||
|
Interest paid
|
$ | 457,000 | $ | 4,000 | ||||
|
Non-cash investing and financing activities:
|
||||||||
|
Adjustment to accrued interest and related allowance
|
$ | 175,000 | $ | -- | ||||
|
Reduction of debt by Advisor treated as contribution
|
$ | (238,000 | ) | $ | -- | |||
|
Note payable related to prepaid D & O insurance
|
$ | 262,000 | $ | 208,000 | ||||
|
Non-controlling interest portion of investment in real estate
|
$ | -- | $ | 4,518,000 | ||||
|
Unrealized gain on marketable securities
|
$ | -- | $ | 472,000 | ||||
|
Unrealized loss on marketable securities - related party
|
$ | (35,000 | ) | $ | 388,000 | |||
|
Assets
|
Transferred Assets
|
|||
|
Cash transferred
|
$ | 1,392,000 | ||
|
Other assets
|
171,000 | |||
|
Land and improvements
|
11,200,000 | |||
|
Building and improvements
|
736,000 | |||
|
49% Non-controlling interest portion of Red Mountain
|
1,208,000 | |||
|
Total assets transferred
|
14,707,000 | |||
|
Liabilities
|
||||
|
Accrued liabilities
|
10,000 | |||
|
Notes payable
|
4,278,000 | |||
|
Total liabilities transferred
|
4,288,000 | |||
|
Net assets transferred
|
$ | 10,419,000 | ||
|
Assets
|
Acquired assets
|
|||
|
Cash
|
$ | 101,000 | ||
|
Other assets
|
22,000 | |||
|
Land and improvements
|
6,275,000 | |||
|
Building and improvements
|
18,521,000 | |||
|
Tenant improvements
|
165,000 | |||
|
Total assets acquired
|
25,084,000 | |||
|
Liabilities
|
||||
|
Accounts payable and accrued liabilities
|
58,000 | |||
|
Note payable
|
14,335,000 | |||
|
Total liabilities acquired
|
14,393,000 | |||
|
Acquisition-date fair value of the total consideration acquired
|
$ | 10,691,000 | ||
VESTIN REALTY MORTGAGE II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
(UNAUDITED)
NOTE A — ORGANIZATION
Vestin Realty Mortgage II, Inc. (“VRM II”, the “Company”, “we”, “us” or “our”) formerly Vestin Fund II, LLC (“Fund II”) invests in loans secured by real estate through deeds of trust or mortgages (hereafter referred to collectively as “deeds of trust” and as defined in our management agreement (“Management Agreement”) as mortgage assets (“Mortgage Assets”). In addition, we invest in, acquire, manage or sell real property and acquire entities involved in the ownership or management of real property. We commenced operations in June 2001. References in this report to the “Company,” “we,” “us,” or “our” refer to Fund II with respect to the period prior to April 1, 2006 and to VRM II with respect to the period commencing on April 1, 2006.
We operated as a real estate investment trust (“REIT”) through December 31, 2011. We are not a mutual fund or an investment company within the meaning of the Investment Company Act of 1940, nor are we subject to any regulation thereunder. As a REIT, we were required to have a December 31 fiscal year end. We announced on March 28, 2012 that we have terminated our election to be treated as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), effective for the tax year ending December 31, 2012. Under the Code, we will not be able to make a new election to be taxed as a REIT during the four years following December 31, 2012. Pursuant to our charter, upon the determination by the Board of Directors that we should no longer qualify as a REIT, the restrictions on transfer and ownership of shares set forth in Article VII of our charter ceased to be in effect and, accordingly, shares of the Company’s stock will no longer be subject to such restrictions. In connection with the termination of our REIT status, we also amended our stockholders’ rights plan to provide that a stockholder, other than Michael Shustek, may own up to 20% of outstanding shares of common stock, and that Michael Shustek may own up to 35% of outstanding shares of common stock.
Michael Shustek owns a significant majority of Vestin Mortgage, LLC, a Nevada limited liability company, which is our manager (the “manager” or “Vestin Mortgage”). On January 7, 2011, Vestin Mortgage converted from a corporation to a limited liability company. The business of brokerage and placement of real estate loans have been performed by affiliated or non-affiliated mortgage brokers, including Advant Mortgage, LLC (“MVP Mortgage”), a licensed Nevada mortgage broker, which is indirectly wholly owned by Mr. Shustek.
Pursuant to a management agreement, our manager is responsible for managing our operations and implementing our business strategies on a day-to-day basis. Consequently, our operating results are dependent to a significant extent upon our manager’s ability and performance in managing our operations and servicing our loans.
Vestin Mortgage is also the manager of Vestin Realty Mortgage I, Inc. (“VRM I”), as the successor by merger to Vestin Fund I, LLC (“Fund I”) and Vestin Fund III, LLC (“Fund III”). VRM I has investment objectives similar to ours, and Fund III is in the process of an orderly liquidation of its assets.
The consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; and MVP Realty Advisors, LLC (“MVP Advisors”) , as well as the Company’s assets that have been sold during 2014. All significant intercompany transactions and balances have been eliminated in consolidation
During April 2009, we entered into an accounting services agreement with Strategix Solutions, LLC (“Strategix Solutions”), a Nevada limited liability company, for the provision of accounting and financial reporting services. Strategix Solutions also provides accounting and financial reporting services to VRM I and Fund III. Our CFO and other members of our accounting staff are employees of Strategix Solutions. Strategix Solutions is managed by LL Bradford and Company, LLC ("LL Bradford"), a certified public accounting firm that has provided non-audit accounting services to us. The principal manager of LL Bradford was a former officer of our manager from April 1999 through January 1, 2005. Strategix Solutions is owned by certain partners of LL Bradford, none of whom are currently or were previously officers of our manager. As used herein, “management” means our manager, its executive officers and the individuals at Strategix Solutions who perform accounting and financial reporting services on our behalf.
In December 2013, we entered into a membership interest transfer agreement with MVP Capital Partners, LLC (“MVP Capital”) pursuant to which we increased our ownership interest from 40% to 60% in MVP Advisors, the manager of MVP REIT, Inc. At the same time, VRM I acquired from MVP Capital the remaining 40% interest in MVP Advisors. Pursuant to the transfer agreement, we and VRM I did not pay any up-front consideration for the acquired interest but will be responsible for our proportionate share of future expenses of MVP Advisors. In recognition of MVP Capital’s substantial investment in MVP Advisors for which MVP Capital received no up-front consideration, the transfer agreement further provides that once we and VRM I have been repaid in full for any capital contributions to MVP Advisors or for any expenses advanced on MVP Advisors’ behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP Capital will receive one-third of the net profits of MVP Advisors. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking facilities located throughout the United States and loans secured by real estate as its core assets.
NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all normal recurring adjustments considered necessary to give a fair presentation of operating results for the periods presented have been included. The information included in this Form 10-Q should be read in conjunction with information included in the 2013 annual report filed on Form 10-K.
Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Investments in Real Estate Loans
We may, from time to time, acquire or sell investments in real estate loans from or to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. The primary purpose is to either free up capital to provide liquidity for various reasons, such as loan diversification, or place excess capital in investments to maximize the use of our capital. Selling or buying loans allows us to diversify our loan portfolio within these parameters. Due to the short-term nature of the loans we make and the similarity of interest rates in loans we normally would invest in, the fair value of a loan typically approximates its carrying value. Accordingly, discounts or premiums typically do not apply upon sales of loans and therefore, generally no gain or loss is recorded on these transactions, regardless of whether to a related or unrelated party.
Investments in real estate loans are secured by deeds of trust or mortgages. Generally, our real estate loans require interest only payments with a balloon payment of the principal at maturity. We have both the intent and ability to hold real estate loans until maturity and therefore, real estate loans are classified and accounted for as held for investment and are carried at amortized cost. Loans sold to or purchased from affiliates are accounted for at the principal balance and no gain or loss is recognized by us or any affiliate. Loan-to-value ratios are initially based on appraisals obtained at the time of loan origination and are updated, when new appraisals are received or when management’s assessment of the value has changed, to reflect subsequent changes in value estimates. Such appraisals are generally dated within 12 months of the date of loan origination and may be commissioned by the borrower.
The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company’s impaired loans include troubled debt restructuring, and performing and non-performing loans in which full payment of principal or interest is not expected. The Company calculates an allowance required for impaired loans based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or at the loan’s observable market price or the fair value of its collateral.
Loans that have been modified from their original terms are evaluated to determine if the loan meets the definition of a Troubled Debt Restructuring (“TDR”) as defined by ASC 310-40. When the Company modifies the terms of an existing loan that is considered a TDR, it is considered performing as long as it is in compliance with the modified terms of the loan agreement. If the modification calls for deferred interest, it is recorded as interest income as cash is collected.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded first as a reduction to the allowance for loan losses. Generally, subsequent recoveries of amounts previously charged off are recognized as income.
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the real estate lending industry. We and our manager generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process; there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
Additional facts and circumstances may be discovered as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that have and may continue to cause significant changes in our estimated allowance include, but are not limited to:
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Declines in real estate market conditions, which can cause a decrease in expected market value;
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Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
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Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
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Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed property; and
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Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
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Discontinued Operations
We have reclassified for all periods presented in the accompanying consolidated statements of operations, the amounts related to discontinued operations and real estate held for sale, in accordance with the applicable accounting criteria. In addition, the assets and liabilities related to the discontinued operations are reported separately in the accompanying consolidated balance sheets as real estate held for sale, assets held for sale, and liabilities related to assets held for sale.
Real Estate Owned Held for Sale
Real estate owned held for sale (“REO”) includes real estate acquired through foreclosure and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property's estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. While pursuing foreclosure actions, we seek to identify potential purchasers of such property. We generally seek to sell properties acquired through foreclosure as quickly as circumstances permit, taking into account current economic conditions. The carrying values of REO are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
Management classifies real estate as REO when the following criteria are met:
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Management commits to a plan to sell the properties;
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The property is available for immediate sale in its present condition subject only to terms that are usual and customary;
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An active program to locate a buyer and other actions required to complete a sale have been initiated;
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The sale of the property is probable;
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The property is being actively marketed for sale at a reasonable price; and
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Withdrawal or significant modification of the sale is not likely.
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Real Estate Owned Held For Sale – Seller-Financed
We occasionally finance sales of foreclosed properties (“seller-financed REO”) to third parties. In order to record a sale of real estate when we provide financing, the buyer of the real estate is required to make minimum initial and continuing investments. Generally minimum initial investments range from 10% to 25% based on the type of real estate sold. In addition, there are limits on commitments and contingent obligations incurred by a seller in order to record a sale.
Because we occasionally foreclose on loans with raw land or developments in progress, available financing for such properties is often limited and we frequently provide financing up to 100% of the selling price on these properties. In addition, we may make additional loans to the buyer to continue development of a property. Although sale agreements are consummated at closing, they lack adequate initial investment by the buyer to qualify as a sale transaction. These sale agreements are not recorded as a sale until the minimum requirements are met.
These sale agreements are recorded under the deposit method or cost recovery method. Under the deposit method, no profit is recognized and any cash received from the buyer is reported as a deposit liability on the balance sheet. Under the cost recovery method, no profit is recognized until payments by the buyer exceed the carrying basis of the property sold. Principal payments received will reduce the related receivable, and interest collections will be recorded as unrecognized gross profit on the balance sheet. The carrying values of these properties would be included in real estate owned held for sale – seller financed on the consolidated balance sheets, when applicable.
In cases where the investment by the buyer is significant (generally 20% or more) and the buyer has an adequate continuing investment, the purchase money debt is not subject to future subordination, and a full transfer of risks and rewards has occurred, we will use the full accrual method. Under the full accrual method, a sale is recorded and the balance remaining to be paid is recorded as a normal note. Interest is recorded as income when received.
Classification of Operating Results from Real Estate Held for Sale
Generally, operating results and cash flows from long-lived assets held for sale are to be classified as discontinued operations as a separately stated component of net income. Our operations related to REO are separately identified in the accompanying consolidated statements of operations.
Secured Borrowings
Secured borrowings provide an additional source of capital for our lending activity. Secured borrowings allow us to increase the diversification of our loan portfolio and to invest in loans that we might not otherwise invest in. We do not receive any fees for entering into secured borrowing arrangements; however, we may receive revenue for any differential of the interest spread, if applicable. Loans in which unaffiliated investors have participated through inter-creditor agreements (“Inter-creditor Agreements”) are accounted for as secured borrowings.
The Inter-creditor Agreements provide us additional funding sources for real estate loans whereby an unaffiliated investor (the “Investor”) may participate on a non-pari-passu basis in certain real estate loans with us and/or VRM I (collectively, the “Lead Lenders”). In the event of borrower non-performance, the Inter-creditor Agreements generally provide that the Lead Lenders must repay the Investor’s loan amount either by (i) continuing to remit to the Investor the interest due on the participated loan amount; (ii) substituting an alternative loan acceptable to the Investor; or (iii) repurchasing the participation from the Investor for the outstanding balance plus accrued interest.
Additionally, an Investor may participate in certain loans with the Lead Lenders through Participation Agreements. In the event of borrower non-performance, the Participation Agreement may allow the Investor to be repaid up to the amount of the Investor’s investment prior to the Lead Lender being repaid. Real estate loan financing under the Participation Agreements are also accounted for as a secured borrowing. We do not receive any revenues for entering into secured borrowing arrangements.
Acquisitions
The Company records the acquired tangible and intangible assets and assumed liabilities of acquisitions of all operating properties and those development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. The Company assesses and considers fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that the Company deems appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.
The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, and leasing costs are based upon current market replacement costs and other relevant market rate information.
The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management's estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options.
The fair value of acquired in-place leases is derived based on management's assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors considered by us in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangibles, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.
The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.
The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of operating property acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related amortization and depreciation expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.
Costs directly associated with all operating property acquisitions and those development and redevelopment acquisitions that meet the accounting criteria to be accounted for as business combinations are expensed as incurred. Our acquisition expenses are directly related to our acquisition activity and if our acquisition activity was to increase or decrease, so would our acquisition costs. Costs directly associated with development acquisitions accounted for as asset acquisitions are capitalized as part of the cost of the acquisition. During the nine months ended September 30, 2014, the Company did not capitalize any such acquisition costs.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income.
Derivative Instruments
The Company may use derivative financial instruments to hedge all or a portion of the interest rate risk associated with its borrowings. Certain of the techniques used to hedge exposure to interest rate fluctuations may also be used to protect against declines in the market value of assets that result from general trends in debt markets. The principal objective of such agreements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions.
The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has 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 changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. 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. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of 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 that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The accounting for subsequent changes in the fair value of these derivatives depends on whether each has been designed and qualifies for hedge accounting treatment. If the Company elects not to apply hedge accounting treatment, any changes in the fair value of these derivative instruments is recognized immediately in gains (losses) on derivative instruments in the consolidated statement of operations. If the derivative is designated and qualifies for hedge accounting treatment, the change in the estimated fair value of the derivative is recorded in other comprehensive income (loss) to the extent that it is effective. Any ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings.
Cash and Cash Equivalents
Cash and cash equivalents include interest-bearing and non-interest bearing bank deposits, money market accounts, short-term certificates of deposit with original maturities of three months or less, and short-term instruments with a liquidation provision of one month or less.
Revenue Recognition
The Company will recognize interest income from loans on an accrual basis over the expected terms of the loans using the effective interest method. The Company may recognize fees, discounts, premiums, anticipated exit fees and direct cost over the terms of the loans as an adjustment to the yield. The Company may recognize fees on commitments that expire unused at expiration. The Company may recognize interest income from available-for-sale securities on an accrual basis over the life of the investment on a yield-to-maturity basis.
The Company’s revenues, which will be derived primarily from rental income, include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease. Since some of the Company’s leases will provide for rental increases at specified intervals, straight-line basis accounting requires the Company to record a receivable, and include in revenues, unbilled rent receivables that the Company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease.
The Company will continually review receivables related to rent and unbilled rent receivables and determine collectability by taking into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of a receivable is in doubt, the Company will record an increase in the Company’s allowance for uncollectible accounts or record a direct write-off of the receivable in the Company’s consolidated statements of operations.
MVP Advisors receives a monthly asset management fee at an annual rate equal to 0.85% of the fair market value of (i) all assets then held by MVP REIT or (ii) MVP REIT’s proportionate share thereof in the case of an investment made through a joint venture or other co-ownership arrangement, excluding (only for clause (ii)) debt financing obtained by MVP REIT or made available to MVP REIT. The fair market value of real property shall be based on annual “AS-IS”, “WHERE-IS” appraisals, and the fair market value of real estate-related secured loans shall be equal to the face value of the such loan, unless it is non-performing, in which case the fair market value shall be equal to the book value of such loan. The asset management fee will be reduced to 0.75% if MVP REIT is listed on a national securities exchange. Asset management fees for the nine months ended September 30, 2014 were approximately $304,000.
MVP Advisors receives a monthly debt financing fee at an annual rate equal to 0.25% of the aggregate debt financing obtained by MVP REIT or made available to MVP REIT, such as mortgage debt, lines of credit, and other term indebtedness, including refinancings. In the case of a joint venture, MVP REIT pays this fee only on MVP REIT’s pro rata share. Debt financing fee for the nine months ended September 30, 2014 were approximately $23,000.
Advertising Costs
Advertising costs incurred in the normal course of operations are expensed as incurred. The Company had no advertising expense for the nine months ended September 30, 2014.
Investments in Real Estate and Fixed Assets
Investments in real estate and fixed assets are stated at cost less accumulated depreciation. Depreciation is provided principally on the straight-line method over the estimated useful lives of the assets, which are primarily 3 to 40 years. The cost of repairs and maintenance is charged to expense as incurred. Expenditures for property betterments and renewals are capitalized. Upon sale or other disposition of a depreciable asset, cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful lives of fixed assets or whether the remaining balance of fixed assets should be evaluated for possible impairment. The Company uses an estimate of the related undiscounted cash flows over the remaining life of the fixed assets in measuring their recoverability.
Investment in Marketable Securities
Investment in marketable securities consists of stock in VRM I, related party. The securities are stated at fair value as determined by the closing market prices as of September 30, 2014 and December 31, 2013. All securities are classified as available-for-sale.
We are required to evaluate our available-for-sale investment for other-than-temporary impairment charges. We will determine when an investment is considered impaired (i.e., decline in fair value below its amortized cost), and evaluate whether the impairment is other than temporary (i.e., investment value will not be recovered over its remaining life). If the impairment is considered other than temporary, we will recognize an impairment loss equal to the difference between the investment’s cost and its fair value.
Basic and Diluted Earnings Per Common Share
Basic earnings per share (“EPS”) is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been exercised. We had no outstanding common share equivalents during the periods ended September 30, 2014 and December 31, 2013.
Common Stock Dividends
During June 2008, our Board of Directors decided to suspend the payment of dividends. Our Board of Directors will closely monitor our operating results in order to determine when dividends should be reinstated; however, we do not expect our Board of Directors to reinstate dividends in the foreseeable future.
Treasury Stock
On March 21, 2007, our Board of Directors authorized the repurchase of up to $10 million worth of our common stock. Depending upon market conditions, shares may be repurchased from time to time at prevailing market prices through open market or privately negotiated transactions. We are not obligated to purchase any shares. Subject to applicable securities laws, including SEC rule 10b-18, repurchases may be made at such times and in such amounts, as our management deems appropriate. The share repurchase program may be discontinued or terminated at any time and we have not established a date for completion of the share repurchase program. The repurchases will be funded from our available cash.
On June 7, 2012, our Board of Directors (“Board”) approved the adoption of a prearranged stock repurchase plan intended to qualify for the safe harbor under Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“10b5-1 Plan”). Due to the postponement of the merger between VRM I and us, the 10b5-1 plan has been terminated. We record our treasury stock using the cost method. Under the Maryland General Corporation Law, shares of its own stock acquired by a corporation constitute authorized but unissued shares.
Segments
We currently are authorized to operate three reportable segments, investments in real estate loans, investments in real property and investment in a real estate management company. As of September 30, 2014, the Company operates all segments.
Our objective is to invest approximately 97% of our assets in real estate loans and real estate related investments, while maintaining approximately 3% as a working capital cash reserve.
Reclassifications
Amounts listed in connection with assets held for sale, including liabilities related to assets held for sale, in the December 31, 2013 consolidated financial statements have been reclassified to conform to the September 30, 2014 presentation.
Reverse Split
On February 5, 2014, the Company effected a 1-for-4 reverse split of its common stock. All share and per share information in the consolidated financial statements and accompanying notes have been adjusted to retroactively reflect the 1-for-4 reverse stock split.
Principles of Consolidation
Our consolidated financial statements include the accounts of VRM II; Building A, LLC, Building C, LLC, Wolfpack Properties, LLC; Devonshire, LLC; SE Properties, LLC; ExecuSuites, LLC; ; and MVP Advisors, as well as the Company’s assets that have been sold during 2014. All significant intercompany transactions and balances have been eliminated in consolidation.
Business Combinations
In December 2007, the Financial Accounting Standards Board (FASB) revised the authoritative guidance for business combinations, establishing principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired (including goodwill), the liabilities assumed, and any noncontrolling interest in the acquiree. Subsequently, on April 1, 2009, the FASB amended and clarified certain aspects of its authoritative guidance on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. We apply the FASB authoritative guidance to all business combinations for which the acquisition date is on or after January 1, 2009, and to certain future income tax effects related to our prior business combinations, should they arise.
Non-controlling Interests
The FASB issued authoritative guidance for non-controlling interests in December 2007, which establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.
Income Taxes
The Company accounts for its income taxes under the assets and liabilities method, which requires recognition of deferred tax assets and liabilities for future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company was to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, they would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also, included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
NOTE C — FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments consist of cash, interest and other receivables, notes receivable, accounts payable and accrued liabilities, due to/from related parties and notes payable. The carrying values of these instruments approximate their fair values due to their short-term nature. Marketable securities – related party and investment in real estate loans are further described in Note M – Fair Value.
Financial instruments with concentration of credit and market risk include cash, interest and other receivables, marketable securities - related party, notes receivable, accounts payable and accrued liabilities, due to/from related parties, notes payable, and loans secured by deeds of trust.
We maintain cash deposit accounts and certificates of deposit that, at times, may exceed federally-insured limits. To date, we have not experienced any losses. As of September 30, 2014 and December 31, 2013 we had approximately $3.2 and $6.9 million of funds in excess of the federally-insured limits.
As of September 30, 2014, 40% of our loans were loans in which we participated with other lenders, most of whom are our affiliates.
As of September 30, 2014, 59% and 23% of our loans were in Nevada and California, respectively, compared to 53% and 28% respectively, at December 31, 2013. As a result of this geographical concentration of our real estate loans, the continuation of depressed conditions in certain of the local real estate markets in these states has had a material adverse effect on us.
At September 30, 2014, the aggregate amount of loans to our three largest borrowers represented approximately 65% of our total investment in real estate loans. These real estate loans consisted of commercial and construction loans, secured by properties located in California, Florida and Nevada, with a first lien position. Their interest rates are between 9% and 24%, and the aggregate outstanding balance is approximately $5.8 million. As of September 30, 2014, our largest loan, totaling $2.4 million is secured by property in Nevada with an interest rate of 15% and is considered non-performing. The second loan totaling approximately $2.1 million and secured by property in California is a performing loan with an interest rate of 9%. The third loan totaling approximately $1.3 million and secured by property located in Florida, is a performing loan with an interest rate of 24%. At December 31, 2013, the aggregate amount of loans to our three largest borrowers represented approximately 67% of our total investment in real estate loans. These real estate loans consisted of commercial and land loans, secured by properties located in California and Nevada, with a first lien position. Their interest rates are between 7.75% and 15%, and the aggregate outstanding balance is approximately $6.9 million. As of December 31, 2013, our largest loan, totaling approximately $2.8 million and secured by property located in California, is a performing loan with an interest rate of 11%. The second loan is secured by property in Nevada with an interest rate of 15% and is considered non-performing. The third loan is secured by property in Nevada with an interest rate of 7.75% and is considered performing.
The success of a borrower’s ability to repay its real estate loan obligation in a large lump-sum payment may be dependent upon the borrower’s ability to refinance the obligation or otherwise raise a substantial amount of cash. With the weakened economy, credit continues to be difficult to obtain and as such, many of our borrowers who develop and sell commercial real estate projects have been unable to complete their projects, obtain takeout financing or have been otherwise adversely impacted. In addition, an increase in interest rates over the loan rate applicable at origination of the loan may have an adverse effect on our borrower’s ability to refinance.
Common Guarantors
As of September 30, 2014 and December 31, 2013, three and five loans totaling approximately $0.6 million and $3.6 million, respectively, representing approximately 6.6% and 34.9%, respectively, of our portfolio’s total value, had a common guarantor. At September 30, 2014 and December 31, 2013 all of these loans were considered performing.
As of September 30, 2014, there were two loans, totaling approximately $1.1 million, representing approximately 12.2%, of our portfolio’s total value, which had a common guarantor. As of December 31, 2013, these loans did not exist.
NOTE D — INVESTMENTS IN REAL ESTATE LOANS
As of September 30, 2014 and December 31, 2013, most of our loans provided for interest only payments with a “balloon” payment of principal payable and any accrued interest payable in full at the end of the term. As of September 30, 2014 and December 31, 2013, three loans had variable interest rates adjusted quarterly at a rate of prime plus 3.30% (6.55% as of September 30, 2014 and December 31, 2013). The balance on these loans was approximately $0.3 million as of September 30, 2014 and December 31, 2013.
In addition, we may invest in real estate loans that require borrowers to maintain interest reserves funded from the principal amount of the loan for a period of time. At September 30, 2014 and December 31, 2013, we had two and no investment in real estate loans that had interest reserves, respectively.
Loan Portfolio
As of September 30, 2014, we had five available real estate loan products consisting of commercial, construction, acquisition and development, land and residential. The effective interest rates on all product categories range from 7% to 15% which includes performing loans that are being fully or partially accrued and will be payable at maturity. Revenue by product will fluctuate based upon relative balances during the period.
Investments in real estate loans as of September 30, 2014, were as follows:
|
Loan Type
|
Number of Loans
|
Balance *
|
Weighted Average Interest Rate
|
Portfolio Percentage
|
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
|
|||||||||||||||
|
Commercial
|
12 | $ | 6,767,000 | 13.46 | % | 75.81 | % | 31.83 | % | |||||||||||
|
Construction
|
1 | 2,059,000 | 9.00 | % | 23.07 | % | 67.63 | % | ||||||||||||
|
Land
|
2 | 100,000 | 9.00 | % | 1.12 | % | 41.38 | % | ||||||||||||
|
Total
|
15 | $ | 8,926,000 | 12.38 | % | 100.00 | % | 43.36 | % | |||||||||||
Investments in real estate loans as of December 31, 2013, were as follows:
|
Loan Type
|
Number of Loans
|
Balance *
|
Weighted Average Interest Rate
|
Portfolio Percentage
|
Current Weighted Average Loan-To-Value, Net of Allowance for Loan Losses
|
|||||||||||||||
|
Commercial
|
10 | $ | 6,395,000 | 10.66 | % | 62.09 | % | 65.58 | % | |||||||||||
|
Land
|
3 | 3,904,000 | 9.66 | % | 37.91 | % | 39.52 | % | ||||||||||||
|
Total
|
13 | $ | 10,299,000 | 10.28 | % | 100.00 | % | 52.62 | % | |||||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
The “Weighted Average Interest Rate” as shown above is based on the contractual terms of the loans for the entire portfolio including non-performing loans. The weighted average interest rate on performing loans only, as of September 30, 2014 and December 31, 2013, was 12.38% and 10.28%, respectively. Please see “Non-Performing Loans” and “Asset Quality and Loan Reserves” below for further information regarding performing and non-performing loans.
Loan-to-value ratios are generally based on the most recent appraisals and may not reflect subsequent changes in value and include allowances for loan losses. Recognition of allowance for loan losses will result in a maximum loan-to-value ratio of 100% per loan.
The following is a schedule of priority of real estate loans as of September 30, 2014 and December 31, 2013:
|
Loan Type
|
Number of Loans
|
September 30, 2014
Balance*
|
Portfolio
Percentage
|
Number of Loans
|
December 31, 2013 Balance*
|
Portfolio
Percentage
|
||||||||||||||||||
|
First deeds of trust
|
14 | $ | 8,631,000 | 96.70 | % | 12 | $ | 10,004,000 | 97.13 | % | ||||||||||||||
|
Second deeds of trust
|
1 | 295,000 | 3.30 | % | 1 | 295,000 | 2.87 | % | ||||||||||||||||
|
Total
|
15 | $ | 8,926,000 | 100.00 | % | 13 | $ | 10,299,000 | 100.00 | % | ||||||||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
The following is a schedule of contractual maturities of investments in real estate loans as of September 30, 2014:
|
Non-performing and past due loans
|
$ | 2,450,000 | ||
|
October 2014 – December 2014
|
3,489,000 | |||
|
January 2015 –March 2015
|
1,579,000 | |||
|
April 2015 – June 2015
|
1,093,000 | |||
|
Thereafter
|
315,000 | |||
|
Total
|
$ | 8,926,000 |
The following is a schedule by geographic location of investments in real estate loans as of September 30, 2014 and December 31, 2013:
|
September 30, 2014 Balance *
|
Portfolio Percentage
|
December 31, 2013 Balance *
|
Portfolio Percentage
|
|||||||||||||
|
Arizona
|
$ | -- | -- | $ | 553,000 | 5.37 | % | |||||||||
|
California
|
2,059,000 | 23.07 | % | 2,848,000 | 27.65 | % | ||||||||||
|
Nevada
|
5,252,000 | 58.84 | % | 5,429,000 | 52.71 | % | ||||||||||
|
Ohio
|
315,000 | 3.53 | % | 318,000 | 3.09 | % | ||||||||||
|
Florida
|
1,300,000 | 14.56 | % | -- | -- | |||||||||||
|
Texas
|
-- | -- | 1,151,000 | 11.18 | % | |||||||||||
|
Total
|
$ | 8,926,000 | 100.00 | % | $ | 10,299,000 | 100.00 | % | ||||||||
|
*
|
Please see Balance Sheet Reconciliation below.
|
Balance Sheet Reconciliation
The following table reconciles the balance of the loan portfolio to the amount shown on the accompanying Consolidated Balance Sheets.
|
September 30, 2014
|
December 31, 2013
|
|||||||
|
Balance per loan portfolio
|
$ | 8,926,000 | $ | 10,299,000 | ||||
|
Less:
|
||||||||
|
Allowance for loan losses (a)
|
(2,450,000 | ) | (2,450,000 | ) | ||||
|
Balance per consolidated balance sheets
|
$ | 6,476,000 | $ | 7,849,000 | ||||
|
|
(a)
|
Please refer to Specific Reserve Allowance below.
|
Non-Performing Loans
As of September 30, 2014 and December 31, 2013, we had one loan considered non-performing (i.e., based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due). This loan is currently carried on our books at a value of $0, net of allowance for loan losses of approximately $2.5 million. This loan has been placed on non-accrual of interest status.
At September 30, 2014, the following loan types were non-performing:
|
Loan Type
|
Number Of Non-Performing Loans
|
Balance at
September 30, 2014
|
Allowance for Loan Losses
|
Net Balance at
September 30, 2014
|
||||||||||||
|
Commercial
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
|
Total
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
At December 31, 2013, the following loan types were non-performing:
|
Loan Type
|
Number Of Non-Performing Loans
|
Balance at
December 31, 2013
|
Allowance for Loan Losses
|
Net Balance at
December 31, 2013
|
||||||||||||
|
Commercial
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
|
Total
|
1 | $ | 2,450,000 | $ | (2,450,000 | ) | $ | -- | ||||||||
Asset Quality and Loan Reserves
Losses may occur from investing in real estate loans. The amount of losses will vary as the loan portfolio is affected by changing economic conditions and the financial condition of borrowers.
The conclusion that a real estate loan is uncollectible or that collectability is doubtful is a matter of judgment. On a quarterly basis, our manager evaluates our real estate loan portfolio for impairment. The fact that a loan is temporarily past due does not necessarily mean that the loan is non-performing. Rather, all relevant circumstances are considered by our manager to determine impairment and the need for specific reserves. Such evaluation, which includes a review of all loans on which full collectability may not be reasonably assured, considers among other matters:
|
|
·
|
Prevailing economic conditions;
|
|
|
·
|
Historical experience;
|
|
|
·
|
The nature and volume of the loan portfolio;
|
|
|
·
|
The borrowers’ financial condition and adverse situations that may affect the borrowers’ ability to pay;
|
|
|
·
|
Evaluation of industry trends; and
|
|
|
·
|
Estimated net realizable value of any underlying collateral in relation to the loan amount.
|
Based upon this evaluation, a determination is made as to whether the allowance for loan losses is adequate to cover any potential losses on an individual loan basis; we do not have a general allowance for loan losses. Additions to the allowance for loan losses are made by charges to the provision for loan loss. As of September 30, 2014, our ratio of total allowance for loan losses to total loans with an allowance for loan loss was 100%.
The following is a breakdown of allowance for loan losses related to performing loans and non-performing loans as of September 30, 2014 and December 31, 2013:
|
As of September 30, 2014
|
||||||||||||
|
Balance
|
Allowance for loan losses **
|
Balance, net of allowance
|
||||||||||
|
Non-performing loans – no related allowance
|
$ | -- | $ | -- | $ | -- | ||||||
|
Non-performing loans – related allowance
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Subtotal non-performing loans
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Performing loans – no related allowance
|
6,476,000 | -- | 6,476,000 | |||||||||
|
Performing loans – related allowance
|
-- | -- | -- | |||||||||
|
Subtotal performing loans
|
6,476,000 | -- | 6,476,000 | |||||||||
| Total | $ | 8,926,000 | $ | (2,450,000 | ) | $ | 6,476,000 | |||||
|
As of December 31, 2013
|
||||||||||||
|
Balance
|
Allowance for loan losses **
|
Balance, net of allowance
|
||||||||||
|
Non-performing loans – no related allowance
|
$ | -- | $ | -- | $ | -- | ||||||
|
Non-performing loans – related allowance
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Subtotal non-performing loans
|
2,450,000 | (2,450,000 | ) | -- | ||||||||
|
Performing loans – no related allowance
|
7,849,000 | -- | 7,849,000 | |||||||||
|
Performing loans – related allowance
|
-- | -- | -- | |||||||||
|
Subtotal performing loans
|
7,849,000 | -- | 7,849,000 | |||||||||
|
Total
|
$ | 10,299,000 | $ | (2,450,000 | ) | $ | 7,849,000 | |||||
|
**
|
Please refer to Specific Reserve Allowances below.
|
Our manager evaluated our loans and, based on current estimates with respect to the value of the underlying collateral, believes that such collateral is sufficient to protect us against further losses of principal. However, such estimates could change or the value of the underlying real estate could decline. Our manager will continue to evaluate our loans in order to determine if any other allowance for loan losses should be recorded.
Specific Reserve Allowances
As of September 30, 2014 and December 31, 2013, we have provided a specific reserve allowance for one non-performing loan based on updated appraisals of the underlying collateral and/or our evaluation of the borrower.
The following table is a roll-forward of the allowance for loan losses for the nine months ended September 30, 2014 and 2013 by loan type. We will continue to evaluate our position in these loans.
|
Loan Type
|
Balance at
12/31/2013
|
Specific Reserve Allocation
|
Loan Pay Downs
|
Write-off
|
Transfers to REO or Notes Receivable
|
Balance at
09/30/14
|
||||||||||||||||||
|
Commercial
|
$ | 2,450,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Total
|
$ | 2,450,000 | $ | -- | $ | -- | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Loan Type
|
Balance at
12/31/2012
|
Specific Reserve Allocation
|
Loan Pay Downs
|
Write-off
|
Transfers to REO or Notes Receivable
|
Balance at
9/30/13
|
||||||||||||||||||
|
Commercial
|
$ | 2,500,000 | -- | $ | (50,000 | ) | $ | -- | $ | -- | $ | 2,450,000 | ||||||||||||
|
Total
|
$ | 2,500,000 | $ | -- | $ | (50,000 | ) | $ | -- | $ | -- | $ | 2,450,000 | |||||||||||
Extensions
As of September 30, 2014 and December 31, 2013, our manager had granted extensions on five and six outstanding loans respectively totaling approximately $11.2 and $17.7 million of which our portion was approximately $3.0 and $9.4 million, respectively, pursuant to the terms of the original loan agreements, which permit extensions by mutual consent, or as part of a TDR. Such extensions are generally provided on loans where the original term was 12 months or less and where a borrower requires additional time to complete a construction project or negotiate take-out financing. Our manager generally grants extensions when a borrower is in compliance with the material terms of the loan, including, but not limited to the borrower’s obligation to make interest payments on the loan. In addition, if circumstances warrant, our manager may extend a loan that is in default as part of a work out plan to collect interest and/or principal. As of September 30, 2014 and December 31, 2013, four and five of the loans, respectively, that have been granted extensions are performing.
NOTE E —ASSETS HELD FOR SALE
On January 14, 2014, we, VRM I and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss. On April 1, 2014 MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility, net of the assumed debt secured by the real estate. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and the storage facility. We and VRM I hold together a 100% interest in the four office properties. These properties have been reported as Discontinued Operations in the accompanying statement of operations.
NOTE F – INVESTMENT IN EQUITY METHOD INVESTEE HELD FOR SALE
On April 1, 2014 MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and the storage facility, net of the assumed debt secured by the real estate. We and VRM I hold together a 100% interest in the four office properties. See Note E – Assets held for sale. These transferred properties have been reported as Discontinued Operations in the accompanying statement of operations.
NOTE G – INVESTMENT IN EQUITY METHOD INVESTEE
During March 2014, we acquired a 42% interest in Building C, LLC for $3.0 million. On July 31, 2014, we and VRM I completed the acquisition of the remaining 58% interest in Building C, LLC. We recorded income from investment in equity method investee from April 1, 2014 through July 31, 2014.
The following is a summary of the results of operations related to the investment in equity method investee held for sale for the period from April 1, 2014 (investment date) through July 31, 2014:
|
For the Period from April 1, 2014 (investment date) through July 31, 2014:
|
||||
|
Revenue
|
$ | 462,000 | ||
|
Expenses
|
(307,000 | ) | ||
|
Net Income
|
157,000 | |||
|
% of ownership
|
42 | % | ||
|
Equity method income
|
66,000 | |||
As of July 31, 2014, we own 72% interest in Building C, LLC. For additional information please see Note H – Acquisitions
NOTE H - ACQUISITIONS
Office Buildings acquired April 30, 2014
On April 1, 2014 MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility, net of the assumed debt secured by the real estate. In exchange we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and the storage facility. We and VRM I hold together a 100% interest in the four office properties. On April 30, 2014 the transaction was completed.
The following table summarizes the acquisition-date fair value of the total consideration transferred:
|
Assets
|
||||
|
Cash received
|
$ | 1,392,000 | ||
|
Other assets
|
171,000 | |||
|
Land and improvements
|
11,200,000 | |||
|
Building and improvements
|
736,000 | |||
|
49% Non-controlling interest portion of Red Mountain
|
1,208,000 | |||
|
Total assets transferred
|
14,707,000 | |||
|
Liabilities
|
||||
|
Accrued liabilities
|
10,000 | |||
|
Notes payable
|
4,278,000 | |||
|
Total liabilities transferred
|
4,288,000 | |||
|
Acquisition-date fair value of the total consideration transferred
|
$ | 10,419,000 | ||
The related assets, liabilities, and results of operations of the acquired properties are included in the consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date for our 2014 acquisition:
|
Assets
|
||||
|
Cash
|
$ | 101,000 | ||
|
Other assets
|
23,000 | |||
|
Land and improvements
|
6,275,000 | |||
|
Building and improvements
|
18,521,000 | |||
|
Tenant improvements
|
165,000 | |||
|
Total assets acquired
|
25,085,000 | |||
|
Liabilities
|
||||
|
Accounts payable and accrued liabilities
|
58,000 | |||
|
Note payable
|
14,335,000 | |||
|
Total liabilities assumed
|
14,393,000 | |||
|
Net assets acquired
|
$ | 10,692,000 | ||
Building C, LLC & Building A, LLC
During March 2014, we acquired a 42% interest in Building C, LLC whose sole asset is an office property located in Las Vegas, NV from MVP REIT. During July 2014, we and VRM I entered into an agreement to acquire the remaining 58% interest in Building C, LLC and 100% interest in Building A, LLC, whose sole asset is an office building, also located in Las Vegas, NV, from MVP REIT. The cash consideration, net of assumed debt of approximately $16.9 million, totals approximately $10.4 million, of which our portion is approximately $3.7 million. On July 31, 2014, we and VRM I completed the acquisition of the remaining 58% interest in Building C, LLC. The acquisition of the interests in Building A, LLC was completed on August 29, 2014. The purchase price for both buildings is equal to the amount paid by MVP to acquire the buildings acquired within the past twelve (12) months. No commissions were paid in connection with the purchase.
The related assets, liabilities, and results of operations of the acquired properties are included in the consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date for our 2014 acquisition:
|
Assets
|
||||
|
Land and improvements
|
$ | 7,500,000 | ||
|
Building and improvements
|
22,020,000 | |||
|
Furniture and fixtures
|
26,000 | |||
|
Tenant improvements
|
283,000 | |||
|
Total assets acquired
|
29,829,000 | |||
|
Liabilities
|
||||
|
Note payable
|
16,875,000 | |||
|
Total liabilities assumed
|
16,875,000 | |||
|
Net assets acquired
|
$ | 12,954,000 | ||
Pro forma results of the Company
The following table of pro forma consolidated results of operations of the Company for the three and nine months ended September 30, 2014 and 2013, and assumes that the acquisition was completed as of January 1, 2013.
|
For the three months ended September 30, 2014
|
For the three months ended September 30, 2013
|
For the nine months ended September 30, 2014
|
For the nine months ended September 30, 2013
|
|||||||||||||
|
Revenues from continuing operations
|
$ | 1,662,000 | $ | 1,594,000 | $ | 5,284,000 | $ | 5,099,000 | ||||||||
|
Revenues from continuing operations
|
$ | 1,662,000 | $ | 1,594,000 | $ | 5,284,000 | $ | 5,099,000 | ||||||||
|
Net loss available to common stockholders
|
$ | (581,000 | ) | $ | (1,109,000 | ) | $ | (1,632,000 | ) | (4,406,000 | ) | |||||
|
Net loss available to common stockholders per share – basic
|
$ | (0.22 | ) | $ | (0.39 | ) | $ | (0.61 | ) | $ | (1.51 | ) | ||||
|
Net loss available to common stockholders per share – diluted
|
$ | (0.22 | ) | $ | (0.39 | ) | $ | (0.61 | ) | $ | (1.51 | ) | ||||
Revenue and expenses of acquisitions since April 30, 2014 (acquisition date) included in consolidated statement of operations
The following is a summary of the results of operations related to the net assets and liabilities acquired for the period from April 30, 2014 (acquisition date) through September 30, 2014:
|
Revenue
|
$ | 1,388,000 | ||
|
Expenses
|
(988,000 | ) | ||
|
Net Income
|
$ | 400,000 | ||
NOTE I — INVESTMENT IN MARKETABLE SECURITIES – RELATED PARTY
As of September 30, 2014 and December 31, 2013, we owned 538,178 shares of VRM I’s common stock, representing approximately 9.6% of the total outstanding shares. The closing price of VRM I’s common stock on September 30, 2014, was $1.63 per share. The closing prices of the common stock on September 30, 2014 resulted in an unrealized loss of approximately $35,000 for the nine months ended September 30, 2014.
During the three months ended September 30, 2014, the trading price for VRM I’s common stock ranged from $1.43 to $2.61 per share. We will continue to evaluate our investment in marketable securities on a quarterly basis.
NOTE J — REAL ESTATE OWNED HELD FOR SALE
At September 30, 2014, we held one property with no carrying value, which was acquired through foreclosure and recorded as investment in REO. Our REO are accounted for at the lower of cost or fair value less costs to sell with fair value based on appraisals and knowledge of local market conditions.
We seek to sell properties acquired through foreclosure as quickly as circumstances permit taking into account current economic conditions.
|
Beginning balance, January 1, 2014
|
$ | 1,234,000 | ||
|
Distributions
|
-- | |||
|
Write down
|
-- | |||
|
Sale
|
(1,234,000 | ) | ||
|
Ending balance, September 30, 2014
|
$ | -- |
During June 2014, we, VRM I and Fund III sold a REO property to an unrelated third party for approximately $1.7 million, of which our portion was approximately $1.1 million. A net loss of approximately $67,000 was recorded.
During August 2014, we, and Fund III sold remaining 26% interest in a VREO XXV, LLC to VRM I for approximately $1.3 million, of which our portion was approximately $39,000. A net gain of approximately $14,000 was recorded.
NOTE K — RELATED PARTY TRANSACTIONS
Transactions with the Manager
During August 2014, we entered into a loan reinstatement and modification agreement whereby we extended a loan with a third party in exchange for an extension fee and reduction of principal totaling $620,000 and $380,000 respectively. The extension fee was paid to our manager.
Our manager is entitled to receive from us an annual management fee of up to 0.25% of our aggregate capital contributions received by us and Fund II from the sale of shares or membership units, paid monthly. The amount of management fees paid to our manager for the nine months ended September 30, 2014 and 2013 were approximately $1.0 million and $0.8 million, during each period.
As of September 30, 2014 and December 31, 2013, our manager owned 23,175 of our common shares, representing approximately 0.9% of our total outstanding common stock at the respective dates.
As of September 30, 2014 and December 31, 2013, we had receivables from our manager of approximately $20,000.
Transactions with Other Related Parties
As of September 30, 2014 and December 31, 2013, we owned 538,178 common shares of VRM I, representing approximately 9.6% of their total outstanding common stock at the respective dates. The closing prices of the common stock on September 30, 2014 resulted in an accumulated unrealized loss of approximately $296,000.
As of September 30, 2014 and December 31, 2013, VRM I owned 134,270 of our common shares, representing approximately 5.1% of our total outstanding common stock for both periods.
As of September 30, 2014 we had a receivable from VRM I of approximately $44,000. As of December 31, 2013 we owed VRM I approximately $54,000 primarily related to asset transfer and legal fees.
As of September 30, 2014 we had a receivable from Fund III of approximately $7,000. As of December 31, 2013 we owed Fund III approximately $20,000.
As of September 30, 2014 and December 31, 2013 we had a receivable from Vestin Mortgage of approximately $0.1 million and $66,000, respectively, related to payroll expenses paid by MVP Advisors.
As of September 30, 2014 and December 31, 2013, we owned a 60% interest in MVP Realty Advisors, LLC, the manager of MVP REIT, Inc.
On April 30, 2014, we completed the property exchange with MVP REIT pursuant to which we exchanged our and VRM I’s interests in parking properties for MVP REIT’s interests in commercial office buildings. See Note F for additional information.
During March 2014, we acquired a 42% interest in Building C, LLC for $3.0 million. During July 2014 we and VRM I acquired the remaining 58% interest for a total of approximately $3.8 million, of which our portion was approximately $2.0 million.
During August 2014, we and VRM I acquired 72% and 28%, respectively of Building A, LLC for a total of $6.5 million of which our portion was approximately $4.7 million.
During August 2014, we sold approximately $2.8 million in real estate loans to VRM I.
During August 2014, we, and Fund III sold remaining 26% interest in a VREO XXV, LLC to VRM I for approximately $1.3 million, of which our portion was approximately $39,000. A net gain of approximately $14,000 was recorded.
From time to time, we may also jointly invest in real property or real estate loans with our affiliates, including VRM I and MVP REIT, Inc. These investments are described elsewhere in this report and incorporated herein by reference.
From time to time, we may also acquire or sell investments in real estate or in real estate loans from/to our manager or other related parties. Pursuant to the terms of our Management Agreement, such acquisitions and sales are made without any mark up or mark down. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans and real estate investments, thereby providing us with additional capital to make additional loans and investments in real estate.
NOTE L — NOTES PAYABLE
On May 16, 2014 Wolfpack, LLC and Devonshire, LLC entered into a loan agreement with a financial institution in the amount of $7.8 million, collateralized by real property held in Las Vegas, Nevada. The loan bears an annual interest rate of 4.6% and is payable in monthly installment payments of principal and interest totaling approximately $50,000, with a lump sum payment of approximately $6.3 million due at maturity in June of 2024. This loan agreement replaces their previous loans which held balances of approximately $3.9 million and $3.9 million, respectively, at payoff.
During April 2014, through the acquisition of SE Properties, the Company assumed the liability on a loan with a balance of approximately $3.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 6.625%, and payable in monthly installment payments of principal and interest totaling approximately $25,000.
During April 2014, through the acquisition of ExecuSuites, the Company assumed the liability on a loan with a balance of approximately $3.1 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 5.875%, and payable in monthly installment payments of principal and interest totaling approximately $21,000.
During July 2014, through the acquisition of Building C, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.810%, and payable in monthly installment payments of principal and interest totaling approximately $49,000.
During August 2014, through the acquisition of Building A, the Company assumed the liability on a loan with a balance of approximately $8.4 million, collateralized by real property located in Las Vegas, Nevada, bearing an annual interest rate of 4.969%, and payable in monthly installment payments of principal and interest totaling approximately $46,000.
As of September 30, 2014, future principal payments on the notes payable are as follows:
|
2014
|
$ | 133,000 | ||
|
2015
|
587,000 | |||
|
2016
|
618,000 | |||
|
2017
|
650,000 | |||
|
2018
|
685,000 | |||
|
Thereafter
|
28,527,000 | |||
|
Total
|
$ | 31,200,000 |
NOTE M — FAIR VALUE
As of September 30, 2014 and December 31, 2013, financial assets and liabilities utilizing Level 1 inputs included investment in marketable securities - related party and third party. We had no assets or liabilities utilizing Level 2 inputs, and assets and liabilities utilizing Level 3 inputs included investments in real estate loans and investments in equity method investees, both held for sale and not held for sale.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, our degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability will be classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.
Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use prices and inputs that are current as of the measurement date, including during periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition may cause our financial instruments to be reclassified from Level 1 to Level 2 or Level 3 and/or vice versa.
Our valuation techniques will be consistent with at least one of the three possible approaches: the market approach, income approach and/or cost approach. Our Level 1 inputs are based on the market approach and consist primarily of quoted prices for identical items on active securities exchanges. Our Level 2 inputs are primarily based on the market approach of quoted prices in active markets or current transactions in inactive markets for the same or similar collateral that do not require significant adjustment based on unobservable inputs. Our Level 3 inputs are primarily based on the income and cost approaches, specifically, discounted cash flow analyses, which utilize significant inputs based on our estimates and assumptions.
The following table presents the valuation of our financial assets and liabilities as of September 30, 2014 and December 31, 2013, measured at fair value on a recurring basis by input levels:
|
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||||||
|
Quoted Prices in Active Markets For Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Balance at 09/30/14
|
Carrying Value on Balance Sheet at 09/30/14
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Investment in marketable securities - related party
|
$ | 877,000 | $ | -- | $ | -- | $ | 877,000 | $ | 877,000 | ||||||||||
|
Investment in real estate loans
|
$ | -- | $ | -- | $ | 6,490,000 | $ | 6,490,000 | $ | 6,476,000 | ||||||||||
|
Fair Value Measurements at Reporting Date Using
|
||||||||||||||||||||
|
Quoted Prices in Active Markets For Identical Assets (Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Balance at 12/31/13
|
Carrying Value on Balance Sheet at 12/31/13
|
||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Investment in equity method investee
|
$ | 1,195,000 | $ | -- | $ | -- | $ | 1,195,000 | $ | 1,195,000 | ||||||||||
|
Investment in marketable securities - related party
|
$ | 941,000 | $ | -- | $ | -- | $ | 941,000 | $ | 941,000 | ||||||||||
|
Investment in marketable securities
|
$ | 5,658,000 | $ | -- | $ | -- | $ | 5,658,000 | $ | 5,658,000 | ||||||||||
|
Investment in real estate loans
|
$ | -- | $ | -- | $ | 7,867,000 | $ | 7,867,000 | $ | 7,849,000 | ||||||||||
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2014 to September 30, 2014:
|
Investment in
real estate loans
|
||||
|
Balance on January 1, 2014
|
$ | 7,867,000 | ||
|
Purchase and additions of assets
|
||||
|
New mortgage loans and mortgage loans acquired
|
14,187,000 | |||
|
Purchase from third parties
|
468,000 | |||
|
Sales, pay downs and reduction of assets
|
||||
|
Collections and settlements of principal and sales of investment in real estate loans
|
(5,145,000 | ) | ||
|
Sale of assets to VRM I
|
(2,823,000 | ) | ||
|
Sale of assets to third parties
|
(8,060,000 | ) | ||
|
Temporary change in estimated fair value based on future cash flows
|
(4,000 | ) | ||
| Balance on September 30, 2014, net of temporary valuation adjustment | $ |
6,490,000
|
||
The following table presents the changes in our financial assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from January 1, 2013 to September 30, 2013:
|
Investment in
real estate loans
|
||||
|
Balance on January 1, 2013
|
$ | 24,500,000 | ||
|
Change in temporary valuation adjustment included in net loss
|
||||
|
Net decrease in allowance for loan losses
|
50,000 | |||
|
Purchase and additions of assets
|
||||
|
New mortgage loans and mortgage loans acquired
|
10,346,000 | |||
|
Sales, pay downs and reduction of assets
|
||||
|
Collections and settlements of principal and sales of investment in real estate loans
|
(12,431,000 | ) | ||
|
Sale of assets to related parties
|
(1,500,000 | ) | ||
|
Sale of assets to third parties
|
(6,534,000 | ) | ||
|
Temporary change in estimated fair value based on future cash flows
|
490,000 | |||
|
Balance on September 30, 2013, net of temporary valuation adjustment
|
$ | 14,921,000 | ||
NOTE N — SEGMENT INFORMATION
Company management reviews financial and operating performance in the following three separate operating segments: (1) investment in real estate loans, (2) investments in real property and (3) investment in a real estate management company. Selling, general and administrative expenses, primarily consisting of compensation of employees, seminar expense, professional fees and overhead costs not directly related to a specific operating segment, are reflected in the table below as corporate activities.
The following are certain financial data for the Company’s operating segments for the periods:
|
For the Nine Months Ended September 30, 2014
|
For the Nine Months Ended September 30, 2013
|
|||||||
|
Revenues
|
||||||||
|
Investment in real estate loans
|
$ | 684,000 | $ | 1,282,000 | ||||
|
Investment in real property
|
1,388,000 | -- | ||||||
|
Investment in real estate management
|
327,000 | -- | ||||||
|
Total revenues as reports
|
2,399,000 | 1,282,000 | ||||||
|
Operating expenses
|
||||||||
|
Investment in real estate loans
|
$ | 823,000 | $ | 816,000 | ||||
|
Investment in real property
|
1,019,000 | 31,000 | ||||||
|
Investment in real estate management
|
1,689,000 | -- | ||||||
|
Corporate activities
|
3,173,000 | 6,329,000 | ||||||
|
Total Operating expenses as reported
|
6,704,000 | 7,176,000 | ||||||
|
Total Assets
|
September 30, 2014
|
December 31, 2013
|
||||||
|
Investment in real estate loans
|
$ | 6,485,000 | $ | 7,849,000 | ||||
|
Investment in real property
|
55,027,000 | -- | ||||||
|
Corporate assets
|
6,918,000 | 30,423,000 | ||||||
|
Total assets
|
$ | 68,430,000 | $ | 38,272,000 | ||||
NOTE O — RECENT ACCOUNTING PRONOUNCEMENTS
No new accounting pronouncements have been defined that would materially impact our financial statements.
NOTE P — LEGAL MATTERS INVOLVING THE MANAGER
The United States Securities and Exchange Commission (the “Commission”), conducted an investigation of certain matters related to us, our manager, Vestin Capital, VRM I, and Fund III. We fully cooperated during the course of the investigation. On September 27, 2006, the investigation was resolved through the entry of an Administrative Order by the Commission (the “Order”). Our manager, Vestin Mortgage and its Chief Executive Officer, Michael Shustek, as well as Vestin Capital (collectively, the “Respondents”), consented to the entry of the Order without admitting or denying the findings therein.
In the Order, the Commission found that the Respondents violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 through the use of certain slide presentations in connection with the sale of units in Fund III and in our predecessor, Vestin Fund II, LLC. The Respondents consented to the entry of a cease and desist order, the payment by Mr. Shustek of a fine of $100,000 and Mr. Shustek’s suspension from association with any broker or dealer for a period of six months, which expired in March 2007. In addition, the Respondents agreed to implement certain undertakings with respect to future sales of securities. We are not a party to the Order.
For additional information, see Note Q – Legal Matters Involving the Company
Other than the matters described above, our manager believes that it is not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our manager’s financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our manager’s net income in any particular period.
NOTE Q — LEGAL MATTERS INVOLVING THE COMPANY
On February 7, 2012, we, VRM I and Fund III entered into a Deed in Lieu Agreement with a borrower in lieu of the foreclosure of our subordinated secured loan which had matured on December 31, 2011, with a principal balance, net of allowance for loan loss, of approximately $9.9 million, of which our portion was approximately $9.0 million. Pursuant to the Deed in Lieu Agreement, our subsidiary 1701 Commerce, LLC (“1701 Commerce”) received a deed to the secured property operated as the Sheraton Hotel and Spa Fort Worth, Texas (the “Hotel”). On March 26, 2012, 1701 Commerce filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Northern District of Texas, Ft. Worth Division, to seek relief from a pending foreclosure of the Hotel by the senior mortgage lien holder and to preserve and protect 1701 Commerce’s equity and the interests of other Hotel creditors. Due to the uncertainty and disputes involving the Hotel, we recorded this investment as Other Real Estate Owned on our balance sheet until August 23, 2012. The Hotel was sold on July 17, 2013 for the sum of $49,300,000. The net proceeds of the sale and the cash on hand as of the date of the sale are being held in a debtor in possession account subject to the Hotel’s operating accounts payable and claims made through the bankruptcy court. The balance, if any, will be paid over to the owners of 1701 Commerce according to their interest. On January 9, 2014, the bankruptcy court entered its Order Confirming the First Amended Plan of Reorganization (the “Plan”). 1701 Commerce is in the process of resolving allowed and disputed claims according to the Plan.
We hold an interest of approximately 90%, VRM I holds an interest of approximately 8% and Fund III holds an interest of approximately 2% in 1701 Commerce.
During September 2010, we established reserves related to a litigation settlement. As of September 30, 2013, management determined that the remaining reserves of $374,000 are no longer necessary and have recognized this amount as reversal of settlement reserve.
In addition to the matters described above, we are involved in a number of other legal proceedings concerning matters arising in the ordinary course of our business activities. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Other than the matters described above, we believe that we are not a party to any pending legal or arbitration proceedings that would have a material adverse effect on our financial condition or results of operations or cash flows, although it is possible that the outcome of any such proceedings could have a material impact on our operations in any particular period.
NOTE R— SUBSEQUENT EVENTS
Management evaluated subsequent events through the date of this filing and determined that no such events have occurred that would require adjustment to or disclosure in the financial statements
|
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following is a financial review and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2014 and 2013. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other detailed information regarding us appearing elsewhere in this report on Form 10-Q and our annual report on Form 10-K, Part II, Item 7 Management’s Discussion and Analysis of Financial Conditions and Results of Operations for the year ended December 31, 2013.
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including, without limitation, matters discussed under this Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations, should be read in conjunction with the consolidated financial statements, related notes, and other detailed information included elsewhere in this report on Form 10-Q. We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties of this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K and in our other securities filings with the Securities and Exchange Commission (“SEC”). Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and involve inherent risks and uncertainties. Our estimates of the value of collateral securing our loans may change, or the value of the underlying property could decline subsequent to the date of our evaluation. As a result, such estimates are not guarantees of the future value of the collateral. The forward-looking statements contained in this report are made only as of the date hereof. We undertake no obligation to update or revise information contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
OVERVIEW
Our investment strategy is to invest substantially in a portfolio of real estate secured loans (including first and second mortgage loans, mezzanine loans, bridge loans, convertible mortgages, variable interest rate real estate secured loans, where a portion of the return is dependent upon performance-based metrics and other loans related to real estate), and direct investments in real property that meet our investment objectives. We have recently increased our investments in office buildings. In addition, we invest in companies that manage real estate or mortgage investment programs.
As of September 30, 2014, we have acquired, along with affiliated entities, seven properties of which our share of the purchase price totaled $7,512,000, including closing costs. During the nine months ended September 30, 2014, we funded nine loans totaling approximately $14.2 million. During the nine months ended September 30, 2013, we funded five loans totaling approximately $8.1 million. As of September 30, 2014, our loan-to-value ratio was 43.36%, net of allowances for loan losses, on a weighted average basis generally using updated appraisals. Additional increases in loan defaults accompanied by additional declines in real estate values, as evidenced by updated appraisals generally prepared on an “as-is-basis,” will have a material adverse effect on our financial condition and operating results.
On January 14, 2014, we, VRM I and MVP REIT sold MVP PF Baltimore 2013, LLC to a third party for $1,550,000 which resulted in a nominal loss. On April 1, 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities and our interest in a storage facility, in each case, net of the assumed debt secured by the real estate. In exchange, we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. The difference between the net amount of the assets exchanged was paid in cash. Following this transaction, MVP REIT holds a 100% interest in the five parking facilities and storage facility. We and VRM I together hold 100% interest in the four office properties. These transferred properties have been reported as Discontinued Operations in the accompanying statement of operations. See “Note E – Assets held for sale” to the financial statements included in this Quarterly Report for more information regarding the property exchanges.
During March 2014, we acquired a 42% interest in Building C, LLC whose sole asset is an office property located in Las Vegas, NV from MVP REIT. During July 2014, we and VRM I entered into an agreement to acquire the remaining 58% interest in Building C, LLC and 100% interest in Building A, LLC whose sole asset is an office building also located in Las Vegas, NV from MVP REIT. The cash consideration, net of assumed debt of approximately $16.9 million, totals approximately $10.3 million, of which our portion is approximately $3.7 million. On July 31, 2014, we and VRM I completed the acquisition of the remaining 58% interest in Building C, LLC. The acquisition of the interests in Building A, LLC was completed on August 29, 2014. The purchase price for both buildings is equal to the amount paid by MVP to acquire the buildings acquired within the past twelve (12) months. No commissions were paid in connection with the purchase.
We have made loans of approximately $7.7 million to our 60% owned subsidiary, MVP Advisors, the manager of MVP REIT. Our ownership of MVP Advisors increased from 40% to 60% during December 2013. MVP REIT is a SEC-registered, non-traded REIT that seeks to invest predominantly in parking and self-storage facilities located throughout the United States as its core assets. We believe MVP Advisors has the opportunity to generate fees for the services it will render to MVP REIT. However, MVP REIT is currently seeking to raise funds through its publicly registered offering and the fees paid to date to MVP Advisors have not been significant. We may not realize interest income from the loan to MVP Advisors or any return on our investment in MVP Advisors until it is able to generate sufficient fees to service the interest on our loan and generate a return on our investment. On March 20, 2014, our board of directors agreed to continue funding MVP Advisors. We recorded an impairment of this investment due to uncertainty as to when we will be repaid the amounts loaned.
SUMMARY OF FINANCIAL RESULTS
Comparison of operating results for the three months ended September 30, 2014, to the three months ended September 30, 2013
|
Total Revenue:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Interest income from investment in real estate loans
|
$ | 180,000 | $ | 256,000 | $ | (76,000 | ) | (30 | %) | |||||||
|
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
|
85,000 | 66,000 | 19,000 | 29 | % | |||||||||||
|
Advisor fee income
|
78,000 | -- | 78,000 | 100 | % | |||||||||||
|
Rental revenue
|
985,000 | -- | 985,000 | 100 | % | |||||||||||
|
Total
|
$ | 1,328,000 | $ | 322,000 | $ | 1,006,000 | 312 | % | ||||||||
Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. There was a net decrease in interest income due to reduction in loan portfolio in 2014 than in 2013. As we redeploy assets from loans to investments in real estate, expect to will recognize a lower interest income from investment in real estate loans in future periods than we have in previous periods. As an offset, we anticipate that as we increase our investments in real property, we expect that rental revenues will increase. Advisor fee income is related to MVP Advisors, which advises MVP REIT, Inc. and earns certain fees for these services. Our ownership of MVP Advisors increased from 40% to 60% during December 2013. Our majority ownership of MVP Advisors requires us to consolidate the financial position and results of operations pursuant to GAAP (the “MVP Advisors Consolidation”). While we expect our investment in MVP Advisors to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT recently commenced operations in December 2012, and in the long term, the amount of such fees will likely be dependent upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds and operate its business. This transaction resulted in the recognition of rental revenue of $985,000 for the three months ended September 30, 2014. During April 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility; in exchange we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate.
For additional information see Note D – Investments in Real Estate Loans and Note E –Assets Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Operating Expenses:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Management fees – related party
|
$ | 275,000 | $ | 267,000 | $ | 8,000 | 3 | % | ||||||||
|
Operating and maintenance
|
177,000 | -- | 177,000 | 100 | % | |||||||||||
|
Impairment of investment in MVP Realty Advisors
|
-- | 1,553,000 | (1,553,000 | ) | (100 | %) | ||||||||||
|
Wages and benefits
|
449,000 | -- | 449,000 | 100 | % | |||||||||||
|
Interest expense
|
298,000 | 3,000 | 295,000 | 9833 | % | |||||||||||
|
Depreciation
|
209,000 | -- | 209,000 | 100 | % | |||||||||||
|
Acquisition expense
|
6,000 | 27,000 | (21,000 | ) | (78 | %) | ||||||||||
|
Professional fees
|
280,000 | 171,000 | 109,000 | 64 | % | |||||||||||
|
Consulting
|
73,000 | 30,000 | 43,000 | 143 | % | |||||||||||
|
Insurance
|
66,000 | 69,000 | (3,000 | ) | (4 | %) | ||||||||||
|
Commissions
|
322,000 | -- | 322,000 | 100 | % | |||||||||||
|
Travel
|
184,000 | -- | 184,000 | 100 | % | |||||||||||
|
Rent
|
70,000 | -- | 70,000 | 100 | % | |||||||||||
|
Other
|
111,000 | 25,000 | 86,000 | 344 | % | |||||||||||
|
Total
|
$ | 2,520,000 | 2,145,000 | 375,000 | 18 | % | ||||||||||
Before the change of ownership of MVP Advisors in December 2013, the Company recognized an impairment of investment in MVP Advisors of approximately $1.6 million. Certain operating expenses were higher during 2014 primarily due to increase in expenses related to the MVP Advisors consolidation.
For additional information Note E –Assets Held for Sale and Note Q – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Non-operating Income:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Gain (loss) on sale of marketable securities
|
$ | (33,000 | ) | $ | 292,000 | $ | (325,000 | ) | (111 | %) | ||||||
|
Recovery from settlement with loan guarantor
|
-- | 24,000 | (24,000 | ) | (100 | %) | ||||||||||
|
Gain related to recovery of allowance on note payable – related party
|
925,000 | -- | 925,000 | 100 | % | |||||||||||
|
Dividend income
|
-- | 8,000 | (8,000 | ) | (100 | %) | ||||||||||
|
Income (loss) on investment in equity method investee
|
21,000 | (58,000 | ) | 79,000 | 136 | % | ||||||||||
|
Total
|
$ | 913,000 | $ | 266,000 | $ | 647,000 | 243 | % | ||||||||
During the three months ended September 30, 2014, we received payments on balances owed from MVP REIT which resulted in a recovery of allowance on note receivable of approximately $0.9 million
For additional information see Note G – Investment in Equity Method Investee of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Discontinued Operations, net of income taxes:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Net gain on sale of real estate owned held for sale
|
$ | (32,000 | ) | $ | (2,000 | ) | $ | (30,000 | ) | (1500 | %) | |||||
|
Expenses related to real estate owned held for sale
|
(251,000 | ) | (24,000 | ) | (227,000 | ) | (946 | %) | ||||||||
|
Recovery from 1701 Commerce
|
-- | 221,000 | (221,000 | ) | (100 | %) | ||||||||||
|
Loss from assets held for sale, net of income taxes
|
-- | (85,000 | ) | 85,000 | 100 | % | ||||||||||
|
Total
|
$ | (283,000 | ) | $ | 110,000 | $ | (393,000 | ) | (357 | %) | ||||||
Discontinued operations related to properties that have been foreclosed on and are recorded as assets held for sale. During the three months ended September 30, 2013 we received a settlement related to 1701 Commerce. In addition, we recorded a loss from assets held for sale acquired during the three months ended September 30, 2013.
For additional information see Note J — Real Estate Owned Held For Sale and Note E –Assets Held for Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Comparison of operating results for the nine months ended September 30, 2014, to the nine months ended September 30, 2013
|
Total Revenue:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Interest income from investment in real estate loans
|
$ | 499,000 | $ | 1,026,000 | $ | (527,000 | ) | (51 | %) | |||||||
|
Gain related to pay off of real estate loan, including recovery for allowance for loan loss
|
-- | 50,000 | (50,000 | ) | (100 | %) | ||||||||||
|
Gain related to pay off of notes receivable, including recovery of allowance for notes receivable
|
185,000 | 206,000 | (21,000 | ) | (10 | %) | ||||||||||
|
Advisor fee income
|
327,000 | -- | 327,000 | 100 | % | |||||||||||
|
Rental revenue
|
1,388,000 | -- | 1,388,000 | 100 | % | |||||||||||
|
Total
|
$ | 2,399,000 | $ | 1,282,000 | $ | 1,117,000 | 87 | % | ||||||||
Our revenue from interest income is dependent upon the balance of our investment in real estate loans and the interest earned on these loans. There was a net decrease in interest income due to reduction in loan portfolio in 2014 than in 2013. As we redeploy assets from loans to investments in real estate, we expect to recognize a lower interest income from investment in real estate loans in future periods than we have in previous periods. As an offset, we anticipate that as we increase our investments in real property, we expect that rental revenues will increase. Advisor fee income is related to MVP Advisors, which advises MVP REIT, Inc. and earns certain fees for these services. Our ownership of MVP Advisors increased from 40% to 60% during December 2013. Our majority ownership of MVP Advisors requires us to consolidate the financial position and results of operations pursuant to GAAP. While we expect our investment in MVP Advisors to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT recently commenced operations in December 2012, and in the long term, the amount of such fees will likely be dependent upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds and operate its business. This transaction resulted in the recognition of rental revenue of $1,388,000 for the nine months ended September 30, 2014. During April 2014, MVP REIT exercised the Purchase Right to acquire our and VRM I’s interest in five parking facilities, net of the assumed debt secured by the real estate and our interest in a storage facility: in exchange we and VRM I received MVP REIT’s interest in four office properties, net of the assumed debt secured by the real estate. Rental revenue of $1,388,000 is a result of this transaction.
For additional information see Note D – Investments in Real Estate Loans and Note E –Assets Held for Sale of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Operating Expenses:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Management fees – related party
|
$ | 823,000 | $ | 816,000 | $ | 7,000 | 1 | % | ||||||||
|
Wages and benefits
|
1,156,000 | -- | 1,156,000 | 100 | % | |||||||||||
|
Operating and maintenance
|
239,000 | -- | 239,000 | 100 | % | |||||||||||
|
Impairment of investment in MVP Realty Advisors
|
533,000 | 5,131,000 | (4,598,000 | ) | (90 | %) | ||||||||||
|
Interest expense
|
457,000 | 4,000 | 453,000 | 11325 | % | |||||||||||
|
Acquisition expense
|
29,000 | 27,000 | 2,000 | 7 | % | |||||||||||
|
Depreciation
|
294,000 | -- | 294,000 | 100 | % | |||||||||||
|
Forgiveness of debt – related party
|
533,000 | -- | 533,000 | 100 | % | |||||||||||
|
Professional fees
|
908,000 | 661,000 | 247,000 | 37.37 | % | |||||||||||
|
Consulting
|
320,000 | 148,000 | 172,000 | 116.22 | % | |||||||||||
|
Insurance
|
202,000 | 213,000 | (11,000 | ) | (5 | %) | ||||||||||
|
Commissions
|
571,000 | -- | 571,000 | 100 | % | |||||||||||
|
Travel
|
482,000 | -- | 482,000 | 100 | % | |||||||||||
|
Rent
|
230,000 | -- | 230,000 | 100 | % | |||||||||||
|
Other
|
428,000 | 176,000 | 252,000 | 144 | % | |||||||||||
|
Total
|
$ | 6,703,000 | 7,176,000 | (473,000 | ) | (7 | %) | |||||||||
Before the change of ownership of MVP Advisors in December 2013, the Company recognized an impairment on MVP Advisors of approximately $5.1 million. Certain operating expenses were higher during 2014 primarily due to increase in expenses related to the MVP Advisors consolidation. During the nine months ended September 30, 2014, a forgiveness of debt was recognized due to the reduction of liabilities due from MVP REIT to MVP Advisors totaling approximately $0.5 million.
For additional information Note E –Assets Held for Sale and Note Q – Legal Matters Involving The Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Non-operating Income:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Gain related to recovery of allowance on note receivable – related party
|
$ | 1,774,000 | $ | -- | $ | 1,774,000 | 100 | % | ||||||||
|
Recovery from settlement with loan guarantor
|
78,000 | 39,000 | 39,000 | 100 | % | |||||||||||
|
Dividend income
|
-- | 8,000 | (8,000 | ) | (100 | %) | ||||||||||
|
Gain (loss) on investment on equity method investee
|
66,000 | (58,000 | ) | 124,000 | 214 | % | ||||||||||
|
Reversal of settlement reserve
|
-- | 374,000 | (374,000 | ) | (100 | %) | ||||||||||
|
Gain (loss) on sale of marketable securities
|
32,000 | 292,000 | (260,000 | ) | (89 | %) | ||||||||||
|
Total
|
$ | 1,950,000 | $ | 655,000 | $ | 1,295,000 | 198 | % | ||||||||
During the nine months ended September 30, 2014, we received payments on balances owed from MVP REIT which resulted in a recovery of allowance on note receivable of approximately $1.8 million. In March 2014 we received a settlement which resulted in recovery from a loan guarantor of approximately $78,000. During September 2010, we established reserves related to our Nevada Lawsuit settlement. As of June 30, 2013, management determined that the remaining reserves of $374,000 are no longer necessary and have recognized this amount as other income.
For additional information see Note G – Investment in Equity Method Investee of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
Discontinued Operations, net of income taxes:
|
2014
|
2013
|
$ Change
|
% Change
|
||||||||||||
|
Net gain on sale of real estate owned held for sale
|
$ | 838,000 | $ | 40,000 | $ | 798,000 | 1995 | % | ||||||||
|
Expenses related to real estate owned held for sale
|
(614,000 | ) | (278,000 | ) | (336,000 | ) | 121 | % | ||||||||
|
Recovery from 1701 Commerce
|
-- | 221,000 | (221,000 | ) | (100 | %) | ||||||||||
|
Income on investment on equity method investee
|
20,000 | -- | 20,000 | 100 | % | |||||||||||
|
Income from assets held for sale, net of income taxes
|
70,000 | (85,000 | ) | 155,000 | (182 | )% | ||||||||||
|
Total
|
$ | 314,000 | $ | (102,000 | ) | $ | 416,000 | 408 | % | |||||||
Discontinued operations related to properties that have been foreclosed on and are recorded as assets held for sale. During 2014, we recorded a net loss of approximately $0.1 million on the sale of Baltimore. In 2014, MVP REIT exercised its Purchase Right to acquire our and VRM I’s interest in the five parking facilities and our interest in a storage facility. Under the agreement between us, VRM I and MVP REIT, MVP REIT agreed that we and VRM I would receive a 7.5% return on our joint venture investments with MVP REIT. With this return, along with the loss on Baltimore and the incurred acquisition fees, we and VRM I received a greater amount of consideration than what was transferred to MVP REIT. This transaction resulted in our net gain on sale of real estate owned held for sale of approximately $8 million. During 2013 we recorded net gain of approximately $40,000 related to the sale of HFS in December 2011. During the three months ended September 30, 2013 we received a settlement related to 1701 Commerce. In addition, we recorded a loss from assets held for sale acquired during the three months ended September 30, 2013.
For additional information see Note J — Real Estate Owned Held For Sale and Note E –Assets Held for Sale of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
CAPITAL AND LIQUIDITY
Liquidity is a measure of a company’s ability to meet potential cash requirements, including ongoing commitments to fund lending activities and general operating purposes. Subject to a 3% reserve, we generally seek to use all of our available funds to invest in real estate assets. Distributable cash flow generated from such loans is paid out to our stockholders, in the form of a dividend. We do not anticipate the need for hiring any employees, acquiring fixed assets such as office equipment or furniture, or incurring material office expenses during the next twelve months. We may pay our manager an annual management fee of up to 0.25% of the aggregate capital received by Fund II and us from the sale of shares or membership units.
During the nine months ended September 30, 2014, net cash flows used in operating activities were approximately $2.5 million. Operating cash flows were used for the payment of normal operating expenses such as management fees, accounting fees, legal bills and expenses related to real estate owned held for sale. Cash flows related to investing activities consisted of cash used for investments in new real estate loans of approximately $14.2 million investment in real estate of approximately $6.3 million, and investment in equity method investee of $3.0 million. In addition, cash flows related to investing activities consisted of cash provided by loan payoffs and sale of investments in real estate loans to third parties of approximately $8.0 million and proceeds from sale of marketable securities of approximately $7.5 million. Cash flows used in financing activities consisted of purchase of treasury stock of approximately $0.4 million, proceeds from notes payable of approximately $7.8 million and cash for payments on notes payable of approximately $8.0 million.
At September 30, 2014, we had approximately $5.5 million in cash, $0.9 million in marketable securities – related party, and approximately $68.6 million in total assets. We intend to meet short-term working capital needs through a combination of proceeds from loan payoffs, loan sales, rental revenue, sales of real estate owned held for sale and/or borrowings. We believe we have sufficient working capital to meet our operating needs during the next 12 months.
We have no current plans to sell any new shares. Although a small percentage of our shareholders had elected to reinvest their dividends, we suspended payment of dividends in June 2008 and at this time are not able to predict when dividend payments will resume. Accordingly, we do not expect to issue any new shares through our dividend reinvestment program in the foreseeable future.
When economic conditions permit, we may seek to expand our capital resources through borrowings from institutional lenders or through securitization of our loan portfolio or similar arrangements. No assurance can be given that, if we should seek to borrow additional funds or to securitize our assets, we would be able to do so on commercially attractive terms. Our ability to expand our capital resources in this manner is subject to many factors, some of which are beyond our control, including the state of the economy, the state of the capital markets and the perceived quality of our loan and real estate portfolios.
During April 2012, we contributed $1,000 for a 40% interest in MVP Advisors. Mr. Shustek, through a wholly owned company named MVP Capital Partners, LLC (“MVP CP”) contributed $1,500 for a 60% interest in MVP Advisors. In December 2013, we and MVP CP entered into a membership interest transfer agreement (the “Transfer Agreement”), dated as of December 19, 2013, pursuant to which we acquired from MVP CP an additional 20% of the membership interests (the “Acquired Interests”) of MVP Advisor. The Company and VRM I now own 60% and 40%, respectively, of the aggregate membership interests of MVP Advisors.
Pursuant to the Transfer Agreement, we did not pay any up-front consideration for the Acquired Interests, but will be responsible for our proportionate share of future expenses of MVP Advisor. In recognition of MVP CP’s substantial investment in MVP Advisor for which MVP CP received no up-front consideration, the Transfer Agreement and the amended operating agreement of MVP Advisor further provide that once we and VRM I have been repaid in full for any capital contributions to MVP Advisor or for any expenses advanced on MVP Advisor’s behalf (“Capital Investment”), and once we and VRM I have received an annualized return on our Capital Investment of 7.5%, then MVP CP will receive one-third of the net profits of MVP Advisor.
Our interest in MVP Advisor has required, and may require us to continue to, direct a portion of our cash towards development of the business of MVP REIT. As of June 30, 2013, we and MVP CP had loaned approximately $3.6 million and approximately $1.2 million, respectively, to MVP Advisors related to MVP REIT, Inc. On June 30, 2013, MVP CP decided to forgive the full amount of its $1.2 million loan. We have not forgiven the balance due from MVP Advisors. However the decision by MVP Advisors to forgive the full amount of its loans created uncertainty as to when we will be repaid the amounts loaned to MVP Advisors. Based on this uncertainty, we determined to treat as fully impaired the balance of this investment and note receivable. During the six months ended June 30, 2014, we provided additional advances to MVP Advisor of $1.0 million. As of September 30, 2014, we had notes receivable from MVP Advisor of approximately $7.7 million, which amount has been fully allowed for. To further support development of the business of MVP REIT, MVP Advisors also has agreed to waive certain fees and expense reimbursements it otherwise would have been entitled to receive under the terms of its advisory agreement with MVP REIT. MVP Advisors ability to repay the loans and the return on our investment in MVP Advisors will likely depend upon the success of MVP REIT’s public offering and its ability to successfully deploy the offering proceeds. While we expect any such investments to ultimately generate a return through management fees payable by MVP REIT to MVP Advisors, such fees may not be significant in the near term as MVP REIT only recently commenced operations in December 2012, and over the next 12 months, there may be a diminution of our liquid assets. If MVP REIT is unable to raise sufficient capital in its initial public offering or deploy the capital and operate its business successfully, then our return on our investment in MVP Advisors and the ability of MVP Advisors to repay our loans could be adversely impacted.
We maintain working capital reserves of approximately 3% in cash and cash equivalents, certificates of deposits and short-term investments or liquid marketable securities. This reserve is available to pay expenses in excess of revenues, satisfy obligations of underlying properties, expend money to satisfy our unforeseen obligations and for other permitted uses of working capital. As of November 13, 2014, we have met our 3% reserve requirement.
Investments in Real Estate Loans Secured by Real Estate Portfolio
We offer five real estate loan products consisting of commercial property, construction, acquisition and development, land, and residential loans. The effective interest rates on all product categories range from 7% to 24%. Revenue by product will fluctuate based upon relative balances during the period. We had investments in 15 real estate loans, as of September 30, 2014, with a balance of approximately $8.9 million as compared to investments in 13 real estate loans as of December 31, 2013, with a balance of approximately $10.3 million.
For additional information on our investments in real estate loans, refer to Note D – Investments In Real Estate Loans of the Notes to the Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
Asset Quality and Loan Reserves
As a commercial real estate lender willing to invest in riskier loans, rates of delinquencies, foreclosures and our losses on our loans could be higher than those generally experienced in the commercial mortgage lending industry. Problems in the sub-prime residential mortgage market have adversely affected the general economy and the availability of funds for commercial real estate developers. We believe this lack of available funds has led to an increase in defaults on our loans. Furthermore, problems experienced in U.S. credit markets from 2007 through 2009 reduced the availability of credit for many prospective borrowers. While credit markets have generally improved, the commercial real estate markets in some of our principal areas of operation have not recovered, thereby resulting in continuing constraints on the availability of credit in these markets. These problems have made it more difficult for our borrowers to obtain the anticipated re-financing necessary in many cases to pay back our loans. Thus, we have had to work with some of our borrowers to either modify, restructure and/or extend their loans in order to keep or restore the loans to performing status. Our manager will continue to evaluate our loan portfolio in order to minimize risk associated with current market conditions.
Real Estate Investments
Investments in real estate are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.
We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
We are required to present the operations related to properties that have been sold or properties that are intended to be sold as discontinued operations in the statement of operations for all periods presented. Properties that are intended to be sold are to be designated as “held for sale” on the balance sheet.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2014, we do not have any interests in off-balance sheet special purpose entities nor do we have any interests in non-exchange traded commodity contracts.
RELATED PARTY TRANSACTIONS
From time to time, we may acquire or sell investments in real estate loans from/to our manager or other related parties pursuant to the terms of our Management Agreement without a premium. No gain or loss is recorded on these transactions, as it is not our intent to make a profit on the purchase or sale of such investments. The purpose is generally to diversify our portfolio by syndicating loans or investments in real estate, thereby providing us with additional capital to invest in real estate or make additional loans. For further information regarding related party transactions, refer to Note J – Related Party Transactions of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
Interest income on loans is accrued by the effective interest method. We do not accrue interest income from loans once they are determined to be non-performing. A loan is considered non-performing when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when the payment of interest is 90 days past due.
The following table presents a sensitivity analysis, averaging the balance of our loan portfolio at the end of the last six quarters, to show the impact on our financial condition at September 30, 2014, from fluctuations in weighted average interest rate charged on loans as a percentage of the loan portfolio:
|
Changed Assumption
|
Increase (Decrease) in Interest Income
|
|||
|
Weighted average interest rate assumption increased by 1.0% or 100 basis points
|
$ | 141,000 | ||
|
Weighted average interest rate assumption increased by 5.0% or 500 basis points
|
$ | 703,000 | ||
|
Weighted average interest rate assumption increased by 10.0% or 1,000 basis points
|
$ | 1,407,000 | ||
|
Weighted average interest rate assumption decreased by 1.0% or 100 basis points
|
$ | (141,000 | ) | |
|
Weighted average interest rate assumption decreased by 5.0% or 500 basis points
|
$ | (703,000 | ) | |
|
Weighted average interest rate assumption decreased by 10.0% or 1,000 basis points
|
$ | (1,407,000 | ) | |
The purpose of this analysis is to provide an indication of the impact that the weighted average interest rate fluctuations would have on our financial results. It is not intended to imply our expectation of future revenues or to estimate earnings. We believe that the assumptions used above are appropriate to illustrate the possible material impact on the consolidated financial statements.
Allowance for Loan Losses
We maintain an allowance for loan losses on our investments in real estate loans for estimated credit impairment in our investment in real estate loans portfolio. Our manager’s estimate of losses is based on a number of factors including the types and dollar amounts of loans in the portfolio, adverse situations that may affect the borrower’s ability to repay, prevailing economic conditions and the underlying collateral securing the loan. Additions to the allowance are provided through a charge to earnings and are based on an assessment of certain factors, which may indicate estimated losses on the loans. Actual losses on loans are recorded as a charge-off or a reduction to the allowance for loan losses. Subsequent recoveries of amounts previously charged off are added back to the allowance or included as income.
The following table presents a sensitivity analysis to show the impact on our financial condition at September 30, 2014, from increases and decreases to our allowance for loan losses as a percentage of the loan portfolio:
|
Changed Assumption
|
Increase (Decrease) in Allowance for Loan Losses
|
|||
|
Allowance for loan losses assumption increased by 1.0% of loan portfolio
|
$ | 89,000 | ||
|
Allowance for loan losses assumption increased by 5.0% of loan portfolio
|
$ | 446,000 | ||
|
Allowance for loan losses assumption increased by 10.0% of loan portfolio
|
$ | 893,000 | ||
|
Allowance for loan losses assumption decreased by 1.0% of loan portfolio
|
$ | (89,000 | ) | |
|
Allowance for loan losses assumption decreased by 5.0% of loan portfolio
|
$ | (446,000 | ) | |
|
Allowance for loan losses assumption decreased by 10.0% of loan portfolio
|
$ | (893,000 | ) | |
Estimating allowances for loan losses requires significant judgment about the underlying collateral, including liquidation value, condition of the collateral, competency and cooperation of the related borrower and specific legal issues that affect loan collections or taking possession of the property. As a commercial real estate lender willing to invest in loans to borrowers who may not meet the credit standards of other financial institutional lenders, the default rate on our loans could be higher than those generally experienced in the mortgage lending industry. We, our manager and MVP Mortgage generally approve loans more quickly than other real estate lenders and, due to our expedited underwriting process, there is a risk that the credit inquiry we perform will not reveal all material facts pertaining to a borrower and the security.
We may discover additional facts and circumstances as we continue our efforts in the collection and foreclosure processes. This additional information often causes management to reassess its estimates. In recent years, we have revised estimates of our allowance for loan losses. Circumstances that may cause significant changes in our estimated allowance include, but are not limited to:
|
|
·
|
Declines in real estate market conditions that can cause a decrease in expected market value;
|
|
|
·
|
Discovery of undisclosed liens for community improvement bonds, easements and delinquent property taxes;
|
|
|
·
|
Lack of progress on real estate developments after we advance funds. We customarily utilize disbursement agents to monitor the progress of real estate developments and approve loan advances. After further inspection of the related property, progress on construction occasionally does not substantiate an increase in value to support the related loan advances;
|
|
|
·
|
Unanticipated legal or business issues that may arise subsequent to loan origination or upon the sale of foreclosed upon property; and
|
|
|
·
|
Appraisals, which are only opinions of value at the time of the appraisal, may not accurately reflect the value of the property.
|
Real Estate Owned Held for Sale
Real estate owned held for sale and other real estate owned includes real estate acquired through foreclosure or deed in lieu and will be carried at the lower of the recorded amount, inclusive of any senior indebtedness, or the property’s estimated fair value, less estimated costs to sell, with fair value based on appraisals and knowledge of local market conditions. The carrying values of real estate owned held for sale are assessed on a regular basis from updated appraisals, comparable sales values or purchase offers.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note N – Recent Accounting Pronouncements of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
|
ITEM 4.
|
CONTROLS AND PROCEDURES
|
(a) Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting during the third quarter of 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
|
ITEM 1.
|
Please refer to Note N – Legal Matters Involving the Manager and Note Q – Legal Matters Involving the Company of the Notes to the Consolidated Financial Statements included in Part I, Item I Consolidated Financial Statements of this Quarterly Report on Form 10-Q for information regarding our legal proceedings, which are incorporated herein by reference.
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
|
None.
The following is a summary of our stock purchases during the three months ended September 30, 2014, as required by Regulation S-K, Item 703.
|
Period
|
Total Number of Shares Purchased
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
Maximum Number of (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
|
||||||||||||
|
July 1, 2014 – July 31, 2014
|
33,814 | $ | 5.17 | 20,750 | $ | 229,406 | ||||||||||
|
August 1, 2014 – August 31, 2014
|
29,660 | 4.68 | 25,058 | 112,239 | ||||||||||||
|
September 1, 2014 – September 30, 2014
|
20,169 | 5.57 | 20,169 | -- | ||||||||||||
|
Total
|
83,643 | $ | 3.21 | 65,977 | $ | -- | ||||||||||
|
ITEM 6.
|
EXHIBIT INDEX
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Exhibit No.
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Description of Exhibits
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2.1 (2)
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Agreement and Plan of Merger between Vestin Fund II, LLC and the Registrant
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2.2(6)
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Membership Interest Purchase Agreement between VRM I, VRM II and NorthStar Hawaii, LLC
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3.1 (1)
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Articles of Incorporation of the Registrant
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3.2 (1)
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Bylaws of the Registrant
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3.3 (1)
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Form of Articles Supplementary of the Registrant
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3.4 (4)
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Amendment to Vestin Realty Mortgage II’s Articles of Incorporation, effective December 31, 2007.
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3.6 (5)
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Amended Articles of Incorporation of the Registrant
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4.1 (1)
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Reference is made to Exhibits 3.1, 3.2 and 3.3
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4.2 (2)
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Specimen Common Stock Certificate
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4.3 (1)
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Form of Rights Certificate
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14 (3)
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Vestin Realty Mortgage II, Inc. Code of Business Conduct and Ethics
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21.1 (2)
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List of subsidiaries of the Registrant
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31.1
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Section 302 Certification of Michael V. Shustek
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31.2
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Section 302 Certification of Tracee Gress
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32
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Certification Pursuant to 18 U.S.C. Sec. 1350
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101
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The following material from the Company's quarterly report on Form 10-Q for the nine months ended September 30 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited), (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited) (iii) Consolidated Statements of Other Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (unaudited) (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited).
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(1)
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Incorporated herein by reference to Post-Effective Amendment No. 6 to our Form S-4 Registration Statement filed on January 4, 2006 (File No. 333-125121)
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(2)
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Incorporated herein by reference to Post-Effective Amendment No. 7 to our Form S-4 Registration Statement filed on January 13, 2006 (File No. 333-125121)
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(3)
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Incorporated herein by reference to the Transition Report on Form 10-K for the nine month transition period ended March 31, 2006 filed on September 7, 2006 (File No. 000-51892)
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(4)
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Incorporated herein by reference to the Current Report on Form 8-K filed on January 4, 2008 (File No. 000-51892)
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(5)
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Incorporated herein by reference to the Annual Report on Form 10-K filed on March 14, 2008 (File No. 000-51892)
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(6)
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Incorporated herein by reference to the Current Report on Form 8-K/A filed on November 14, 2011 (File No. 000-51892)
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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.
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Vestin Realty Mortgage II, Inc.
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By:
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/s/ Michael V. Shustek
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Michael V. Shustek
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President and Chief Executive Officer
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Date:
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November 13, 2014
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By:
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/s/ Tracee Gress
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Tracee Gress
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Chief Financial Officer
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Date:
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November 13, 2014
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