<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
------------------
Commission file number 1-10360
-------
CRIIMI MAE INC.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 52-1622022
- ------------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11200 Rockville Pike, Rockville, Maryland 20852
- ----------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
(301) 816-2300
- --------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of October 31, 1996
- ---------------------------- ----------------------------------
Common Stock, $.01 par value 31,174,163
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of September 30,
1996 (unaudited) and December 31, 1995 . . . . 3
Consolidated Statements of Income - for the
three and nine months ended September 30, 1996
and 1995 (unaudited) . . . . . . . . . . . . . 4
Consolidated Statement of Changes in
Shareholders' Equity - for the nine months
ended September 30, 1996 (unaudited) . . . . . 5
Consolidated Statements of Cash Flows -
for the nine months ended September 30, 1996
and 1995 (unaudited) . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 32
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 46
Item 2. Changes in Securities . . . . . . . . . . . . . . 47
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 48
Signature . . . . . . . . . . . . . . . . . . . . . . . . 49
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE><CAPTION>
September 30, December 31,
1996 1995
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Mortgage Assets:
Mortgage security collateral, at
amortized cost $ 625,620,061 $ 674,289,774
Subordinated CMBS, at amortized cost 335,959,966 278,400,699
Mortgages, at fair value 71,859,355 132,823,515
Equity Investments 37,560,584 37,137,786
Other Assets
Assets acquired in Merger 25,182,095 27,425,483
Deferred costs 15,707,212 16,072,517
Receivables and other assets 24,808,960 20,575,725
Cash and cash equivalents 14,104,387 16,577,407
-------------- --------------
Total assets $1,150,802,620 $1,203,302,906
============== ==============
Liabilities:
Securitized Mortgage Obligations $ 605,475,967 $ 645,260,921
Repurchase Agreements - Subordinated CMBS 162,590,467 187,947,276
Bank Term Loans 9,547,880 21,227,880
Working Capital Line of Credit -- --
Payables and accrued expenses 9,486,526 10,929,366
-------------- --------------
Total liabilities 787,100,840 865,365,443
-------------- --------------
Minority interests in
consolidated subsidiary 25,958,597 52,233,520
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Convertible Preferred stock 24,400 --
Common stock 314,329 309,356
Net unrealized gains on mortgage
investments 8,514,187 16,138,649
Additional paid-in capital 333,860,685 274,226,356
-------------- --------------
342,713,601 290,674,361
Less treasury stock, at cost-
538,635 shares (4,970,418) (4,970,418)
-------------- --------------
Total shareholders' equity 337,743,183 285,703,943
-------------- --------------
Total liabilities and shareholders'
equity $1,150,802,620 $1,203,302,906
============== ==============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
<PAGE>4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Mortgage investment income $14,043,539 $16,461,886 $43,098,767 $49,763,511
Income from investment in subordinated
CMBS 9,926,577 2,811,803 27,913,058 6,248,247
Equity in earnings from investments 807,422 832,120 2,409,578 1,979,514
Other investment income 570,645 315,689 2,268,670 1,313,605
----------- ----------- ----------- -----------
25,348,183 20,421,498 75,690,073 59,304,877
----------- ----------- ----------- -----------
Expenses:
Interest expense 15,173,966 12,010,136 46,610,765 36,063,926
General and administrative 2,111,626 1,463,014 5,468,716 3,741,690
Fees to related party 70,569 95,702 311,604 1,813,831
Amortization of assets acquired in the Merger 719,391 715,660 2,162,433 715,660
Adjustment to hedges for valuation
and sales 163,795 1,944,837 34,456 1,944,837
----------- ----------- ----------- -----------
18,239,347 16,229,349 54,587,974 44,279,944
----------- ----------- ----------- -----------
Income before mortgage dispositions 7,108,836 4,192,149 21,102,099 15,024,933
Mortgage dispositions:
Gains 13,423 -- 9,738,346 1,819,176
Losses (133,862) (9,409) (470,336) (194,306)
----------- ----------- ----------- -----------
Income before minority interests 6,988,397 4,182,740 30,370,109 16,649,803
Minority interests in net income of
consolidated subsidiary (475,245) (945,381) (5,922,307) (3,887,635)
----------- ----------- ----------- -----------
Net income $ 6,513,152 $ 3,237,359 $24,447,802 $12,762,168
=========== =========== =========== ===========
Preferred Dividends $ 1,727,718 $ -- $ 1,727,718 $ --
----------- ----------- ----------- -----------
Net income available to common shares $ 4,785,434 $ 3,237,359 $22,720,084 $12,762,168
=========== =========== =========== ===========
Earnings per share:
Primary $ 0.16 $ 0.11 $ 0.74 $ .46
=========== =========== =========== ===========
Shares used in computing primary
earnings per share 30,818,139 30,133,575 30,604,838 27,721,252
=========== =========== =========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Preferred Common Stock Gains on Additional Total
Stock Par Par Mortgage Paid-in Undistributed Treasury Shareholders'
Value Value Investments Capital Net Income Stock Equity
---------- ------------ ------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ -- $ 309,356 $ 16,138,649 $ 274,226,356 $ -- $ (4,970,418) $ 285,703,943
Net income -- -- -- -- 24,447,802 -- 24,447,802
Dividends paid on
preferred shares -- -- -- -- (1,727,718) -- (1,727,718)
Dividends paid on common
shares -- -- -- (4,796,012) (22,720,084) -- (27,516,096)
Conversion of preferred
stock into common stock (500) 5,000 -- (4,500) -- -- --
Stock options exercised -- 73 -- 71,580 -- -- 71,653
Adjustment to net unrealized
gains on mortgage
investments -- -- (7,624,462) -- -- -- (7,624,462)
Shares issued 24,900 -- -- 64,444,116 -- -- 64,469,016
Shares retired -- (100) -- (80,855) -- -- (80,955)
---------- ------------ ------------- ------------- ------------- ------------- -------------
Balance, September 30,
1996 $ 24,400 $ 314,329 $ 8,514,187 $ 333,860,685 $ -- $ (4,970,418) $ 337,743,183
========== ============ ============= ============= ============= ============= ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE><CAPTION>
For the nine months ended
September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,447,802 $ 12,762,168
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount and deferred financing
costs on debt 2,090,568 3,054,129
Amortization of assets acquired in the Merger 2,162,433 715,660
Depreciation and other amortization 660,857 494,615
Discount/premium amortization on investments (1,816,521) (1,126,880)
Servicing rights contributed to Services Partnership (1,558,017) (394,000)
Net gains on mortgage dispositions (9,268,010) (1,624,870)
Equity in earnings from investments (396,203) (105,360)
Valuation adjustment to hedges 34,456 1,944,837
Minority interests in earnings of consolidated
subsidiary 5,922,307 3,887,635
Changes in assets and liabilities:
Increase in receivables and other assets (5,023,339) (849,860)
Decrease in (payment of) deferred costs 54,443 (1,213,004)
Decrease in payables and accrued expenses (194,985) (1,598,514)
Decrease in interest payable (872,690) (2,564,409)
----------- ------------
Net cash provided by operating activities 16,243,101 13,382,147
----------- ------------
Cash flows from investing activities:
Purchase of mortgages and advances on construction loans (260,916) (6,049,793)
Purchase of Subordinated CMBS (57,378,058) (77,866,846)
Proceeds from mortgage dispositions 102,143,420 56,162,174
Receipt of principal payments 6,371,926 4,962,355
Other investing activities 539,936 189,969
------------ -----------
Net cash provided by (used in) investing
activities 51,416,308 (22,602,141)
------------ ------------
Cash flows from financing activities:
Proceeds from debt issuances 72,160,934 560,357,330
Principal payments on debt obligations (150,107,485) (510,306,722)
Increase in deferred financing costs (903,691) (3,112,694)
Dividends (including return of capital) paid to
shareholders, including minority interests (55,822,856) (44,519,882)
Proceeds from the issuance of preferred stock 64,469,016 --
Proceeds from the issuance of common stock 71,653 14,033,172
------------ ------------
Net cash (used in) provided by financing
activities (70,132,429) 16,451,204
------------ ------------
Net (decrease) increase in cash and cash equivalents (2,473,020) 7,231,210
Cash and cash equivalents, beginning of period 16,577,407 5,143,171
------------ ------------
Cash and cash equivalents, end of period $ 14,104,387 $ 12,374,381
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>7
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
CRIIMI MAE Inc. (CRIIMI MAE), a full service commercial mortgage company
structured as a self-administered real estate investment trust (REIT), invests
in (i) government insured and guaranteed mortgages secured by multifamily
housing complexes located throughout the United States (Government Insured
Multifamily Mortgages) and (ii) uninsured mortgage and mortgage-related assets
backed by multifamily and other commercial mortgages, such as higher yielding,
higher risk, subordinated ownership interests in bonds issued in commercial
mortgage loan securitizations (Subordinated CMBS), using a combination of debt
and equity. CRIIMI MAE's principal objectives are to provide increasing
dividends to its shareholders and to enhance the value of CRIIMI MAE's stock.
As a result of a shareholder-approved merger transaction (the Merger) with
certain mortgage businesses affiliated with C.R.I., Inc. (CRI) (the CRI Mortgage
Businesses) on June 30, 1995, CRIIMI MAE expanded its lines of business to
include mortgage advisory services, mortgage servicing and mortgage origination.
Through the Merger and as a result of employee additions, CRIIMI MAE has a team
of mortgage, real estate and financial professionals to take advantage of the
opportunities available for expanded investments in uninsured mortgage-related
products and services.
CRIIMI MAE owns 100% of CRIIMI MAE Financial Corporation, CRIIMI MAE
Financial Corporation II and CRIIMI MAE Financial Corporation III which are
wholly owned financing subsidiaries (discussed in Notes 5 and 10), 100% of
CRIIMI MAE Management, Inc. (CRIIMI Management) and approximately 57% of CRI
Liquidating REIT, Inc. (CRI Liquidating), a finite-life, self-liquidating REIT
which owns Government Insured Multifamily Mortgages. Additionally, CRIIMI,
Inc., a wholly owned subsidiary of CRIIMI MAE, owns all of the general
partnership interests in the American Insured Mortgage Investors Funds (the AIM
Funds). The AIM Funds own mortgage investments which are substantially similar
to the Government Insured Multifamily Mortgages owned by CRIIMI MAE and CRI
Liquidating. CRIIMI, Inc. receives the general partner's share of income, loss
and distributions (which ranges among the AIM Funds from 2.9% to 4.9%) from each
of the AIM Funds. In addition, CRIIMI MAE indirectly owns a limited partnership
interest in the adviser to the AIM Funds.
CRIIMI MAE has elected to qualify as a REIT for tax purposes. To qualify
for tax treatment as a REIT under the Internal Revenue Code, CRIIMI MAE must
meet certain income and asset tests. CRIIMI MAE closely monitors its
activities, its income and its assets in an effort to ensure that it maintains
its qualification as a REIT.
CRIIMI MAE intends to conduct its business so as not to become regulated as
an investment company under the Investment Company Act of 1940 (the "Investment
Company Act"). The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (Qualifying Interests). Under current
interpretation by the staff of the Securities and Exchange Commission (SEC), in
order to qualify for this exemption, CRIIMI MAE, among other things, must
maintain at least 55% of its assets in Qualifying Interests. Therefore, the
type and amount of assets CRIIMI MAE may acquire may be limited by the
Investment Company Act. In addition to investing in Government Insured
Multifamily Mortgages and other mortgage assets, CRIIMI MAE also invests in
Subordinated CMBS. In making investments in any mortgage assets, including
Subordinated CMBS, CRIIMI MAE draws upon its mortgage servicing, advisory and
underwriting departments to perform due diligence on such mortgage assets
(including in the case of Subordinated CMBS, the underlying mortgages). CRIIMI
MAE will generally acquire Subordinated CMBS only when such mortgage assets are
<PAGE>8
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization - Continued
collateralized by pools of first mortgage loans, CRIIMI MAE can monitor the
performance of the underlying mortgage loans, and when CRIIMI MAE has
appropriate foreclosure/modification rights with respect to the underlying
mortgage loans. Accordingly, CRIIMI MAE believes that such Subordinated CMBS
constitute Qualifying Interests for purposes of the Investment Company Act and,
thus, CRIIMI MAE should not be required to register as an "investment company"
under such Act. If the SEC or its staff were to take a different position with
respect to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying
Interests, CRIIMI MAE could be required: (i) to modify its business plan or (ii)
to register as an investment company.
2. Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, including CRI Liquidating, CRIIMI Management, CRIIMI
MAE Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE
Financial Corporation III and CRIIMI, Inc., contain all adjustments (consisting
of only normal recurring adjustments and consolidating adjustments) necessary to
present fairly the consolidated financial position of CRIIMI MAE as of September
30, 1996 and December 31, 1995, the consolidated results of its operations for
the three and nine months ended September 30, 1996 and 1995 and its cash flows
for the nine months ended September 30, 1996 and 1995.
These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the SEC. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. While management believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in CRIIMI MAE's Annual Report filed on Form
10-K for the year ended December 31, 1995.
3. Summary of Significant Accounting Policies
Method of Accounting
--------------------
The consolidated financial statements of CRIIMI MAE are prepared on
the accrual basis of accounting in accordance with generally accepted
accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Investments in Subordinated CMBS
--------------------------------
Income from investments in Subordinated CMBS is recognized based on
the effective interest method using the anticipated yield over the expected
life of these investments. Changes in yield resulting from prepayments are
recorded as an adjustment to interest income recognized with respect to the
related investment. CRIIMI MAE recognizes impairment on its investments in
Subordinated CMBS whenever it determines that the impact of expected future
credit losses, as currently projected, exceeds the impact of expected
future credit losses as originally projected. Impairment losses are
determined by comparing the current fair value of a Subordinated CMBS to
its existing carrying amount, the difference being recognized as a loss in
<PAGE>9
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
the current period on the consolidated statement of income.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
the three and nine months ended September 30, 1995 have been reclassified
to conform to the 1996 presentation.
Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the nine months ended September
30, 1996 and 1995 were $46,142,510 and $35,574,206, respectively.
4. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and nine months ended September 30, 1996, and 1995. These items are
described further in the text which follows:
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Payments to the Adviser
- -----------------------
Annual fee - CRIIMI MAE (a)(b)(h) $ -- $ -- $ -- $ 1,493,297
Annual fee - CRI Liquidating (b)(g) 70,569 95,702 311,604 320,534
Incentive fee - CRI Liquidating (f) -- -- 568,638 --
Mortgage selection fees - CRIIMI MAE (k) -- -- -- 211,137
------------ ------------ ------------ -------------
Total $ 70,569 $ 95,702 $ 880,242 $ 2,024,968
============ ============ ============ =============
Payments to CRI (c):
- --------------------
Expense reimbursement - CRIIMI MAE (i) $ 142,389 $ 193,666 $ 529,845 $ 1,123,082
Expense reimbursement - CRI Liquidating (j) -- 13,896 -- 125,482
------------ ------------ ------------ -------------
Total $ 142,389 $ 207,562 $ 529,845 $ 1,248,564
============ ============ ============ =============
Amounts Received or Accrued from Related Parties
- ------------------------------------------------
CRIIMI,Inc.
- -----------
Income (d) $ 435,617 $ 531,786 $ 1,327,647 $ 1,464,336
Return of capital (e) 75,232 30,404 584,720 242,535
------------ ------------ ------------ -------------
Total $ 510,849 $ 562,190 $ 1,912,367 $ 1,706,871
============ ============ ============ =============
CRI/AIM Investment Limited
Partnership (d)(h) $ 185,637 $ 193,744 $ 571,925 $ 543,744
============ ============ ============ =============
Expense Reimbursements to CRIIMI Management(c)(j)
- ------------------------------------------------
CRI Liquidating and the AIM Funds $ 174,415 $ 120,000 $ 324,415 $ 120,000
CRIIMI MAE Services Limited Partnership 704,442 145,611 1,554,442 145,611
------------ ------------ ------------ -------------
$ 878,857 $ 265,611 $ 1,878,857 $ 265,611
============ ============ ============ =============
<FN>
(a) In connection with the Merger, effective June 30, 1995, CRIIMI MAE became a self-administered REIT, and as of that date is
no longer required to make payments to CRI Insured Mortgage Associates Adviser Limited Partnership (the Adviser).
(b) Included in the accompanying consolidated statements of income.
(c) Included as general and administrative expenses on the accompanying consolidated statements of income.
(d) Included as equity in earnings from investments on the accompanying consolidated statements of income.
(e) Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(f) Netted with gains on mortgage dispositions on the accompanying consolidated statements of income.
(g) As a result of reaching certain specified performance goals during the third quarter of 1996, CRI Liquidating paid
deferred annual fees of $19,905 during the three months ended September 30, 1996. CRI Liquidating paid deferred annual
fees of $148,435 and $28,467, during the nine months ended September 30, 1996 and 1995, respectively. The amount paid for
the nine months ended September 30, 1996 included $86,739 paid for the last three quarters of 1995. No deferred annual
fees were paid during the three months ended September 30, 1995.
(h) As of June 1, 1993, pursuant to the First Amendment to the CRI Insured Mortgage Association, Inc. advisory agreement (the
Advisory Agreement), CRI guaranteed that CRIIMI MAE would receive an annual distribution from CRI/AIM Investment Limited
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
Partnership of $700,000. CRIIMI MAE was granted the right to reduce the amounts paid to the Adviser by the difference
between the guaranteed $700,000 distribution and the amount actually paid to CRIIMI MAE by CRI/AIM Investment Limited
Partnership. As such, the amounts paid to the Adviser for the nine months ended September 30, 1995 were reduced by
$154,862, which represented the difference between the guaranteed distribution for the period and the amount actually paid
to CRIIMI MAE. This guarantee was terminated effective June 30, 1995 in connection with the transaction in which CRIIMI
MAE became a self-administered REIT.
(i) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to CRI as reimbursement for expenses incurred by
the Adviser on behalf of CRIIMI MAE. In connection with the Merger, on June 30, 1995, CRIIMI MAE was no longer required
to reimburse the Adviser, as these expenses are now directly incurred by CRIIMI MAE. However, pursuant to an agreement
between CRIIMI MAE and CRI (the CRI Administrative Services Agreement), CRI provides CRIIMI MAE with certain
administrative and office facility services and other services, at cost, with respect to certain aspects of CRIIMI MAE's
business. CRIIMI MAE uses the services provided under the CRI Administrative Services Agreement to the extent such
services are not performed by CRIIMI Management or provided by another service provider. The CRI Administrative Services
Agreement is terminable on 30 days notice at any time by CRIIMI MAE.
(j) Prior to CRIIMI MAE becoming a self-administered REIT, amounts were paid to CRI as reimbursement for expenses incurred by
the Adviser on behalf of CRI Liquidating and the AIM Funds. The transaction in which CRIIMI MAE became a self-
administered REIT had no impact on CRI Liquidating's or the AIM Funds' financial statements except that the expense
reimbursements previously paid to CRI, are, effective June 30, 1995, paid to CRIIMI Management. Additionally, effective
June 30, 1995, CRIIMI Management is reimbursed for its employees' time and expenses incurred on behalf of CRIIMI MAE
Services Limited Partnership (the Services Partnership).
(k) Included as deferred costs on the accompanying balance sheets and amortized over the expected mortgage life.
</FN>
</TABLE>
In addition to the above transactions, CRIIMI MAE entered into agreements
with CRI after June 30, 1995 to sublease approximately 27,200 square feet of
office space leased by CRI, at a total annual rent of approximately $544,000.
All increases in lease occupancy charges, including inflation adjustments and
expense reimbursements, will be passed through to CRIIMI MAE on a per square
foot basis. The sublease agreement was terminated effective June 30, 1996 and
CRIIMI MAE entered into a lease with the third party owner of their current
office space. During the nine months ended September 30, 1996 and 1995, CRIIMI
MAE paid related parties rent charges of approximately $224,000 and $66,000,
respectively, which is included in general and administrative expenses on the
accompanying consolidated statements of income.
CRIIMI MAE has entered into a deferred compensation arrangement with
William B. Dockser and H. William Willoughby (collectively, the Principals) in
the aggregate amount of $5,002,183 pursuant to which CRIIMI MAE agreed to pay
each of the Principals for services performed in connection with structuring the
Merger. CRIIMI MAE's obligation to pay the deferred compensation is limited,
with certain exceptions, to the creation of an irrevocable grantor trust for the
benefit of the Principals and to the transfer to such trust of the right to
receive such deferred compensation in the amount of $5,002,183 (the Note
Receivable). The deferred compensation is fully vested and payable only to the
extent that CRI continues to make principal payments on the Note Receivable.
However, in the event of bankruptcy or a similar event affecting CRIIMI MAE, the
remaining trust corpus would revert back to CRIIMI MAE, and the Principals would
become unsecured creditors of CRIIMI MAE. Payments of principal and interest on
the Note Receivable and the deferred compensation are payable quarterly and
terminate on June 30, 2005. Both the Note Receivable and the deferred
compensation obligation bear interest at the prime rate (8.25% as of September
30, 1996) plus 2% per annum. During the three and nine months ended September
30, 1996, CRIIMI MAE, through CRIIMI Management, recognized interest income of
approximately $116,000 and $357,000, respectively, on the Note Receivable, which
is included in other investment income on the accompanying consolidated
statements of income, and recognized interest expense of approximately $116,000
and $357,000, respectively, on the deferred compensation obligation, which is
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
included in interest expense on the accompanying consolidated statements of
income. The deferred compensation obligation and the Note Receivable are
included in Payables and accrued expenses and Receivables and other assets,
respectively, on the accompanying consolidated balance sheets as of September
30, 1996 and December 31, 1995.
Since the Merger, through one of its affiliates, the Services Partnership,
CRIIMI MAE has increased its mortgage advisory and servicing activities in
conjunction with its purchases of Subordinated CMBS by acquiring servicing
rights for the mortgage loans collateralizing these investments. These
servicing rights allow CRIIMI MAE to proactively monitor the performance of its
investments in Subordinated CMBS and provide CRIIMI MAE with appropriate
foreclosure/modification rights with respect to the underlying collateral. As
of September 30, 1996, the Services Partnership provided a variety of servicing
functions on a mortgage portfolio of approximately $4 billion. The servicing
contracts are contributed to the Services Partnership and increase CRIIMI MAE's
interest in that partnership. As of September 30, 1996, CRIIMI MAE held a 33%
general partnership interest in the Services Partnership. The Services
Partnership provides mortgage servicing and advisory services to third parties,
CRIIMI MAE, certain affiliates of CRI and the AIM Funds on a fee basis. CRIIMI
MAE, through CRIIMI Management, manages the Services Partnership as general
partner.
5. Mortgage Assets - Mortgage Security Collateral and Mortgages
CRIIMI MAE's consolidated investment in mortgage security collateral and
mortgages is comprised of participation certificates evidencing a 100% undivided
interest in Government Insured Multifamily Mortgages issued or sold pursuant to
programs of the Federal Housing Administration (FHA) (FHA-Insured Loans),
mortgage-backed securities guaranteed by the Government National Mortgage
Association (GNMA) (GNMA Mortgage-Backed Securities) and, to a lesser extent,
FHA-Insured Loans relating to the construction of nursing homes and intermediate
care facilities (Government Insured Construction Mortgages). Government Insured
Construction Mortgages are intended to be converted to permanent, amortizing
insured loans upon final endorsement of the mortgage by HUD. Additionally,
mortgage security collateral includes Federal Home Loan Mortgage Corporation
(Freddie Mac) participation certificates which are collateralized by FHA-Insured
Loans and GNMA Mortgage-Backed Securities, as discussed below. As of September
30, 1996, 26% of CRIIMI MAE's investment in mortgage security collateral and
mortgages (including loans which collateralize Freddie Mac participation
certificates) were FHA-Insured Loans, 72% were GNMA Mortgage-Backed Securities
and 2% were Government Insured Construction Mortgages. FHA-Insured Loans, GNMA
Mortgage-Backed Securities and Government Insured Construction Mortgages are
collectively referred to as mortgages herein. As of September 30, 1996, CRIIMI
MAE had committed approximately $640,000 for advances on insured Government
Insured Construction Mortgages.
During the nine months ended September 30, 1996, CRIIMI MAE funded advances
of approximately $261,000 on Government Insured Construction Mortgages with a
weighted average net effective interest rate of approximately 8.0%. These loans
are anticipated to convert to permanent loans over the next three months with a
maturity of 38 years.
Through its wholly owned subsidiaries and CRI Liquidating, CRIIMI MAE owns
the following mortgages directly and indirectly:
<PAGE>13
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Assets - Mortgage Security Collateral and Mortgages -
Continued
<TABLE>
<CAPTION>
As of September 30, 1996
-------------------------
Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE (c) 5 $ 17,552,244 $ 17,552,244 8.10% 36 years
CRIIMI MAE Financial Corporation(c) 56 213,445,113 215,133,101 8.45% 32 years
CRIIMI MAE Financial Corporation II(c) 59 250,532,362 244,280,076 7.19% 30 years
CRIIMI MAE Financial Corporation III(c) 39 161,642,586 160,723,501 8.07% 32 years
CRI Liquidating(b) 11 54,307,111 54,307,111 11.3% 25 years
--------- ------------ ------------
170 $697,479,416 $691,996,033
========= ============ ============
As of December 31, 1995
-------------------------
Weighted
Average
Number of Carrying Fair Effective Weighted Average
Mortgages Value Value(a) Interest Rate Remaining Term
--------- ------------ ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
CRIIMI MAE 6 $ 18,138,311 $ 18,138,311 8.16% 36 years
CRIIMI MAE Financial Corporation 57 222,533,271 227,923,719 8.45% 33 years
CRIIMI MAE Financial Corporation II 59 252,152,518 254,137,614 7.19% 31 years
CRIIMI MAE Financial Corporation III 46 199,603,985 203,080,637 8.36% 32 years
CRI Liquidating 22 114,685,204 114,685,204 10.67% 27 years
--------- ------------ ------------
190 $807,113,289 $817,965,485
========= ============ ============
</TABLE>
(a) The estimated fair values of CRIIMI MAE's mortgages are presented in
accordance with generally accepted accounting principles which define fair value
as the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
These estimated fair values, however, do not represent the liquidation value or
the market value of CRIIMI MAE. The fair value of the Government Insured
Multifamily Mortgages is based on quoted market prices.
(b) During the nine months ended September 30, 1996, CRIIMI MAE, through its
subsidiary, CRI Liquidating, disposed of 11 Government Insured Multifamily
Mortgages which constituted approximately 52% of CRI Liquidating's December 31,
1995 tax basis portfolio balance. These 11 dispositions resulted in financial
statement gains of approximately $9.7 million and tax basis gains of
approximately $14.5 million.
(c) During the nine months ended September 30, 1996, there were 9 prepayments
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Mortgage Assets - Mortgage Security Collateral and Mortgages -
Continued
of mortgages held by CRIIMI MAE and its financial corporation subsidiaries.
These prepayments generated net proceeds of approximately $45.2 million and
resulted in net losses of approximately $424,000, which are included in losses
on mortgage dispositions on the accompanying consolidated statement of income
for the nine months ended September 30, 1996.
6. Mortgage Assets - Investment in Subordinated CMBS
In addition to investing in Government Insured Multifamily Mortgages, the
Board of Directors has authorized CRIIMI MAE to invest in other mortgage assets
which are not federally insured or guaranteed provided that certain requirements
are met, including specific equity requirements, based on management's perceived
level of risk of the investment.
The following table summarizes information related to these mortgage assets
on an aggregate basis by pool:
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Investment in Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Face Current
Amount Pass-Through Weighted
Date as of 9/30/96 Rate Average
Pool Acquired (in millions) (as of 9/30/96) Remaining Life(1)
- ---- ------------ -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Mortgage Capital
Funding, Inc.
Series 1993-C1 Dec 1994 $ 19.7 8.7% 2 years
Series 1994-MC1 Jul-Dec 1994 34.4 8.7% 7 years
Series 1995-MC1 Aug 1995 33.2 9.6% 21 years
Nomura Asset Securities
Series 1994-C3 April-Aug 1995 25.2 11.7% 15 years
Structured Mortgage
Securities Corp.
Series 1995-M1 May 1995 15.2 9.0% 15 years
Asset Securitization Corp.
Series 1995-D1 Aug 1995 30.6 7.6% 20 years
Lehman Pass-Through
Securities Inc.
Series 1994-A Oct 1995 10.3 8.6% 8 years
LB Commercial Conduit
Series 1995-C2 Nov 1995 42.9 9.5% 15 years
DLJ Mortgage Acceptance
Corporation
Series 1995-CF2 Dec 1995 61.0 8.8% 12 years
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C3 Dec 1995 90.1 8.5% 14 years
Asset Securtization Corp.
Series 1996-D2 April 1996 68.6 8.7% 16 years
Fannie Mae
Multifamily REMIC
Series 1996-M1 May 1996 17.9 6.6% 17 years
--------
Total (See Note 13) $ 449.1
========
(1) Weighted average remaining life represents the weighted average expected life of the Subordinated CMBS based on contractual
terms of the underlying mortgage loans prior to consideration of losses, extensions or prepayments other than those factored in the
assumed constant prepayment rate used in determining the September 30, 1996 fair value.
(2) Represents the original anticipated yield to maturity of the Subordinated CMBS, based on management's estimate of the timing
and amount of future credit losses and prepayments.
</TABLE>
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Investment in Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Original Current
Amortized Amortized Anticipated Anticipated
Cost Cost Unlevered Unlevered
as of 9/30/96 as of 12/31/95 Yield to Yield to
Pool (in millions) (in millions) Maturity(2) Maturity
- ---- --------------- --------------- ------------ -----------
<S> <C> <C>
Mortgage Capital
Funding, Inc.
Series 1993-C1 $ 17.8 $ 17.4 13.0% 13.0%
Series 1994-MC1 22.2 22.1 14.1% 14.1%
Series 1995-MC1 25.5 25.6 12.2% 12.2%
Nomura Asset Securities
Series 1994-C3 21.8 22.0 12.3% 12.3%
Structured Mortgage
Securities Corp.
Series 1995-M1 9.8 9.8 12.9% 12.9%
Asset Securitization Corp.
Series 1995-D1 20.2 20.2 11.6% 11.6%
Lehman Pass-Through
Securities Inc.
Series 1994-A 6.0 6.1 13.4% 13.4%
LB Commercial Conduit
Series 1995-C2 35.5 35.5 11.2% 11.2%
DLJ Mortgage Acceptance
Corporation
Series 1995-CF2 50.9 50.7 11.0% 11.0%
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C3 69.0 69.0 11.1% 11.1%
Asset Securtization Corp.
Series 1996-D2 48.3 -- 12.4% 12.4%
Fannie Mae
Multifamily REMIC
Series 1996-M1 9.0 -- 11.7% 11.7%
---------- ----------
Total (See Note 13) $ 336.0 $ 278.4
========== ==========
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Investment in Subordinated CMBS - Continued
The aggregate investment by the underlying rating of the Subordinated CMBS is
as follows:
</TABLE>
<TABLE>
<CAPTION>
Face Amount Fair Value
as of as of Amortized Cost as of
September 30, 1996 September 30, 1996(a) (in millions)
Security Rating (in millions) % (in millions) September 30, 1996 December 31, 1995
- --------------- ------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
BBB Rated $ 14.6 3.3% $ 14.4 $ 13.9 $ 4.0
BB Rated (b) 204.5 45.5% 173.3 180.8 155.2
B Rated (b) 145.6 32.4% 104.0 108.9 91.7
Unrated 84.4 18.8% 31.9 32.4 27.5
-------- ------ --------- -------- ---------
Total (See Note 13) $ 449.1 100.0% $ 323.6 $ 336.0 $ 278.4
======== ====== ========= ======== =========
</TABLE>
(a) The estimated fair values of Subordinated CMBS are based on quoted market
prices.
(b) In May 1996, Fitch Investor Services, one of the rating agencies for
Subordinated CMBS, announced that it had upgraded several of the Mortgage
Capital Funding, Inc. Series 1993-C1 tranches. As a result of the upgrade,
CRIIMI MAE's investment in the B rated tranche, with a face amount of $9.1
million and an amortized cost (at June 30, 1996) of $7.8 million, was
upgraded to BB rated and CRIIMI MAE's investment in the BB rated tranche,
with a face amount of $10.6 million and an amortized cost (at June 30,
1996) of $9.9 million, was upgraded to BBB rated.
CRIIMI MAE's investment in the lower rated and unrated tranches provides
credit support to the more senior bond classes of the related commercial
securitization. Cash flow from the underlying mortgages is allocated to the
securitized tranches, with the investment grade or higher rated tranches having
a priority right to the cash flow until their investment returns are met. Then,
any remaining cash flow is generally allocated among the other tranches in order
of their relative seniority. To the extent there are defaults and unrecoverable
losses on the underlying mortgages, resulting in reduced cash flows, the unrated
tranche will bear this loss first. To the extent there are losses in excess of
the unrated tranche's stated right to principal and interest, then the most
subordinated rated tranches will begin absorbing losses.
Based on the timing and amount of future credit losses and prepayments
estimated by management, the weighted average anticipated unleveraged yield over
the expected average life for the investments in Subordinated CMBS as of
September 30, 1996 is approximately 12%. The accounting treatment required
under generally accepted accounting principles requires that the income on
Subordinated CMBS be recorded based on the effective interest method using the
anticipated yield over the expected life of these investments. This currently
results in income which is lower for financial statement purposes than for tax
purposes. CRIIMI MAE anticipates the leveraged return on these investments will
approximate 21% over the life of the Subordinated CMBS. This return was
determined based on the anticipated yield over the expected weighted average
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Investment in Subordinated CMBS - Continued
life of the Subordinated CMBS, which considers, among other things, anticipated
losses, net of interest expense attributable to the financing of the rated
tranches at current interest rates and borrowing amounts.
Management's anticipated returns on its investments in Subordinated CMBS
are based upon a number of assumptions that are currently subject to certain
business and economic uncertainties and contingencies, including, without
limitation, the potential lack of a liquid secondary market for Subordinated
CMBS, prevailing interest rates on the current floating-rate debt financing,
renewal of the repurchase agreements (which provided financing toward the
purchase of the rated tranches of the Subordinated CMBS) at similar terms or the
availability of alternative financing, and the timing and magnitude of credit
losses on the underlying mortgages collateralizing the Subordinated CMBS that
are a result of the general condition of the real estate market, including
competition for tenants and changes in market rental rates. As these
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter these assumptions, no assurance can be given that
the anticipated yields to maturity will be achieved.
In making these investments, CRIIMI MAE and its affiliates apply their
knowledge of multifamily and other commercial mortgages to perform due diligence
on the mortgage investments collateralizing the Subordinated CMBS. This
analysis may include reviewing, to the extent available, the operating records
of the underlying real estate assets, appraisals, environmental studies, market
studies and architectural and engineering studies, and where deemed necessary,
independently developing projected operating budgets. In addition, site visits
are conducted at a majority of the properties. Further, CRIIMI MAE will
generally make investments of this type only when satisfactory arrangements
exist whereby CRIIMI MAE can proactively monitor the performance of the
collateral and where CRIIMI MAE has appropriate foreclosure/modification rights
with respect to the underlying collateral. CRIIMI MAE believes that all
transactions entered into to date have had such satisfactory arrangements.
The underlying mortgages collateralizing CRIIMI MAE's investment in
Subordinated CMBS (aggregate) as of September 30, 1996 are concentrated as
follows:
Property Type Geographic
------------- ----------
Multifamily 52% Texas 17%
Retail 16% California 9%
Hotel 13% Florida 7%
Nursing Homes 8% Michigan 6%
Mobile Homes 5% Illinois 6%
Other 6% Arizona 5%
New Jersey 5%
Other 45%(1)
(1) No other individual state makes up more than 5% of the total.
Investments in uninsured mortgage and mortgage-related investments, such as
Subordinated CMBS, are expected to represent a significant component of CRIIMI
MAE's new business activity for the foreseeable future. As described in Note
10, upon closing on the purchase of the Subordinated CMBS, CRIIMI MAE entered
into a series of repurchase agreements which provided financing to purchase the
rated tranches of the Subordinated CMBS (the unrated tranches were purchased
with equity or available cash). Generally, approximately 75% and 70% of the
respective fair values of the BB and B rated tranches are financed. As of
<PAGE>19
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Investment in Subordinated CMBS - Continued
September 30, 1996, borrowings of approximately $162.6 million were outstanding
related to these investments. This aggregate amount of borrowings is net of
approximately $52.8 million of borrowings that were paid down on a temporary
basis pending use for additional investments in Subordinated CMBS. See Note 10
for a further discussion of these repurchase agreements and other financing
facilities.
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income
Reconciliations of the financial statement net income to the tax basis
income for the three and nine months ended September 30, 1996 and 1995 are as
follows:
<PAGE>20
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income - Continued
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 6,513,152 $ 3,237,359 $ 24,447,802 $ 12,762,168
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes (52,346) 41,339 2,575,295 4,489,192
Mortgage dispositions 104,644 -- 304,351 39,155
Reamortization of investments in
Subordinated CMBS 481,761 128,914 1,296,908 405,541
Interest income - U.S. Treasuries 144,898 176,105 459,305 547,530
Interest expense - defeased notes (197,164) (245,326) (627,613) (772,097)
Interest expense - amortization of deferred
financing and debt issue costs (51,413) (458,631) (857,510) (1,327,841)
Adjustment to hedges for valuation and sales 163,795 1,944,837 34,456 1,944,837
Equity in earnings from investments 159,320 130,657 413,949 196,540
Capital gain on installment sale 179,954 154,309 499,442 154,309
Amortization of assets acquired in the Merger 719,391 715,660 2,162,433 715,660
Other (7,616) (5,235) (157,126) (15,120)
------------ ------------ ------------ ------------
Tax basis income $ 8,158,376 $ 5,819,988 $ 30,551,692 $ 19,139,874
------------ ------------ ------------ ------------
Dividends paid on preferred shares 1,727,718 -- 1,727,718 --
------------ ------------ ------------ ------------
Tax basis income available to common shares $ 6,430,658 $ 5,819,988 $ 28,823,974 $ 19,139,874
============ ============ ============ ============
Tax basis income per share:
Ordinary income per share - Primary $ 0.21 $ 0.18 $ 0.66 $ 0.48
Capital gain income per share - Primary 0.00 0.01 0.28 0.21
------------ ------------ ------------ ------------
Total tax basis income per share - Primary $ 0.21 $ 0.19 $ 0.94 $ 0.69
============ ============ ============ ============
Weighted Average Shares - Primary 30,906,271 30,434,344 30,574,654 27,906,217
============ ============ ============ ============
</TABLE>
<PAGE>21
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Reconciliation of Financial Statement Net Income to Tax
Basis Income - Continued
Differences in the financial statement net income and the tax basis income
principally relate to differences in the methods of accounting for the Merger,
investments in mortgage security collateral, mortgages and Subordinated CMBS,
long-term debt, deferred financing costs, U.S. Treasury Securities, partnership
investments and the merger of the CRIIMI Funds.
8. Dividends to Common Shareholders
For the nine months ended September 30, 1996, dividends of $0.90 per share
were paid to common shareholders. These dividends, which include long-term
capital gains, are as follows:
Dividend Record Date
-------- ------------------
Quarter ended March 31, 1996 $ 0.30 March 18, 1996
Quarter ended June 30, 1996 $ 0.30 June 17, 1996
Quarter ended September 30, 1996 $ 0.30 September 20, 1996
--------
$ 0.90
========
9. Preferred Stock
CRIIMI MAE's charter authorizes the issuance of up to 25,000,000 shares of
preferred stock, of which 150,000 shares have been classified as Series A
Preferred Shares and 3,000,000 shares have been classified as Series B Preferred
Shares as of September 30, 1996.
Series A Cumulative Convertible Preferred Stock
-----------------------------------------------
In July 1996, CRIIMI MAE completed a public offering of 75,000 shares of
Series A Cumulative Convertible Preferred Stock, with a par value of $0.01 per
share (the Series A Preferred Shares), at an aggregate offering price of
$7,500,000. The Series A Preferred Shares pay a dividend based on a fixed
premium over three-month LIBOR and, subject to the terms of CRIIMI MAE's
Articles of Incorporation, as amended and supplemented, are (i) convertible at
the option of the holders, (ii) subject to mandatory conversion by CRIIMI MAE
and (iii) subject to redemption by CRIIMI MAE. The number of common shares
deliverable upon conversion of a Series A Preferred Share is equal to a fraction
(1) the numerator of which is 100 and (2) the denominator of which is 94% of the
average closing trade price reported on the New York Stock Exchange of CRIIMI
MAE's common shares for the 21 days prior to the date notice of conversion is
received. The liquidation preference and the redemption price on the Series A
Preferred Shares equals $100 per share, together with accrued but unpaid
dividends. The Series A Preferred Shares were purchased by a single European
institutional investor. CRIIMI MAE also acquired a put option to sell up to an
additional 75,000 Series A Preferred Shares, at a price of $100 per share, to
such investor at any time prior to July 1, 1997. As of September 30, 1996,
CRIIMI MAE has not exercised its put option to sell additional shares of Series
A Preferred Shares. In August and September 1996, the holder of the Series A
Preferred Shares elected to exercise its right to convert 50,000 Series A
Preferred Shares into 499,954 shares of common stock. Accordingly, as of
September 30, 1996, there were 25,000 Series A Preferred Shares outstanding.
Dividends paid and accrued on Series A Preferred Shares totaled $85,518 for the
three and nine months ended September 30, 1996.
On October 14, 1996, the holder of the Series A Preferred Shares elected to
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Preferred Stock - Continued
exercise its right to convert the remaining 25,000 Series A Preferred Shares
into 244,558 shares of common stock.
Series B Cumulative Convertible Preferred Stock
-----------------------------------------------
In August 1996, CRIIMI MAE completed a public offering of 2,415,000 shares
of Series B Cumulative Convertible Preferred Stock, with a par value of $0.01
per share (the Series B Preferred Shares), at an aggregate offering price of
$60,375,000. The Series B Preferred Shares pay a dividend in an amount equal to
the sum of (1) $.68 per share per quarter plus (ii) the product of the excess
over $.30, if any, of the quarterly cash dividend declared and paid with respect
to each share of common stock times a conversion ratio (2.2844) times one plus a
conversion premium of 3%, subject to adjustment upon the occurrence of certain
events. The Series B Preferred Shares are (i) convertible at the option of the
holders, and (ii) subject to redemption at CRIIMI MAE's sole discretion after
the 10th anniversary of issuance. Each Series B Preferred Share is convertible
into 2.2844 shares of common stock, subject to adjustment upon the occurrence of
certain events. The liquidation preference and the redemption price on the
Series B Preferred Shares equals $25 per share, together with accrued but unpaid
dividends. At September 30, 1996, there were 2,415,000 Series B Preferred
Shares outstanding. Dividends paid and accrued on Series B Preferred Shares
totaled $1,642,200 for the three and nine months ended September 30, 1996.
As discussed further in Note 13, CRIIMI MAE has used or has committed to
use the net proceeds from these stock issuances (which totalled approximately
$65 million) to acquire Subordinated CMBS. Pending investments in Subordinated
CMBS, the net proceeds were used to pay down approximately $52.8 million in
short-term, floating-rate financing on a temporary basis (see also Notes 10 and
13); and the balance was invested in short-term, interest bearing accounts.
10. Obligations under Financing Facilities
The following table summarizes CRIIMI MAE's debt outstanding as of
September 30, 1996 and December 31, 1995:
<PAGE>23
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
<TABLE>
<CAPTION>
Nine months ended September 30, 1996
-------------------------------------------------------------------------
Balance at Eff. rate Average Average Maturity
Type of Debt quarter end at qtr. end Balance Eff. Rate Date
- ------------ ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) $238,166,133 7.4% $238,800,000 7.4% Sept 2031
FNMA Funding Note (2) 157,972,147 7.4% 173,400,000 7.4% March 2035
CMOs (3) 209,337,687 7.3% 209,900,000 7.3% Jan 2033
Repurchase Agreements -
Subordinated CMBS 162,590,467 6.6% 197,500,000 6.9% November 1996 -
March 1999
Bank Term Loans 9,547,880 3.4%(4) 13,500,000 4.1%(4) April 1997-
Dec 1998
Working Capital Lines of Credit -- N/A 44,000 6.1% April 1997
------------
Total $777,614,314
============
(1) As of September 30, 1996 and December 31, 1995, the face amount of the note was $247,251,840 and $248,821,009, respectively,
with unamortized discount of $9,085,707 and $9,335,538, respectively. During the nine months ended September 30, 1996, discount
amortization of $249,831 was recorded as interest expense. Additionally, as a result of one mortgage prepayment, principal of
approximately $8 million was paid down during the nine months ended September 30, 1996.
(2) As of September 30, 1996 and December 31, 1995, the face amount of the note was $160,526,387 and $198,394,480, respectively,
with unamortized discount of $2,554,240 and $2,893,104, respectively. During the nine months ended September 30, 1996, discount
amortization of $338,864 was recorded as interest expense. Additionally, as a result of seven mortgage prepayments, principal of
approximately $35 million was paid down during the nine months ended September 30, 1996.
(3) As of September 30, 1996 and December 31, 1995, the face amount of the note was $214,669,014 and $215,766,328, respectively,
with unamortized discount of $5,331,327 and $5,492,254, respectively. During the nine months ended September 30, 1996, discount
amortization of $160,927 was recorded as interest expense.
(4) The average effective interest rate as of September 30, 1996 and December 31, 1995 includes the impact of a rate reduction
agreement which was in place from July 1995 through March 1996, providing for a reduction in the rate on a portion of the loan based
on balances maintained at the bank.
</TABLE>
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
FHLMC Funding Note (1) $239,485,471 7.4% $ 66,000,000 7.4%
FNMA Funding Note (2) 195,501,376 7.4% 8,700,000 7.4%
CMOs (3) 210,274,074 7.3% 47,300,000 7.3%
Repurchase Agreements -
Mortgages -- N/A 408,700,000 6.7%
Repurchase Agreements -
Subordinated CMBS 187,947,276 7.0% 56,500,000 7.3%
Revolving Credit Facility -- N/A 49,400,000 6.6%
Bank Term Loans 21,227,880 5.2%(4) 21,600,000 6.6%(4)
Working Capital Lines of Credit -- N/A 400,000 6.6%
------------
Total $854,436,077
============
CRIIMI MAE's debt matures as follows:
1996 $158,596,706
1997 10,291,641
1998 3,250,000
1999 --
2000 --
Beyond 605,475,967
------------
Total $777,614,314
============
Securitized Mortgage Obligations
- --------------------------------
CRIIMI MAE, through three wholly owned financing subsidiaries, issued
approximately $664 million (face amount) of long-term, fixed-rate debt in order
to refinance short-term, floating-rate debt during the third and fourth quarters
of 1995. Changes in interest rates will have no impact on the cost of funds or
the collateral requirements on this debt. Proceeds from the issuance of this
long-term debt, net of original issue discount, were initially applied as
follows: $557 million was used to pay down short-term, floating-rate debt
facilities, approximately $8.0 million was used to pay transaction costs and
approximately $80 million was invested in Subordinated CMBS.
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
As discussed further in Note 5, the refinancings were completed through
three separate transactions. GNMA Mortgage-Backed Securities with a fair value
of approximately $244 million as of September 30, 1996 are pledged as security
for a funding note payable to Freddie Mac (the FHLMC Funding Note).
Collateralized Mortgage Obligations (CMOs) are collateralized by FHA-Insured
Loans and GNMA Mortgage-Backed Securities with a fair value of approximately
$215 million as of September 30, 1996. GNMA Mortgage-Backed Securities with a
fair value of approximately $161 million as of September 30, 1996 are pledged as
security for a funding note payable to the Federal National Mortgage Association
(the FNMA Funding Note).
Each of the above-mentioned transactions has been accounted for as a
financing in accordance with Financial Accounting Standards Board Technical
Bulletin 85-2. The discount on the CMOs and the Funding Notes are being
amortized on a level yield basis. Transaction costs were capitalized and are
included in deferred costs on the accompanying consolidated balance sheets as of
September 30, 1996 and December 31, 1995.
Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
CRIIMI MAE has financed through numerous repurchase agreements, on average,
approximately 87%, 75%, and 70% of the respective fair values of the BBB, BB and
B rated tranches of Subordinated CMBS. These agreements mature between November
1996 and March 1999. The interest rates are generally based on the one-month
London Interbank Offered Rate (LIBOR), plus a spread ranging from 1.0% to 1.5%.
On March 28, 1996, CRIIMI MAE entered into a three-year master repurchase
agreement with a lender to finance up to $200 million of additional and/or
existing investments in lower rated Subordinated CMBS. Outstanding borrowings
under this master repurchase agreement are secured by the financed Subordinated
CMBS and bear interest at CRIIMI MAE's choice of one or three-month LIBOR, plus
a spread of 1.5%. This master repurchase agreement expires on March 28, 1999.
As of September 30, 1996, no borrowings were outstanding under this facility.
The aforementioned repurchase agreements are secured, generally, by the
rated tranches with an aggregate fair value of approximately $292 million and
$260 million as of September 30, 1996 and December 31, 1995, respectively.
As discussed in Note 9, in connection with the two public offerings of
convertible preferred stock during the third quarter of 1996, repurchase
agreements aggregating $52.8 million were paid down on a temporary basis.
CRIIMI MAE expects to re-borrow these amounts in the fourth quarter of 1996 in
conjunction with its additional investments in Subordinated CMBS.
As discussed below, CRIIMI MAE expects to refinance a significant portion
of its short-term floating-rate debt with longer term fixed rate financing
within the next few months allowing CRIIMI MAE to better match the maturities of
its assets and liabilities and to obtain a fixed interest rate on that portion
of its debt. The longer term financing is expected to be in the form of
collateralized mortgage obligations.
Repurchase Agreements-Mortgages and Revolving Credit Facility
- -------------------------------------------------------------
Prior to the financings described above, CRIIMI MAE financed the purchase
of FHA-Insured Loans and GNMA Mortgage-Backed Securities through the use of two
separate master repurchase facilities with two separate lenders and a revolving
credit facility. The master repurchase facility with one lender and the
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
revolving credit facility were both terminated upon the completion of the 1995
refinancings described above. On April 1, 1996, a commitment of $300 million,
available under another master repurchase facility, expired in accordance with
its terms. In May 1996, CRIIMI MAE renewed this facility in an amount up to
$100 million ($20 million committed and $80 million uncommitted) for a period of
three years. Any borrowings under this facility will be secured by FHA-Insured
Loans or GNMA Mortgage-Backed Securities, and will bear interest at CRIIMI MAE's
choice of one, three- or six-month LIBOR, plus a spread of 0.75% or 0.50%,
depending on whether FHA-Insured Loans or GNMA Mortgage-Backed Securities,
respectively, are pledged as collateral.
Bank Term Loans
- ---------------
CRIIMI MAE has two reducing term loans (Bank Term Loans) with a lender. As
of September 30, 1996 and December 31, 1995, Bank Term Loan I was secured by the
value of 2,447,500 and 6,950,000 CRI Liquidating shares owned by CRIIMI MAE,
respectively, based on a requirement that collateral valued at 125% and 175% of
the outstanding balance, respectively, secure the loan. Interest is based on
CRIIMI MAE's choice of one, two or three-month LIBOR. Bank Term Loan I requires
a quarterly principal payment based on the greater of (i) the return of capital
portion of the dividend received by CRIIMI MAE on its CRI Liquidating shares
securing Bank Term Loan I or (ii) the amount necessary to bring Bank Term Loan I
to its scheduled outstanding balance at the end of such quarter. Any remaining
amounts outstanding are due by April 1, 1997.
In connection with the Merger, CRIIMI Management assumed certain debt of
the CRI Mortgage Businesses in the principal amount of $9,100,000 (Bank Term
Loan II). Bank Term Loan II is secured by certain cash flows generated by
CRIIMI MAE's direct and indirect interests in the AIM Funds and is guaranteed by
CRIIMI MAE. The loan requires quarterly principal payments of $650,000 and
matures on December 31, 1998. Interest on the loan is based on CRIIMI MAE's
choice of one, two or three-month LIBOR, plus a spread of 1.25%.
Working Capital Lines of Credit
- -------------------------------
In February 1995, CRIIMI MAE executed a $10 million working capital line of
credit with a lender, which was terminated in June 1996. Outstanding borrowings
under the line of credit were secured by shares of CRI Liquidating valued at
approximately 125% of any outstanding borrowings.
In June 1996, CRIIMI MAE entered into a $15 million working capital line of
credit with a termination date of April 30, 1997. Outstanding borrowings under
this line of credit are secured by shares of CRI Liquidating valued at 125% of
any outstanding borrowings and bear interest at CRIIMI MAE's choice of one, two,
or three- month LIBOR, plus a spread of .65%. No amounts were outstanding under
the line of credit as of September 30, 1996.
Loan Origination Program Agreement
- ----------------------------------
In July of 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with a major financial institution (the Program).
The Program is designed to create a pool of multifamily and commercial mortgage
loans, either through origination or acquisition, for the purpose of issuing
commercial mortgage-backed securities. The financial institution will fund all
mortgage loans under the Program, and, as collateral therefor, CRIIMI MAE will
be required to deposit in a reserve account with this institution in connection
with the funding of each mortgagee loan, an amount determined pursuant to the
Program. Additionally, a subsidiary of CRIIMI MAE will service the mortgage
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
loans, and CRIIMI MAE will facilitate any securitization of the loans. In such
securitization, CRIIMI MAE anticipates retaining both the subordinated bond
tranches backed by these pools; the senior bonds would be placed with other
investors. As of September 30, 1996, no loans have been originated or acquired
through this Program.
Other Debt Related Information
- ------------------------------
In January 1996, CRIIMI MAE's management adopted and the Board of Directors
approved a change in CRIIMI MAE's investment policy requiring, among other
things: (1) A maximum overall debt-to-equity ratio of 5.0 to 1.0, (2) maximum
debt-to-equity ratios for specific asset types based on management's perceived
risk of those investments and the related funding, and (3) interest rate hedge
agreements in a notional amount of at least 75% of the outstanding floating-rate
debt. This policy enables CRIIMI MAE to continue to utilize leverage in taking
advantage of investment opportunities while directing and monitoring how CRIIMI
MAE funds these investments.
As previously stated, changes in interest rates will have no impact on the
cost of funds or the collateral requirements on CRIIMI MAE's fixed-rate debt,
which approximates 78% of CRIIMI MAE's current consolidated debt. Fluctuations
in interest rates will continue to impact the value on that portion of CRIIMI
MAE's investments which are not match-funded and could impact potential returns
to shareholders through increased cost of funds on the floating-rate debt in
place. The flexibility in CRIIMI MAE's leverage is dependent upon, among other
things, the levels of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit of the underlying asset. In
certain circumstances, including, among other things, increases in interest
rates, changes in market spreads, or decreases in credit quality of the
underlying asset, CRIIMI MAE would be required to provide additional collateral
in connection with its short-term, floating-rate borrowing facilities. From
time to time, CRIIMI MAE has been required to fund such additional collateral
needs. In each instance and currently, CRIIMI MAE has had adequate unencumbered
assets to meet its operating, investing and financing requirements and
management continually monitors the levels of unencumbered collateral.
CRIIMI MAE's ability to extend or refinance debt facilities upon maturity
will depend on a number of variables including, among other things, CRIIMI MAE's
financial condition and its current and projected results from operations which
are impacted by a number of variables, including changes in interest rates. As
previously discussed, in March 1996, CRIIMI MAE entered into a three-year master
repurchase agreement to finance investments in Subordinated CMBS. Management
intends to utilize this facility to replace a portion of existing floating-rate
debt on Subordinated CMBS which is scheduled to mature over the next 12 months
and/or to finance additional investments in lower rated Subordinated CMBS.
Additionally, management intends to refinance a significant portion of its
short-term, floating-rate debt with longer-term, fixed-rate financing within the
next few months. The longer-term financing is expected to be in the form of
collateralized mortgage obligations. Management continuously monitors CRIIMI
MAE's overall financing and hedging strategy in an effort to ensure that CRIIMI
MAE is making optimal use of its borrowing ability based on market conditions
and opportunities.
For the nine months ended September 30, 1996, the weighted average cost of
borrowing on all of CRIIMI MAE's borrowings, including amortization of discounts
and deferred financing fees of approximately $2.1 million was approximately
7.4%. As of September 30, 1996, CRIIMI MAE's debt-to-equity ratio was
approximately 2.3 to 1.0. Under certain of CRIIMI MAE's existing debt
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
facilities, CRIIMI MAE's debt-to-equity ratio, as defined, may not exceed 5.0 to
1.0.
11. Interest Rate Hedge Agreements
CRIIMI MAE has entered into interest rate hedging agreements to partially
limit the adverse effects of rising interest rates on its floating-rate
borrowings. Interest rate caps provide protection to CRIIMI MAE to the extent
interest rates, based on a readily determinable interest rate index, increase
above the stated interest rate cap, in which case, CRIIMI MAE will receive
payments based on the difference between the index and the cap. The following
hedge agreements were in place at September 30, 1996:
<PAGE>29
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
</TABLE>
<TABLE><CAPTION>
Notional
Amount Effective Date Maturity Date(b) Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 June 25, 1993 June 25, 1998 6.5000% 3M LIBOR
50,000,000 July 20, 1993 July 20, 1998 6.2500% 3M LIBOR
35,000,000 February 2, 1994 February 2, 1999 6.1250% 1M LIBOR
50,000,000 March 25, 1994 March 25, 1998 6.5000% 3M LIBOR
50,000,000 August 27, 1993 August 27, 1997 6.1250% 3M LIBOR
- ------------
$235,000,000(a)
============
(a) CRIIMI MAE's designated interest rate hedge agreements hedge CRIIMI MAE's floating-rate borrowing costs. As of September 30,
1996, total borrowings of approximately $172.1 million are hedged by the interest rate hedge agreements.
(b) The weighted average remaining term for these interest rate cap agreements is approximately 1.61 years.
</TABLE>
In addition to the above interest rate cap agreements which are treated as
hedges against rising interest rates, CRIIMI MAE holds the following additional
interest rate caps:
<PAGE>30
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
<TABLE><CAPTION>
Notional
Amount Effective Date Maturity Date Cap Index
- ------------ -------------------- ----------------- ------ -------
<S> <C> <C> <C> <C>
$ 50,000,000 November 10, 1993 November 10, 1997 6.0000% 3M LIBOR
50,000,000 August 10, 1993 August 11, 1997 6.0000% 3M LIBOR
937,500(a) March 31, 1993 December 31, 1996 10.500% 3M LIBOR
- ------------
$100,937,500(b)
============
<FN>
(a) The notional amount of this hedge amortizes based on the expected pay down schedule of Bank Term Loan I.
(b) Due to the refinancings completed during 1995, these interest rate cap agreements are, as of September 30, 1996, no longer
needed to hedge interest rate changes. These agreements are accounted for at fair value. Management expects to hold these
caps and continue to account for them at fair value until their expiration dates, or until such time as they are needed to
hedge against increases in interest rates on additional floating-rate debt.
</FN>
</TABLE>
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate hedge agreements should interest rates
exceed the caps. However, management does not anticipate nonperformance by any
of the counterparties. All of the counterparties have long-term debt ratings of
A+ or above by Standard and Poor's and A1 or above by Moody's. Management
believes that these hedge instruments are highly liquid. The hedges could be
sold or transferred with the consent of the counterparties. Management does not
believe that this consent would be withheld. Although none of CRIIMI MAE's
hedge instruments are exchange-traded, there are a number of financial
institutions which enter into these types of transactions as part of their day-
to-day activities.
12. Litigation
In June 1995, Edge Partners, L.P. filed a complaint in the United States
District Court for the District of Maryland against CRIIMI MAE's directors. The
complaint purported to be a derivative action on behalf of CRIIMI MAE and
alleged breach of fiduciary duty by the directors and a misleading proxy
statement in connection with the Merger. The plaintiff sought unspecified
damages, a determination that the shareholder vote in favor of the Merger should
be set aside and other relief.
The defendants filed a motion to dismiss and on December 18, 1995, the case
was dismissed with leave to refile within 30 days of receipt of a transcript of
the order. The plaintiff refiled a complaint in February 1996. The revised
complaint is a class-action suit, alleging breach of fiduciary duty by the
directors and solicitation by a misleading proxy statement in connection with
the Merger. In October of 1996, defendants' motions to dismiss were denied, and
the litigation will thus continue. Management believes the suit is without
merit and does not expect the case to have a material adverse financial impact
on CRIIMI MAE.
13. Subsequent Events
In October of 1996, CRIIMI MAE invested an additional $104 million in
Subordinated CMBS issued by Nomura Asset Securitization Corporation, 1996 D3
<PAGE>31
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Subsequent Event - Continued
($69.7 million) and Lehman Brothers Commercial Mortgage Conduit Trust 1996 C-2
($33.8 million) using in aggregate, approximately $32 million from equity
proceeds and the balance from financing provided by repurchase agreements.
CRIIMI MAE expects to invest an additional $105 million in Subordinated CMBS by
the end of 1996.
<PAGE>32
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction and Business Strategy
- ----------------------------------
Introduction
- ------------
CRIIMI MAE Inc.'s (CRIIMI MAE) Management's Discussion and Analysis of
Financial Condition and Results of Operations contains statements that may be
considered forward looking. These statements contain a number of risks and
uncertainties as discussed herein and in CRIIMI MAE's reports filed with the
Securities and Exchange Commission that could cause actual results to differ
materially.
General
- -------
CRIIMI MAE, a full service commercial mortgage company structured as a
self-administered real estate investment trust (REIT), uses a combination of
debt and equity to invest in government insured and guaranteed mortgages secured
by multifamily housing complexes located throughout the United States
(Government Insured Multifamily Mortgages) and in uninsured mortgage and
mortgage-related investments backed by multifamily and other commercial
mortgages, such as higher yielding, higher risk, subordinated ownership
interests in bonds issued in commercial loan securitizations (Subordinated
CMBS). In making investments in Subordinated CMBS, CRIIMI MAE and its
affiliates utilize their extensive knowledge of multifamily and commercial real
estate to perform due diligence on the underlying collateral. CRIIMI MAE will
generally acquire mortgage assets of this type only when such mortgage assets
are collateralized by first mortgage loans, CRIIMI MAE can monitor the
performance of the underlying mortgage loans, and when CRIIMI MAE has
appropriate foreclosure/modification rights with respect to the mortgage loans.
CRIIMI MAE's principal objectives are to provide increasing dividends to its
shareholders and to enhance the value of CRIIMI MAE's stock.
As a result of a shareholder-approved merger transaction (the Merger) with
certain mortgage businesses affiliated with C.R.I., Inc. (CRI) (the CRI Mortgage
Businesses) on June 30, 1995, CRIIMI MAE expanded its lines of business to
include mortgage advisory services, mortgage servicing and mortgage origination.
Through the Merger and as a result of employee additions, CRIIMI MAE has a team
of mortgage, real estate and financial professionals to take advantage of the
opportunities available for expanded investments in uninsured mortgage-related
products and services.
Since the Merger, through one of its affiliates, CRIIMI MAE Services
Limited Partnership (the Services Partnership), CRIIMI MAE has increased its
mortgage advisory and servicing activities in conjunction with its purchases of
Subordinated CMBS by acquiring servicing rights for the mortgage loans
collateralizing these investments. These servicing rights allow CRIIMI MAE to
proactively monitor the performance of its investments in Subordinated CMBS and
the underlying assets and provide CRIIMI MAE with appropriate
foreclosure/modification rights with respect to the underlying mortgage loans.
As of September 30, 1996, the Services Partnership provided a variety of
servicing functions on a mortgage portfolio of approximately $4 billion. CRIIMI
MAE expects to increase its servicing portfolio by approximately $1.2 billion by
November 1, 1996 in conjunction with its purchases of additional Subordinated
CMBS in October of 1996.
During the second half of 1995, CRIIMI MAE refinanced (through three
separate transactions) a significant portion of its floating-rate debt with
match-funded, fixed-rate debt that resulted in a better matching of the
maturities of the assets financed and the related liabilities and largely
reduced the impact of short-term interest rate fluctuations on earnings. In
<PAGE>33
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
addition to reducing floating-rate debt, the refinancings provided CRIIMI MAE
with additional net proceeds of approximately $80 million which were used
primarily for investments in Subordinated CMBS. As of September 30, 1996,
approximately 78% of CRIIMI MAE's total consolidated debt had long-term, fixed-
rates and 22% had short-term, floating rates. The floating-rate debt is
currently hedged with interest rate caps. As discussed further below, CRIIMI
MAE intends to refinance a significant portion of its short-term, floating-rate
debt with longer-term, fixed rate financing within the next few months.
Change in Investment Policy
- ---------------------------
To help CRIIMI MAE increase its income and stabilize earnings, and to allow
it to take advantage of current opportunities, particularly with respect to
uninsured mortgage and mortgage-related investments, the Board of Directors
adopted a new investment policy in January 1996. This policy is designed to
monitor and direct how CRIIMI MAE funds its investments in order to try to
minimize the risk of loss by evaluating the perceived levels of risk associated
with various investment types. The policy is also designed to broaden the types
of mortgage investment opportunities available to CRIIMI MAE.
The policy states that CRIIMI MAE may invest in government insured or
uninsured assets backed by multifamily and other commercial mortgages. However,
the majority of mortgage investments must remain, on an overall basis, in
mortgages and mortgage-related assets backed by multifamily housing.
Specific investment limitations include:
o CRIIMI MAE's overall debt-to-equity ratio may not exceed 5.0 to 1.0.
o Certain specific asset types will have maximum debt-to-equity ratios.
o At least 75% of CRIIMI MAE's floating-rate debt must be hedged.
As of September 30, 1996, CRIIMI MAE's overall debt-to-equity ratio was
approximately 2.3 to 1.0 and all of its floating rate debt was hedged. Total
assets approximated $1.15 billion, 78% of which was invested in mortgages and
mortgage-related assets backed by multifamily housing.
<PAGE>34
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
1996 Strategies
- ---------------
For 1996 and beyond, CRIIMI MAE's business strategies are designed to
increase recurring earnings. Management believes the development of CRIIMI MAE
into a full-service commercial mortgage company during 1995 -- with mortgage
servicing and loan origination capabilities -- has strengthened CRIIMI MAE's
ability to keep growing.
Specific strategies for 1996 are summarized below:
o Raise additional equity capital, and invest the proceeds primarily in
uninsured mortgage assets, including Subordinated CMBS. As discussed
in Note 9 of the notes to the consolidated financial statements,
during the third quarter of 1996, CRIIMI MAE completed two public
offerings of convertible preferred stock, resulting in aggregate net
equity proceeds of approximately $65 million. CRIIMI MAE has used or
committed to use these net proceeds to acquire Subordinated CMBS as
follows. In October of 1996, CRIIMI MAE invested an additional $104
million in Subordinated CMBS issued by Nomura Asset Securitization
Corporation, 1996 D3 ($69.7 million) and Lehman Brothers Commercial
Mortgage Conduit Trust 1996 C-2 ($33.8 million) using in aggregate,
approximately $32 million from equity proceeds and the balance from
financing provided by repurchase agreements. CRIIMI MAE expects to
invest an additional $105 million in Subordinated CMBS by the end of
1996. Pending investment in Subordinated CMBS, the net proceeds were
used to paydown approximately $52.8 million in floating-rate, short-
term financing on a temporary basis, and the balance of the net
proceeds was invested in short-term, interest bearing accounts.
o Begin originating uninsured multifamily and commercial mortgages. In
July of 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with a major financial institution (the
Program). The Program is designed to create a pool of multifamily and
commercial mortgage loans, either through origination or acquisition,
for the purpose of issuing commercial mortgage-backed securities. The
financial institution will fund all mortgage loans under the Program,
and, as collateral therefor, CRIIMI MAE will be required to deposit in
a reserve account with this institution in connection with the funding
of each mortgagee loan, an amount determined pursuant to the Program.
Additionally, a subsidiary of CRIIMI MAE will service the mortgage
loans, and CRIIMI MAE will facilitate any securitization of the loans.
In such securitization, CRIIMI MAE anticipates retaining both the
subordinated bond tranches backed by these pools; the senior bonds
would be placed with other investors. As of September 30, 1996, no
loans have been originated or acquired through this Program.
o Build CRIIMI MAE's servicing business as it originates, acquires, and
securitizes assets. As discussed above, the Services Partnership's
mortgage servicing portfolio is expected to approximate $5.2 billion
as of November 1996, which compares to a total of $1.3 billion as of
November 1, 1995.
o Continue to explore alternatives to replace short-term, floating-rate
debt with longer-term financing. As discussed in Note 10 of the notes
to the consolidated financial statements, in March 1996, to provide
CRIIMI MAE with additional financial flexibility, CRIIMI MAE entered
into a three-year master repurchase agreement which will be used to
replace a portion of existing floating-rate debt on Subordinated CMBS
which is scheduled to mature in the next 12 months and/or to finance
additional investments in lower rated Subordinated CMBS.
<PAGE>35
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Additionally, as discussed below, CRIIMI MAE intends to refinance a
significant portion of its short-term, floating-rate debt with longer-
term, fixed-rate financing within the next few months, allowing CRIIMI
MAE to better match the maturities of its assets and liabilities and
to obtain a fixed interest rate on that portion of its debt. The
longer term financing is expected to be in the form of collateralized
mortgage obligations.
CRIIMI MAE's management believes that continued growth in income from
uninsured mortgage and mortgage-related assets, such as Subordinated CMBS, net
of related interest expense, as well as growth from its other lines of business
- - mortgage origination and mortgage servicing - will increase the recurring tax
basis income and financial statement net income even though the contribution of
its subsidiary, CRI Liquidating REIT, Inc. (CRI Liquidating) (as discussed
further below) will terminate after 1997 in accordance with CRI Liquidating's
business plan. This anticipated growth in income is based on CRIIMI MAE's
business strategies, as previously discussed. As future events may alter these
assumptions, no assurance can be given that the business plan results will be
achieved.
Results of Operations
- ---------------------
1996 versus 1995
- ----------------
Tax Basis Income
----------------
CRIIMI MAE earned approximately $6.4 million in tax basis income available
to common shares for the three months ended September 30, 1996, a 10% increase
from approximately $5.8 million for the corresponding period in 1995. CRIIMI
MAE earned approximately $28.8 million in tax basis income available to common
shares for the nine months ended September 30, 1996, a 50% increase from
approximately $19.1 million for the corresponding period in 1995. On a per
share basis, tax basis income for the three months ended September 30, 1996
increased to $0.21 per weighted average primary share from $0.19 per weighted
average primary share for the corresponding period in 1995. On a per share
basis, primary tax basis income for the nine months ended September 30, 1996
increased to $0.94 per weighted average primary share from $0.69 per weighted
average primary share for the corresponding period in 1995. Ordinary income
increased from approximately $5.6 million for the three months ended September
30, 1995 to approximately $6.3 million (net of preferred dividends) for the
corresponding period in 1996, resulting in a 17% increase on a per share basis
to $0.21 per weighted average primary share for the three months ended September
30, 1996 from $0.18 for the corresponding period in 1995. For the nine months
ended September 30, 1996, ordinary income available to common shares increased
on a per share basis to $0.66 per weighted average primary share for the nine
months ended September 30, 1996 from $0.48 for the corresponding period in 1995.
Net capital gains increased on a per share basis, from $0.21 per weighted
average primary share for the nine months ended September 30, 1995 to $0.28 per
weighted average primary share for the corresponding period in 1996. Net
capital gains were insignificant during the three months ended September 30,
1996 and 1995.
The primary factors resulting in the increase in tax basis income were as
follows: Recurring income increased during the three and nine months ended
September 30, 1996 as compared to 1995 principally as a result of growth in
CRIIMI MAE's commercial mortgage operations, particularly additional investments
in Subordinated CMBS made during 1995 and 1996. Partially offsetting these
increases in tax basis income was an increase in interest expense as a result of
additional amounts borrowed under debt facilities to acquire Subordinated CMBS,
as well as the higher interest rate on the long-term, fixed-rate debt. Annual
<PAGE>36
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
and incentive fees paid to CRIIMI MAE's former Adviser decreased as a result of
the termination of the CRIIMI MAE advisory agreement in connection with the
Merger. The decrease in CRIIMI MAE's annual and incentive fees was offset by an
increase in general and administrative expenses as a result of the Merger and
CRIIMI MAE's growth during 1995 and 1996. The non-cash purchase accounting
amortization expense described below does not impact tax basis income. The
increase in net capital gains during the nine months ended September 30, 1996 as
compared to 1995 resulted from the disposition of a portion of CRI Liquidating's
mortgage assets which was made in this year's lower long-term interest rate
environment, as discussed further below.
Financial Statement Net Income
------------------------------
Net income available to common shares for financial statement purposes was
approximately $6.5 million for the three months ended September 30, 1996, as
compared to approximately $3.2 million for the corresponding period in 1995.
Net income for financial statement purposes was approximately $24.4 million for
the nine months ended September 30, 1996, as compared to approximately $12.8
million for the corresponding period in 1995. On a primary earnings per share
basis, financial statement net income for the three months ended September 30,
1996 increased to $0.16 per weighted average common share from $0.11 per
weighted average common share for the corresponding period in 1995. On a
primary earnings per share basis, financial statement net income for the nine
months ended September 30, 1996 increased to $0.74 per weighted average common
share from $0.46 per weighted average common share for the corresponding period
in 1995. Net income for financial statement purposes increased primarily for
the same reasons as tax basis income: Greater recurring earnings during the
three and nine months ended September 30, 1996 as compared to 1995 principally
resulting from additional investments in Subordinated CMBS during 1995 and 1996,
net of related interest expense. In addition, there were higher net capital
gains during the nine months ended September 30, 1996 as compared to 1995
primarily resulting from the disposition of a portion of CRI Liquidating's
assets, which was made in this year's lower long-term interest rate environment.
Partially offsetting these increases to net income, but not affecting tax basis
income, was the non-cash amortization of assets acquired in the Merger, along
with the adjustment to hedges for valuation and sales. Those items contributing
to the change in financial statement net income are discussed below.
Mortgage Investment Income
- --------------------------
Mortgage investment income decreased by approximately $2.4 million or 15%
to $14 million for the three months ended September 30, 1996 from $16.5 million
for the corresponding period in 1995. Mortgage investment income decreased by
approximately $6.7 million or 13% to $43.1 million for the nine months ended
September 30, 1996 from $49.8 million for the corresponding period in 1995.
These decreases were principally due to the disposition of a portion of CRI
Liquidating's mortgage investments in 1995 and 1996. Also contributing to the
decrease in mortgage investment income was the prepayment of nine mortgages held
by CRIIMI MAE and its wholly owned subsidiaries (aggregating approximately $45
million) during the nine months ended September 30, 1996. These prepayments
resulted in net losses of approximately $424,000 which are included in losses on
mortgage dispositions on the accompanying consolidated statement of income.
On a consolidated basis, as of September 30, 1996 and December 31, 1995,
CRIIMI MAE or its subsidiaries owned, directly or indirectly, 170 and 190
Government Insured Multifamily Mortgages and construction loans, respectively.
As of September 30, 1996, these investments had a weighted average net effective
interest rate of approximately 8.05%, a weighted average remaining term of
approximately 31 years and an aggregate fair value of approximately $692
million. These amounts compare to a weighted average net effective interest
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
rate of approximately 8.26%, a weighted average remaining term of approximately
31 years and an aggregate fair value of approximately $818 million as of
December 31, 1995. As of September 30, 1996, CRIIMI MAE had committed
approximately $640,000 for advances on insured construction loans.
While CRIIMI MAE and its financing subsidiaries do not intend to sell any
of their mortgage investments, CRI Liquidating's business plan calls for an
orderly liquidation of its portfolio by the end of 1997. In accordance with CRI
Liquidating's business plan, in January 1996, 11 mortgages were disposed of
generating net proceeds of approximately $57 million, representing approximately
52% of the December 31, 1995 tax basis portfolio balance. The remaining
portfolio is expected to be disposed of through sales during 1997.
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Income from Investments in Subordinated CMBS
- --------------------------------------------
Income from investments in Subordinated CMBS increased by approximately
$7.1 million to $9.9 million for the three months ended September 30, 1996 from
$2.8 million for the corresponding period in 1995. Income from investments in
Subordinated CMBS increased by approximately $21.7 million to $27.9 million for
the nine months ended September 30, 1996 from $6.2 million for the corresponding
period in 1995. These increases were a result of the acquisition of
Subordinated CMBS at purchase prices aggregating approximately $297 million
during 1995 and 1996.
In January 1996, CRIIMI MAE's Board of Directors authorized CRIIMI MAE to
invest in other mortgage investments which are not federally insured or
guaranteed provided that specific funding requirements are met based on
management's perceived level of risk of the investment. CRIIMI MAE has reviewed
opportunities for investment in other real estate assets which complement CRIIMI
MAE's existing holdings and in the current investment climate, CRIIMI MAE's
management believes that investments in uninsured mortgages and mortgage-related
investments, such as higher yielding, higher risk Subordinated CMBS, represent
attractive investment opportunities and, as such, are expected to represent a
significant component of CRIIMI MAE's new business activity for the foreseeable
future.
Based on the timing and amount of future credit losses and prepayments
estimated by management, the anticipated unleveraged yield over the expected
weighted average life for the investments in Subordinated CMBS, as of September
30, 1996, is approximately 12%. The accounting treatment required under
generally accepted accounting principles requires that the income from
investments in Subordinated CMBS be recorded based on the effective interest
method using the anticipated yield over the expected life of these investments.
This currently results in income which is lower for financial statement purposes
than for tax purposes. The leveraged tax basis return on the Subordinated CMBS
is expected to approximate 23% for 1996. This return was determined based on
cash basis interest income, no defaults or unrecoverable losses, net of interest
expense attributable to the financing of the rated tranches at current interest
rates and borrowing amounts and adjusted for amortization of original issue
discount related to the Subordinated CMBS. CRIIMI MAE anticipates the leveraged
return on these investments for financial statement purposes will approximate
21% over the life of the Subordinated CMBS. This return was determined based on
the anticipated yield over the expected weighted average life of the
Subordinated CMBS, which considers, among other things, anticipated losses, net
of interest expense attributable to the financing of the rated tranches at
current interest rates and borrowing amounts.
Management's anticipated returns on the Subordinated CMBS are based upon a
number of assumptions that are currently subject to certain business and
economic uncertainties and contingencies, including, without limitation, the
potential lack of a liquid secondary market for Subordinated CMBS, prevailing
interest rates on the current floating-rate debt financing, renewal of the
repurchase agreements (which provided financing toward the purchase of the rated
tranches of the Subordinated CMBS) at similar terms or the availability of
alternative financing, and the timing and magnitude of credit losses on the
underlying mortgages collateralizing the Subordinated CMBS that are a result of
the general condition of the real estate market, including competition for
tenants and changes in market rental rates. As these uncertainties and
contingencies are difficult to predict and are subject to future events that may
alter these assumptions, no assurance can be given that the anticipated yields
will be achieved.
In making investments in Subordinated CMBS, CRIIMI MAE and its affiliates
<PAGE>39
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
apply their knowledge of multifamily and other commercial mortgages to perform
due diligence on the mortgage investments collateralizing the Subordinated CMBS.
This analysis may include reviewing the operating records of the underlying real
estate assets, appraisals, environmental studies, market studies and
architectural and engineering studies, and where deemed necessary, independently
developing projected operating budgets. In addition, site visits are conducted
at a substantial portion of the properties. Further, CRIIMI MAE will generally
make investments of this type only when satisfactory arrangements exist whereby
CRIIMI MAE can closely monitor the collateral of the pool and where CRIIMI MAE
has substantial foreclosure/modification rights with respect to the underlying
collateral. CRIIMI MAE believes that all transactions entered into to date have
had such satisfactory arrangements.
Equity in Earnings from Investments
- -----------------------------------
Equity in earnings from investments increased by approximately $430,000 or
22% to $2.4 million for the nine months ended September 30, 1996 as compared to
$2.0 million for the corresponding period in 1995. The increase was primarily
due to increases in earnings from the Services Partnership and CRIIMI MAE
Services, Inc. as a result of additional revenue streams acquired in the Merger
as well as servicing fees earned in connection with additional investments in
Subordinated CMBS. These increases were partially offset by decreases in
earnings from the AIM funds due to fewer mortgage dispositions. Changes in
equity in earnings from investments were insignificant for the three months
ended September 30, 1996 as compared to the same period in 1995.
Other Investment Income
- -----------------------
Other investment income increased by approximately $254,000 or 81% to
$570,000 for the three months ended September 30, 1996 as compared to
approximately $316,000 for the corresponding period in 1995. Other investment
income increased by approximately $1.0 million or 73% to $2.3 million for the
nine months ended September 30, 1996 as compared to approximately $1.3 million
for the corresponding period in 1995. These increases were primarily
attributable to income earned on the short term investment of mortgage
disposition proceeds received pending the reinvestment in Subordinated CMBS
and/or distribution to shareholders. Also contributing to these increases was
the recognition of interest income on the note receivable from CRI which was
acquired by CRIIMI MAE in connection with the Merger.
Interest Expense
- ----------------
Interest expense increased by approximately $3.2 million or 26% to $15.2
million for the three months ended September 30, 1996 from $12.0 million for the
corresponding period in 1995. Interest expense increased by approximately $10.5
million or 29% to $46.6 million for the nine months ended September 30, 1996 as
compared to $36.1 million for the corresponding period in 1995. These increases
were principally a result of additional amounts borrowed in connection with the
acquisition of Subordinated CMBS during 1995 and 1996 and the higher rate on the
longer-term, fixed-rate financings completed in the fourth quarter of 1995.
Partially offsetting these increases was a reduction in interest expense as a
result of the expiration of CRIIMI MAE's interest rate collars during 1995,
coupled with the temporary paydown during August 1996 of $52.8 million of
repurchase agreements.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $600,000 or
44% to $2.1 million for the three months ended September 30, 1996 as compared to
$1.5 million for the corresponding period in 1995. General and administrative
<PAGE>40
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
expenses increased by approximately $1.7 million or 46% to $5.4 million for the
nine months ended September 30, 1996 as compared to $3.7 million for the
corresponding period in 1995. These increases were primarily due to increases
in payroll and related costs, rent, professional fees and other operating
expenses as a result of the Merger and the increasing size of CRIIMI MAE's
operations.
Fees to Related Party
- ---------------------
Total fees to related party are comprised of annual fees and incentive fees
paid to CRIIMI MAE's former advisor, CRI Insured Mortgage Associates Adviser
Limited Partnership (the Adviser). From inception through June 30, 1995, the
Adviser received certain fees for managing CRIIMI MAE's portfolio. In
connection with the Merger, effective June 30, 1995, CRIIMI MAE was no longer
required to pay any fees to the Adviser. The Adviser continues to receive fees
for managing CRI Liquidating's portfolio.
Total fees to related party decreased by approximately $25,000 or 26% to
$71,000 for the three months ended September 30, 1996 from $96,000 for the
corresponding period in 1995. Total fees to related party decreased by
approximately $1.5 million or 83% to $300,000 for the nine months ended
September 30, 1996 as compared to $1.8 million for the corresponding period in
1995. These decreases were primarily the result of the termination of CRIIMI
MAE's advisory agreement in connection with the Merger. Contributing to the
decrease in fees to related party was a reduction in the annual fees payable by
CRI Liquidating resulting from its reduced asset base during 1995 and 1996.
Partially offsetting the decrease in the annual fee was the payment by CRI
Liquidating in 1996 of approximately $87,000 of deferred annual fees related to
the last three quarters of 1995 as a result of achieving certain specified
performance goals.
<PAGE>41
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Amortization of Assets Acquired in the Merger
- ---------------------------------------------
In connection with the Merger, CRIIMI MAE acquired certain assets, $28.9
million of which are being amortized using the straight line method over 10
years beginning June 30, 1995. Since the Merger was accounted for under the
purchase method of accounting, which resulted in recording the purchased assets
at fair value, there are significant non-cash amortization expenses related to
these assets. As a result, amortization of assets acquired in the Merger was
approximately $719,000 and $2.2 million, during the three and nine months ended
September 30, 1996, respectively, as compared to $716,000 for the three and nine
months ended September 30, 1995.
Adjustment to hedges for Valuation and Sales
- --------------------------------------------
Adjustments to hedges for valuation and sales decreased both for the three
and nine months ended September 30, 1996 as compared to the corresponding
periods in 1995 primarily due to the following reasons. During the third
quarter of 1995, in connection with the refinancings during late 1995, CRIIMI
MAE sold two interest rate cap agreements resulting in the recognition of a one-
time loss of approximately $833,000. Additionally, certain interest rate hedge
agreements no longer qualified for hedge accounting, and were accounted for at
fair value, which resulted in a charge to income of approximately $787,000.
Additionally, during the third quarter of 1995, CRIIMI MAE terminated the
Revolving Credit Facility and recognized a one-time charge to income of
approximately $325,000, representing the unamortized costs incurred in
connection with the establishment of this facility. Thus, a total adjustment to
hedges for valuation and sales of approximately $1.9 million was recognized for
the three and nine months ended September 30, 1995. This amount compares to the
recognition of a charge to income for hedge adjustments to fair value of
$164,000 and $34,000, respectively, for the three and nine months ended
September 30, 1996.
Gains/Losses on Mortgage Dispositions
- -------------------------------------
Net losses on mortgage dispositions increased to a net loss of
approximately $120,000 for the three months ended September 30, 1996 as compared
to a net loss of approximately $9,000 for the corresponding period in 1995. Net
gains on mortgage dispositions increased by approximately $7.6 million or 470%
to $9.3 million for the nine months ended September 30, 1996 as compared to $1.6
million for the corresponding period in 1995. Gains or losses on mortgage
dispositions are based on the number, carrying amounts and proceeds of mortgage
investments disposed of during the period. The proceeds realized from the
disposition of a mortgage investment are based on the net coupon rates of the
specific mortgage investments disposed of in relation to prevailing long-term
interest rates at the date of disposition. During the nine months ended
September 30, 1996, 11 CRI Liquidating mortgage investments, with a weighted
average net coupon rate of approximately 8.2%, were disposed of resulting in
financial statement gains of approximately $9.7 million and tax basis gains of
approximately $14.5 million. This compares to the disposition of 22 CRI
Liquidating mortgage investments during the corresponding period in 1995, that
generated net financial statement gains of approximately $1.6 million and tax
basis gains of approximately $9.5 million. These increases were partially
offset by nine prepayments of mortgage investments held by CRIIMI MAE and its
subsidiaries during the nine months ended September 30, 1996, which resulted in
financial statement net losses of approximately $424,000 and tax basis net
losses of approximately $120,000 as compared to the disposition of four CRIIMI
MAE mortgages during the corresponding period in 1995 resulting in financial
statement gains of approximately $55,000 and tax basis gains of approximately
$95,000.
<PAGE>42
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Cash Flow
- ---------
1996 versus 1995
- ----------------
Net cash provided by operating activities increased for the nine months
ended September 30, 1996 as compared to the corresponding period in 1995
primarily due to the increase in net income, as previously discussed. Partially
offsetting the increase to net cash provided by operating activities was an
increase in receivables of $7.2 million related to prepayment proceeds due on a
mortgage loan, net of a $2.2 million receipt of assignment proceeds during the
first quarter of 1996.
Net cash provided by investing activities increased for the nine months
ended September 30, 1996 as compared to the corresponding period in 1995
primarily as a result of an increase in net proceeds from mortgage dispositions,
an increase in principal payments collected, and a decrease in the purchase of
Subordinated CMBS due to the timing of additional investments in CMBS.
Net cash used in financing activities increased for the nine months ended
September 30, 1996 as compared to the corresponding period in 1995 primarily due
to the following: (1) lower proceeds from debt issuances resulting from fewer
purchases of Subordinated CMBS during this period, (2) lower principal payments
on debt obligations resulting from the late 1995 refinancing of a significant
portion of CRIIMI MAE's floating-rate debt, and (3) increased dividends paid in
the first three quarters of 1996 as compared to 1995. These items were
partially offset by increases in proceeds from stock offerings, as previously
discussed.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Flexibility
- --------------------
CRIIMI MAE uses proceeds from long-term, fixed-rate debt refinancings,
repurchase agreements, other borrowings, a working capital line of credit,
return of capital from its investment in CRI Liquidating and issuances of stock
to meet its capital requirements. As previously discussed, CRIIMI MAE
substantially reduced the impact of changing interest rates on its financial
results through three separate refinancings during the second half of 1995.
Changes in interest rates will have no impact on the cost of funds or the
collateral requirements for approximately 78% of the debt outstanding as of
September 30, 1996. Fluctuations in interest rates will continue to impact the
value on that portion of CRIIMI MAE's investments which are not match-funded and
could impact potential returns to shareholders through increased cost of funds
on the floating-rate debt in place. CRIIMI MAE has a series of interest rate
cap agreements in place in order to partially limit the adverse effects of
rising interest rates on the remaining floating-rate debt. When these cap
agreements expire, CRIIMI MAE will have interest rate risk to the extent
interest rates increase on any remaining floating-rate borrowings unless the
caps are replaced or other steps are taken to mitigate this risk. However, as
previously discussed, CRIIMI MAE's investment policy requires that at least 75%
of floating-rate debt be hedged. CRIIMI MAE's ability to extend or refinance
debt facilities upon maturity will depend on a number of variables including,
among other things, CRIIMI MAE's financial condition and its current and
projected results from operations which are impacted by a number of variables,
including changes in interest rates. As previously discussed, in March 1996,
CRIIMI MAE entered into a three-year master repurchase agreement to finance
investments in Subordinated CMBS. Management intends to utilize this facility
to replace a portion of existing floating-rate debt on Subordinated CMBS which
is scheduled to mature over the next 12 months and/or to finance additional
<PAGE>43
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
investments in lower rated Subordinated CMBS. Additionally, management intends
to refinance a significant portion of CRIIMI MAE's floating-rate debt with
longer-term, fixed-rate financing by the end of 1996, allowing CRIIMI MAE to
better match the maturities of its assets and liabilities and to obtain a fixed
interest rate on that portion of its debt.
The flexibility in CRIIMI MAE's leverage is dependent upon, among other
things, the levels of unencumbered assets, which are inherently linked to
prevailing interest rates and changes in the credit quality of the underlying
asset. In certain circumstances, including, among other things, increases in
interest rates, changes in market spreads, or decreases in credit quality of the
underlying asset, CRIIMI MAE would be required to provide additional collateral
in connection with its short-term, floating-rate borrowing facilities. From
time to time, CRIIMI MAE has been required to fund such additional collateral
needs. In each instance and currently, CRIIMI MAE has had adequate unencumbered
assets to meet its operating, investing and financing requirements, and
management continually monitors the levels of unencumbered collateral. Under
certain existing debt facilities, CRIIMI MAE's debt-to-equity ratio may not
exceed 5.0 to 1.0. As previously mentioned, as of September 30, 1996, CRIIMI
MAE's debt-to-equity ratio was 2.3 to 1 and, therefore, CRIIMI MAE was in
compliance with this and other contractual requirements. Management
continuously monitors CRIIMI MAE's overall financing and hedging strategy in an
effort to ensure that CRIIMI MAE is making optimal use of its borrowing ability
based on market conditions and opportunities.
Management believes that the long-term, fixed-rate refinancings previously
discussed and the Merger have created the basis for an overall return to CRIIMI
MAE's shareholders that is less interest rate sensitive. The income which has
been derived from the Merger is primarily fee-based, in the form of servicing
fees and advisory fees. While origination fees may decline in a rising interest
rate environment, servicing fees are expected to become more stable in a rising
interest rate environment as the likelihood of prepayments or refinancings
decreases with higher rates. The potential loss of servicing fees as loans
prepay or refinance in a period of declining interest rates is expected to be
partly offset by the savings CRIIMI MAE would have on its cost of borrowing on
floating-rate debt.
Dividends
- ---------
CRIIMI MAE's principal objectives are to provide increasing dividends to
its shareholders and to enhance the value of CRIIMI MAE's stock. Tax basis
income, as well as net income and recurring earnings, increased for the three
and nine months ended September 30, 1996 as compared to the corresponding
periods in 1995 and, as a result, dividends for the first three quarters of 1996
increased. Specifically, dividends paid on common shares totaled $0.90 per
share for the nine months ended September 30, 1996 as compared to $0.685 for the
corresponding period in 1995. As discussed in the Note 9, in the third quarter
of 1996 CRIIMI MAE issued two series of convertible preferred stock. Dividends
paid on these preferred shares totaled $1.7 million for the three months ended
September 30, 1996.
Although the mortgage investments held by CRIIMI MAE and its subsidiaries
yield a fixed monthly mortgage payment once purchased, the cash dividends paid
by CRIIMI MAE and by its subsidiaries may vary during each period due to several
factors. The factors which impact CRIIMI MAE's dividend include (i) the
distributions which CRIIMI MAE receives on its CRI Liquidating shares, (ii) the
level of income earned on CRIIMI MAE's or its subsidiaries' mortgage investments
depending on prepayments, defaults, etc., (iii) the level of income earned on
uninsured mortgage investments, such as Subordinated CMBS which varies depending
on prepayments, defaults, etc. (iv) the fluctuating yields on short-term debt
<PAGE>44
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
and the rate at which CRIIMI MAE's LIBOR-based debt is priced, as well as the
rate at which dividends on its Cumulative Convertible Preferred Stock are based,
(v) the fluctuating yields in the short-term money market where the monthly
mortgage payments received are temporarily invested prior to the payment of
quarterly dividends, (vi) the yield at which principal from scheduled monthly
mortgage payments, mortgage dispositions and distributions from the AIM Funds
and from CRI Liquidating can be reinvested, (vii) variations in the cash flow
received from the AIM Funds, (viii) changes in operating expenses, and (ix)
dividends paid on preferred shares. CRIIMI MAE's dividends will also be
impacted by the timing and amounts of cash flows attributable to its new lines
of business - mortgage servicing, advisory and origination services.
REIT STATUS
- -----------
CRIIMI MAE and CRI Liquidating have qualified and intend to continue to
qualify as REITs under Sections 856-860 of the Internal Revenue Code. As REITs,
CRIIMI MAE and CRI Liquidating do not pay taxes at the corporate level.
Qualification for treatment as REITs requires CRIIMI MAE and CRI Liquidating to
meet certain criteria, including certain requirements regarding the nature of
their ownership, assets, income and distributions of taxable income. CRIIMI MAE
and CRI Liquidating, however, may be subject to tax at normal corporate rates on
net income or capital gains not distributed.
CRIIMI MAE intends to conduct its business so as not to become regulated as
an investment company under the Investment Company Act of 1940 (the "Investment
Company Act"). The Investment Company Act exempts entities that are "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (Qualifying Interests). Under current
interpretation by the staff of the Securities and Exchange Commission (SEC), in
order to qualify for this exemption, CRIIMI MAE, among other things, must
maintain at least 55% of its assets in Qualifying Interests. Therefore, the
type and amount of assets CRIIMI MAE may acquire may be limited by the
Investment Company Act. In addition to investing in Government Insured
Multifamily Mortgages, CRIIMI MAE also invests in Subordinated CMBS and other
mortgage assets. In making investments in any mortgage assets, including
Subordinated CMBS, CRIIMI MAE draws upon its mortgage servicing, advisory and
underwriting departments to perform due diligence on such mortgage assets
(including in the case of Subordinated CMBS, the underlying mortgages). As
previously discussed, CRIIMI MAE will acquire Subordinated CMBS only when such
mortgage assets are collateralized by pools of first mortgage loans, CRIIMI MAE
can monitor the performance of the underlying mortgage loans, and when CRIIMI
MAE has appropriate foreclosure/modification rights with respect to the
underlying mortgage loans. Accordingly, CRIIMI MAE believes that such
Subordinated CMBS constitute Qualifying Interests for purposes of the Investment
Company Act and, thus, CRIIMI MAE should not be required to register as an
"investment company" under such Act. If the SEC or its staff were to take a
different position with respect to whether CRIIMI MAE's Subordinated CMBS
constitute Qualifying Interests, CRIIMI MAE could be required to: (i) modify its
business plan or (ii) register as an investment company.
OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. filed a complaint in the United States
District Court for the District of Maryland against CRIIMI MAE's directors. The
complaint purported to be a derivative action on behalf of CRIIMI MAE and
alleged breach of fiduciary duty by the directors and a misleading proxy
statement in connection with the Merger. The plaintiff sought unspecified
damages, a determination that the shareholder vote in favor of the Merger should
be set aside and other relief.
<PAGE>45
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
The defendants filed a motion to dismiss and on December 18, 1995, the case
was dismissed with leave to refile within 30 days of receipt of a transcript of
the order. The plaintiff refiled a complaint in February 1996. The revised
complaint is a class-action suit, alleging breach of fiduciary duty by the
directors and solicitation by a misleading proxy statement in connection with
the Merger. In October of 1996, defendants' motions to dismiss were denied, and
the litigation will thus continue. Management believes the suit is without
merit and does not expect the case to have a material adverse financial impact
on CRIIMI MAE.
<PAGE>46
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 12 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>47
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Reference is made to Note 9 of the notes to the consolidated financial
statements of CRIIMI MAE Inc., which is incorporated herein by reference.
<PAGE>48
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A report on Form 8-K (Item 5), dated July 1, 1996, was filed with the
Securities and Exchange Commission on July 1, 1996 with respect to the issuance
of Series A Cumulative Convertible Preferred Stock.
A report on Form 8-K (Item 5), dated August 7, 1996, was filed with the
Securities and Exchange Commission on August 9, 1996 with respect to the
issuance of Series B Cumulative Convertible Preferred Stock.
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<PAGE>49
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CRIIMI MAE INC.
/s/ Cynthia O. Azzara
--------------- -----------------------------
DATE Cynthia O. Azzara
Senior Vice President,
Principal Accounting Officer
and Chief Financial Officer <PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 14,104
<SECURITIES> 1,033,439
<RECEIVABLES> 24,809
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,150,803
<CURRENT-LIABILITIES> 9,487
<BONDS> 777,614
0
24
<COMMON> 314
<OTHER-SE> 337,405
<TOTAL-LIABILITY-AND-EQUITY> 1,150,803
<SALES> 0
<TOTAL-REVENUES> 85,428
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,899
<LOSS-PROVISION> 470
<INTEREST-EXPENSE> 46,611
<INCOME-PRETAX> 24,448
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,448
<EPS-PRIMARY> .74
<EPS-DILUTED> 0
</TABLE>
