<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 June 30, 1997
-------------
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 July 25, 1997
- ---------------------------- --------------------------------
Common Stock, $.01 par value 38,221,034
<PAGE>2
CRIIMI MAE INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
Page
----
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - as of June 30, 1997
(unaudited) and December 31, 1996 . . . . . . . 3
Consolidated Statements of Income - for the
three and six months ended June 30, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 4
Consolidated Statement of Changes in
Shareholders' Equity - for the six months
ended June 30, 1997 (unaudited) . . . . . . . . 5
Consolidated Statements of Cash Flows -
for the six months ended June 30, 1997
and 1996 (unaudited) . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . .
(unaudited) . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 29
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 39
Item 2. Changes in Securities . . . . . . . . . . . . . . 40
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . 41
Signature . . . . . . . . . . . . . . . . . . . . . . . . 42
<PAGE>3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CRIIMI MAE INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE><CAPTION>
June 30, December 31,
1997 1996
-------------- --------------
(unaudited)
<S> <C> <C>
Assets:
Mortgage Assets:
Mortgage security collateral, at
amortized cost $ 602,784,063 $ 618,133,219
Subordinated CMBS,
at amortized cost 645,235,488 564,335,400
Mortgages, at fair value 18,332,519 72,976,503
Equity Investments 37,062,720 35,059,648
Receivables and Other Assets 69,811,780 65,774,174
Cash and cash equivalents 16,883,609 10,966,354
-------------- --------------
Total assets $1,390,110,179 $1,367,245,298
============== ==============
Liabilities:
Securitized Mortgage Obligations:
Mortgage security collateral $ 575,526,426 $ 590,222,369
Subordinated CMBS 142,000,000 142,000,000
Repurchase Agreements-Subordinated CMBS 238,644,933 241,137,588
Bank Term Loans 4,550,000 8,897,880
Payables and accrued expenses 11,922,431 11,798,073
-------------- --------------
Total liabilities 972,643,790 994,055,910
-------------- --------------
Minority interests in
consolidated subsidiary 2,926,542 26,518,125
-------------- --------------
Commitments and contingencies
Shareholders' equity:
Convertible Preferred stock 19,341 24,900
Common stock 386,880 319,128
Net unrealized gains on
mortgage assets 121,723 8,916,228
Additional paid-in capital 419,063,276 342,462,380
-------------- --------------
419,591,220 351,722,636
Less treasury stock, at cost-
538,635 and 538,635 shares, respectively (5,051,373) (5,051,373)
-------------- --------------
Total shareholders' equity 414,539,847 346,671,263
-------------- --------------
Total liabilities and shareholders'
equity $1,390,110,179 $1,367,245,298
============== ==============
</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 six months ended
June 30, June 30,
1997 1996 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Mortgage income $12,251,276 $ 14,285,082 $24,912,078 $29,055,228
Income from Subordinated CMBS 17,515,784 9,792,772 34,279,820 17,986,481
Equity in earnings from investments 730,940 850,156 1,545,462 1,602,156
Other investment income 348,749 477,943 1,269,096 1,698,025
------------ ------------ ----------- -----------
30,846,749 25,405,953 62,006,456 50,341,890
------------ ------------ ----------- -----------
Expenses:
Interest expense 17,066,076 15,761,485 35,388,000 31,436,799
General and administrative 2,628,005 1,958,395 5,021,773 3,357,090
Fees to related party -- 69,919 11,468 241,035
Amortization of assets acquired in the Merger 719,391 721,521 1,438,782 1,443,042
Adjustment to hedges for valuation and sales 28,250 18,850 28,250 (129,339)
------------ ------------ ----------- -----------
20,441,722 18,530,170 41,888,273 36,348,627
------------ ------------ ----------- -----------
Income before mortgage dispositions and minority
interest 10,405,027 6,875,783 20,118,183 13,993,263
Mortgage dispositions:
Gains 95,000 32,679 17,409,553 9,724,923
Losses -- (64,421) (175,603) (336,474)
------------ ------------ ----------- -----------
Income before minority interests 10,500,027 6,844,041 37,352,133 23,381,712
Minority interests in net income of
consolidated subsidiary (87,842) (452,516) (7,840,407) (5,447,062)
------------ ------------ ----------- -----------
Net income $ 10,412,185 $ 6,391,525 $29,511,726 $17,934,650
Preferred Dividends (1,541,478) -- (3,366,865) --
------------ ------------ ----------- -----------
Net income available to common shareholders $ 8,870,707 $ 6,391,525 $26,144,861 $17,934,650
============ ============ =========== ===========
Earnings per share:
Primary $ 0.23 $ 0.21 $ 0.73 $ 0.59
============ ============ =========== ===========
Shares used in computing primary earnings per
share, exclusive of shares held in treasury 38,746,615 30,407,024 35,827,735 30,407,024
============ ============ =========== ===========
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 six months ended June 30, 1997
(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, 1996 $ 24,900 $ 319,128 $ 8,916,228 $ 342,462,380 $ -- $ (5,051,373) $346,671,263
Net income -- -- -- -- 29,511,726 -- 29,511,726
Dividends paid on preferred
shares -- -- -- -- (3,366,865) -- (3,366,865)
Dividends paid on common shares -- -- -- -- (24,682,605) -- (24,682,605)
Conversion of preferred stock
into common stock (5,559) 16,584 -- (11,025) -- -- --
Stock options exercised -- 100 -- 103,560 -- -- 103,660
Adjustment to net unrealized gains
on mortgage investments -- -- (8,794,505) -- -- -- (8,794,505)
Shares issued -- 51,068 -- 75,046,105 -- -- 75,097,173
---------- ------------ ------------- ------------- ------------- ------------ ------------
Balance, June 30, 1997 $ 19,341 $ 386,880 $ 121,723 $ 417,601,020 $ 1,462,256 $ (5,051,373) $414,539,847
========== ============ ============= ============= ============= ============ ============
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 six months ended
June 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,511,726 $ 17,934,650
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount and deferred financing
costs on debt 1,853,564 1,396,901
Amortization of assets acquired in the Merger 1,438,782 1,443,042
Depreciation and other amortization 419,595 450,839
Discount/Premium amortization on mortgage assets 122,554 (1,163,850)
Net gains on mortgage dispositions (17,181,590) (9,388,449)
Equity in earnings from investments (272,891) (265,419)
Valuation adjustment to hedges 28,250 (129,339)
Minority interests in earnings of consolidated subsidiary 7,840,407 5,447,062
Changes in assets and liabilities:
(Increase)/Decrease in receivables and other assets (1,851,833) 2,398,895
Decrease in payables and accrued expenses (201,430) (725,642)
Increase (decrease) in interest payable 575,898 (595,664)
----------- ------------
Net cash provided by operating activities 22,283,032 16,803,026
----------- ------------
Cash flows from investing activities:
Purchase of Subordinated CMBS (80,984,641) (57,378,058)
Proceeds from mortgage dispositions 69,349,521 86,964,909
Purchase of Real Estate Owned Property (3,700,116) --
Receipt of principal payments 3,139,128 4,271,418
Servicing rights acquired and contributed to Services Partnership (2,422,077) (1,558,017)
Decrease in (payment of) deferred costs (2,141) 163,281
Purchase of mortgages and advances on construction loans -- (260,916)
Other investing activities -- 346,003
------------ ------------
Net cash (used in) provided by investing activities (14,620,326) 32,548,620
------------ ------------
Cash flows from financing activities:
Proceeds from debt issuances 151,001,288 72,115,401
Principal payments on debt obligations (173,260,149) (81,471,535)
Increase in deferred financing costs (1,865,075) (699,984)
Dividends (including return of capital) paid to shareholders,
including minority interests (52,822,348) (44,426,554)
Proceeds from the issuance of common stock 75,200,833 --
------------ ------------
Net cash used in financing activities (1,745,451) (54,482,672)
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,917,255 (5,131,026)
Cash and cash equivalents, beginning of period 10,966,354 16,577,407
------------ ------------
Cash and cash equivalents, end of period $ 16,883,609 $ 11,446,381
============ ============
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 or the Company") is a full service commercial
mortgage company structured as a self-administered real estate investment trust
(REIT). CRIIMI MAE's portfolio of assets consists primarily of non-investment
grade subordinated securities backed by first mortgage loans on multifamily and
other commercial real estate ("Subordinated CMBS") and interests in government
insured or guaranteed mortgages secured by multifamily housing complexes located
throughout the United States ("Government Insured Mortgage Assets"). CRIIMI MAE
believes that its concentration on acquiring Subordinated CMBS, together with
its expertise as an underwriter and servicer of commercial mortgage loans,
enables the Company to take advantage of the rapid growth in the securitization
of debt backed by income-producing commercial real estate. Before purchasing
Subordinated CMBS, CRIIMI MAE and its affiliates utilize their multifamily and
commercial real estate expertise to perform due diligence on the underlying
collateral and require that certain control mechanisms, such as the ability to
monitor the performance of the underlying mortgage loans and control of
workout/foreclosure proceedings, are in place. CRIIMI MAE's principal
objectives are to enhance the value of CRIIMI MAE's capital stock and to provide
increasing dividends to its shareholders.
CRIIMI MAE owns 100% of multiple financing and operating subsidiaries
(discussed in Notes 5 and 10), and various interests in other entities which
either own or service mortgage assets.
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 and distribution requirements. CRIIMI MAE
closely monitors its activities, its income and its assets in an effort to
ensure that it maintains its qualification as a REIT.
The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(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"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering as an investment company or to register as an
investment company, either of which may adversely affect the Company.
2. Basis of Presentation
In management's opinion, the accompanying unaudited consolidated financial
statements of CRIIMI MAE, including CRI Liquidating REIT, Inc. ("CRI
Liquidating"), CRIIMI MAE Management Inc. ("CRIIMI Management"), CRIIMI MAE
<PAGE>8
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Basis of Presentation - Continued
Financial Corporation, CRIIMI MAE Financial Corporation II, CRIIMI MAE Financial
Corporation III, CRIIMI MAE QRS 1, Inc., CRIIMI MAE Holdings Inc., CRIIMI MAE
Holdings L.P. 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 June 30, 1997 and
December 31, 1996, the consolidated results of its operations for the three and
six months ended June 30, 1997 and 1996 and its cash flows for the six months
ended June 30, 1997 and 1996.
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, 1996.
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.
Reclassifications
-----------------
Certain amounts in the consolidated financial statements as of and for
the three and six months ended June 30, 1996 have been reclassified to
conform to the 1997 presentation.
Subordinated CMBS
-----------------
CRIIMI MAE has the intent and ability to hold its Subordinated CMBS
until maturity. Consequently, these mortgage assets are classified as Held
to Maturity and are carried at amortized cost. For GAAP purposes, CRIIMI
MAE recognizes income from Subordinated CMBS using the effective interest
method, using the anticipated yield over the projected life of the
investment. Changes in estimated yields are due to revisions in estimates
of future credit losses, losses incurred and actual prepayment speeds.
Changes in estimated yield resulting from prepayments are recognized over
the remaining life of the investment with recognition of a cumulative
catch-up at the date of change from the original investment date. CRIIMI
MAE recognizes impairment on its Subordinated CMBS whenever it determines
that the current estimate of expected future credit losses, exceeds future
credit losses as originally projected. Impairment losses are determined by
comparing the fair value of a Subordinated CMBS to its current carrying
amount, the difference being recognized as a loss in the current period in
the consolidated statement of income if the fair value is less than
amortized cost. Reduced estimates of credit losses are recognized as an
adjustment to the estimated yield over the remaining life of the
<PAGE>9
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
Subordinated CMBS.
Receivables and Other Assets
----------------------------
Receivables and Other Assets primarily include merger related costs,
deferred financing costs and interest receivables. Additionally, included
in Receivables and Other Assets is Real Estate Owned (REO) property
acquired through foreclosure. In June 1997, CRIIMI MAE acquired a real
estate property in a foreclosure sale from a CMBS trust. CRIIMI MAE also
serves as the special servicer and has a subordinated investment in the
same trust. As of June 30, 1997, REO property totaled approximately $3.7
million. REO property acquired through foreclosure is recorded at cost.
Such assets will be evaluated for impairment by the Company when events or
changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. At such time, if the expected future undiscounted
cash flows from the property are less than the cost basis, the assets will
be marked down to fair value. Costs relating to development and
improvement of property are capitalized, provided that the resulting
carrying value does not exceed fair value. Costs relating to holding the
assets are expensed.
Consolidated Statements of Cash Flows
-------------------------------------
Cash payments made for interest during the six months ended June 30,
1997 and 1996 were $32,958,537 and $30,635,562, respectively.
Earnings per Share
------------------
Primary earnings per share is computed by deducting preferred
dividends from net income in order to determine net income available to
common shareholders. This amount is then divided by the weighted average
common stock shares and dilutive common stock equivalents outstanding
during the period. The common stock equivalents arise from the Company's
stock options which were assumed to be exercised at the average market rate
during the period.
New Accounting Statements
-------------------------
During 1996, the Financial Accounting Standards Board (FASB) issued
SFAS No. 127 "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" ("FAS 125"). This statement defers the applicability of
FAS 125 to repurchase agreements, dollar rolls, securities lending and
certain other transactions that occur after December 31, 1997. CRIIMI MAE
believes the deferral of this aspect of FAS 125 will have no material
impact on its financial statements.
In February 1997, FASB issued SFAS No. 128 "Earnings per Share" ("FAS
128"). FAS 128 changes the requirements for calculation and disclosure of
earnings per share. This statement eliminates the calculation of primary
earnings per share and requires the disclosure of basic earnings per share
and fully diluted earnings per share. Under these provisions, CRIIMI MAE
would have basic earnings per share of $0.24 and $0.21 for the three months
ended June 30, 1997 and 1996, respectively; and $0.75 and $0.59 for the six
months ended June 30, 1997 and 1996, respectively. Fully diluted earnings
per share would reflect $0.23 and $0.21 for the three months ended June 30,
1997 and 1996, respectively, and $0.73 and $0.59 for the six months ended
June 30, 1997 and 1996, respectively.
<PAGE>10
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Summary of Significant Accounting Policies - Continued
During 1997, FASB issued SFAS No. 129 "Disclosure of Information about
Capital Structure" ("FAS 129"). FAS 129 continues the existing
requirements to disclose the pertinent rights and privileges of all
securities other than ordinary common stock but expands the number of
companies subject to portions of its requirements. CRIIMI MAE does not
anticipate a significant impact to its current disclosures.
During 1997, FASB Issued SFAS No. 130 "Reporting Comprehensive Income"
("FAS 130"). FAS 130 states that all items that are required to be
recognized under accounting standards as components of comprehensive income
are to be reported in the statement of income. This would include net
income as currently reported by CRIIMI MAE adjusted for unrealized gains
and losses related to CRIIMI MAE mortgages accounted for as "available for
sale". Net unrealized gains and losses on mortgage assets are currently
reported in the shareholders' equity section of the balance sheet. FAS 130
is effective beginning January 1, 1998.
4. Transactions with Related Parties
Below is a summary of the related party transactions which occurred during
the three and six months ended June 30, 1997 and 1996. These items are described
further in the text which follows:
<PAGE>11
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
<TABLE><CAPTION>
For the three months ended For the six months ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PAYMENTS TO THE ADVISER
- -----------------------
Annual fee - CRI Liquidating (a)(f) $ -- $ 69,919 $ 11,468 $ 241,035
Incentive fee - CRI Liquidating (e) -- -- 958,081 568,638
------------ ------------ ------------ ------------
Total $ -- $ 69,919 $ 969,549 $ 809,673
============ ============ ============ ============
PAYMENTS TO CRI:
- --------------------
Expense reimbursement - CRIIMI MAE
Management Inc. (g) $ 94,393 $ 158,940 $ 204,179 $ 387,456
============ ============ ============ ============
AMOUNTS RECEIVED OR ACCRUED FROM RELATED PARTIES
- ------------------------------------------------
CRIIMI,Inc.
- -----------
Income (c) $ 406,365 $ 434,066 $ 806,003 $ 892,030
Return of capital (d) -- 187,650 450,096 509,488
------------ ------------ ------------ ------------
Total $ 406,365 $ 621,716 $ 1,256,099 $ 1,401,518
============ ============ ============ ============
CRI/AIM Investment Limited
Partnership (d) $ 167,843 $ 193,606 $ 335,831 $ 386,288
============ ============ ============ ============
Expense Reimbursements to CRIIMI Management(b)
- -------------------------------------------
CRI Liquidating and the AIM Funds $ 55,587 75,000 $ 149,619 $ 150,000
CRIIMI MAE Services Limited Partnership -- 425,000 -- 850,000
------------ ------------- ------------ ------------
$ 55,587 $ 500,000 $ 149,619 $ 1,000,000
============ ============= ============ ============
(a) Included in the accompanying consolidated statements of income as fees to related party.
(b) Included as general and administrative expenses on the accompanying consolidated statements of income.
(c) Included as equity in earnings from investments on the accompanying consolidated statements of income.
(d) Included as a reduction of equity investments on the accompanying consolidated balance sheets.
(e) Netted with gains on mortgage dispositions on the accompanying consolidated statements of income.
(f) As a result of reaching the carryover CRIIMI I target yield during the second quarter of 1996, CRI Liquidating paid
deferred annual fees of $19,721 during the three months ended June 30, 1996. Liquidating paid deferred annual fees of
$12,726 and $128,530, during the six months ended June 30, 1997 and 1996, respectively. The amount paid for the six
months ended June 30, 1996 included $86,739 paid for the last three quarters of 1995. Due to the disposition of the
remaining CRI Liquidating mortgages during the first quarter of 1997, no annual fees were paid during the second quarter
of 1997.
(g) 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.
</TABLE>
<PAGE>12
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Transactions with Related Parties - Continued
CRIIMI MAE Services Limited Partnership ("Services Partnership") provides
certain servicing functions for approximately $8.8 billion of commercial
mortgage assets as of July 15, 1997. These arrangements provide fee income to
Services Partnership, and CRIIMI MAE believes these servicing arrangements
enable the Company to better monitor the pool of mortgage loans securing its
Subordinated CMBS and control workout or foreclosure proceedings, thereby
partially mitigating the risk of owning Subordinated CMBS. The assets are
contributed to the Services Partnership and increase CRIIMI MAE's interest in
that partnership. As of June 30, 1997, the general partnership interest
represented a 47% interest in the Services Partnership. CRIIMI MAE, through
CRIIMI Management, manages the Services Partnership as general partner.
CRIIMI MAE was also recently rated as a Master Servicer by three rating
agencies. One rating agency issues an annual Master Servicer rating and the
other two rating agencies issue the rating on a deal by deal basis.
5. Mortgage Assets - Mortgage Security Collateral and Mortgages
CRIIMI MAE's consolidated portfolio of mortgage security collateral and
mortgages is comprised of FHA-Insured Loans, GNMA Mortgage-Backed Securities and
a HUD-insured construction loan. The construction loan is intended to be
converted to a permanent, amortizing insured loan upon final endorsement.
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 June 30, 1997, approximately 22% of CRIIMI MAE's investment in mortgage
security collateral and mortgages were FHA-Insured Loans, approximately 78% were
GNMA Mortgage-Backed Securities and less than 1% was a construction loan
(including loans which collateralize Freddie Mac participation certificates).
FHA-Insured Loans, GNMA Mortgage-Backed Securities and Government Insured
Construction Mortgages are collectively referred to as mortgages herein.
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 June 30, 1997
--------------------
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 (b) 5 $ 18,332,519 $ 18,332,519 8.09% 35 years
CRIIMI MAE Financial Corporation(b) 53 198,388,766 201,644,865 8.41% 31 years
CRIIMI MAE Financial Corporation II(b) 59 248,814,139 246,535,031 7.19% 30 years
CRIIMI MAE Financial Corporation III(b) 38 155,581,158 158,066,357 8.10% 31 years
--------- ------------ ------------
155 $621,116,582 $624,578,772
========= ============ ============
As of December 31, 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 5 $ 18,527,970 $ 18,527,970 8.09% 35 years
CRIIMI MAE Financial Corporation 55 206,803,142 209,693,241 8.41% 31 years
CRIIMI MAE Financial Corporation II 59 249,969,567 247,126,393 7.19% 30 years
CRIIMI MAE Financial Corporation III 39 161,360,510 162,003,486 8.08% 32 years
CRI Liquidating(c) 11 54,448,533 54,448,533 11.3% 25 years
--------- ------------ ------------
169 $691,109,722 $691,799,623
========= ============ ============
(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 six months ended June 30, 1997, there were three prepayments of mortgages held by CRIIMI MAE and its financing
subsidiaries. These prepayments generated net proceeds of approximately $12.8 million and resulted in net financial statement
losses of approximately $161,000, which are included in losses on mortgage dispositions on the accompanying consolidated statement
of income for the six months ended June 30, 1997.
(c) In January 1997, the Liquidating Company sold its remaining 11 mortgages, generating proceeds of approximately $54 million
which resulted in financial statement and tax basis gains of approximately $14 million.
</TABLE>
6. Mortgage Assets - Subordinated CMBS
In addition to holding Government Insured Mortgage Assets, CRIIMI MAE has
also purchased other mortgage assets which are not federally insured or
guaranteed.
<PAGE>14
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
The following table summarizes information related to these other mortgage
assets on an aggregate basis by pool:
<TABLE><CAPTION>
Original Current
Estimated Estimated
Unleveraged Unleveraged
Yield to Yield to
Pool(5) Maturity (1) Maturity (2)
- ------------ ------------ ------------
<S> <C> <C>
Mortgage Capital Funding, Inc.
Series 1993-C1(4) 13.0% 14.1%
Series 1994-MC1 13.9% 13.9%
Series 1995-MC1 12.2% 12.1%
Series 1997-MC1 10.2% 10.2%
Nomura Asset Securities Corp.
Series 1994-C3 12.1% 12.2%
Lehman Pass-Through Securities Inc.
Series 1994-A 13.4% 13.4%
Structured Mortgage Securities Corp.
Series 1995-M1 12.4% 12.5%
Fannie Mae Multifamily REMIC
Series 1996-M1 11.7% 11.7%
LB Commercial Conduit
Series 1995-C2 11.2% 11.2%
Series 1996-C2 11.8% 11.8%
DLJ Mortgage Acceptance Corp.
Series 1995-CF2 11.0% 11.0%
Series 1996-CF2 11.8% 11.8%
Asset Securitization Corp.
Series 1995-D1 11.5% 11.5%
Series 1996-D2 12.4% 12.4%
Series 1996-D3 11.9% 11.8%
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3 11.1% 11.1%
Series 1996-C2 11.9% 11.9%
First Union-Lehman Brothers Commercial
Series 1997-C1 11.3% 11.3%
Weighted Average 11.7%(3) 11.7%(3)
(1) Represents the original estimated unleveraged yield over the expected life
(calculated as of the acquisition date) of the related Subordinated CMBS, based
on management's estimate of the timing and amount of future credit losses and
prepayments of the underlying mortgage loans.
(2) Unless otherwise noted, changes in the current estimated yield to maturity
<PAGE>15
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
from that originally estimated are primarily the result of changes in prepayment
assumptions relating to mortgage collateral. As of June 30, 1997, CRIIMI MAE
has not incurred any losses on Subordinated CMBS, nor has the performance of the
underlying collateral caused CRIIMI MAE to adjust its original loss estimates.
(3) Represents the estimated weighted average unleveraged yield over the
expected average life of the Company's Subordinated CMBS portfolio as of the
date of acquisition and June 30, 1997, respectively.
(4) As of July 14, 1997, Fitch Investor Services upgraded the ratings of
Mortgage Capital Funding Inc's Series 1993-C1 Class D and Class E from BBB and
BB to AA- and BB+, respectively.
(5) As of July 1, 1997, CRIIMI MAE serviced a total CMBS pool of $8.3 billion.
Approximately 1% of the total CMBS pool is specially serviced by CRIIMI MAE, of
which, .54% of the loans are specially serviced due to payment default and the
remainder is specially serviced due to non-payment default.
</TABLE>
The aggregate investment by the underlying rating of the Subordinated CMBS is as
follows:
<PAGE>16
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
<TABLE>
<CAPTION>
Face Amount Fair Value
as of as of Amortized Cost as of
June 30, 1997 June 30, 1997(a) (in millions)
Security Rating(d) (in millions) % (in millions) June 30, 1997 December 31, 1996
- --------------- ------------------- -------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C>
BBB $ 14.6 1.6 14.7 14.4 14.2
BB (b) 383.4 41.2 372.2 327.7 307.8
BB- (b) 19.6 2.0 16.0 15.1 --
B- (b) 283.8 30.5 216.2 200.9 175.0
B- (b) 36.7 3.9 20.7 17.6 8.3
Unrated 193.7 20.8 77.7 69.5 59.0
-------- ------ --------- -------- ---------
Total $ 931.8(c) 100.0 $ 717.5 $ 645.2(c) $ 564.3
======== ====== ========= ======== =========
(a) The estimated fair values of Subordinated CMBS are based on dealer quoted market prices or an average of market quotes.
(b) During the three months ended June 30, 1997, CRIIMI MAE purchased a portion of Subordinated Tranches from two separate pools
that have a combined face value of approximately $135.3 million, and purchase price aggregating approximately $81 million.
(c) On July 1, 1997 CRIIMI MAE purchased a portion of Subordinated tranches of Morgan Stanley Capital One Inc. Commercial Pass-
Through Certificates, Series 1997-WF1 that have a face value of $28 million and purchase price of $19.2 million.
(d) As of July 14, 1997, Fitch Investor Services upgraded the ratings of Mortgage Capital Funding Inc.'s Series 1993-C1 Class D and
Class E from BBB and BB to AA- and BB+, respectively.
</TABLE>
The Subordinated CMBS tranches owned by CRIIMI MAE provide credit support
to the more senior tranches of the related commercial securitization. Cash flow
from the underlying mortgages generally is allocated first to the senior
tranches, with the most senior tranche having a priority right to cash flow.
Then, any remaining cash flow is allocated generally 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 most subordinate tranche will be the first to bear this loss. To the
extent there are losses in excess of the most subordinate tranche's stated right
to principal and interest, then the remaining tranches will bear such losses in
order of their relative subordination.
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 mortgage assets. This currently results in income which is lower for
financial statement purposes than for tax purposes. Based on the timing and
amount of future credit losses and prepayments estimated by management, the
estimated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of June 30,
1997 was approximately 11.7%.
CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
<PAGE>17
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
uncertainties and contingencies. Examples of these include the prevailing
interest rates on that portion of the Subordinated CMBS which has been financed
with floating rate debt, interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the ability to renew repurchase agreements and the
terms of any such renewed agreements and the availability of alternative
financing. Further examples include the timing and magnitude of credit losses
on the mortgage loans underlying the Subordinated CMBS that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental rates.
In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
in underwriting and servicing various types of performing and nonperforming
income-producing real estate, including multifamily, retail and hotel
properties. CRIIMI MAE "re-underwrites" substantially all of the mortgage loans
in a prospective pool by reviewing historical and current operating records of
the underlying real estate assets, appraisals, environmental studies, market
studies and architectural and engineering studies, all to independently assess
the stabilized performance level of the underlying properties. In addition, the
Company conducts site visits at the properties that are in special servicing
and/or represent significant properties in a pool. Other site visits are
conducted by third parties to ensure that all the properties are visited. The
Company stresses the adjusted net operating incomes of the properties to
simulate certain recessionary scenarios and applies market or greater
capitalization rates to assess loan quality. Further, CRIIMI MAE will generally
purchase Subordinated CMBS only when satisfactory arrangements exist which
enable it to closely monitor the underlying mortgage loans and provide CRIIMI
MAE with appropriate workout/foreclosure rights with respect to the underlying
mortgage loans due to Services Partnership's status as special servicer. CRIIMI
MAE believes that all transactions entered into have had such satisfactory
arrangements.
<PAGE>18
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Mortgage Assets - Subordinated CMBS - Continued
As of July 1, 1997, the mortgage loans underlying CRIIMI MAE's Subordinated
CMBS portfolio were secured by properties of the types and at the locations
identified below:
Property Type Percentage(3) Geographic(1) Percentage(3)
- ------------- ------------ ------------ -------------
Multifamily 44 Texas 16
Retail 26 California 13
Hotel 13 Florida 8
Office 6 Other (2) 63
Other 11
(1) No significant concentration by region.
(2) No other individual state makes up more than 5% of the total.
(3) Based on a percentage of the total unpaid principal balance of the
underlying loans.
Uninsured mortgage and mortgage-related assets, such as Subordinated CMBS,
are expected to represent a significant component of CRIIMI MAE's new business
activity for the foreseeable future. Upon closing on the purchase of the
Subordinated CMBS, CRIIMI MAE, generally, enters into repurchase agreements
which provide financing to purchase the rated tranches of the Subordinated CMBS
(the unrated tranches are purchased with equity), until such time as CRIIMI MAE
is able to refinance the short-term, floating-rate debt with longer-term, fixed-
rate debt (see Note 10 for a discussion of financing). Generally, when
purchasing Subordinated CMBS, approximately 75%, and 70% of the respective fair
values of the BB and B rated tranches are financed through repurchase
agreements. As of June 30, 1997, repurchase agreements in the amount of
approximately $238.6 million were outstanding related to the Subordinated CMBS.
Additionally, CRIIMI MAE expects to reborrow approximately $48 million from
existing repurchase agreements which were paid down in March 1997, in connection
with the purchase of additional CMBS during 1997. Additionally, as of June 30,
1997, securitized mortgage obligations related to Subordinated CMBS were
outstanding in the amount of $142 million, which were issued as a result of
refinancing a portion of repurchase agreements on Subordinated CMBS (see also
Note 10 for a discussion of this refinancing).
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 six months ended June 30, 1997 and 1996 are as follows:
<PAGE>19
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 six months ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Consolidated financial statement net income $ 10,412,185 $ 6,391,525 $ 29,511,726 $ 17,934,650
Adjustment due to accounting for subsidiary
as a pooling for financial statement
purposes and a purchase for tax purposes -- (46,130) (2,132,614) 2,627,641
Mortgage dispositions -- 52,970 91,850 199,707
Reamortization of Subordinated CMBS 1,605,617 442,127 2,638,352 815,147
Amortization and other interest expense adjustments (650,999) (64,956) (939,158) (922,139)
Equity in earnings from investments 291,689 69,878 442,289 254,629
Amortization of assets acquired in the Merger 719,391 721,521 1,438,782 1,443,042
Other 19,350 90,920 10,424 40,639
------------ ------------ ------------ ------------
Tax basis income $ 12,397,233 $ 7,657,855 $ 31,061,651 $ 22,393,316
============ ============ ============ ============
Dividends paid on preferred shares (1,541,478) -- (3,366,865) --
------------ ------------ ------------ ------------
Tax basis income available to
common shareholders $ 10,855,755 $ 7,657,855 $ 27,694,786 $ 22,393,316
============ ============ ============ ============
Tax basis income per share:
Recurring income before gains from CFR - primary $ 0.28 $ 0.26 $ 0.57 $ 0.47
Capital gain from CFR - Primary -- -- 0.22 0.27
------------ ------------ ------------ ------------
Total tax basis income per share - Primary $ 0.28 $ 0.26 $ 0.79 $ 0.74
============ ============ ============ ============
Weighted Average Shares - Primary 38,149,257 30,407,024 35,276,822 30,407,024
============ ============ ============ ============
</TABLE>
Differences in the financial statement net income and the tax basis income
available to common shares principally relate to differences in the methods of
accounting for the merger of the CRI Mortgage Businesses, mortgages and mortgage
security collateral and Subordinated CMBS, amortization of certain deferred
costs and the merger of the CRIIMI Funds.
<PAGE>20
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Dividends to Common Shareholders
For the six months ended June 30, 1997, dividends of $0.70 per share were
paid to common shareholders. These dividends, which included long-term capital
gains, are as follows:
Dividend Record Date
-------- --------------
Quarter ended March 31, 1997 $ 0.35 March 20, 1997
Quarter ended June 30, 1997 $ 0.35 June 20, 1997
--------
$ 0.70
========
In March 1997, CRIIMI MAE successfully completed an underwritten public
offering of 5.069 million common shares at a price to the public of $15 5/8 per
share. The net offering proceeds were approximately $75 million. These
proceeds were used to temporarily reduce repurchase agreement financing pending
the purchase of additional Subordinated CMBS (as discussed in Note 6).
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 June 30, 1997.
As of March 31, 1997, the holder of the Series A Preferred Shares had
converted all the Series A Preferred Shares into shares of common stock and no
Series A Shares were outstanding. Dividends paid on the Series A Preferred
Shares totaled $50,848 for the three months ended March 31, 1997. No dividends
were paid on the Series A Preferred Shares for the three months ended June 30,
1997.
During the six months ended June 30, 1997, 480,900 Series B Preferred
Shares were converted into 1,098,564 shares of common stock, resulting in
1,934,100 Series B Preferred Shares outstanding as of June 30, 1997. Dividends
paid and accrued on Series B Preferred Shares totaled $3,316,017 for the six
months ended June 30, 1997.
In March 1997, CRIIMI MAE entered into an agreement with an institutional
investor pursuant to which the Company has the right to sell, and such investor
is obligated to purchase, up to 300,000 shares of a new series of cumulative
convertible preferred stock (Series C) through June 1998 at a price of $100 per
share. The preferred stock will be convertible into shares of common stock at
the option of the holders and is subject to redemption by CRIIMI MAE. As of
June 30, 1997, no shares have been issued under this agreement.
10. Obligations under Financing Facilities
The following table summarizes CRIIMI MAE's debt outstanding as of June 30,
1997 and December 31, 1996:
<PAGE>21
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
<TABLE>
<CAPTION>
Six months ended June 30, 1997
-----------------------------------------------------------------------------
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) $236,759,384 7.4% 237,000,000 7.4% Sept 2031
FNMA Funding Note (2) 152,100,768 7.3% 152,211,000 7.3% March 2035
CMOs (3) 186,666,274 7.3% 190,650,000 7.3% Jan 2033
Subordinated CMBS 142,000,000 7.6% 142,000,000 7.6% May 1998 -
March 2016
Repurchase Agreements -
Subordinated CMBS 238,644,933 7.0% 162,220,000 7.0% November 1997 -
March 1999
Bank Term Loan 4,550,000 1.7%(5) 4,590,636 1.7% Dec 1998
------------
Total $960,721,359
============
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1996
--------------------------------------------------------
Balance Eff. Rate Average Average
Type of Debt at year end at year end Balance Eff. Rate
- ------------ ----------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
Securitized Mortgage Obligations:
FHLMC Funding Note (1) $237,708,781 7.4% $238,700,000 7.4%
FNMA Funding Note (2) 157,607,340 7.3% 169,500,000 7.4%
CMOs (3) 194,906,248 7.3% 207,800,000 7.3%
Subordinated CMBS (4) 142,000,000 7.6% 4,300,000 7.6%
Repurchase Agreements -
Subordinated CMBS 241,137,588 6.8% 193,500,000 6.8%
Bank Term Loans 8,897,880 3.1%(5) 12,300,000 3.9%
------------
Total $982,257,837
============
<PAGE>22
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
(1) As of June 30, 1997 and December 31, 1996, the face amount of the note was $245,590,768 and $246,708,610, respectively, with
unamortized discount of $8,831,384 and $8,999,829, respectively. During the six months ended June 30, 1997 and 1996, discount
amortization of $168,445 and $165,552, respectively, were recorded as interest expense.
(2) As of June 30, 1997 and December 31, 1996, the face amount of the note was $154,621,908 and $160,250,349, respectively, with
unamortized discount of $2,521,140 and $2,643,009, respectively. During the six months ended June 30, 1997 and 1996, discount
amortization of $121,869 and $230,994, respectively, were recorded as interest expense. Additionally, as a result of one mortgage
prepayment, principal of approximately $5.1 million was paid down in April 1997.
(3) As of June 30, 1997 and December 31, 1996, the face amount of the note was $191,613,826 and $200,035,759, respectively, with
unamortized discount of $4,947,552 and $5,129,511, respectively. During the six months ended June 30, 1997 and 1996, discount
amortization of $181,959 and $106,795, respectively, were recorded as interest expense. Additionally, as a result of two mortgage
prepayments, principal of approximately $7.7 million was paid down in April 1997.
(4) Balance represents face amount of notes, as the issuance did not include any bond discount.
(5) The effective interest rate as of June 30, 1997 and December 31, 1996 includes the impact of a rate reduction agreement which
was in place from July 1995 through June 30,1997, providing for a reduction in the rate on a portion of the loan based on balances
maintained at the bank.
</TABLE>
Securitized Mortgage Obligations - Subordinated CMBS
- ----------------------------------------------------
In December 1996, CRIIMI MAE, through a wholly owned financing subsidiary,
issued three classes of fixed-rate bonds in an aggregate principal amount of
$142 million to refinance short-term, floating-rate debt which had been used to
finance the acquisition of Subordinated CMBS. The three classes of bonds issued
are collateralized by $449 million in aggregate face amount of Subordinated CMBS
evidencing direct or indirect interests in 12 separate segregated pools of
commercial and multifamily mortgage loans and/or participations and other
certificated interests in individual commercial and multifamily mortgage loans.
A portion of the remaining bonds issued in connection with the refinancing, with
an aggregate face amount of $307 million, were retained by affiliates of CRIIMI
MAE. These bonds have maturities matching those of the underlying collateral.
Through this transaction, CRIIMI MAE obtained a higher overall weighted
average credit rating for its securitized mortgage obligations than the weighted
average credit rating on the individual Subordinated CMBS that collateralize
this debt. Also, in conjunction with this refinancing, CRIIMI MAE obtained
repurchase agreement financing from two lenders in the aggregate amount of up to
$99 million. Proceeds from the issuance of these bonds and the additional
repurchase agreements were applied as follows: approximately $215 million was
used to pay down short-term, floating-rate repurchase agreements, approximately
$4 million was used to pay transaction costs and approximately $22 million was
made available for other corporate purposes.
Securitized Mortgage Obligations - Mortgage Security Collateral
- ---------------------------------------------------------------
During late 1995, 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. 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 originally applied as follows:
approximately $557 million was used to pay down short-term, floating-rate debt
facilities, approximately $8 million was used to pay transaction costs and
approximately $80 million was used to purchase Subordinated CMBS.
<PAGE>23
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 $246.5 million as of June 30, 1997 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 $201.6 million as
of June 30, 1997. GNMA Mortgage-Backed Securities with a fair value of
approximately $158.1 million as of June 30, 1997 are pledged as security for a
funding note payable to the Federal National Mortgage Association (the FNMA
Funding Note and, together with the FHLMC Funding Note, the Funding Notes).
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
June 30, 1997 and December 31, 1996.
Repurchase Agreements-Subordinated CMBS
- -----------------------------------------
As previously discussed, when purchasing Subordinated CMBS, CRIIMI MAE
generally finances, through repurchase agreements, approximately 75% and 70% of
the respective fair values of the BB and B rated tranches of Subordinated CMBS.
These repurchase agreements are either provided by the issuer of the CMBS pool
or through a master repurchase agreement, as discussed below. As of June 30,
1997, the repurchase agreements on Subordinated CMBS have maturity dates ranging
from November 1997 to March 1999 and have interest rates that are generally
based on the one-month London Interbank Offered Rate (LIBOR), plus a spread
ranging from 1.0% to 1.5%.
In early 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. As of June 30, 1997 and December 31, 1996, approximately $90 million and
$168 million, respectively, in borrowings were outstanding under this facility.
The aforementioned repurchase agreements are secured by the rated tranches
with an aggregate fair value of approximately $447 million as of June 30, 1997
and $348 million as of December 31, 1996. The repurchase agreements are
executed through a sale of securities with a simultaneous agreement to
repurchase them in the future at the same price plus a contracted rate of
interest. If the counterparty to the repurchase agreement defaults on its
obligation to sell the securities back to CRIIMI MAE, then CRIIMI MAE could
suffer an economic loss. At June 30, 1997, CRIIMI MAE had repurchase agreements
with German American Capital Corporation, Lehman Brothers Commercial Paper,
First Union National Bank and Nomura Bermuda, Ltd. which have such counterparty
credit risk.
Repurchase Agreements and Revolving Credit Facility -
Government Insured Mortgages
- -----------------------------------------------------
In May 1996, CRIIMI MAE renewed a financing facility with a lender 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
<PAGE>24
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
Securities, respectively, are pledged as collateral. No amounts were borrowed
during 1996 or the six months ending June 30, 1997 under this facility.
Bank Term Loans
- ---------------
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 Line of Credit
- ------------------------------
In December 1996, CRIIMI MAE entered into a $30 million unsecured working
capital line of credit provided by two lenders with a termination date of
December 31, 1998. Outstanding borrowings under this line of credit bear
interest at one-month LIBOR, plus a spread of 1.30%. No amounts were
outstanding under the line of credit as of June 30, 1997 and December 31, 1996.
Loan Origination Program Agreement
- ----------------------------------
In July 1996, CRIIMI MAE entered into a $200 million mortgage loan
origination program agreement with Citicorp Real Estate, Inc. ("Citicorp"). The
origination program is designed to create pools of multifamily and commercial
mortgage loans, either through origination or acquisition, of requisite size and
composition to facilitate the securitization of such pools through the issuance
of commercial mortgage obligations (CMO). Citicorp will fund a substantial
portion of the mortgage loans under the origination program. CRIIMI MAE will
service the mortgage loans and will facilitate any securitization of the loans.
In connection with any such securitization, CRIIMI MAE anticipates retaining the
Subordinated CMBS backed by these pools and an interest-only tranche of the
underlying mortgage loan payments, placing the senior tranches with other
investors and additionally retaining the right to act as master and special
servicer with respect to the entire pool of underlying mortgage loans.
<PAGE>25
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
Other Debt Related Information
- ------------------------------
In June 1997, CRIIMI MAE's management adopted and the Board of Directors
approved a change in CRIIMI MAE's mortgage asset acquisition policy requiring,
among other things: (1) maximum overall debt-to-equity ratio of 5.0 to 1.0, (2)
changes to the maximum debt-to-equity ratios for specific asset types based on
management's perceived risk of those assets and the related funding, (3)
interest rate protection agreements in a notional amount of at least 75% of the
outstanding floating-rate debt and (4)a new asset class for real estate assets.
This policy enables CRIIMI MAE to continue to utilize leverage in taking
advantage of mortgage asset acquisition opportunities while directing and
monitoring how CRIIMI MAE funds its purchases of Subordinated CMBS and other
mortgage assets.
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 75% of CRIIMI MAE's consolidated debt as of June 30, 1997.
Fluctuations in interest rates will continue to impact the value on that portion
of CRIIMI MAE's mortgage assets 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 CRIIMI MAE's cap
agreements expire, CRIIMI MAE will have interest rate risk to the extent
interest rates increase on any 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. 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 underlying assets, CRIIMI MAE would be required to provide additional
collateral in connection with its short-term, floating-rate borrowing
facilities. From time to time, the Company has been required to fund such
additional collateral needs. In each instance and currently, the Company 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. As previously discussed, in early 1996,
CRIIMI MAE entered into a three-year master repurchase agreement to finance
investments in rated 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 rated Subordinated CMBS. 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 six months ended June 30, 1997, CRIIMI MAE's weighted average cost
of borrowing, including amortization of discounts and deferred financing fees of
approximately $1.9 million, was approximately 7.68%. As of June 30, 1997,
CRIIMI MAE's debt-to-equity ratio was approximately 2.3 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
<PAGE>26
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Obligations under Financing Facilities - Continued
defined, may not exceed 5.0 to 1.0.
11. Interest Rate Hedge Agreements
CRIIMI MAE has entered into interest rate protection ("Caps") 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. None of
CRIIMI MAE's Caps are held for trading purposes. As of June 30, 1997, CRIIMI
MAE held Caps with a notional amount of approximately $435 million ($150 million
of which will expire in the second half of 1997). The remaining $285 million of
Caps are used to hedge current variable rate debt and variable rate debt
expected to be incurred throughout the year to fund the Company's planned
acquisition of Subordinated CMBS.
<PAGE>27
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Interest Rate Hedge Agreements - Continued
<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
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
100,000,000 April 8, 1997 April 10, 2000 6.6875% 1M LIBOR
- ------------
$435,000,000(a)
============
(a) CRIIMI MAE's designated interest rate protection agreements hedge CRIIMI MAE's floating-rate borrowing costs. As of June 30,
1997 total borrowings of approximately $243.2 million are hedged by the interest rate cap agreements.
(b) The weighted average remaining term for these interest rate cap agreements is approximately 1.1 years.
</TABLE>
CRIIMI MAE is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate protection 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 Caps are highly liquid. The Cap 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 Cap 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. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading
proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.
<PAGE>28
CRIIMI MAE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Litigation - Continued
In November 1996, each defendant filed an Answer to the Complaint.
Discovery proceedings began in December 1996 and are continuing. Management
believes the suit is without merit and does not expect the case to have a
material adverse financial impact on CRIIMI MAE.
<PAGE>29
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 or the Company") 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 is a full service commercial mortgage company structured as a
self-administered real estate investment trust (REIT). CRIIMI MAE's portfolio of
assets consists primarily of non-investment grade subordinated securities backed
by first mortgage loans on multifamily and other commercial real estate
("Subordinated CMBS") and interests in government insured or guaranteed
mortgages secured by multifamily housing complexes located throughout the United
States ("Government Insured Mortgage Assets"). CRIIMI MAE believes that its
concentration on acquiring Subordinated CMBS, together with its expertise as an
underwriter and servicer of commercial mortgage loans, enables the Company to
take advantage of the rapid growth in the securitization of debt backed by
income-producing commercial real estate. Before purchasing Subordinated CMBS,
CRIIMI MAE and its affiliates utilize their multifamily and commercial real
estate expertise to perform due diligence on the underlying collateral and
require that certain control mechanisms, such as the ability to monitor the
performance of the underlying mortgage loans, and control of workout/foreclosure
proceedings, are in place. CRIIMI MAE's principal objectives are to provide
increasing dividends to its shareholders and to enhance the value of CRIIMI
MAE's capital 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 real estate and financial professionals to take advantage of the
opportunities available for expanded acquisition of uninsured mortgage and
mortgage-related products and services.
CRIIMI MAE conducts its mortgage loan servicing and advisory operations
through its affiliate, CRIIMI MAE Services Limited Partnership (the "Services
Partnership"). The Services Partnership has been approved as a special servicer
by four major rating agencies. As of July 15, 1997, the Services Partnership
was responsible for certain servicing functions on a mortgage loan portfolio of
approximately $8.8 billion, as compared to approximately $4.0 billion as of July
1, 1996. CRIIMI MAE has increased its mortgage advisory and servicing
activities through its purchases of Subordinated CMBS by acquiring certain
servicing rights for the mortgage loans collateralizing the Subordinated CMBS.
In addition, the Services Partnership has been approved as a Master Servicer by
three major rating agencies. One rating agency issues an annual rating of
Master Servicer and the other two rating agencies issue the rating of Master
Servicer on a deal by deal basis. The addition of Master Servicing to the
Company's portfolio administration program provides an additional revenue stream
and gives the Company greater supervision over the mortgage loans that back a
securitization. CRIIMI MAE will generally acquire Subordinated CMBS only when
satisfactory arrangements exist which enable it to closely monitor the
underlying mortgage loans and provide CRIIMI MAE with workout/foreclosure
<PAGE>30
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
rights with respect to the underlying mortgage loans due to its status as
Special Servicer or Master Servicer. CRIIMI MAE believes that all
transactions entered into to date have had such satisfactory arrangements.
1997 Strategies
- ---------------
For 1997 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
opportunities for continued growth.
Specific strategies for 1997 and the program towards achieving strategies
are summarized below:
o Raise additional equity capital, and use the proceeds primarily to
purchase additional Subordinated CMBS. During March 1997, CRIIMI MAE
completed a public offering of common stock resulting in net equity
proceeds of approximately $75 million. The net proceeds were used
temporarily to pay-down repurchase agreement financing.
o CRIIMI MAE intends to purchase at least $250 million of Subordinated
CMBS using a combination of debt and equity. Through July 1, 1997,
the company purchased Subordinated CMBS having an aggregate face value
of approximately $163 million and an aggregate purchase price of $100
million using approximately $40 million in equity proceeds.
o CRIIMI MAE intends to increase its mortgage servicing portfolio
through the purchase of such additional Subordinated CMBS, which was
$8.8 billion as of July 1, 1997 as compared to $6.4 billion as of
February 1, 1997. CRIIMI MAE was rated as an "Acceptable" master
servicer of commercial mortgage assets in May 1997, which will enable
it to increase its servicing functions and servicing income. CRIIMI
MAE is the Master Servicer for the Mortgage Capital Funding Inc.
Multifamily Commercial Mortgage Pass-Through Certificates, Series
1997-MC1 CMBS pool, which was purchased on June 30, 1997 of which
CRIIMI MAE owns portions of the Subordinated tranches.
o CRIIMI MAE will continue to originate/acquire commercial mortgage
loans, which are intended to be pooled for securitization.
Additionally, CRIIMI MAE expanded its commercial mortgage origination
capabilities in the second quarter with the launch of its "no-lock"
loan program. The fixed-rate program allows borrowers the flexibility
to prepay loans at any time. The Company expects to retain the
Subordinated CMBS portion of these pools and interest-only tranche of
the underlying mortgage loan payments and to retain the right to act
as master and special servicer with respect to the entire pool of
underlying mortgage loans, thereby further increasing its servicing
portfolio.
o CRIIMI MAE will continue to explore alternatives that would provide
the Company with more financial flexibility and continue its plan to
replace a portion of its remaining short-term, floating-rate debt with
longer-term financing.
CRIIMI MAE believes that these strategies will result in continued growth
in income from uninsured mortgage assets, particularly Subordinated CMBS, as
well as growth from its mortgage servicing and origination operations. As
future events may alter these assumptions, no assurance can be given that these
strategies will succeed.
<PAGE>31
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
- ---------------------
1997 versus 1996
- ----------------
Tax Basis Income
----------------
CRIIMI MAE earned approximately $10.9 million in tax basis income available
to common shareholders for the three months ended June 30, 1997, a 42% increase
from approximately $7.7 million for the corresponding period in 1996. CRIIMI
MAE earned approximately $27.7 million in tax basis income for the six months
ended June 30, 1997, a 24% increase from approximately $22.4 million for the
corresponding period in 1996. On a primary share basis, recurring tax basis
income for the three months ended June 30, 1997 increased to $0.28 per share
from $0.26 per share for the corresponding period in 1996. On a primary share
basis, tax basis income for the six months ended June 30, 1997 increased to
$0.79 per weighted average share from $.74 for the corresponding period in 1996,
of which $0.57 and $0.47 per share, respectively, represented recurring tax
basis income.
The primary factor resulting in the net increase in tax basis recurring
earnings during the three and six months ended June 30, 1997 as compared to the
corresponding periods in 1996 was the net earnings associated with CRIIMI MAE's
growing portfolio of Subordinated CMBS. Partially offsetting this increase to
tax basis income was an increase in interest expense as further discussed under
Financial Statement Net Income and a decrease in mortgage interest earned due to
the prepayment of CRIIMI MAE mortgages during 1997 and 1996 and the sale of CRI
Liquidating's mortgage investments according to its business plan.
Financial Statement Net Income
------------------------------
Net income available to common shareholders for financial statement
purposes was approximately $8.9 million for the three months ended June 30,
1997, as compared to approximately $6.4 million for the corresponding period in
1996. Net income for financial statement purposes was approximately $26.1 for
the six months ended June 30, 1997, a 46% increase from approximately $17.9
million for the corresponding period in 1996. On a primary earnings per share
basis, financial statement net income for the three months ended June 30, 1997
increased to $0.23 per weighted average common share from $0.21 per weighted
average common share for the corresponding period in 1996, all of which was
recurring income. On a per share basis, financial statement net income for the
six months ended June 30, 1997 increased to $0.73 per weighted average common
share from $.59 per weighted average common share for the corresponding period
in 1996, of which $0.46 and $0.41 per share, respectively, was recurring income.
Descriptions of the significant changes in financial statement net income are
discussed below.
Mortgage Income
- ---------------
Mortgage income decreased by approximately $2.0 million or 14% to $12.3
million for the three months ended June 30, 1997 from $14.3 million for the
corresponding period in 1996. Mortgage investment income decreased by
approximately $4.2 million or 14% to $24.9 million for the six months ended June
30, 1997 from $29.1 million for the corresponding period in 1996. These
decreases were principally due to the disposition of CRI Liquidating's mortgages
(according to its business plan) in 1996 and 1997. Also contributing to the
decrease in mortgage income was the prepayment of mortgages held by CRIIMI MAE
and its wholly owned subsidiaries (aggregating approximately $12.8 million and
$51.9 million of amortized cost, respectively) during the six months ended June
30, 1997 and the year ended December 31, 1996, respectively.
<PAGE>32
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
While CRIIMI MAE and its financing subsidiaries do not intend to sell any
of their mortgages, 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 1997, its remaining 11 mortgages were
disposed of generating net proceeds of approximately $55 million. On April 23,
1997, CRI Liquidating Shareholders approved the adoption of a plan of complete
liquidation and dissolution of CRI Liquidating.
Income from Subordinated CMBS
- -----------------------------
Income from Subordinated CMBS increased by approximately $7.7 million or
79% to $17.5 million for the three months ended June 30, 1997 from $9.8 million
for the corresponding period in 1996. Income from Subordinated CMBS increased
by approximately $16.3 million or 91% to $34.3 million for the six months ended
June 30, 1997 from $18.0 million for the corresponding period in 1996. These
increases were the result of the acquisition of Subordinated CMBS at purchase
prices aggregating approximately $81 million during the second quarter of 1997
and $285 million during 1996, $228 million of which were purchased during the
fourth quarter.
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 mortgage assets. This
currently results in income which is lower for financial statement purposes than
for tax purposes. Based on the timing and amount of future credit losses and
certain other assumptions estimated by management, as discussed below, the
estimated weighted average unleveraged yield over the expected average life of
CRIIMI MAE's Subordinated CMBS for financial statement purposes as of June 30,
1997 was approximately 11.7%. Although there can be no assurance, the estimated
weighted average leveraged yield over the expected life of CRIIMI MAE's existing
Subordinated CMBS for financial statement purposes as of June 30, 1997 is
approximately 23%. 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.
CRIIMI MAE's estimated returns on its Subordinated CMBS are based upon a
number of assumptions that are subject to certain business and economic
uncertainties and contingencies. Examples of these include the prevailing
interest rates on that portion of the Subordinated CMBS which has been financed
with floating rate debt, interest payment shortfalls due to delinquencies on the
underlying mortgage loans, the ability to renew repurchase agreements and the
terms of any such renewed agreements and the availability of alternative
financing. Further examples include the timing and magnitude of credit losses
on the mortgage loans underlying the Subordinated CMBS that are a result of the
general condition of the real estate market (including competition for tenants
and their related credit quality) and changes in market rental rates. As these
uncertainties and contingencies are difficult to predict and are subject to
future events which may alter these assumptions, no assurance can be given that
the estimated yields, discussed above and elsewhere herein, will be achieved.
In making acquisitions of Subordinated CMBS, CRIIMI MAE applies its
experience in underwriting multifamily and other commercial real estate to
perform extensive due diligence on the properties collateralizing the loans
underlying the Subordinated CMBS. The Company's employees have broad experience
underwriting and servicing various types of performing and nonperforming income-
producing real estate, including multifamily, retail and hotel properties.
CRIIMI MAE "re-underwrites" substantially all of the mortgage loans in a
prospective pool by reviewing historical and current operating records of the
PAGE>33
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
underlying real estate assets, appraisals, environmental studies, market studies
and architectural and engineering studies, all to independently assess the
stabilized performance level of the underlying properties. In addition, the
Company conducts site visits at a substantial number of the properties. The
Company stresses the adjusted net operating incomes of the properties to
simulate certain recessionary scenarios and applies market or greater
capitalization rates to assess loan quality.
Equity In Earnings From Investments
- -----------------------------------
Equity in earnings from investments decreased by approximately $119,000 or
14% to approximately $731,000 for the three months ended June 30, 1997 as
compared to $850,000 for the corresponding period in 1996. These decreases were
primarily attributable to a reduction in earnings from the AIM Funds principally
due to a lower asset base. These decreases were partially offset by increased
net income from Services Partnership. Equity in earnings from investments did
not change materially for the six months ended June 30, 1997 and 1996.
Other Investment Income
- -----------------------
Other investment income decreased by approximately $129,000 or 27% to
approximately $349,000 for the three months ended June 30, 1997 as compared to
approximately $478,000 for the corresponding period in 1996. Other investment
income decreased by approximately $429,000 or 25% to approximately $1.3 million
for the six months ended June 30, 1997 as compared to approximately $1.7 million
for the corresponding period in 1996. These decreases were primarily
attributable to decreases in short-term interest income earned by CRIIMI MAE
Financial Corporation III during 1997 as compared to 1996 due to the investment
of 1996 prepayment proceeds pending debt payoff.
Interest Expense
- ----------------
Interest expense increased by approximately $1.3 million or 8% to
approximately $17.1 million for the three months ended June 30, 1997 from
approximately $15.8 million for the corresponding period in 1996. Interest
expense increased by approximately $4.0 million or 13% to $35.4 million for the
six months ended June 30, 1997 as compared to $31.4 million for the
corresponding period in 1996. These increases were principally a result of
additional amounts borrowed in connection with the acquisition of Subordinated
CMBS during the last quarter of 1996 and the first six months of 1997, and, to a
lesser extent, the higher cost of debt on the $142 million fixed-rate financing
of December 1996. These increases were partially mitigated by temporary
paydowns of repurchase agreements during the second quarter of 1997 pending the
purchase of additional Subordinated CMBS.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by approximately $670,000 or
34% to approximately $2.6 million for the three months ended June 30, 1997 as
compared to approximately $2.0 million for the corresponding period in 1996.
General and administrative expenses increased by approximately $1.7 million or
50% to $5.0 million for the six months ended June 30, 1997 as compared to $3.4
million for the corresponding period in 1996. These increases were primarily
due to the growth of CRIIMI MAE's commercial mortgage operations during 1996 and
1997.
<PAGE>34
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Fees to Related Party
- ---------------------
Total fees to related party decreased by approximately $70,000 or 100% to
$0 for the three months ended June 30, 1997. Total fees to related party
decreased by approximately $230,000 or 95% to approximately $11,500 for the six
months ended June 30, 1997 as compared to approximately $241,000 for the
corresponding period in 1996. The decrease in fees to related party was due to
a reduction in the annual fees payable by CRI Liquidating resulting from its
reduced asset base during 1996 and 1997. As a result of the first quarter
disposition of the remaining CRI Liquidating mortgages, no annual fees were paid
during the three months ended June 30, 1997 and no annual fees will be paid in
future periods.
Gains/Losses on Mortgage Dispositions
- -------------------------------------
Net gains on mortgage dispositions was approximately $95,000 for the three
months ended June 30, 1997 as compared to a loss of approximately $32,000 for
the corresponding period in 1996. Net gains on mortgage dispositions increased
by $7.8 million or 84% to $17.2 million for the six months ended June 30, 1997
as compared to $9.4 million for the corresponding period in 1996. Gains or
losses on mortgage dispositions are based on the number, carrying amounts and
proceeds of mortgages disposed of during the period. The proceeds realized from
the disposition of mortgage assets are based on the net coupon rates of the
specific mortgages disposed of in relation to prevailing long-term interest
rates at the date of disposition. During the three months ended March 31, 1997,
11 CRI Liquidating mortgage assets were disposed of resulting in financial
statement gains of approximately $14.1 million and tax basis gains of
approximately $14.0 million. In addition, during the first and second quarters
of 1997, CRI Liquidating disposed of its interest in two limited partnership
participation agreements and a portion of its interest in a third limited
partnership participation agreement which resulted in net gains for financial
statement purposes of approximately $3.2 million and net tax basis losses of
approximately $250,000. This compares to the disposition of 11 CRI Liquidating
mortgage assets during the corresponding period in 1996, which generated net
financial statement gains of approximately $9.7 million and tax basis gains of
approximately $14.5 million. CRI Liquidating did not dispose of any limited
partnership participation agreements during the six months ended June 30, 1996.
These increases were partially offset by three prepayments of mortgage assets
held by CRIIMI MAE and its subsidiaries during the six months ended June 30,
1997, which resulted in financial statement net losses of approximately $161,000
and tax basis net losses of approximately $70,000 as compared to the disposition
of four CRIIMI MAE mortgages during the corresponding period in 1996 resulting
in financial statement losses of approximately $304,000 and tax basis losses of
approximately $104,000.
<PAGE>35
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Cash Flow
- ---------
1997 versus 1996
- ----------------
Net cash provided by operating activities increased for the six months
ended June 30, 1997 as compared to the corresponding period in 1996 primarily
due to increased net income, as previously discussed. Partially offsetting the
increase to net income was a net increase in receivables and other assets of
approximately $4.3 million, the majority of which is due to an increase in
Subordinated CMBS interest receivable.
Net cash provided by investing activities decreased for the six months
ended June 30, 1997 as compared to the corresponding period in 1996 primarily as
a result of decreased proceeds from mortgage dispositions and increased
purchases of Subordinated CMBS.
Net cash used in financing activities decreased for the six months ended
June 30, 1997 as compared to the corresponding period in 1996 primarily due to
proceeds from the common stock offering in March 1997. Partially offsetting the
increase was increased principal payments on debt obligations including
temporary principal paydowns using proceeds from the common stock issuance
pending purchases of Subordinated CMBS. Additionally, dividends paid in the
first half of 1997 increased as compared to 1996.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Financial Flexibility
- --------------------
To meet its capital requirements, CRIIMI MAE uses proceeds from long-term,
fixed-rate debt refinancings, repurchase agreements, other borrowings, an
unsecured working capital line of credit and issuances of capital stock. In
general, CRIIMI MAE initially funds a significant portion of its Subordinated
CMBS acquisitions with short term, variable rate debt. CRIIMI MAE's strategy is
to refinance at least 50% of this short term variable rate acquisition debt with
fixed rate debt having maturities that match those of the underlying collateral
through resecuritizations of its Subordinated CMBS. In December 1996, CRIIMI
MAE completed the first resecuritization of its Subordinated CMBS portfolio,
which refinanced $142 million of short term variable rate debt with fixed rate
match-funded debt, thereby substantially reducing the impact of changing
interest rates on that portion of its debt. The Company intends to enter into a
similar resecuritization or refinancing approximately every two years after
accumulating a sufficient pool of Subordinated CMBS. Additionally, the Company
replaced other floating-rate debt with fixed rate match-funded debt through
three separate refinancings during the second half of 1995. As of June 30,
1997, approximately 75% of CRIIMI MAE's consolidated debt was fixed rate.
For the six months ended June 30, 1997, CRIIMI MAE's weighted average cost
of borrowing (including amortization of discounts and deferred financing fees of
approximately $1.9 million) was approximately 7.68%. As of June 30, 1997,
CRIIMI MAE's debt-to-equity ratio was approximately 2.3 to 1.0. Under certain
of CRIIMI MAE's existing debt facilities, CRIIMI MAE's debt-to-equity ratio, as
defined, may not exceed 5.0 to 1.0.
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 floating-
rate debt. When CRIIMI MAE's cap agreements expire, CRIIMI MAE will have
interest rate risk to the extent interest rates increase on any 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
<PAGE>36
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
requires that at least 75% of floating-rate debt be hedged and as of July 1,
1997, 100% of CRIIMI MAE's outstanding floating-rate debt is hedged with
interest rate cap agreements that have weighted average strike price of 6.3%.
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 underlying assets,
CRIIMI MAE would be required to provide additional collateral in connection with
its short-term, floating-rate borrowing facilities. From time to time, the
Company has been required to fund such additional collateral needs. In each
instance and currently, the Company has had adequate unencumbered assets to meet
its operating, investing and financing requirements, and management continually
monitors the levels of unencumbered collateral.
The Company's ability to achieve its objectives depends not only on its
ability to borrow money in sufficient amounts and on favorable terms but also on
its ability to renew or replace on a continuous basis its maturing short term
borrowings. As previously discussed, in early 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. CRIIMI MAE's business strategy relies in part on short-term borrowings to
fund acquisitions of long-term mortgage assets including Subordinated CMBS. If
CRIIMI MAE is unable to fund additional collateral needs as discussed above, or
renew or replace maturing borrowings, the Company could be required to sell,
under adverse market conditions, a portion of its mortgage assets, and could
incur losses as a result. Furthermore, no active secondary market for
Subordinated CMBS currently exists and there can be no assurance that one will
develop, thereby possibly limiting the Company's ability to dispose of its
Subordinated CMBS in such situations. Also, if CRIIMI MAE is unable to complete
additional resecuritizations or other refinancings of its Subordinated CMBS, the
Company would be required to rely more heavily on short-term borrowings, such as
repurchase agreements or other sources of financing, which may be on less
favorable terms.
CRIIMI MAE's repurchase agreements are executed through a sale of
securities with a simultaneous agreement to repurchase them in the future at the
same price plus a contracted rate of interest. If the counterparty to the
repurchase agreement defaults on its obligation to sell the securities back to
CRIIMI MAE, then CRIIMI MAE could suffer an economic loss. At June 30, 1997,
CRIIMI MAE had repurchase agreements with German American Capital Corporation,
Lehman Brothers Commercial Paper, First Union National Bank and Nomura Bermuda,
Ltd.
Dividends
- ---------
CRIIMI MAE's principal objectives are to enhance the value of CRIIMI MAE's
capital stock and to provide increasing dividends to its shareholders. Tax
basis income, as well as financial statement net income and recurring earnings,
increased for the three months ended June 30, 1997 as compared to the
corresponding periods in 1996 and, as a result, total dividends increased.
Specifically, common stock dividends were $0.35 per share in each of the first
two quarters of 1997 as compared to $0.30 for the corresponding periods in 1996.
Dividends paid on Series B Preferred Shares were $0.797 per share for the three
months ended March 31, 1997 and June 30, 1997. Dividends totaling $50,848 were
paid on the Series A Preferred Shares for the three months ended March 31, 1997.
There were no Preferred Shares outstanding prior to the third quarter of 1996
and no Series A Preferred Shares outstanding subsequent to March 31, 1997.
<PAGE>37
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Although the mortgage assets 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. Some of the factors which impact CRIIMI MAE's dividend include (i) the
level of income earned on CRIIMI MAE's or its subsidiaries' mortgage security
collateral depending on prepayments, defaults, etc., (ii) the level of income
earned on uninsured mortgage assets, such as Subordinated CMBS and originated
loans, which varies depending on prepayments, defaults, etc. (iii) the
fluctuating yields on short-term debt and the rate at which CRIIMI MAE's LIBOR-
based debt is priced, as well as the rate CRIIMI MAE pays on its refinanced
debt, (iv) 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, (v) the yield at which principal from scheduled monthly
mortgage asset payments, mortgage dispositions and distributions from its
subsidiaries can be reinvested, (vi) changes in operating expenses, (vii)
dividends paid on preferred shares and (viii) through 1997, the distributions
which CRIIMI MAE receives on its CRI Liquidating shares. CRIIMI MAE's dividends
will also be impacted by the timing and amounts of cash flows attributable to
its other lines of business - mortgage servicing, advisory and origination
services.
REIT STATUS
- -----------
CRIIMI MAE has qualified and intends to continue to qualify as a REIT under
Sections 856-860 of the Internal Revenue Code. As a REIT, CRIIMI MAE does not
pay taxes at the corporate level. Qualification for treatment as a REIT
requires CRIIMI MAE to meet certain criteria, including certain requirements
regarding the nature of their ownership, assets, income and distributions of
taxable income. CRIIMI MAE however, may be subject to tax at normal corporate
rates on net income or capital gains not distributed.
Investment Company Act
- ----------------------
The Company intends to conduct its business so as not to become regulated
as an investment company under the Investment Company Act of 1940, as amended
(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"), to qualify for this exemption, CRIIMI MAE, among
other things, must maintain at least 55% of its assets in Qualifying Interests.
The Company will generally acquire Subordinated CMBS only when such mortgage
assets are collateralized by pools of first mortgage loans, when the Company can
monitor the performance of the underlying mortgage loans through loan management
and servicing rights, and when the Company has appropriate workout/foreclosure
rights with respect to the underlying mortgage loans. When such arrangements
exist, CRIIMI MAE believes that the related Subordinated CMBS constitute
Qualifying Interests for purposes of the Investment Company Act. Therefore,
CRIIMI MAE believes that it should not be required to register as an "investment
company" under the Investment Company Act as long as it continues to invest
primarily in such Subordinated CMBS and/or in other Qualifying Interests.
However, if the SEC or its staff were to take a different position with respect
to whether CRIIMI MAE's Subordinated CMBS constitute Qualifying Interests, the
Company could be required to modify its business plan so that it would not meet
the requirements for registering G1 as an investment company or to register as
an investment company, both of which may adversely affect the Company.
<PAGE>38
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
OTHER EVENTS
- ------------
In June 1995, Edge Partners, L.P. (the Plaintiff), derivatively on behalf
of CRIIMI MAE, filed a Derivative Complaint in the District Court of Maryland,
Southern Division. This complaint was dismissed in December 1995. The
Plaintiff filed a First Amended Class and Derivative Complaint (the Complaint)
in February 1996. The Complaint names as defendants each of the Directors who
served on the board at the time of the Merger and CRIIMI MAE as a nominal
defendant. Each of the Directors has an indemnity from CRIIMI MAE.
Count I of the complaint alleges violations of Section 14(a) of the
Securities Exchange Act of 1934 for issuing a materially false and misleading
proxy in connection with the Merger and brings such count individually on its
own behalf and asks the court to certify such count as a class action. Count II
alleges a breach of fiduciary duty owed to CRIIMI MAE and its shareholders and
purports to bring such count derivatively in the right of and for the benefit of
CRIIMI MAE. Through the Complaint, the Plaintiff seeks, among other relief,
that unspecified damages be accounted to CRIIMI MAE, that the stockholder vote
in connection with the Merger be null and void, and that certain salaries and
other remuneration paid to the Directors be returned to CRIIMI MAE.
In November 1996, each defendant filed an Answer to the Complaint.
Discovery proceedings began in December 1996 and are continuing. Management
believes the suit is without merit and does not expect the case to have a
material adverse financial impact on CRIIMI MAE.
<PAGE>39
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>40
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>41
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on form 8-K were filed on May 23, 1997 for the quarter ended June
30, 1997.
The exhibits filed as part of this report are listed below:
Exhibit No. Description
---------- -----------
27 Financial Data Schedule
<PAGE>42
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.
July 25, 1997 /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 INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,884
<SECURITIES> 1,266,352
<RECEIVABLES> 69,812
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,390,110
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
19
<COMMON> 387
<OTHER-SE> 414,134
<TOTAL-LIABILITY-AND-EQUITY> 1,390,110
<SALES> 0
<TOTAL-REVENUES> 79,416
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,500
<LOSS-PROVISION> 176
<INTEREST-EXPENSE> 35,388
<INCOME-PRETAX> 29,512
<INCOME-TAX> 0
<INCOME-CONTINUING> 29,512
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<EPS-PRIMARY> .73
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