Item 1. Business.
Certain statements contained in this Annual Report on Form 10-K constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. These forward-looking statements may be identified by reference to a future period(s) or by the use of forward-looking terminology, such as "may", "will", "intend", "should", "expect", "anticipate", "estimate", or "continue" or the negatives thereof or other comparable terminology. The Company's (as hereinafter defined) actual results could differ materially from those anticipated in such forward-looking statements due to a variety of factors, including, but not limited to, changes in national, regional or local economic environments, competitive products and pricing, government fiscal and monetary policies, changes in prevailing interest rates, the course of negotiations, the fulfillment of contractual conditions, factors inherent to the valuation and pricing of interests in commercial mortgage-backed securities, credit risk management, asset/liability management, the financial and securities markets, the availability of and costs associated with the sources of liquidity, other factors generally understood to affect the real estate acquisition, mortgage and leasing markets and security investments, and other risks detailed in the Company's registration statement on Form S-11 (File No. 333-42629), as amended, filed with the Securities and Exchange Commission (the "SEC"), and declared effective on April 23, 1998, the Company's quarterly reports on Form 10-Q filed with the SEC, and other filings made by the Company with the SEC. The Company does not undertake, and specifically disclaims any obligation, to publicly release the results of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
General.
Chastain Capital Corporation (the "Company") is a Georgia corporation that was organized on December 16, 1997 and that plans to make an election to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code") commencing with its first REIT taxable year ended on December 31, 1998. As a REIT, the Company generally is not subject to federal income taxation on that portion of its income that it distributes currently to its shareholders, provided that it distributes at least 95% of its taxable income (excluding net capital gains) to its shareholders annually and meets certain other REIT tests for qualification as a REIT under the Code. The Company was initially capitalized on December 16, 1997 through the sale of 100 shares of common stock, par value $.01 per share ("Common Stock") for an aggregate purchase price of $1,000.
The Company incorporated and capitalized two wholly owned subsidiaries, Chastain GP Holdings, Inc. (the "General Partner") and Chastain LP Holdings, Inc. (the "Initial Limited Partner") which organized and capitalized Chastain Investments, L.P. (the "Operating Partnership"), a Georgia limited partnership through which the business of the Company is conducted. Because the Company indirectly owns 100% of the partnership interests in the Operating Partnership, the Operating Partnership is disregarded as a separate entity from the Company for federal income tax purposes unless a third party other than either (i) the Company or (ii) a qualified REIT subsidiary of the Company is admitted as a partner in the Operating Partnership. The Company organized the Operating Partnership to provide potential sellers of assets with the opportunity to transfer those assets to the Company in a tax-deferred exchange.
The General Partner engaged ERE Yarmouth, Inc. ("ERE Yarmouth"), a wholly-owned indirect subsidiary of Lend Lease Corporation Limited ("Lend Lease Corporation") to manage and advise the Company's business and investment affairs. On July 13, 1998, Lend Lease Corporation changed the name of ERE Yarmouth to Lend Lease Real Estate Investments, Inc. ("Lend Lease" or the "Manager"). Lend Lease continues to manage and advise the Company.
Initial Public Offering.
The Company offered to the public 7,380,000 shares of Common Stock at $15.00 per share in an initial public offering (the "Offering") which commenced in April 1998. Gross proceeds from the Offering were $110,700,000 and net proceeds to the Company were $102,951,000. Additional public offering costs of $1,215,750 were incurred in connection with the Offering.
The Company also issued, pursuant to two separate private placements, an aggregate of 897,678 shares of Common Stock to Lend Lease Investment Holdings, Inc. ("LLIH"), (formerly ERE Yarmouth Investment Holdings, Inc.), an indirect, wholly-owned subsidiary of Lend Lease, and 700,000 shares of Common Stock to FBR Asset Investment Corporation, an affiliate of Friedman, Billings, Ramsey & Co., Inc. (lead underwriter of the Company's Offering), each of which closed concurrently with the closing of the Offering, at $13.95 per share, with total proceeds to the Company of $22,287,608.
Business of the Company.
The Company was organized to originate commercial and multifamily Mortgage Loans ("Mortgage Loans") for the purpose of securitizing the loans by issuing collateralized mortgage obligations ("CMOs") and retaining residual interests in the Mortgage Loans subject to the CMO debt. The Company also was organized to acquire subordinated interests in commercial mortgage-backed securities ("CMBS"), originate and acquire loans on real property that are subordinated to first lien Mortgage Loans ("Mezzanine Investments") and acquire real property and other real estate related assets.
Mortgage Loans consist of whole loan originations collateralized by real estate assets to which an investor has first priority to cash flow.
Commercial mortgage-backed securities represent an ownership interest in a securitized pool of commercial Mortgage Loans. The most basic mortgage-backed securities ("MBS"), known as "Pass-Through Certificates," or participation certificates, represent a direct ownership interest in a trust comprised of a pool of Mortgage Loans. The trusts are typically organized to issue CMOs or certificates of Real Estate Mortgage Investment Conduits ("REMICs").
CMOs and REMICs are similar types of securities that allow cash flows to be split so that different classes of securities with different maturities, coupons and risk profiles may be created. They may be collateralized by a single Mortgage Loan or a pool of loans. The key feature is the prioritization of the cash flows among several different classes of bondholders. This mechanism creates a series of bonds with varying maturities, interest coupons and risk profiles that appeal to different investors. Holders of the first tranche receive all principal paid on the mortgages until that tranche is fully retired, at which point the holders of the second tranche begin to receive principal payments. Holders of the last tranche receive principal only when the previous classes have been fully retired.
Mezzanine Investments are investments that are subordinated to first lien Mortgage Loans on commercial and multifamily real estate. Mezzanine Mortgage Loans generally provide the right to receive a stated interest rate on the loan balance and may also include a percentage of gross revenues from the property, payable on an ongoing basis, and/or a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan, or otherwise would allow an investor to charge an interest rate that would provide an attractive risk-adjusted return. Mezzanine Investments may also take the form of preferred equity, which will have a claim against both the operating cash flow and liquidation proceeds from the specific real estate assets.
Investment Guidelines
The Company announced in October 1998 that it would cease acquiring any additional assets or funding any additional loans in order to focus on stabilizing its existing assets and improving its liquidity position. The Board of Directors is currently reviewing the strategic alternatives available to the Company with respect to its remaining assets. The discussion below describes the principal categories of assets that the Company was authorized to acquire under its investment guidelines up until October 1998. While the investment guidelines are currently suspended, they are presented below to describe the environment the Manager was operating in and might operate in if the suspension is terminated. All investment guidelines may be amended from time to time by the Board of Directors.
The Manager is authorized to commit the Company contractually to aggregate investments in any calendar quarter up to $250,000,000 without the approval of the Board of Directors. In addition, in any calendar quarter the Manager may contractually commit the Company to purchase up to a specified aggregate amount in each category of Real Estate Related Assets, as set forth below. Commencing on April 28, 1999, the Manager must have approval by the Board of Directors to invest more than 45% of the Company's aggregate assets in any single region of the United States, or in any individual property type. In addition, after such date the Manager will need Board of Directors approval to invest in excess of 45% of the total assets of the Company in any single category of assets described below.
Subordinated Interests. The Company has the authority to originate commercial whole loans for the purpose of securitizing such pools of such loans and retaining non-investment grade subordinated interests. Mortgage-backed securities ("MBS") typically are divided into two or more classes, sometimes called "tranches." The senior classes are higher "rated" securities, which would be rated by independent agencies from low investment grade "BBB" to higher investment grade "AA" or "AAA." The junior, subordinated classes typically would include a lower rated, non-investment grade "BB" and "B" class, and an unrated, higher-yielding, credit support class (the "Subordinated Interest," which generally is required to absorb the first losses on the underlying mortgage loans). The Manager may contractually commit the Company to aggregate Mortgage Loans up to $150 million, or $30 million for any individual transaction, in any calendar quarter. Any investments outside of these guidelines must be approved in advance by the Board of Directors.
MBS generally are issued either as CMOs or Pass-Through Certificates. CMOs are debt obligations of special purpose corporations, owner trusts or other special purpose entities secured by commercial mortgage loans or MBS. CMOs and Pass-Through Certificates may be issued or sponsored by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage bankers, commercial banks, investment banks and other entities. MBS are not guaranteed by an entity having the credit status of a governmental agency or instrumentality and generally are structured with one or more of the types of credit enhancement described below. In addition, MBS may be illiquid.
In most mortgage loan securitizations, a series of MBS is issued in multiple classes in order to obtain investment-grade ratings for the senior classes and thus increase their marketability. Each class of MBS may be issued with a specific fixed or variable coupon rate and has a stated maturity or final scheduled distribution date. Principal prepayments on the mortgage loans comprising the collateral may cause the MBS to be retired substantially earlier than their stated maturities or final scheduled distribution dates
although, with respect to commercial mortgage loans, there generally are penalties for or limitations on the ability of the borrower to prepay the loan. Interest is paid or accrued on MBS on a periodic basis, typically monthly.
The credit quality of MBS depends on the credit quality of the underlying mortgage collateral. Among the factors determining the credit quality of the underlying Mortgage Loans will be the ratio of the Mortgage Loan balances to the value of the properties securing the Mortgage Loans, the purpose of the Mortgage Loans (e.g., refinancing or new purchase), the amount and terms of the Mortgage Loans, the geographic diversification of the location of the properties and, in the case of commercial Mortgage Loans, the credit-worthiness of tenants.
Moreover, the principal of and interest on the underlying mortgage loans may be allocated among the several classes of a MBS in many ways, and the credit quality of a particular class results primarily from the order and timing of the receipt of cash flow generated from the underlying Mortgage Loans. Subordinated Interests carry significant credit risks. Typically, in a "senior-subordinated" structure, the Subordinated Interests provide credit protection to the senior classes by absorbing losses from loan defaults or foreclosures before such losses are allocated to senior classes. Moreover, typically, as long as the more senior tranches of securities are outstanding, all prepayments on the Mortgage Loans generally are paid to those senior tranches. In some instances, particularly with respect to Subordinated Interests in commercial securitizations, the holders of Subordinated Interests are not entitled to receive scheduled payments of principal until the more senior tranches are paid in full. Because of this structuring, Subordinated Interests in a typical securitization are subject to a substantially greater risk of non-payment than are those more senior tranches. Accordingly, the Subordinated Interests are assigned lower credit ratings, or no ratings at all. Neither the Subordinated Interests nor the underlying Mortgage Loans are guaranteed by agencies or instrumentalities of the U.S. government or by other governmental entities and, accordingly, are subject to credit risks.
As a result of the typical "senior-subordinated" structure, the Subordinated Interest will be extremely sensitive to losses on the underlying Mortgage Loans. For example, if the Company owns a $10 million Subordinated Interest in an MBS consisting of $100 million of underlying mortgage loans, a 7% loss on the underlying mortgage loans will result in a 70% loss on the Subordinated Interest. Accordingly, the holder of the Subordinated Interest is particularly interested in minimizing the loss frequency (the percentage of the loan balances that default over the life of the Mortgage Collateral) and the loss severity (the amount of loss on a defaulted mortgage loan, i.e., the principal amount of the mortgage loan unrecovered after applying any recovery to the expenses of foreclosure and accrued interest) on the underlying Mortgage Loans.
The loss frequency on a pool of mortgage loans will depend upon a number of factors, most of which will be beyond the control of the Company or the applicable servicer. Among other things, the default frequency will reflect broad conditions in the economy generally and real estate particularly, economic conditions in the local area in which the underlying property is located, the loan-to-value ratio of the mortgage loan, the purpose of the loan, and the debt service coverage ratio. The loss severity will depend upon many of the same factors described above, and will also be influenced by the servicer's ability to foreclose on the defaulted mortgage loan and sell the underlying mortgaged property.
The underwriting standards used by the Company in evaluating Mortgage Loans include a review of (i) the underlying collateral of each Mortgage Loan, including property characteristics, location and credit-worthiness of tenants, (ii) the borrower and manager's ability to manage the
property and make debt service payments, (iii) the relative principal amounts of the loan, including the loan-to-value and debt service coverage ratios and (iv) the Mortgage Loan's purpose and documentation. Such evaluation includes engaging third party appraisal, environmental and engineering firms to prepare independent reports. The Company's Mortgage Loans have consisted primarily of assets backed by first liens on commercial property.
Commercial Mortgage-Backed Securities. The Manager is authorized to contractually commit the Company to aggregate CMBS up to $75 million, or $75 million for any individual transaction, in any calendar quarter. Any investments outside of these guidelines must be approved in advance by the Board of Directors. CMBS are backed generally by a more limited number of commercial or multifamily Mortgage Loans with larger principal balances than those of single family residential Mortgage Loans. As a result, a loss on a single Mortgage Loan underlying a CMBS will have a greater negative effect on the yield of such CMBS, especially the Subordinated Interests in such CMBS.
Before acquiring Subordinated Interests, the Company performs certain credit underwriting and stress testing to attempt to evaluate future performance of the Mortgage Collateral supporting the CMBS which will include (i) a review of the underwriting criteria used in making Mortgage Loans comprising the Mortgage Collateral for CMBS, (ii) a review of the relative principal amounts of the loans, their loan-to-value and debt service coverage ratios as well as the Mortgage Loans' purpose and documentation, (iii) where available, a review of the historical performance of the loans originated by the particular originator, (iv) in the case of the CMBS, some level of reunderwriting the underlying Mortgage Loans, as well as selected site visits and (v) a review of independent third party appraisal, environmental and engineering reports.
Real Properties. The Company's policy is to conduct an investigation and evaluation of real property before purchasing such property. Evaluations of potential properties are conducted primarily by the Manager's employees who specialize in the analysis of underperforming or distressed assets, often with further specialization based on geographic or collateral-specific factors. It is expected that the Manager's employees will use third parties, such as brokers who are familiar with the property's type and location, to assist them in conducting an evaluation of the value of the property, and depending on the circumstances, may use subcontractors, such as local counsel and engineering and environmental experts, to assist in the evaluation and verification of information and the gathering of other information not previously made available by the potential seller. The amount offered by the Company generally is the price that the Manager estimates is sufficient to generate an acceptable risk-adjusted return on the Company's investment. The Manager may contractually commit the Company to aggregate real properties up to $75 million, or $25 million for any individual transaction, in any calendar quarter. Any investments outside of these guidelines must be approved in advance by the Board of Directors.
Mezzanine Investments. The Company is authorized to make investments that are subordinated to first lien Mortgage Loans on commercial and multifamily real estate. For example, on a commercial property subject to a first lien Mortgage Loan with a principal balance equal to 70% of the value of the property, the Company could lend the owner of the property (typically a partnership) an additional 15% to 20% of the value of the property. Typically the loan would be secured, either by the property subject to the first lien (giving the Company a second lien position) or a partnership interest in the owner. If a partnership interest is pledged, the Company would be in a position to take over the operation of the property in the event of a default on the loan. These Mezzanine Investments generally provide the Company with the right to receive a stated interest rate on the loan balance and may also include a percentage of gross revenues from the property, payable to the Company on an ongoing basis, and/or a percentage of
any increase in value of the property, payable upon maturity or refinancing of the loan, or otherwise would allow the Company to charge an interest rate that would provide an attractive risk-adjusted return. Mezzanine Investments may also take the form of preferred equity, which will have a claim against both the operating cash flow and liquidation proceeds from the specific real estate assets. The Manager may contractually commit the Company to aggregate Mezzanine Investments up to $75 million, or $20 million for any individual transaction, in any calendar quarter. Any investments outside of these guidelines must be approved in advance by the Board of Directors.
Before originating Mezzanine Investments, the Company performs certain credit underwriting to attempt to evaluate future performance of the collateral supporting such investment, which will include a review of (i) the underlying collateral of each Mortgage Loan, including property characteristics, location, credit-worthiness of tenants and economics; (ii) the relative principal amounts of the loan, including the loan-to-value and debt service coverage ratios, (iii) the borrower and manager's ability to manage the property and make debt service payments, and (iv) the Mortgage Loan's purpose and documentation.
Other Real Estate Related Assets. The Manager may contractually commit the Company to aggregate other real estate related assets up to $50 million, or $20 million for any individual transaction, in any calendar quarter. Any investments outside of these guidelines must be approved in advance by the Board of Directors. The Company's policy is to conduct an investigation and evaluation of real estate related assets before purchasing such assets. Evaluation of potential properties will be conducted primarily by the Manager's employees who specialize in the analysis of such assets, often with further specialization based on geographic or collateral-specific factors. The Company expects the Manager to use third parties, such as brokers who are familiar with the property's type and location, to assist it in conducting an evaluation of the value of the property, and, depending on the circumstances, to use subcontractors, such as local counsel and engineering and environmental experts, to assist in the evaluation and verification of information and the gathering of other information not previously made available by the potential seller. Other real estate related assets may include the following.
Construction Loans. The Company is authorized to provide construction loans on commercial property, taking a first lien mortgage to secure the debt.
Agricultural Loans. The Company is authorized to originate or acquire agricultural loans for use in securitization pools and may acquire agricultural underperforming real estate assets. Agricultural loans are secured by first liens on a parcel or parcels of land, which may be improved by buildings, fixtures, and equipment or other structures permanently affixed to the parcel or parcels, that are used for the production of one or more agricultural commodities or products. Loans are secured by a first lien mortgage with principal amortization based upon the nature of depreciable assets and commodity types. Lower percentage (longer duration) amortizations are associated with productive agricultural real estate with limited or no depreciable buildings or structures. Typically, as the value of depreciable structures becomes a larger percentage of the security, the amortization percentage is higher (shorter duration). Agricultural real estate may also be improved with permanent plantings (orange groves, vineyards, etc.) which produce crops for multiple years and the loan amortizations are structured to reflect the economic life of the productive assets. The loans are payable monthly, quarterly or semi-annually depending upon the nature of the commodity produced.
Foreign Real Properties. In addition to purchasing real properties, the Company is authorized to originate or acquire Mortgage Loans secured by real estate located outside the
United States or purchase such real estate. The Company has not imposed any limits with respect to the amounts that it could invest in foreign real properties in the aggregate, any particular type of foreign real property, or properties located in any particular country.
Other MBS. The Company may create or acquire interest-only MBS that have characteristics of Subordinated Interests, known as "Sub IOs." A Sub IO is entitled to no payments of principal; moreover, interest on a Sub IO often is withheld in a reserve fund or spread account and is used to fund required payments of principal and interest on the more senior tranches. Once the balance in the spread account reaches a certain level, interest on the Sub IO is paid to the holders of the Sub IO. These Sub IOs provide credit support to the senior classes, and thus bear substantial credit risk. Moreover, because a Sub IO receives only interest payments, its yield is extremely sensitive to changes in the weighted average life of the class, which in turn is dictated by the rate of prepayments (including as a result of defaults) on the underlying loans.
Real Estate Companies. The Company is authorized to invest in private placements of common stock or other securities convertible into common stock.
Purchases of Assets
During the second quarter of 1998, commencing on the completion of the Offering on April 23, 1998 and ending June 30, 1998, the Company purchased five CMBS for $73.6 million and one real estate property for $3.7 million. The Company also made two Mezzanine Investments for $25.8 million.
During the third quarter ended September 30, 1998, the Company purchased two CMBS for $29.1 million and one real estate property for $3.2 million. The Company also made two Mezzanine Investments for $22.4 million and two Mortgage Loans for $29.5 million.
During October, 1998, the Company made one Mezzanine Investment for $4.6 million and originated six Mortgage Loans for $60.6 million.
Debt Agreements
On May 15, 1998, the Company entered into two Master Loan and Security Agreements with Morgan Stanley Mortgage Capital Inc. ("Morgan Stanley") and Morgan Guaranty Trust Company of New York ("Morgan Guaranty Trust"), respectively, to provide financing for the Company's investments. On October 26, 1998, the Company terminated the agreement with Morgan Stanley at no cost to the Company. The Company made no borrowings under the Morgan Stanley agreement. As of December 31, 1998, there were $52,412,238 in borrowings outstanding under the Morgan Guaranty Trust agreement, secured by the Company's assets with an aggregate carrying value of $70,745,575 at December 31, 1998. All borrowings under the Morgan Guaranty Trust agreement were paid off on March 31, 1999, and the facility was terminated.
On August 21, 1998, the Company entered into a Master Assignment Agreement with Merrill Lynch Mortgage Capital, Inc. and Merrill Lynch Capital Services, Inc. (the "Merrill Lynch Agreement"), to provide financing for the Company's investments. The facility required assets to be pledged as collateral. As of December 31, 1998, there were $9,505,918 in borrowings outstanding under the Merrill Lynch Agreement, secured solely by a Mezzanine Investment which had a carrying value of $16,764,264 at December 31, 1998. All borrowings under the Merrill Lynch Agreement were paid off on March 25, 1999, and the facility was terminated.
On August 25, 1998, the Company entered into a Master Repurchase Agreement with Deutsche Bank Securities, Inc. (the "Deutsche Bank Agreement"), which provided financing for the Company's investments. As of December 31, 1998, there were $7,926,375 in borrowings outstanding under the Deutsche Bank Agreement, secured solely by one of the Company's BBB- rated CMBS. On February 19, 1999, the CMBS was sold, and the remaining borrowings under the Deutsche Bank Agreement were repaid.
On November 13, 1998 LLIH agreed to provide the Company with up to $40 million of unsecured subordinated indebtedness (the "LLIH Agreement"). As of December 31, 1998 borrowings outstanding under the LLIH Agreement were $9,000,000. All outstanding borrowings under the LLIH Agreement were due on March 31, 1999. On March 30, 1999, LLIH granted the Company an extension until April 5, 1999.
Repurchase of Common Stock
The Company began repurchasing shares of its Common Stock on August 6, 1998 and in total, as of December 31, 1998, had repurchased a total of 1,634,000 shares at an average price of $9.91 per share, for a total price of $16,191,994. The shares repurchased by the Company have been retired and are presented as a reduction of Common Stock and additional paid-in capital in the Company's consolidated financial statements.
Restructuring
During the third quarter of 1998, turmoil in credit markets caused a significant and unexpected widening of interest rate spreads as market interest rates for mortgage-related debt instruments increased dramatically relative to the interest rates of U.S. Treasury securities. As a result, the Company incurred substantial losses in the market value of its assets. On October 23, 1998, the Company announced that it had experienced estimated losses in its investment portfolio of $32.0 million. For the three months ended September 30, 1998, the Company recorded non-cash charges of approximately $24.0 million from marking the value of its investment portfolio to market. In addition, the Company reported losses of approximately $15.7 million for the third quarter as a result of the termination of the Company's interest rate hedges. For the three months ended December 31, 1998, the Company recorded approximately $7.6 million in losses realized upon the sale of assets and approximately $2.0 million in mark-to-market charges and changes in valuation allowances on its remaining assets.
In response, on October 21, 1998, the Board of Directors formed a special committee (the "Special Committee") to (i) review and evaluate the short term and long term strategic alternatives available to the Company and report its recommendations to the full Board of Directors and (ii) negotiate the terms of and approve any action that the Special Committee determines involves a conflict of interest with Lend Lease Corporation. Since its formation, the Special Committee has discussed and approved the restructuring of the credit facilities with Morgan Guaranty Trust and Merrill Lynch, the terms of the unsecured subordinated debt provided by LLIH and the sale of assets to repay the Company's indebtedness.
On October 23, 1998 the Company announced it was necessary to obtain temporary waivers from Morgan Guaranty Trust and Merrill Lynch to avoid being in default of tangible net worth covenants under the Company's credit facilities. The facilities were amended to provide for new credit limits, debt covenants, interest rates and maturity dates, as further discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations", and in "Item 8. Financial Statements and Supplementary Data".
The Company announced on November 13, 1998 that it had reached an agreement with its lenders to restructure its credit facilities, dispose of certain assets and that it would cease acquiring new investments. The Board of Directors then commenced a review of the strategic alternatives available with respect to the Company's remaining assets. In connection with the credit facility restructurings, LLIH agreed to provide the Company with up to $40 million of unsecured subordinated indebtedness.
The dramatic increase in interest rates spreads on mortgage-related debt instruments also meant that fulfilling the Company's existing whole Mortgage Loan commitments would be impracticable. The resale value of the Mortgage Loans underlying such commitments had fallen significantly, rendering any subsequent resale or securitization of such loans unprofitable. In October, the Company began discussions with borrowers that had Mortgage Loans from the Company under commitment. The Company was able to negotiate terminations of several commitments. These terminations required the Company to pay third party costs, legal costs and in many cases, a fee to the borrower. As a result of these terminations, the Company realized losses of $1,116,400 on the termination of $59,315,000 in Mortgage Loan commitments during the fourth quarter.
Sales of Assets
During the fourth quarter ended December 31, 1998, the Company sold two CMBS for $13.8 million resulting in a loss of $1.1 million and seven Mortgage Loans for $68.8 million resulting in a loss of $5.3 million. Subsequent to December 31, 1998, the Company accepted a discounted payoff of its remaining Mortgage Loan for $15.1 million resulting in a realized loss of $798,000, all of which was recognized in 1998.
In February, 1999 the Company sold a CMBS for $8.8 million resulting in a realized loss of $0.6 million, of which $0.5 million was recognized in 1998. The proceeds were used to repay borrowings under the Deutsche Bank Agreement.
The amended credit facilities and LLIH Agreement provided the Company with the necessary liquidity in the short term to fund its Mortgage Loan commitments, meet margin calls and hold investments. In order to meet the Company's restructured debt maturities and hedging liabilities, the Company began marketing a package of investments in early March 1999. On March 31, 1999 the sale of a package of CMBS was completed. The total proceeds were $39.0 million, resulting in a realized loss of $13.6 million, of which $11.2 million was recognized in 1998. The Company
used the proceeds to repay in full its borrowings from Morgan Guaranty Trust. In connection with its sale of investments on March 31, 1999, the Company entered into an agreement to sell a Mezzanine Investment to GMAC Commercial Mortgage Corporation ("GMAC"). The agreement allows the Company to repurchase the investment no later than April 1, 2000 (transaction referred to hereafter as the "GMAC Repo"). The GMAC Repo is expected to close no later than April 5, 1999, and will generate proceeds of $10.5 million. The Company paid a fee of $105,000 in connection with the GMAC Repo. The repurchase price of the GMAC Repo will be adjusted such that GMAC will receive an 8% annualized yield on its investment if the Company repurchases the investment prior to October 1, 1999. After October 1, 1999, the repurchase price is fixed at $9.6 million. The Company will use the proceeds of the GMAC Repo to repay borrowings from LLIH and to meet its remaining corporate obligations, which primarily consist of hedging liabilities.
On March 25, 1999, the Company sold a 51,388 square foot office complex located in Atlanta, Georgia. Proceeds of the sale were $3.8 million, resulting in a realized loss of approximately $258,000, all of which was recognized in 1998.
Competition.
The Company is engaged in a business that has become increasingly competitive as more companies enter the market. In acquiring real estate related assets generally, the Company competes with other REITs, investment banking firms, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds and other lenders and other entities purchasing similar assets, many of which have established operating histories and procedures, may have access to greater capital and other resources and may have other advantages over the Company in conducting certain businesses and providing certain services.
Conflicts of Interest.
The Company is subject to conflicts of interest involving the Manager. In addition to the Management Agreement, the Company has a number of relationships with the Manager and its affiliates, some of which may give rise to conflicts of interest. Transactions that may give rise to a conflict of interest between the Company's shareholders and the Manager include, but are not limited to, borrowings under the LLIH Agreement and the sale of assets to repay such indebtedness the re-negotiation of the Management Agreement between the Company and the Manager, the Company's origination of a Mortgage Loan for a client of the Manager, the Company's investment in a joint venture with a client of the Manager, the hiring of an affiliate of the Manager to manage or develop a property owned by the Company, and the Company's purchase or sale of assets from the Manager or its affiliates.
The market in which the Company purchases assets is characterized by rapid evolution of products and services and, as a result, there may, currently or in the future, be relationships between the Company, the Manager, and affiliates of the Manager in addition to those described herein.
Officers and Directors. The executive officers of the Company are officers and employees of the Manager. A majority of the Company's directors have no business affiliations with the Manager ("Independent Directors"), but were initially selected by the Manager. Matthew L. Banks, the Chairman of the Board, is Chief Executive Officer of the Manager. Kurt L. Wright, the President and Chief Executive Officer and a Director of the Company, is an Executive Vice President of the Manager.
Role of Independent Directors. The relationships between the Company, on the one hand, and the Manager and its affiliates, on the other, is governed by policy guidelines that have been approved by a majority of the Independent Directors. The guidelines establish certain parameters for the operations of the Company, including quantitative and qualitative limitations on the Company's assets that may be acquired. The guidelines are intended to assist and instruct the Manager and to establish restrictions applicable to transactions with affiliates of the Manager. Transactions with affiliates of the Manager must be approved by a majority of the Independent Directors. The Independent Directors will, however, review the Company's transactions on a quarterly basis to ensure compliance with the guidelines.
In addition, the Special Committee, which is made up solely of Independent Directors, was established to negotiate the terms of and approve any action by the Company that the Special Committee determines involves a conflict of interest with Lender Lease Corporation. Harald R. Hansen, Elizabeth Kennan and W. J. Smith were appointed to serve on the Special Committee. The Special Committee has engaged Alston & Bird LLP as its independent counsel and Chase Securities, Inc. as its independent financial advisor. Each of the members of the Special Committee was paid $4,500 in additional Board fees in 1998 for service on the Special Committee.
Although the Independent Directors review the guidelines periodically and monitor compliance with those guidelines, investors should be aware that, in conducting this review, the Independent Directors rely primarily on information provided to them by the Manager.
If the Independent Directors determine in their periodic review of transactions that a particular transaction does not comply with the guidelines, then the Independent Directors will consider what corrective action, if any, can be taken. Moreover, if transactions are consummated that deviate from the guidelines, then the Independent Directors will have the option, under the terms of the Management Agreement, to terminate the Manager. In such event, a termination fee will be owed to the Manager unless the Manager's actions demonstrate bad faith, willful misconduct, gross negligence or reckless disregard of its duties.
Management Agreement.
The Company entered into the Management Agreement with the Manager for an initial two-year term expiring on April 28, 2000. Thereafter, successive extensions, each for a period not to exceed 24 months, may be made by agreement between the Company and the Manager, subject to the affirmative vote of a majority of the Independent Directors. The Company may terminate, or decline to extend the term of, the Management Agreement without cause at any time after the initial term upon 60 days written notice by a majority vote of the Independent Directors; provided that the Company shall pay
the Manager a termination fee equal to the sum of the base management fee and incentive management fee, if any, earned with respect to the immediately preceding four fiscal quarters. This requirement may adversely affect the Company's ability to terminate the Manager without cause. In addition, Independent Directors of the Company may terminate the Management Agreement upon the occurrence of certain specified events, including a material breach by the Manager of any provision contained in the Management Agreement, without the payment of any termination fee. If the Management Agreement is terminated for any reason, LLIH will have certain registration rights with respect to its Common Stock.
The Manager at all times is subject to the supervision of the Company's Board of Directors and has only such functions and authority as the Company may delegate to it. The Company relies on the Manager's expertise in six principal areas: (i) portfolio management; (ii) equity acquisition and loan origination; (iii) equity asset management; (iv) interim servicing; (v) special servicing; and (vi) monitoring servicing. The Manager is responsible for the day-to-day operations of the Company and performs (or causes to be performed) such services and activities relating to the assets and operations of the Company as may be appropriate.
ASSET MANAGEMENT FEE. The following table presents all compensation, fees and other benefits (including reimbursement of certain out-of-pocket expenses) that the Manager may earn or receive under the terms of the Management Agreement. There are no caps on any category of such compensation, fees or benefits payable under the Management Agreement.
- ---------------------------- (1) Intended to cover the Manager's costs in providing management services to the Company. In connection with renewal and re-negotiation of the Management Agreement, the Board of Directors of the Company may adjust the base management fee in the future to align it more closely with the Manager's actual costs of providing such services. The Manager will pay a portion of this fee to Lend Lease Hyperion Capital Advisors, LLC for sub-management services performed on behalf of the Company. (2) The term "Average Invested Assets" for any period means the average of the aggregate book value of the assets of the Company, including a proportionate amount of the assets of all of its direct and indirect subsidiaries, before reserves for depreciation or bad debts or other similar non-cash reserves less (i) un-invested cash balances and (ii) the book value of the Company's CMO liabilities, computed by dividing (a) the sum of such values for each of the three months during such quarter (based on the book value of such assets as of the last day of each month) by (b) three. (3) The term "Funds From Operations" as defined by the National Association of Real Estate Investment Trusts ("NAREIT") means net income (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after deduction of preferred stock dividends, if any, and similar adjustments for unconsolidated partnerships and joint ventures. Funds From Operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity or ability to make distributions.
(4) The quarterly incentive management fee is equal to the product of (A) 25% of the dollar amount by which (1) (a) Funds From Operations (before the incentive fee) of the Company for the applicable quarter per weighted average number of shares of Common Stock outstanding plus (b) gains (or minus losses) from debt restructuring or sales of assets not included in Funds From Operations of the Company for such quarter per weighted average number of shares of Common Stock outstanding, exceed (2) an amount equal to (a) the weighted average of the price per share at the initial offering and the prices per share at any secondary offerings by the Company multiplied by (b) 25% of the sum of the Ten-Year U.S. Treasury Rate plus four percent, and (B) the weighted average number of shares of Common Stock outstanding. Because this amount is based on the income of the Company, it is not currently determinable. The quarterly incentive fee is non-cumulative. As used in calculating the Manager's compensation, the term "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly average yield to maturity for actively traded current coupon U.S. Treasury fixed interest rate securities (adjusted to constant maturities of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal Reserve Bank or agency or department of the federal government selected by the Company. If the Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. government securities selected by the Company. (5) There is no cap on the reimbursement of out-of-pocket expenses.
The ability of the Company to generate Funds from Operations in excess of the Ten-Year U.S. Treasury Rate, and of the Manager to earn the incentive compensation described in the above table, is dependent upon the level and volatility of interest rates, the Company's ability to react to changes in interest rates and to utilize successfully the operating strategies described herein, and other factors, many of which are not within the Company's control.
The management fees are payable in arrears. The Manager's base and incentive fees will be calculated by the Manager within 45 days after the end of each quarter, and such calculation will be promptly delivered to the Company. The Company is obligated to pay such fees and expenses within 60 days after the end of each fiscal quarter.
The Manager is expected to use the proceeds from its base management fee and incentive compensation in part to pay compensation to its officers who, although they also are officers of the Company, will receive no cash compensation directly from the Company. During 1998, the Manager earned $1,096,562 in base management fees and no incentive fees. There were no out-of-pocket expenses that the Company had to reimburse the Manager.
Option Plan
Eligibility and Awards. All employees (including officers), directors and others providing services to the Company, as well as the Manager and employees (including officers) and directors of the Manager (collectively, the "Eligible Recipients"), will be eligible to receive stock options at the discretion of the Compensation Committee of the Board of Directors. In addition, 80% of the options remaining in the option plan following the initial grant of options to the Manager have been set aside for future option grants to the Manager. Such reserve does not guarantee that the Manager will be granted such options. The Compensation Committee will be authorized to determine which Eligible Recipients shall receive options, and the terms and conditions on which options shall be granted. The Compensation Committee may grant options to employees of the Manager, subject to certain limits described in the option plan. Options granted pursuant to the option plan will be nonqualified stock options. Options granted to individuals pursuant to the option plan generally are not transferable except by will or by the applicable laws of descent and distribution. The Manager may transfer its options to any other Eligible Recipient. Grants of options under the option plan to persons or entities other than employees and directors of the Company may result in a charge against the Company's earnings for financial reporting purposes under GAAP. Any such charge to earnings will be recognized over the period during which such options become exercisable.
The Company has a stock option plan for the Company's executive officers and the Manager, which provides for the issuance of up to 2,500,000 shares of Common Stock. At the closing of the Offering, the Company granted the Manager a fully vested option to purchase 1,166,667 shares of Common Stock exercisable at the Offering price of $15.00 per share. The Manager received the stock option as compensation for its efforts in completing the Offering. The Manager granted a portion of its options to the individual officers of the Company. One-fourth of the Manager's options become exercisable on each of the first four anniversaries of the Offering. Unless exercised, these options expire in 2008.
The underwriters sold in the Offering 79,586 shares of Common Stock to directors and officers of the Company and the Manager for $15.00 per share. Pursuant to the Company's Directed Share Program, such individuals were granted an option to purchase one share of Common Stock for each share purchased in the Offering at an exercise price of $15.00 per share. One-fifth of the options became exercisable immediately, and one-fifth of the options become exercisable on each of the first four anniversaries of the Offering. Unless exercised, these options expire in 2008.
Exercise Price and Exercisability. The exercise price of all options will be not less than 100% of the fair market value of the Common Stock subject to the options on the date of grant. All options will become exercisable as determined by the Compensation Committee at the time of the award. Options granted under the plan generally will be exercisable in five equal installments on the date of grant and each of the four anniversaries of the date of grant. The exercise price of an option may be paid by any one or more of the following: (i) cash or certified check, (ii) shares of Common Stock held more than six months, (iii) cancellation of any indebtedness owed by the Company, (iv) a full-recourse promissory note, if approved by the Committee or (v) a "cashless" exercise pursuant to a sale through a broker of all or a portion of the shares covered by the option.
Termination of Employment. If an Eligible Recipient's affiliation with the Company is terminated for cause or if such Eligible Recipient terminates his affiliation voluntarily, all of such Eligible Recipient's unexercised options will terminate
immediately upon such termination. Except as otherwise determined by the Compensation Committee, if an Eligible Recipient has a termination of affiliation because of death or total and permanent disability or for any other reason (other than a voluntary termination or a termination for cause), all of such Eligible Recipient's unexercised options may be exercised by the Eligible Recipient or his beneficiary or legal representative to the extent such options are or become exercisable in accordance with their terms during the shorter of (i) the one-year period following the Eligible Recipient's death or total and permanent disability or, if longer, a period to be determined by the Board acting in its absolute discretion or (ii) the period of the remaining life of the option. If an Eligible Recipient has a termination of affiliation for any reason other than death, total and permanent disability, a voluntary termination or a termination for cause, all of such Eligible Recipient's unexercised options may be exercised by the Eligible Recipient on the date of such termination or during the 90 day period immediately following such termination or, if less, during the remaining life of the option. Upon termination of the Manager, all options granted to employees of the Manager will become immediately exercisable for a period of 90 days from such termination.
Amendment and Termination. The Board of Directors generally may amend the option plan at any time, except that approval by the Company's shareholders will be required for any amendment that increases the aggregate number of shares of Common Stock that may be issued pursuant to the option plan, that materially changes the class of persons eligible to receive such options, that extends the maximum option term or that decreases the exercise price of any option to less than the fair market value of the Common Stock on the date of grant. Shares of Common Stock subject to options that expire, are terminated or otherwise are surrendered to the Company will be available for issuance in connection with future awards under the option plan. No option term may exceed ten years from the date of grant, and no option grant may be made under the option plan after the tenth anniversary of the date the option plan was adopted by the Board of Directors.
Limits of Responsibility
Pursuant to the Management Agreement, the Manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of the Company's Board of Directors in following or declining to follow its advice or recommendations. In addition, the Manager does not owe any fiduciary duties to the Company and its shareholders. The Manager, its directors and its officers are not liable to the Company, any subsidiary of the Company, the Independent Directors, the Company's shareholders or any subsidiary's shareholders for acts performed in accordance with and pursuant to the Management Agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. The Company has agreed to indemnify the Manager, its directors and its officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of the Manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Management Agreement.
The Management Agreement does not limit or restrict the right of the Manager or any of its officers, directors, employees or affiliates from engaging in any business or rendering services of any kind to any other person, including the purchase of, or rendering advice to others purchasing, assets that meet the Company's policies and criteria.
Employees.
As of December 31, 1998, the Company had no employees. The Company is managed by the Manager. The Company is not party to any collective bargaining agreement.
REIT Status.
The Company plans to make an election to be taxed as a REIT under the Code, commencing with its first REIT taxable year ended on December 31, 1998. The Company believes that it qualifies for taxation as a REIT and therefore will not be subject to federal corporate income tax on net income that it distributes currently.
To qualify as a REIT under the Code, the Company must meet several requirements regarding, among other things, the ownership of its outstanding stock, the sources of its gross income, the nature of its assets, and the levels of distributions to the shareholders. These requirements are highly technical and complex, and the Company's determination that it qualifies as a REIT requires an analysis of various factual matters and circumstances that may not be entirely within the Company's control. Accordingly, there can be no assurance that the Company has qualified or will remain qualified as a REIT.
If the Company fails to qualify for taxation as a REIT in any taxable year, and certain relief provisions of the Code do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to the Company's shareholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made. In such event, to the extent of the Company's current and accumulated earnings and profits, all distributions to shareholders will be taxable as ordinary income and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from taxation as a REIT for the four taxable years following the year during which the Company ceased to qualify as a REIT. It is impossible to predict whether the Company would be entitled to such statutory relief.
INVESTMENT PORTFOLIO.
The Company was organized to invest in commercial and multifamily mortgage and real estate related assets sourced, managed and actively serviced through the Manager's offices located in major metropolitan markets throughout the United States. As of December 31, 1998, the Company's real estate related investments included $71,567,475 of CMBS, $44,374,346 of Mezzanine Investments, a $15,150,400 Mortgage Loan and $7,294,583 of real estate investments. The CMBS and Mezzanine Investments were recorded at the lower of cost or fair value in order to recognize impairment losses. The Mortgage Loan and real estate investments were also recorded at the lower of cost or fair value since they were held for sale at December 31, 1998. During the year, the Company acquired $18,423,411 in additional CMBS and $68,826,722 in additional Mortgage Loans. These investments were sold before year-end and resulted in realized losses of $1,124,753 on the sale of CMBS, and $5,325,524 on the sale of Mortgage Loans. In addition, the Company incurred a loss of $1,116,400 on the termination of Mortgage Loan commitments.
Commercial Mortgage-Backed Securities.
During 1998, the Company acquired $127,077,975 in CMBS investments. Prior to December 31, 1998, the Company sold $18,928,000 of its CMBS resulting in a realized loss of $1,167,179. The Company recorded impairment losses on the remainder of its CMBS in the amount of $16,676,570 at December 31, 1998.
The following table shows the Company's CMBS portfolio as of December 31, 1998.
The Company's investments in CMBS are supported by mortgage loans on the following property types and are located in the following regions:
From January 1, 1999 to March 31, 1999 the Company has sold certain of its CMBS investments. The total proceeds from the sales were $47.8 million resulting in a realized loss of $14.2 million, of which $11.7 million was recognized in 1998.
Mezzanine Investments.
As of December 31, 1998, the Company's Mezzanine Investments consisted of the following:
* Interest rates are for year ended December 31, 1998 however, these interest rates are adjustable from period to period. ** Interest rates represent the stated coupon rates written into the contract. The yield to maturities for the multi-family and other underlying security are 12% and 11.82% respectively.
The Company's $19,647,200 Mezzanine Investment is a British pounds Sterling loan. The Company purchased the investment for L.11.98 million. Interest on the loan is based on Sterling Libor ("Base Rate") plus 4.00%. The exchange rate at the date of investment was 1.64 dollars per pound. In order to reduce the risk of foreign currency exchange rate fluctuations, the Company entered into a foreign currency swap arrangement with Merrill Lynch Capital
Services, Inc. The swap arrangement provides the Company with an exchange rate of $1.64 per pound on the return of its principal regardless of exchange rate fluctuation. The swap arrangement also converts the Base Rate to US$ Libor minus 0.06% regardless of movements in the Sterling Libor. The Company is subject to foreign currency risk on the spread portion (4.00%) of the quarterly interest payments. The market value of the currency swap at December 31, 1998 was a liability of $242,000. The foreign currency swap arrangement expires on the maturity date of the related loan.
Mortgage Loans.
As of December 31, 1998, the Company's investment in Mortgage Loans consisted of White Station Tower, first Mortgage Loan in the amount of $16,000,000 that closed in July 1998. The loan is a 10-year loan on which principal and interest are paid monthly at an annual interest rate of 7.11%. The collateral is a 278,000 square foot office building in Memphis, Tennessee. As of December 31, 1998, the loan was recorded at its negotiated payoff amount. A discounted pay off was accepted on January 4, 1999 for $15,150,400, resulting in a realized loss of $797,810.
Real Properties.
As of December 31, 1998, the Company's investment in real property consisted of the following:
LAKESIDE PLAZA - In June 1998, the Company acquired a 72,829 square foot, specialty retail and commercial center located in Stockton, California for $3,675,000. The property was originally built in 1981. The property consists of one single tenant store anchored by a 26,000 square foot Marshall's and a multi-tenant strip retail building. The multi-tenant building contains one level of storefronts on the north side and two levels of storefronts on the south side containing an additional 46,829 square feet. The total site is 4.39 acres.
BRYARWOOD 85 - In September 1998, the Company acquired a 51,388 square foot office complex located in Atlanta, Georgia for $4,058,500. The property has two buildings, each occupied by one tenant. The largest building is 44,974 square feet and is occupied by BellSouth. The second building is 6,414 square feet and is occupied by MCG Communications. The property was originally built in 1969. In 1998 the property underwent improvements to complete an ADA ramp and restroom, exterior stucco was repainted and repaired, a new built-up roof system was completed and the electrical supply to the property was upgraded. The property was sold on March 25, 1999 for $3.8 million, resulting in a realized loss of $258,000, all of which was recognized in 1998.
At December 31, 1998, the Company's investments in real estate are held for sale. Accordingly, the Company wrote down its investments in real estate to estimated fair value and recognized an impairment loss of $447,505. The Company's ability to hold its real estate investments has been negatively affected by the recent turmoil in the financial markets and its effect on the value of the property, along with the restructuring of its debt agreements.
Minimum future rentals to be received on real estate properties under leases in effect as of December 31, 1998 are as follows:
The major tenants occupying more than ten percent of leasable space at each of the Company's real estate properties are as follows:
Item 2.
Item 2. Properties.
The Company does not maintain any offices. It relies on the facilities of the Manager. In addition, reference is made to the section captioned "Business - Real Properties" in Item 1, which is incorporated by reference herein.
Item 3.
Item 3. Legal Proceedings.
None
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded under the symbol "CHAS" on the Nasdaq Stock Market. Below is a table of the high and low sale prices for the Common Stock during the three quarters of 1998 after the Offering on April 23, 1998.
On March 30, 1999, the Company's Common Stock closed at $5.38 per share. As of March 30, 1999 there were approximately 10 shareholders of record (including holders who were nominees for a number of beneficial shareholders) of the Company's Common Stock.
During 1998, the Company paid total dividends of $0.41 per share. A $0.09 per share dividend was declared for shareholders of record on June 30, 1998 and paid on July 15, 1998. A $0.32 per share dividend was declared for shareholders of record on September 30, 1998 and paid on October 15, 1998. On November 13, 1998, the Company announced that the fourth quarter dividend had been suspended. Under its borrowing arrangements with Morgan Guaranty Trust and LLIH, the Company is allowed to pay distributions only to meet the requirements of a REIT. The Company was not required to pay any dividends in the fourth quarter of 1998 due to net taxable losses incurred for the year.
Item 6.
Item 6. Selected Financial Data.
The following sets forth selected financial data for the entire year ended December 31, 1998 and selected quarterly financial data for the year ended December 31, 1998:
The above selected financial data for the 1998 should be read in conjunction with the consolidated financial statements and the related notes appearing elsewhere in this annual report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of the Company's consolidated financial condition, results from operations, and capital resources and liquidity should be read in conjunction with the Financial Statements and related Notes included in Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Chastain Capital Corporation
We have audited the accompanying consolidated balance sheets of Chastain Capital Corporation and its subsidiaries (the "Company") as of December 31, 1998 and 1997 and the related statements of operations, shareholders' equity, and cash flows for the year ended December 31, 1998 and for the period December 16, 1997 to December 31, 1997. Our audits also included the financial statement schedules listed in the index at Item 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)2. Financial Statement Schedules:
Schedule III. Real Estate and Accumulated Depreciation
Schedule IV. Mortgage Loans on Real Estate
(a)3. Exhibits
(Asterisk indicates exhibit previously filed with the Securities and Exchange Commission as indicated in parentheses and incorporated herein by reference.)
(b) Reports on Form 8-K
The Company did not file any Form 8-K's for the period covered by this report.
(c) Exhibits
See Item 14(a)(3) above.
Signatures.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March, 1999.
CHASTAIN CAPITAL CORPORATION
By: /s/Kurt L. Wright -------------------------------------- Kurt L. Wright Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 31, 1998.
/s/Matthew Banks -------------------------------------- Matthew Banks Chairman of the Board
/s/Kurt L. Wright -------------------------------------- Kurt L. Wright Chief Executive Officer and Director (Principal Executive Officer)
/s/Steven G. Grubenhoff -------------------------------------- Steven G. Grubenhoff Chief Financial Officer (Principal Financial and Accounting Officer)
/s/Harald R. Hansen -------------------------------------- Harald R. Hansen Director
-------------------------------------- Elizabeth Kennan Director
-------------------------------------- W.J. Smith Director
EXHIBIT INDEX
(Asterisk indicates exhibit previously filed with the Securities and Exchange Commission as indicated in parentheses and incorporated herein by reference.)