How would you interpret this letter from a man?

I think your answer was perfect: cordial and sincere, but not encouraging. He most definitely likes you a lot, and if your situation were different you would probably have a great shot at a thriving romance. However, he does seem to be making an honest effort to patch up his former marriage and it's really good that you are respecting that and giving them a much better opportunity to work things out than if you took up a role as "the Other Woman". Bravo!!!