10-Q 1 tv504548_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________________ to __________________

 

Commission File Number 001-11981

MMA CAPITAL MANAGEMENT, LLC
(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

52-1449733

(I.R.S. Employer Identification No.)

3600 O’Donnell Street, Suite 600

Baltimore, Maryland

(Address of principal executive offices)

21224

(Zip Code)

 

(443) 263-2900

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class
Common Shares, no par value

Common Stock Purchase Rights

Name of each exchange on which registered
Nasdaq Capital Market

Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes þNo ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

           
  Large accelerated filer ¨   Accelerated filer þ
           
  Non-accelerated filer ¨   Smaller reporting company þ
           
  Emerging growth company ¨      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

 

There were 5,846,269 shares of common shares outstanding at November 1, 2018.

 

 

 

 

MMA Capital Management, LLC

 

Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 2
   
PART I – FINANCIAL INFORMATION 3
         
  Item 1. Financial Statements (Unaudited) 27
         
    (a) Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 27
         
    (b) Consolidated Statements of Operations for the three months and nine months ended September 30, 2018 and September 30, 2017 28
         
    (c) Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2018 and September 30, 2017 30
         
    (d) Consolidated Statements of Equity for the nine months ended September 30, 2018 and September 30, 2017 31
         
    (e) Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and September 30, 2017 33
         
    (f) Notes to Consolidated Financial Statements 35
         
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
         
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 69
         
  Item 4. Controls and Procedures 69
         
PART II – OTHER INFORMATION 70
         
  Item 1. Legal Proceedings 70
       
  Item 1A. Risk Factors 70
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 70
         
  Item 3. Defaults Upon Senior Securities 70
         
  Item 4. Mine Safety Disclosures 70
       
  Item 5. Other Information 70
       
  Item 6. Exhibits 71
         
SIGNATURES     S-1

 

 1 

 

Cautionary Statement Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-Q for the period ended September 30, 2018 (this “Report”) should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report”), filed with the United States Securities and Exchange Commission (“SEC”), to which reference is hereby made. This Report contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements often include words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “seek,” “would,” “could,” and similar words or expressions and are made in connection with discussions of future events and future operating or financial performance.

 

Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements. There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report. For a discussion of certain of those risks and uncertainties and the factors that could cause our actual results to differ materially because of those risks and uncertainties, see Part I, Item 1A, Risk Factors of our 2017 Annual Report.

 

Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we may make from time to time, and to consider carefully the factors discussed in Part I, Item 1A. “Risk Factors” of the 2017 Annual Report in evaluating these forward-looking statements. We do not undertake to update any forward-looking statements contained herein, except as required by law.

 

 2 

 

PART I – FINANCIAL INFORMATION

 

MMA Capital Management, LLC

Consolidated Financial Highlights

(Unaudited)

 

 

   As of and for the quarterly period ended 
(in thousands, except per common share data)  3Q18   2Q18   1Q18   4Q17   3Q17 
Selected income statement data                         
Net interest income  $2,603   $3,209   $2,895   $1,666   $1,817 
Non-interest revenue   204    293    220    225    793 
Total revenues, net of interest expense   2,807    3,502    3,115    1,891    2,610 
                          
Operating and other expenses   4,607    4,213    9,279    13,152    20,640 
Net gains (losses) from bonds and other continuing operations   10,533    3,608    3,136    (3,644)   10,058 
Net income (loss) from continuing operations before income taxes   

8,733

    2,897    (3,028)   (14,905)   (7,972)
                          
Income tax (expense) benefit   (122)   (754)   790    1,977    (384)
Net income from discontinued operations, net of tax   13    619    20,578    6,939    5,095 
Loss allocable to noncontrolling interests from continuing operations     ─      ─      ─    11,346    12,717 
Loss allocable to noncontrolling interests from discontinued operations     ─      ─      ─    151    465 
Net income allocable to common shareholders  $

8,624

   $2,762   $18,340   $5,508   $9,921 
Earnings per share data                         
Net income allocable to common shareholders: Basic  $1.49   $0.48   $3.25   $0.94   $1.69 
Diluted   1.41    0.42    3.25    0.89    1.69 
                          
Average shares: Basic   5,804    5,697    5,650    5,838    5,871 
  Diluted   6,087    6,074    5,650    6,223    5,871 
Market and per common share data                         
Market capitalization  $149,981   $150,870   $153,699   $134,274   $143,952 
Common shares at period-end   5,830    5,770    5,746    5,618    5,836 
Share price during period:                         
High   28.00    29.40    30.58    26.60    25.05 
Low   25.18    25.45    23.85    23.70    18.00 
Closing price at period-end   26.18    26.60    27.20    24.30    25.05 
Book value per common share: Basic   33.20    32.35    31.05    24.49    23.26 
Diluted   32.96    32.02    30.82    24.48    23.26 
Selected balance sheet data (period end)                         
Cash and cash equivalents  $15,556   $27,045   $33,444   $35,693   $29,356 
Investments in debt securities (without consolidated funds and ventures ("CFVs")   147,808    162,261    157,824    143,604    142,951 
Investment in partnerships   146,104    128,206    122,432    128,820    119,883 
All other assets (without CFVs)   94,430    99,800    99,666    34,737    40,937 
Assets of discontinued operations     ─      ─      ─    61,220    65,862 
Assets of CFVs     ─      ─      ─    127,812    136,507 
Total assets  $403,898   $417,312   $413,366   $531,886   $535,496 
                          
Debt (without CFVs)  $187,172   $203,087   $205,099   $209,427   $209,233 
All other liabilities (without CFVs)   23,179    27,543    29,854    27,580    25,562 
Liabilities of discontinued operations     ─      ─      ─    17,212    15,603 
Liabilities of CFVs     ─      ─      ─    50,565    48,320 
Noncontrolling interests     ─      ─      ─    89,529    101,052 
Total liabilities and noncontrolling interests   210,351    230,630    234,953    394,313    399,770 
Common shareholders' equity  $193,547   $186,682   $178,413   $137,573   $135,726 
Rollforward of common shareholders' equity                         
Common shareholders' equity - at beginning of period  $186,682   $178,413   $137,573   $135,726   $127,547 
Net income allocable to common shareholders   8,624    2,762    18,340    5,508    9,921 
Other comprehensive income allocable to common shareholders   (3,375)   4,047    9,160    2,154    61 
Common share repurchases   (772)   (3,341)     ─    (5,694)   (1,161)
Common shares issued and options exercised   4,057    5,034    4,125      ─      ─ 
Cumulative change due to change in accounting principles     ─      ─    9,206      ─      ─ 
Other changes in common shareholders' equity   (1,669)   (233)   9    (121)   (642)
Common shareholders' equity - at end of period  $193,547   $186,682   $178,413   $137,573   $135,726 

 3 

 

 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION 

 

 

  

Overview

 

MMA Capital Management, LLC was organized in 1996 as a Delaware limited liability company.  Unless the context otherwise requires, and when used in this Report, the “Company,” “MMA,” “we,” “our” or “us” refers to MMA Capital Management, LLC and its subsidiaries.

 

The Company invests in debt associated with renewable energy infrastructure and real estate. We focus on investments with attractive risk-adjusted returns that generate positive environmental or social impacts. Our investments, other assets and liabilities are organized into three portfolios:

  

·Energy Capital – This portfolio consists primarily of investments that we have made through joint ventures with an institutional capital partner in loans that finance renewable energy projects;

 

·Leveraged Bonds – This portfolio primarily includes tax-exempt mortgage revenue bonds that are leveraged; and

 

·Other Assets and Liabilities – This portfolio includes certain loan receivables, cash, real estate-related investments, subordinated debt and the balance of the Company’s assets and liabilities.

 

Commencing on January 8, 2018, we became externally managed by Hunt Investment Management, LLC, an investment adviser registered with the SEC (our “External Manager”). In conjunction with this change, and as further discussed in the 2017 Annual Report, we completed the sale of the following businesses and assets to Hunt (Hunt Companies, Inc. and/or its affiliates are herein referred to as “Hunt” and this sale transaction is hereinafter referred to as the “Disposition”):

 

·our Low Income Housing Tax Credit (“LIHTC”) business;

 

·our international asset and investment management business;

 

·the loan origination, servicing and management components of our Energy Capital business (including certain management, expense reimbursement and other contractual rights that were held by the Company with respect to this business line);

 

·our bond servicing platform; and

 

·certain miscellaneous investments.

 

Given these changes to our business model and effective the first quarter of 2018, we operate as a single reporting segment. As a result, we no longer operate, or present the results of our operations, through three reportable segments that, as of December 31, 2017, included United States (“U.S.”) Operations, International Operations and Corporate Operations.  

 

Proposed Conversion to a Corporation

 

On August 7, 2018, the Board of Directors (“Board”) approved the conversion of our legal form of organization from a limited liability company to a corporation. Since its inception, the Company has followed a corporate form of governance and, in July 2013, elected to be taxed as a corporation. The proposed conversion would conform our legal form of organization to that of our tax and governance attributes.

 

If the conversion is approved by our shareholders, our common shares will be converted on a one-for-one basis from common shares of a limited liability company to common shares of a corporation and our current governance framework, including Board of Directors, will remain in place. Similarly, the measurement of our assets, liabilities and other tax, financial and accounting attributes for financial reporting purposes will be unchanged. However, upon conversion, we will be governed by the Delaware General Corporation Law (the “DGCL”) and a new certificate of incorporation instead of by the Delaware Limited Liability Company Act (the “LLC Act”) and our current limited liability company operating agreement.

 

The proposed conversion of the Company’s legal form to that of a corporation is subject to the approval of our shareholders. Accordingly, the Company will hold a special shareholders’ meeting on November 20, 2018 at which shareholders will be provided an opportunity to vote on the Company’s proposed conversion. The Company filed a proxy statement with the SEC on September 28, 2018 that provides more information about the Company’s proposed conversion including the differences between the DGCL and our proposed corporate documents as compared with the LLC Act and our current limited liability company operating agreement.

 

 4 

 

 

Energy Capital Portfolio

 

In our Energy Capital portfolio, we invest in loans that finance renewable energy projects to enable developers, design and build contractors and system owners to develop, build and operate renewable energy systems throughout North America. These loans include late-stage development, construction and permanent loans. We typically invest in these loans directly or through Renewable Energy Lending, LLC (“REL”) with an institutional capital partner in multiple ventures that include: Solar Construction Lending, LLC (“SCL”); Solar Permanent Lending, LLC (“SPL”); and Solar Development Lending, LLC (“SDL”) (REL, SCL, SPL and SDL are collectively referred to hereinafter as, the “Solar Ventures”). Our External Manager provides loan origination, servicing, asset management and other management services to the Solar Ventures.

 

On June 1, 2018, the Company became the sole owner of REL and consolidates this venture for reporting purposes. The Company’s buyout of its prior investment partner’s interest in REL enabled it to increase the amount of equity we are able to deploy into renewable energy investments through the Solar Ventures, provided the Company with full decision-making control over REL and eliminated the preferred return that was payable to our prior investment partner. At September 30, 2018, REL holds a 50% membership interest in each of SCL and SPL that had a carrying value of $101.1 million and $2.9 million, respectively.

 

Upon the formation of SDL, the Company and its institutional capital partner each agreed to contribute 50% of the initial and incremental capital contributions to the partnership.  However, during the third quarter of 2017, the partners agreed that the Company would fund 10% and our capital partner would fund the remaining 90% for a particular portfolio of loans, thereby causing our ownership interest in SDL to decrease in percentage terms.  At September 30, 2018, the Company’s investment in SDL had a carrying value of $11.5 million, representing approximately a 50% ownership interest in this venture.

 

On July 13, 2018, the Company extended the investment period in SDL, SCL and SPL with our institutional capital partner through July 15, 2023.

 

At September 30, 2018, the loans that were funded through the Solar Ventures had an aggregate UPB of $178.7 million, a weighted-average remaining maturity of five months and a weighted-average coupon of 9.2%. These loans generated origination fees that ranged from 1% to 2% on committed capital and had fixed-rate coupons that ranged from 7.0% to 13.5%.

  

Leveraged Bonds Portfolio

 

In our Leveraged Bonds portfolio, we primarily invest in bonds that finance affordable housing and infrastructure in the U.S.

 

The bonds we hold are fixed rate and unrated. Our bonds are also generally tax-exempt and collateralized by affordable multifamily rental properties. Substantially all of the rental units in these multifamily properties, some of which may be subsidized by the government, have tenant income and rent restrictions.

 

The Company also has two municipal bonds that finance the development of infrastructure (“Infrastructure bonds”) for a mixed-use town center development and are secured by incremental tax revenues generated from the development.

 

The Company has financed its ownership of a majority of its investments in bonds through total return swap (“TRS”) agreements. These financing arrangements enable the Company to retain the economic risks and rewards of the fixed rate bonds that are referenced in such agreements and generally require the Company to pay a variable rate of interest that resets on a weekly basis. The Company also has executed TRS agreements to synthetically acquire the total return of multifamily bonds that it does not own. The Company has hedged a portion of the interest rate risk associated with its TRS agreements and other sources of variable interest rate exposure using various interest rate risk management agreements.

 

Table 1 provides key metrics related to all bonds in which we have an economic interest, including bonds in which we acquired an economic interest through TRS agreements (such bonds and TRS agreements are hereinafter referred to collectively as the “Bond Portfolio”). See Notes to Consolidated Financial Statements – Note 6, “Debt,” and Note 7, “Derivative Instruments,” for more information about how TRS and interest rate risk management agreements are reported in the Company’s financial statements.

 

 5 

 

 

Table 1: Bond Portfolio - Summary

 

   At September 30, 2018 
   Unpaid                      
   Principal             Wtd. Avg.   Number  Number of 
   Balance  Fair  Wtd. Avg.   Wtd. Avg.   Debt Service   of  Multifamily 
(dollars in thousands)  ("UPB")  Value  Coupon   Pay Rate (6)   Coverage (7)   Bonds (8)  Properties (8) 
Multifamily tax-exempt bonds                                 
Performing  $167,687  $176,728   6.42%   6.42%   1.22    21   19 
Non-performing (1)   9,869   12,966   6.45%   3.70%   0.89    1   1 
Subordinated cash flow (2)   9,620   10,674   6.78%   1.98%   N/A     3    ─ 
Total multifamily tax-exempt bonds  $187,176  $200,368   6.42%(5)   6.27%(5)   1.20    25   20 
                                  
Infrastructure bonds (3)  $26,825  $21,576   6.75%   6.75%   0.60    2   N/A 
Total Bond Portfolio (4)  $214,001  $221,944   6.47%(5)   6.33%(5)   1.12    27   20 

 

(1)Includes bond investments that are 30 days or more past due in either principal or interest payments.

 

(2)Coupon interest on these investments is payable only to the extent sufficient cash flows are available for the debtor to make such payments. As a result, debt service coverage is not calculated for these investments.

 

(3)On October 30, 2018, the Company agreed to restructure its two infrastructure bond investments into a single tax-exempt bond with a UPB of $27.2 million, a coupon of 6.30% and a contractual term of 30.1 years. See Notes to Consolidated Financial Statements – Note 17, “Subsequent Events,” for more information on the restructuring.

 

(4)Includes nine bonds with a combined UPB and fair value of $70.3 million and $74.1 million, respectively, that were financed with TRS agreements that had a combined notional amount of $71.6 million and that were accounted for as derivatives at September 30, 2018. The Bond Portfolio also includes eight bonds with a combined UPB and fair value of $81.0 million and $85.5 million, respectively, that were financed with TRS agreements that had a combined notional amount of $81.5 million and where the transfer of underlying bond investments was accounted for as a secured borrowing.

 

(5)Excludes the effects of subordinated cash flow bonds. If the Company had included the effects of subordinated cash flow bonds in the determination of these amounts, the weighted average coupon for total multifamily tax-exempt bonds and for the total bond portfolio would have been 6.44% and 6.48%, respectively, at September 30, 2018, and the weighted-average pay rate for total multifamily tax-exempt bonds and for the total bond portfolio would have been 6.05% and 6.14%, respectively, at September 30, 2018.

 

(6)Reflects cash interest payments collected as a percentage of the average UPB of corresponding bond investments for the preceding 12 months at September 30, 2018.

 

(7)Calculated on a rolling 12-month basis using property level information as of the prior quarter-end for those bonds with must pay coupons that are collateralized by multifamily properties or incremental tax revenues in the case of infrastructure bonds.

 

(8)For comparative purposes, at June 30, 2018, the Bond Portfolio was comprised of 29 bonds, which included 25 multifamily tax-exempt bonds that were collateralized by 20 affordable multifamily rental properties. During the third quarter of 2018, the Company sold its two bond investments that were classified as “Other bonds” that had a UPB and fair value of $14.8 million and $15.3 million, respectively, at June 30, 2018.

 

The fair value of the Bond Portfolio as a percentage of its UPB increased from 103.3% at June 30, 2018 to 103.7% at September 30, 2018, while the weighted-average debt service coverage ratio of the Bond Portfolio was 1.12x at both June 30, 2018 and September 30, 2018.

 

The contractual terms of investments in the Bond Portfolio include provisions that permit bonds to be prepaid at par after a specified date that is prior to their stated maturity date.  Table 2 provides information about the UPB and fair value of bonds that were prepayable at par at September 30, 2018, and stratifies such information based upon the periods in which such instruments become prepayable at par.

 

Interest Rate Risk Hedge Positions

 

We use interest rate swaps and caps to hedge interest rate risk associated with this portfolio. The net fair value of these financial instruments was $1.8 million at September 30, 2018.

  

 6 

 

 

Table 2: Stratification of the Bond Portfolio Based Upon Prepayment Features

 

(in thousands)  UPB   Fair Value 
September 30, 2018  $26,825   $21,576 
October 1 through December 31, 2018   1,855    2,113 
2019   5,170    5,222 
2020   18,006    18,685 
2021   55,612    59,864 
2022   81,778    88,493 
Thereafter   24,755    25,991 
Bonds that may not be prepaid    ─     ─ 
Total  $214,001   $221,944 

 

Other Assets and Liabilities Portfolio

 

In our Other Assets and Liabilities portfolio, we manage the Company’s cash, loan receivables, real estate-related investments, subordinated debt and other assets and liabilities of the Company. An overview of the primary assets and liabilities within this portfolio follows.

 

Cash

 

As of September 30, 2018, we had $15.6 million of unrestricted cash and $10.9 million of restricted cash that was primarily pledged as collateral in connection with risk management and financing agreements.

 

Hunt Note

 

As consideration for the Disposition, Hunt agreed to pay the Company $57.0 million and to assume certain liabilities of the Company. The Company provided seller financing to Hunt through a $57.0 million note receivable from Hunt that has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum.  The unpaid principal balance on the note will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020.

 

On October 4, 2018, the Company’s note receivable from Hunt increased to $67.0 million as part of Hunt’s settlement of the MGM Agreements as defined and further discussed below within “Interests in MGM” and Notes to Consolidated Financial Statements — Note 17, “Subsequent Events.”

 

Real Estate-Related Investments

 

When the Company conveyed its international asset and investment management business to Hunt, it retained an 11.85% ownership interest in the South Africa Workforce Housing Fund (“SAWHF”), along with related financing for that investment and a foreign currency hedge agreement for risk management purposes. SAWHF is a multi-investor fund managed by affiliates of International Housing Solutions S.à r.l. (“IHS”) that began operations in April 2008 and is currently in the process of exiting its investments. The carrying value of the Company’s investment in SAWHF was $10.7 million at September 30, 2018.

 

At September 30, 2018, we owned one direct investment in real estate consisting of a land parcel.  This undeveloped real estate is located just outside the city of Winchester in Frederick County, Virginia and had a carrying value of $3.7 million as of September 30, 2018.

 

At September 30, 2018, we were an equity partner in four real estate-related investments consisting of (i) an 80.0% ownership interest in a mixed-use town center development whose incremental tax revenues secure our infrastructure bond investments and (ii) three limited partner interests in partnerships that owned affordable housing and in which our ownership interest ranged from 74.25% to 74.92%. The carrying value of these four investments was $19.9 million at September 30, 2018.

 

Deferred Tax Assets

 

Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes.  Deferred tax assets (“DTAs”) are recognized if we assess that it is more likely than not that tax benefits, including net operating losses (“NOLs”) and other tax attributes, will be realized prior to their expiration.  As of December 31, 2017, the carrying value of our DTAs was $140 million, although these assets were fully reserved because management determined that, as of such reporting date, it was not more likely than not that the Company would realize its DTAs. The Company’s DTAs remain fully reserved as of September 30, 2018.

 

 7 

 

 

Debt Obligations

 

This portfolio includes the Company’s subordinated debt, notes payable and other debt.  The carrying value and weighted-average yield of these debt obligations at September 30, 2018 is provided below in Table 21.

 

Interest Rate Risk Hedge Positions

 

We use interest rate swaps and caps to hedge interest rate risk associated with debt obligations in this portfolio. The net fair value of these financial instruments was $5.1 million at September 30, 2018.

 

Interests in MGM

 

As consideration for the sale of our LIHTC business to Morrison Grove Management, LLC (“MGM”) in 2014, the Company received an option to acquire the LIHTC business of MGM, which primarily manages LIHTC investments on behalf of third party investors and for its own account.  This purchase option was converted on January 8, 2018, into a purchase and sale agreement that required the Company to complete the purchase of MGM subject to certain conditions precedent.  On January 8, 2018, the Company also (i) executed agreements to acquire from an affiliate of MGM certain assets pertaining to a specific LIHTC property and (ii) purchased a $9.0 million senior loan from an MGM affiliate.  This senior loan, which is secured by assets of MGM, bears interest at 11% payable quarterly.  The unpaid principal balance of this loan, which was $9.0 million as of September 30, 2018, is payable in full in June 2020.

 

On October 4, 2018, Hunt exercised its option to take assignment of the Company’s agreements to acquire (i) the LIHTC business of MGM and (ii) certain assets pertaining to a specific LIHTC property from affiliates of MGM (these agreements are collectively referred hereinafter to as the “MGM Agreements”). As a result of the concurrent assignment of the MGM Agreements and Hunt’s closing thereunder, the Company expects to recognize an increase in common shareholders’ equity of approximately $14.2 million in the fourth quarter of 2018, or approximately $2.35 per share based upon diluted shares outstanding at September 30, 2018.

 

In connection with the closing of the MGM Agreements, the Company executed a series of additional transactions completing the Company’s disposition of MGM and other LIHTC related assets. Those additional transactions included the acquisition by Hunt of (i) the Company’s $9.0 million held for sale loan for $9.4 million of cash that the Company had previously acquired from an affiliate of MGM and (ii) the Company’s remaining general partner interests in two nonconsolidated LIHTC funds. In addition, the Company acquired $10.0 million in Hunt notes from the MGM principals for $5.0 million in cash and $5.0 million in a Company note. This purchase increased the aggregate principal balance of the Company’s existing $57.0 million note from Hunt to $67.0 million. The Company’s $5.0 million note to the MGM principals bears interest at 5.0%, is payable quarterly in arrears and has a varying amortization schedule that fully amortizes the note by its maturity date of January 1, 2026. 

 

Our External Manager

 

In conjunction with the Disposition, we entered into a management agreement with the External Manager (the “Management Agreement”) that took effect on January 8, 2018. At the time of the Disposition, all employees of the Company were hired by the External Manager.  In consideration for the management services being provided by the External Manager, the Company pays the External Manager (i) a base management fee, which is payable quarterly in arrears and is calculated as a percentage of the Company’s GAAP common shareholders’ equity, with certain annual true-ups, and (ii) an annual incentive fee equal to 20% of the total annual return of diluted common shareholders’ equity per share in excess of 7%.  However, for the first and second quarters of 2018, the base management fee was fixed at $1 million per quarter.  The Company also agreed to reimburse the External Manager for certain allocable overhead costs including costs associated with an allocable share of the costs of (i) noninvestment personnel of the External Manager who spend all or a portion of their time managing the Company’s operations and reporting as a public company (based on their time spent on such matters) and (ii) the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) based on the percentage of their time spent managing the Company. Such reimbursement is, however, subject to a cap of $2.5 million through 2019 and $3.5 million thereafter, until the Company’s GAAP common shareholders’ equity exceeds $500 million.

 

 8 

 

 

SUMMARY OF FINANCIAL PERFORMANCE

 

 

 

Net Worth

 

Common shareholders’ equity increased $6.9 million in the third quarter to $193.5 million at September 30, 2018. This change was driven by $5.3 million in comprehensive income that was allocable to common shareholders and by $1.6 million of other increases in common shareholders’ equity.

 

Diluted common shareholders’ equity (“Book Value”) per share increased $0.94 per share in the third quarter of 2018 to $32.96 at September 30, 2018.

 

Refer to “Consolidated Balance Sheet Analysis” for more information about changes in common shareholders’ equity and other components of our Consolidated Balance Sheets.

 

Comprehensive Income

 

We recognized comprehensive income that was allocable to common shareholders of $5.3 million in the third quarter of 2018, which consisted of $8.6 million of net income that was allocable to common shareholders and $3.3 million of other comprehensive loss that was allocable to common shareholders. In comparison, we recognized $10.0 million of comprehensive income that was allocable to common shareholders during the third quarter of 2017, which consisted of $9.9 million of net income that was allocable to common shareholders and $0.1 million of other comprehensive income that was allocable to common shareholders.

 

Net income that we recognized in the third quarter of 2018 was primarily driven by net interest income, net gains on bonds and equity in income from unconsolidated funds and ventures. Refer to “Consolidated Results of Operations” for more information about changes in common shareholders’ equity that is attributable to net income allocable to common shareholders.

 

Other comprehensive loss that we reported in the third quarter of 2018 was primarily attributable to the reclassification of unrealized holding gains out of accumulated other comprehensive income (“AOCI”) and into our Consolidated Statements of Operations due to the sale of certain bond investments. The impact of this reclassification was partially offset by net unrealized holding gains that we recognized in AOCI during the third quarter in connection with our Bond Portfolio. Refer to “Consolidated Balance Sheet Analysis” for more information about other comprehensive income.

 

Other Considerations

 

As further discussed in “Introduction – Overview” in Item 2 of this Report, the Company sold certain business lines and assets to Hunt and converted to an externally managed business model by engaging Hunt to perform management services for the Company. By executing this strategic transaction, the Company no longer recognizes:

 

·asset management fees and expense reimbursement revenues from international operations, LIHTC and renewable energy funds that we previously managed;

 

·investment income associated with conveyed equity co-investments in previously-managed funds;

 

·guarantee revenues or expenses associated with our LIHTC business line;

 

·various legal and other professional fees that are incurred in the normal course to manage the previously managed investment funds;

 

·employee salaries and benefits (other than stock compensation expense associated with unexercised options that were not conveyed and that is reported as a component of “Salaries and benefits” expense in our Consolidated Statements of Operations); and

 

·other income and expense associated with conveyed interests and employees.

 

The Disposition also resulted in the deconsolidation from the Company’s Consolidated Balance Sheets on January 8, 2018 of all guaranteed LIHTC funds and derecognition of nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017. As a result, the Company will no longer recognize in future reporting periods revenues, expenses, assets, liabilities and noncontrolling interests associated with such CFVs.

 

In place of the aforementioned revenues and expenses, and notwithstanding revenues and expenses associated with assets and liabilities of the Company that were excluded from the sale transaction, the Company recognizes interest income associated with its loan receivable from Hunt and will recognize various costs set forth in the Management Agreement, including base management fees, incentive management fees and reimbursements to the External Manager for certain allocable overhead costs.

 

Information that is provided in this Report’s “Consolidated Balance Sheet Analysis” and “Consolidated Results of Operations” should be reviewed in consideration of the aforementioned changes.

 

 9 

 

 

CONSOLIDATED BALANCE SHEET ANALYSIS

 

 

  

This section provides an overview of changes in our assets, liabilities and equity and should be read together with our consolidated financial statements, including the accompanying notes to the financial statements.

 

Table 3 provides a balance sheet summary for the periods presented. For presentation purposes, assets, liabilities and equity that were attributable to noncontrolling interest holders of CFVs are presented in Table 3 as separate line items because the Company generally has a minimal ownership interest in these consolidated entities. For the periods presented, the assets, liabilities and noncontrolling interests related to these CFVs were attributable to consolidated property partnerships and certain LIHTC funds in which we guaranteed minimum yields on investment to investors and for which we agreed to indemnify the purchaser of our general partner interest in such funds from investor claims related to those guarantees. However, the Disposition resulted in the deconsolidation from the Company’s Consolidated Balance Sheets in the first quarter of 2018 of all guaranteed LIHTC funds and derecognition of nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017. See Notes to Consolidated Financial Statements – Note 14, “Discontinued Operations,” and Note 15, “Consolidated Funds and Ventures,” for more information about CFVs.

 

Table 3: Balance Sheet Summary

 

   At   At   At   At     
   September 30,   June 30,   March 31,   December 31,   Change for 
(in thousands, except per share data)  2018   2018   2018   2017   3Q 2018 
Assets                         
Cash and cash equivalents  $15,556   $27,045   $33,444   $35,693   $(11,489)
Restricted cash (without CFVs)   10,944    15,916    15,870    21,271    (4,972)
Investments in debt securities (without CFVs)   147,808    162,261    157,824    143,604    (14,453)
Investments in partnerships (without CFVs)   146,104    128,206    122,432    128,820    17,898 
Loans   67,299    66,299    66,299    736    1,000 
Other assets (without CFVs)   16,187    17,585    17,497    12,730    (1,398)
Assets of discontinued operations    ─     ─     ─    61,220     ─ 
Assets of CFVs (1)    ─     ─     ─    127,812     ─ 
Total assets  $403,898   $417,312   $413,366   $531,886   $(13,414)
                          
Liabilities and Noncontrolling Interests                         
Debt (without CFVs)  $187,172   $203,087   $205,099   $209,427   $(15,915)
Accounts payable and accrued expenses   3,166    3,405    4,137    6,098    (239)
Other liabilities (without CFVs) (1), (2)   20,013    24,138    25,717    21,482    (4,125)
Liabilities of discontinued operations    ─     ─     ─    17,212     ─ 
Liabilities of CFVs    ─     ─     ─    50,565     ─ 
Noncontrolling interests related to CFVs    ─     ─     ─    89,529     ─ 
Total liabilities and noncontrolling interests  $210,351   $230,630   $234,953   $394,313   $(20,279)
                          
Common Shareholders' Equity  $193,547   $186,682   $178,413   $137,573   $6,865 
                          
                          
Common shares outstanding   5,830    5,770    5,746    5,618    60 
Common shareholders' equity per common share  $33.20   $32.35   $31.05   $24.49   $0.85 
                          
Diluted common shareholders' equity (3)  $198,978   $196,205   $188,947   $146,915   $2,773 
Diluted common shares outstanding   6,037    6,128    6,130    6,002    (91)
Diluted common shareholders' equity per common share  $32.96   $32.02   $30.82   $24.48   $0.94 

 

(1)Deferred revenue balances associated with financial guarantees that were made by the Company to 11 guaranteed LIHTC funds had been eliminated for reporting purposes in conjunction with prepaid guarantee assets of CFVs because the Company had consolidated such guaranteed LIHTC funds for reporting purposes. The unamortized balances of such deferred revenue and prepaid assets, which are equal and offsetting, were $7.5 million at December 31, 2017. The 11 guaranteed LIHTC funds were deconsolidated as of March 31, 2018, and, as a result, related deferred revenue balances were derecognized from the Company’s Consolidated Balance Sheets as of such reporting date.

 

 10 

 

 

(2)Includes $14.1 million of deferred revenue associated with the Company’s sale of its LIHTC business as of September 30, 2018, June 30, 2018 and March 31, 2018 and $10.3 million as of December 31, 2017. See Notes to Consolidated Financial Statements — Note 17, “Subsequent Events,” for more information regarding the realization of such deferred revenue in the fourth quarter of 2018.

 

(3)Diluted common shareholders’ equity measures common shareholders’ equity assuming that all outstanding employee common share options that are dilutive were exercised in full at September 30, 2018, June 30, 2018, March 31, 2018 and December 31, 2017. In this case, liabilities recognized by the Company in its Consolidated Balance Sheets that relate to options that are dilutive would be reclassified into common shareholders’ equity upon their assumed exercise. These liabilities are measured at fair value and, therefore, are sensitive to changes in the market price for the Company’s common shares. The carrying value of liabilities that relate to all outstanding employee common share options was $5.4 million, $9.5 million, $10.5 million and $9.3 million at September 30, 2018, June 30, 2018, March 31, 2018 and December 31, 2017, respectively.

 

Common Shareholders’ Equity

 

Table 4 summarizes the changes in common shareholders’ equity for the periods presented.

 

Table 4: Changes in Common Shareholders’ Equity

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Net income allocable to common shareholders  $8,624   $9,921   $(1,297)  $29,726   $13,894   $15,832 
Other comprehensive (loss) income allocable to common shareholders   (3,375)   61    (3,436)   9,832    1,181    8,651 
Other changes in common shareholders' equity   1,616    (1,803)   3,419    16,416    (4,673)   21,089 
Net change in common shareholders' equity  $6,865   $8,179   $(1,314)  $55,974   $10,402   $45,572 

 

Other Comprehensive Income Allocable to Common Shareholders

 

Table 5 summarizes other comprehensive income that was allocable to common shareholders for the periods presented.

 

Table 5: Other Comprehensive Income Allocable to Common Shareholders

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Bond related activity:                              
Bond fair value adjustments  $1,025   $(274)  $1,299   $2,143   $(1,135)  $3,278 
Increase in accumulated other comprehensive income due to equity in losses from LTPPs    ─    897    (897)    ─    3,104    (3,104)
Reclassification of realized gains on sold or redeemed bonds into the Consolidated Statements of Operations   (5,080)   (620)   (4,460)   (5,080)   (620)   (4,460)
Reclassification of realized losses to the Consolidated Statements of Operations related to bond investments assessed as OTTI   141    39    102    6    39    (33)
Recognition of unrealized holding gains due to deconsolidation of consolidated LTPPs    ─     ─     ─    9,415     ─    9,415 
Other comprehensive (loss) income related to bond activity   (3,914)   42    (3,956)   6,484    1,388    5,096 
Income tax benefit   14     ─    14     ─     ─     ─ 
Cumulative translation adjustment   525   19    506   3,348    (207)   3,555 
Other comprehensive (loss) income allocable to
common shareholders
  $(3,375)  $61   $(3,436)  $9,832   $1,181   $8,651 

  

 11 

 

 

The other comprehensive loss that was allocable to common shareholders for the three months ended September 30, 2018 was primarily a result of the reclassification out of AOCI and into our Consolidated Statements of Operations of $5.1 million of realized gains associated with two bond investments that were sold in the third quarter of 2018. This decline was partially offset by a net increase in unrealized holdings gains that we recognized in the third quarter of 2018 in connection with our bond investments.

 

Other comprehensive income that was allocable to common shareholders for the nine months ended September 30, 2018 increased compared to other comprehensive income for the nine months ended September 30, 2017, primarily as a result of (i) the recognition of net unrealized holding gains associated with bond investments that were no longer eliminated for reporting purposes in the first quarter of 2018 due to the derecognition of corresponding lower tier property partnerships, (ii) net increase in unrealized holding gains that we recognized in the third quarter of 2018 in connection with our bond investments and (iii) the reversal of a $3.4 million cumulative translation adjustment due to the sale of our international asset and investment management business in the first quarter of 2018. These increases were partially offset by the reclassification out of AOCI and into our Consolidated Statements of Operations of $5.1 million of realized gains associated with two bond investments that were sold in the third quarter of 2018.

 

Other Changes in Common Shareholders’ Equity

 

Table 6 summarizes other changes in common shareholders’ equity for the periods presented.

 

Table 6: Other Changes in Common Shareholders’ Equity

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Common share repurchases  $(772)  $(1,161)  $389   $(4,113)  $(3,913)  $(200)
Common shares issued    ─     ─     ─    8,375     ─    8,375 
Net change due to change in accounting principles    ─     ─     ─    9,206     ─    9,206 
Purchases of shares in a subsidiary (including price adjustments on prior purchases)    ─    (724)   724    (73)   (931)   858 
Director and employee share awards   82    82     ─    246    171    75 
Options exercised   4,057     ─    4,057    4,841     ─    4,841 
Options tendered for payment of withholding taxes   (1,751)    ─    (1,751)   (2,066)    ─    (2,066)
Other changes in common shareholders' equity  $1,616   $(1,803)  $3,419   $16,416   $(4,673)  $21,089 

 

The amount of other changes in common shareholders’ equity for the three months ended September 30, 2018 increased compared to that reported for the three months ended September 30, 2017, primarily as a result of (i) the exercise of stock options previously granted to our officers and (ii) the decline in the number of common shares that were repurchased by the Company during the third quarter of 2018 compared to that purchased by the Company in the third quarter of 2017.

 

The amount of other changes in common shareholders’ equity for the nine months ended September 30, 2018 increased compared to that reported for the nine months ended September 30, 2017, primarily as a result of (i) a $9.2 million transition adjustment to retained earnings that we recognized in connection with the adoption of new accounting standards on January 1, 2018 (see “Adoption of New Accounting Standards” within Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies”), (ii) the issuance of 250,000 common shares to Hunt during the nine months ended September 30, 2018 in connection with the Disposition and (iii) the exercise of stock options during 2018 that were previously granted to our officers.

 

 12 

 

 

CONSOLIDATED RESULTS OF OPERATIONS

 

 

 

This section provides a comparative discussion of our Consolidated Results of Operations for the three months and nine months ended September 30, 2018 and September 30, 2017 and should be read in conjunction with our financial statements, including the accompanying notes. See “Critical Accounting Policies and Estimates” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.

 

For presentation purposes, income (loss) that was attributable to noncontrolling interest holders of CFVs are excluded from our comparative discussion of our results of operations because (i) the Company had a minimal ownership interest in these consolidated entities and (ii) such income (loss) does not affect the measurement of diluted common shareholders’ equity per common share, which is a key metric that is used by management to evaluate the Company’s financial performance. In this regard, the discussion and analysis of consolidated results of operations herein is focused on income (loss) that is allocable to common shareholders. Additionally, income (loss) that was attributable to businesses or assets that were conveyed by the Company in the Disposition was reclassified for all reporting periods and is presented as discontinued operations. The Disposition resulted in the deconsolidation from the Company’s Consolidated Balance Sheets in the first quarter of 2018 of all guaranteed LIHTC funds and the derecognition of nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017. See Notes to Consolidated Financial Statements – Note 15, “Consolidated Funds and Ventures,” for more information about income (loss) that was attributable to noncontrolling interest holders of CFVs.

 

Net Income Allocable to Common Shareholders

 

Table 7 summarizes net income allocable to common shareholders for the periods presented.

 

Table 7: Net Income Allocable to Common Shareholders

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Net interest income  $2,603   $1,814   $789   $8,707   $6,361   $2,346 
Other income   204    793    (589)   717    1,302    (585)
Operating and other expenses:                              
Other interest expense   (1,166)   (953)   (213)   (3,353)   (3,331)   (22)
Operating expenses   (3,441)   (7,933)   4,492    (14,746)   (16,697)   1,951 
Net gains on bonds, derivatives, real estate sales and operations, loans and debt extinguishment of liabilities   7,260    5,390    1,870    11,622    5,129    6,493 
Equity in income from unconsolidated funds and ventures   3,273    6,531    (3,258)   5,655    11,472    (5,817)
Net loss allocated to common shareholders related to CFVs    ─    (897)   897     ─    (3,094)   3,094 
Net income to common shareholders from continuing operations before income taxes   8,733    4,745    3,988    8,602    1,142    7,460 
Income tax expense   (122)   (384)   262    (86)   (550)   464 
Net income to common shareholders from discontinued operations, net of tax   13    5,095    (5,082)   21,210    11,787    9,423 
Net losses allocable to noncontrolling interests in CFVs related to discontinued operations    ─    465    (465)    ─    1,515    (1,515)
Net income allocable to common shareholders  $8,624   $9,921   $(1,297)  $29,726   $13,894   $15,832 

 

Net Interest Income

 

Net interest income represents interest income earned on our investment in bonds, loans and other interest-earning assets less our cost of funding associated with short-term borrowings and long-term debt that we use to finance such assets.

 

Table 8 summarizes net interest income for the periods presented.

 

 13 

 

 

Table 8: Net Interest Income

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Interest income:                              
Interest on bonds  $2,178   $2,194   $(16)  $7,425   $7,049   $376 
Interest on loans and short-term
investments
   1,055    91    964    3,196    638    2,558 
Total interest income   3,233    2,285    948    10,621    7,687    2,934 
Asset related interest expense:                              
Bond related debt   (630)   (471)   (159)   (1,914)   (1,326)   (588)
Total interest expense   (630)   (471)   (159)   (1,914)   (1,326)   (588)
Net interest income  $2,603   $1,814   $789   $8,707   $6,361   $2,346 

 

Net interest income for the three months and nine months ended September 30, 2018 increased compared to that reported for the three months and nine months ended September 30, 2017 primarily due to (i) interest income on a $57.0 million note receivable that we recognized during 2018 in connection with the Disposition and (ii) the recognition of interest income on a $9.0 million senior loan during 2018 that we acquired from an affiliate of MGM. The impact associated with these items was partially offset by an increase in interest expense associated with bond related debt that was prompted by the reclassification of notes payable and other debt to bond related debt. The reclassification of such debt obligations was made in connection with the two bond investments that were recognized in the first quarter of 2018 upon the deconsolidation of various CFVs.

 

Other Income

 

Other Income includes asset management fees and reimbursements as well as other miscellaneous income.

 

Table 9 summarizes other income for the periods presented.

 

Table 9: Other Income

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Other income  $204   $793   $(589)  $717   $1,302   $(585)

 

Other income for the three months and nine months ended September 30, 2018 declined compared to that reported for the three months and nine months ended September 30, 2017 primarily due to the recognition of approximately $0.6 million of non-recurring income that was received in the third quarter of 2017 in connection with the reimbursement by MMA Capital TC Fund I, LLC of a mandatory loan that the Company had made to fulfill a guaranteed obligation.

 

Other Interest Expense

 

Other interest expense represents our cost of funding associated with debt obligations that do not finance our interest earning assets.

 

Table 10 summarizes other interest expense for the periods presented.

 

Table 10: Other Interest Expense

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Subordinated debt  $(891)  $(782)  $(109)  $(2,472)  $(3,003)  $531 
Notes payable and other debt   (275)   (171)   (104)   (881)   (328)   (553)
Other interest expense  $(1,166)  $(953)  $(213)  $(3,353)  $(3,331)  $(22)

 

 14 

 

 

Other interest expense for the three months and nine months ended September 30, 2018 increased compared to that reported for the three months and nine months ended September 30, 2017 primarily as a result of (i) the issuance of debt in the third quarter of 2017 that was used to finance our purchase of an 11.85% ownership interest in SAWHF and (ii) an increase in variable interest rates associated with our subordinated debt. The impact of these items was partially offset by a reduction in other interest expense that was attributable to our discounted purchase during the first nine months of 2017 of $26.4 million of the Company’s subordinated debt of which $19.9 million and $6.5 million pertained to purchases during the second and third quarters of 2017, respectively.

 

Operating Expenses

 

Operating expenses include salaries and benefits, management fees and reimbursable expenses payable to our External Manager, general and administrative expense, professional fees and other miscellaneous expenses.

 

Table 11 summarizes operating expenses for the periods presented.

 

Table 11: Operating Expenses

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Salaries and benefits  $(33)  $(4,204)  $4,171   $(1,128)   (9,471)  $8,343 
External management fees and reimbursable expenses   (1,059)    ─    (1,059)   (5,762)    ─    (5,762)
General and administrative   (328)   (411)   83    (1,032)   (1,184)   152 
Professional fees   (1,230)   (2,077)   847    (5,031)   (4,408)   (623)
Other expenses   (791)   (1,241)   450    (1,793)   (1,634)   (159)
Operating expenses  $(3,441)  $(7,933)  $4,492   $(14,746)  $(16,697)  $1,951 

 

Operating expenses for the three months ended September 30, 2018 declined compared to those reported for the three months ended September 30, 2017 primarily due to (i) a decrease in employee-related compensation and other overhead costs that stemmed from the Company’s conversion to an externally managed business model upon settlement of the Disposition, (ii) a non-recurring $0.9 million other-than-temporary impairment charge recognized in the third quarter of 2017 in connection with one of our investments in infrastructure bonds and (iii) non-recurring professional fees that were incurred during the three months ended September 30, 2017 primarily associated with the Disposition. The impact of these items was partially offset by (i) the incurrence in 2018 of external management fees and reimbursable expenses payable to our External Manager and (ii) $0.6 million of foreign currency losses associated with the remeasurement of foreign currency-denominated assets and liabilities to U.S. dollars during the three months ended September 30, 2018.

 

Operating expenses for the nine months ended September 30, 2018 declined compared to those reported for the nine months ended September 30, 2017 primarily due a reduction in (i) employee-related compensation and other overhead costs that stemmed from the Company’s conversion to an externally managed business model upon settlement of the Disposition and (ii) stock compensation-related expense that was attributable to decreases in the volume of outstanding stock options driven by the exercise thereof in 2018 by our officers. The impact of these items was partially offset by (i) the incurrence in 2018 of external management fees and reimbursable expenses payable to our External Manager, (ii) an increase in non-recurring professional fees during the first quarter of 2018 that were largely driven by the Disposition and (iii) $0.5 million of foreign currency losses associated with the remeasurement of foreign currency-denominated assets and liabilities to U.S. dollars during the nine months ended September 30, 2018.

 

Net Gains (Losses) Relating to Bonds, Derivatives, Real Estate-Related Investments, Loans and Extinguishment of Liabilities

 

Net gains (losses) relating to bonds, derivatives, real estate-related investments, loans and extinguishment of liabilities (“Net gains”) includes net realized and unrealized gains and losses associated with loans and derivative instruments, as well as includes gains that are realized by the Company in connection with the extinguishment of its recognized debt obligations.

 

 15 

 

 

Table 12 summarizes Net gains for the periods presented.

 

Table 12: Net Gains

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Net gains on bonds  $5,080   $620   $4,460   $5,080   $620   $4,460 
Net gains on derivatives   1,102    1,430    (328)   5,464    2,501    2,963 
Net gains on real estate-related investments   1,092    1,526    (434)   1,092    1,700    (608)
Net gains (losses) on loans    ─    805    (805)    ─    (4,530)   4,530 
Net (losses) gains on extinguishment of liabilities   (14)   1,009    (1,023)   (14)   4,838    (4,852)
Total net gains  $7,260   $5,390   $1,870   $11,622   $5,129   $6,493 

 

Net gains for the three months ended September 30, 2018 increased compared to those reported for the three months ended September 30, 2017 primarily due to the recognition of $5.1 million of realized gains associated with two bond investments that were sold in the third quarter of 2018. The impact of this item was partially offset by decreases that were attributable to (i) non-recurring extinguishment gains that were recognized in the third quarter of 2017 in connection with the discounted purchase of $6.5 million of subordinated debt and (ii) an $0.8 million loan recovery that was received in connection with the settlement of a third-party guaranty in the third quarter of 2017.

 

Net gains for the nine months ended September 30, 2018 increased compared to those reported for the nine months ended September 30, 2017 primarily due to (i) $5.3 million of non-recurring fair value losses that we recognized in the first quarter of 2017 associated with a subordinated loan that the Company made to a residential solar power provider that filed for bankruptcy protection in March 2017, (ii) $5.1 million of realized gains associated with two bond investments that were sold in the third quarter of 2018 and (iii) an increase in net gains on derivatives that primarily related to derivative instruments that we use to hedge interest rate risk. The impact of these items was partially offset by non-recurring extinguishment gains of $4.8 million that were recognized during the first nine months of 2017 in connection with discounted purchases of debt obligations that were made by the Company during such reporting period.

 

Equity in Income from Unconsolidated Funds and Ventures

 

Equity in income from unconsolidated funds and ventures includes our portion of the income associated with certain funds and ventures in which we have an equity interest.

 

Table 13 summarizes equity in income from unconsolidated funds and ventures for the periods presented.

 

Table 13: Equity in Income from Unconsolidated Funds and Ventures

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
U.S. real estate partnerships  $1,770   $3,908   $(2,138)  $1,996   $4,053   $(2,057)
Solar Ventures   2,032    2,160    (128)   4,004    6,956    (2,952)
SAWHF   (529)   463    (992)   (345)   463    (808)
Equity in income from unconsolidated funds and ventures  $3,273   $6,531   $(3,258)  $5,655   $11,472   $(5,817)

 

Equity in income from unconsolidated funds and ventures for the three months ended September 30, 2018 declined compared to that reported for the three months ended September 30, 2017 primarily due to (i) a non-recurring $3.8 million gain that was recognized in the third quarter of 2017 in connection with the sale of the underlying real estate by the partnership in which the Company held a 33% limited partner interest and (ii) a decline in the net income attributable to the Company from its SAWHF investment primarily the result of unrealized investment gains being recognized in the 2017 reporting periods by the fund as compared to unrealized investment losses recognized in the 2018 reporting periods. This decline was partially offset by additional income recognized in the third quarter of 2018 related to three limited partner interests in affordable housing partnerships that were acquired in the first quarter of 2018.

 

 16 

 

 

Equity in income from unconsolidated funds and ventures for the nine months ended September 30, 2018 declined compared to that reported for the nine months ended September 30, 2017 primarily due to the factors identified in the preceding paragraph, coupled with a decrease in interest income earned by our Solar Ventures that was attributable to uninvested capital during the first six months of 2018 and an increase in the preferred return earned by our previous institutional capital partner during 2018.

 

Net Income to Common Shareholders from Discontinued Operations

 

Net income from discontinued operations primarily includes income and expenses associated with businesses and assets that were sold by the Company in connection with the Disposition.

 

Table 14 summarizes our income from discontinued operations, net of tax related to the sale of certain businesses and assets.

 

Table 14: Net Income to Common Shareholders from Discontinued Operations

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Income from discontinued operations  $13   $4,844   $(4,831)  $790    11,536   $(10,746)
Net gain from disposal of business    ─    251    (251)   20,420    251    20,169 
Total net gain from discontinued operations   13    5,095    (5,082)   21,210    11,787    9,423 
Loss from discontinued operations allocable to noncontrolling interests    ─    465    (465)    ─    1,515    (1,515)
Net income to common shareholders from discontinued operations  $13   $5,560   $(5,547)  $21,210   $13,302   $7,908 

 

Net income to common shareholders from discontinued operations for the three months ended September 30, 2018 declined compared to that reported for the three months ended September 30, 2017 because of the derecognition in the first quarter of 2018 of various businesses and assets that were conveyed to Hunt in connection with the Disposition.

 

Net income to common shareholders from discontinued operations for the nine months ended September 30, 2018 increased compared to that reported for the nine months ended September 30, 2017 primarily due to a net gain of $20.4 million that we recognized in the first quarter of 2018 in connection with the Disposition. The impact of this net gain was partially offset by a decline in income from discontinued operations that was primarily driven by (i) the short duration of the Company’s ownership in the first quarter of 2018 of the businesses and assets that were conveyed in the Disposition, while corresponding amounts reported for the nine months ended September 30, 2017 reflect ownership of such items for a full reporting period and (ii) the derecognition upon settlement of the Disposition of noncontrolling interests associated with previously consolidated property partnerships. See Notes to Consolidated Financial Statements – Note 14, “Discontinued Operations,” for more information.

 

Net Loss from CFVs Allocable to Common Shareholders

 

Table 15 allocates the net loss from CFVs to noncontrolling interests in CFVs and common shareholders for the periods presented.

 

Table 15: Net Loss from CFVs Allocable to Common Shareholders

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Interest on loans and short-term investments  $  ─   $3   $(3)  $ ─   $8   $(8)
Other income     ─      ─      ─      ─    239    (239)
Interest expense     ─    (121)   121      ─    (307)   307 
Professional fees     ─    (487)   487      ─    (589)   589 
Impairment     ─    (9,671)   9,671      ─    (21,071)   21,071 
Asset management fee expense     ─    (1,016)   1,016      ─    (3,206)   3,206 
Other expenses     ─    (459)   459      ─    (1,370)   1,370 
Equity in losses from LTPPs of CFVs     ─    (1,863)   1,863      ─    (9,125)   9,125 
Net loss from CFVs     ─    (13,614)   13,614      ─    (35,421)   35,421 
Net loss from CFVs allocable to noncontrolling interest in CFVs from continuing operations     ─    12,717    (12,717)     ─    32,327    (32,327)
Net loss from CFVs allocable to common shareholders from continuing operations  $  ─   $(897)  $897   $ ─   $(3,094)  $3,094 

 

 

 17 

 

 

Table 16 further attributes the reported net loss from CFVs that was allocable to common shareholders for the periods presented.

 

Table 16: Net Loss from CFVs Allocable to Common Shareholders

 

   For the three months ended       For the nine months ended     
   September 30,       September 30,     
(in thousands)  2018   2017   Change   2018   2017   Change 
Equity in losses from LTPPs  $  ─   $(897)   897   $  ─   $(3,104)  $3,104 
Equity in income from consolidated property partnerships     ─      ─      ─      ─    10    (10)
Net loss from CFVs allocable to common shareholders from continuing operations  $ ─   $(897)  $897   $  ─   $(3,094)  $3,094 

 

 

The sale of our LIHTC business line and certain assets to Hunt on January 8, 2018 resulted in the deconsolidation from the Company’s Consolidated Balance Sheets in the first quarter of 2018 of all guaranteed LIHTC funds and derecognition of nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017. As a result, for the three months and nine months ended September 30, 2018, the Company did not recognize any revenues, expenses, assets, liabilities or noncontrolling interests associated with such CFVs or an allocation to common shareholders during such reporting periods.

 

 18 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

 

 

Liquidity

 

Our principal sources of liquidity include: (i) cash and cash equivalents; (ii) cash flows from operating activities; and (iii) cash flows from investing activities.

 

Summary of Cash Flows

 

For purposes of presenting the Company’s summary of cash flows and changes thereto, Tables 17 – 20 of this Report have been retrospectively adjusted to reflect the Company’s adoption on January 1, 2018, of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This guidance requires the Company to include amounts that are deemed to be restricted cash and restricted cash equivalents together with its cash and cash equivalent balances for purposes of preparing its Consolidated Statements of Cash Flows.

 

Table 17 provides a consolidated view of the change in cash, cash equivalents and restricted cash of the Company for the periods presented, though changes in such balances that were attributable to CFVs are separately identified in such tabular disclosure. However, changes in net cash flows that are reported in Tables 18, 19 and 20 are exclusive of changes in restricted cash of CFVs. At September 30, 2018, and September 30, 2017, $10.9 million and $42.7 million, respectively, of cash, cash equivalents and restricted cash as presented below in Table 17 represents restricted cash.

 

As a result of the Disposition, $19.7 million and $19.1 million of cash, cash equivalents and restricted cash were classified in the Consolidated Balance Sheets as “Assets of discontinued operations” at December 31, 2017 and September 30, 2017, respectively.

 

We believe that cash generated from operating and investing activities, along with available cash and cash equivalents has been, and will continue to be, sufficient to fund our normal operating needs and meet our obligations as they become due.

 

Table 17: Net Decrease in Cash, Cash Equivalents and Restricted Cash

 

   For the nine months ended September 30, 2018 
(in thousands)  MMA   CFVs   Total 
Cash, cash equivalents and restricted cash at beginning of period  $75,632   $24,554   $100,186 
Net cash used in:               
Operating activities   (3,994)     ─    (3,994)
Investing activities   (41,814)   (24,554)   (66,368)
Financing activities   (3,324)     ─    (3,324)
Net decrease in cash, cash equivalents and restricted cash   (49,132)   (24,554)   (73,686)
Cash, cash equivalents and restricted cash at end of period  $26,500    $  ─   $26,500 

 

   For the nine months ended September 30, 2017 
(in thousands)  MMA   CFVs   Total 
Cash, cash equivalents and restricted cash at beginning of period  $79,445   $23,584   $103,029 
Net cash provided by (used in):               
Operating activities   5,872    (2,176)   3,696 
Investing activities   (1,229)   2,208    979 
Financing activities   (16,444)   (79)   (16,523)
Net decrease in cash, cash equivalents and restricted cash   (11,801)   (47)   (11,848)
Cash, cash equivalents and restricted cash at end of period  $67,644   $23,537   $91,181 

 

 19 

 

 

Operating Activities

 

Table 18 provides information about net cash flows provided by, or used in, operating activities for the periods presented. Cash flows from operating activities include, but are not limited to, interest income on our investments and asset management fees.

 

Table 18: Net Cash Flows Associated With Operating Activities

 

   For the nine months ended     
   September 30,     
(in thousands)  2018   2017   Change 
Interest income  $12,135   $11,618   $517 
Distributions received from investments in partnerships   7,810    4,517    3,293 
Asset management fees received   1,017    12,248    (11,231)
Other income   183    987    (804)
Salaries and benefits   (176)   (13,666)   13,490 
(Advances on) and proceeds received on loans held for sale   (9,000)   805    (9,805)
Interest paid   (5,547)   (5,568)   21 
Professional fees   (5,396)   (4,751)   (645)
External management fees and reimbursable expenses   (4,703)    ─    (4,703)
General and administrative   (1,015)   (2,022)   1,007 
Other expenses   (431)   (220)   (211)
Other   1,129    1,924    (795)
Net cash flows (used in) provided by operating activities  $(3,994)  $5,872   $(9,866)

 

Net cash flows used in operating activities increased by $9.9 million during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. This net increase was primarily driven by the following: (i) an $11.2 million decrease in asset management fees received as a result of the Disposition; (ii) the purchase of a $9.0 million senior loan from an MGM affiliate that we designated as held for sale; and (iii) $4.7 million of external management fees and reimbursable expenses incurred as a result of the Company’s conversion to an externally managed business model in the first quarter of 2018 in connection with the Disposition. The effects of these items were partially offset by (i) a $13.5 million decrease in cash flows used for salaries and benefits that stemmed from the Company’s conversion to an externally managed business model upon settlement of the Disposition and (ii) a $3.3 million increase in distributions received from the Company’s investments in partnerships and ventures primarily driven by distributions from the affordable housing partnerships in which we acquired limited partner interests in during the first quarter of 2018.

 

Investing Activities

 

Table 19 provides information about net cash flows provided by, or used in, investing activities for the periods presented. Cash flows from investing activities include, but are not limited to, principal payments and sales proceeds received on bonds and proceeds from the sale of real estate and other investments.

 

Table 19: Net Cash Flows Associated With Investing Activities

 

   For the nine months ended     
   September 30,     
(in thousands)  2018   2017   Change 
Principal payments and sales proceeds received on bonds and loans  $7,466   $23,828   $(16,362)
Proceeds from the sale of real estate and other investments   1,678    5,887    (4,209)
Cash and restricted cash derecognized in the Disposition   (21,942)    ─    (21,942)
Capital distributions received from investments in partnerships   21,595    10,681    10,914 
Investments in property partnerships and real estate   (49,611)   (26,097)   (23,514)
Advances on and originations of loans held for investment   (1,000)   (15,528)   14,528 
Net cash flows used in investing activities  $(41,814)  $(1,229)  $(40,585)

 

 20 

 

 

Net cash flows used in investing activities during the nine months ended September 30, 2018 increased by $40.6 million as compared to amounts used during the nine months ended September 30, 2017. This net increase was primarily driven by the following: (i) a $23.5 million increase in contributions to the Company’s investments in partnerships primarily related to the Solar Ventures; (ii) the derecognition of $21.9 million of cash and restricted cash upon settlement of the Disposition; and (iii) a decline in the pace of redemption of bonds and loans. The effects of these items were partially offset by (i) a $14.5 million decrease in loan originations and advances, primarily due to the portfolio of taxable senior mortgage loans the Company acquired in the first quarter of 2017 and (ii) a $10.9 million increase in capital distributions received from the Company’s investments in partnerships, primarily related to the Solar Ventures.

 

Financing Activities

 

Table 20 provides information about net cash flows provided by, or used in, financing activities for the periods presented.

 

Table 20: Net Cash Flows Associated With Financing Activities

 

   For the nine months ended     
   September 30,     
(in thousands)  2018   2017   Change 
Proceeds from borrowing activity  $12,189   $15,248   $(3,059)
Repayment of borrowings   (17,708)   (26,426)   8,718 
Purchase of common shares   (4,113)   (3,913)   (200)
Options tendered for payment of withholding taxes   (2,067)    ─    (2,067)
Issuance of common shares   8,375     ─    8,375 
Other    ─    (1,353)   1,353 
Net cash flows used in financing activities  $(3,324)  $(16,444)  $13,120 

 

Net cash flows used in financing activities during the nine months ended September 30, 2018 decreased by $13.1 million as compared to amounts used during the nine months ended September 30, 2017. This decrease in net cash flows used for such activities was primarily attributable to (i) an $8.4 million increase in net cash flows provided from the private placement of 250,000 of the Company’s common shares to Hunt; and (ii) an $8.7 million decrease in the amount of net cash flows used to repay borrowings. During the nine months ended September 30, 2017, the Company used $21.8 million of cash to execute discounted purchases of the Company’s fixed rate subordinated debt while the Company used $16.3 million of cash in the nine-month period ended September 30, 2018 to terminate a total return swap that financed one of our leveraged bond investments. The effects of these items were partially offset by a decline in the Company’s borrowing activity.

 

Capital Resources

 

Our debt obligations primarily include liabilities that we recognized in connection with the execution of TRS agreements that we use to finance a portion of our investments in bonds, as well as subordinated debentures and other notes payable.  Each of the major types of our debt obligations is further discussed below.

 

 21 

 

 

Table 21 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at September 30, 2018 and December 31, 2017. See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information about these contractual commitments.

 

Table 21: Asset Related Debt and Other Debt

 

   At   At 
   September 30, 2018   December 31, 2017 
       Weighted-Average       Weighted-Average 
   Carrying   Effective Interest   Carrying   Effective Interest 
(dollars in thousands)  Value   Rate   Value   Rate 
Asset Related Debt (1)                    
Notes payable and other debt – bond related  $81,414    3.0%  $83,838    3.1%
                     
Other Debt (2)                    
Subordinated debt   98,285    3.5    99,997    2.6 
Notes payable and other debt   7,473    14.7    25,592    6.7 
Total other debt   105,758    4.3    125,589    3.5 
                     
Total asset related debt and other debt   187,172    3.7    209,427    3.3 
                     
Debt related to CFVs (3)    ─     ─    6,712    6.5 
                     
Total debt  $187,172    3.7%  $216,139    3.4%

 

(1)Asset related debt is debt that finances interest-bearing assets. The interest expense from this debt is included in “Net interest income” on the Consolidated Statements of Operations.

 

(2)Other debt is debt that does not finance interest-bearing assets. The interest expense from this debt is included in “Interest expense” under “Operating and other expenses” on the Consolidated Statements of Operations.

 

(3)See Notes to Consolidated Financial Statements – Note 15, “Consolidated Funds and Ventures,” for more information about CFVs.

 

Notes Payable and Other Debt – Bond Related

 

These debt obligations pertain to bonds that are classified as available-for-sale and that were financed by the Company through TRS agreements. See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information.

 

Subordinated Debt

 

At September 30, 2018 and December 31, 2017, the Company had subordinated debt with a UPB of $90.3 million and $91.6 million, respectively. The carrying value and weighted-average yield of this debt at September 30, 2018 and December 31, 2017 is provided above in Table 21. See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information.

 

Notes Payable and Other Debt

 

At September 30, 2018 and December 31, 2017, the Company had notes payable and other debt with a UPB of $7.8 million and $26.0 million, respectively. See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information.

 

Debt Related to CFVs

 

The Disposition resulted in the derecognition from the Company’s Consolidated Balance Sheets of nearly all CFVs. As a result, all debt obligations associated with CFVs were derecognized upon the settlement of the Disposition. Consequently, the Company had no recognized debt related to CFVs as of September 30, 2018.

 

At December 31, 2017, the $6.7 million of debt related to CFVs consisted of debt obligations associated with one of the guaranteed LIHTC funds that we consolidated for reporting purposes. At December 31, 2017, the carrying value of this debt, which was due on demand, equaled its UPB and its weighted-average effective interest rate was 6.5%.

 

 22 

 

 

Covenant Compliance and Debt Maturities

 

At September 30, 2018 and December 31, 2017, the Company was in compliance with all covenants under its debt arrangements.

 

Off-Balance Sheet Arrangements

 

At December 31, 2017, the Company had guaranteed minimum yields to investors in 11 guaranteed LIHTC funds that were consolidated for reporting purposes. The Company also had agreed to make mandatory loans to MMA Capital TC Fund I for distribution to the fund investor in the event of certain tax credit shortfalls covered by a tax credit guarantee provided by the Company. Refer to Notes to Consolidated Financial Statements – Note 9, “Guarantees and Collateral,” for more information about our guarantees and certain other contingent arrangements.

 

The Company’s guarantee obligations to investors in 11 guaranteed LIHTC funds were assumed by Hunt in connection with the Disposition and, consequently, such guaranteed LIHTC funds were deconsolidated from the Company’s Consolidated Balance Sheets in the first quarter of 2018.

 

Other Contractual Commitments

 

The Company is committed to make additional capital contributions to certain of its investments in partnerships and ventures. Refer to Notes to Consolidated Financial Statements - Note 3, “Investments in Partnerships,” for information about these commitments.

 

The Company had no unfunded loan commitments at September 30, 2018 and December 31, 2017. Refer to Notes to Consolidated Financial Statements - Note 4, “Loans Held for Investment (“HFI”) and Loans Held for Sale (“HFS”),” for more information.

 

The Company uses derivative instruments for various purposes. These instruments contingently obligate the Company in most cases to make payments to its counterparties. Refer to Notes to Consolidated Financial Statements - Note 7, “Derivative Instruments,” for more information about these instruments.

 

Other Capital Resources

 

Common Shares

 

On March 13, 2018, the Board authorized a 2018 share repurchase program (“2018 Plan”) for up to 125,000 common shares, at a maximum price of $30.00 per share. The Company adopted a Rule 10b5-1 plan implementing the Board’s authorization. On August 7, 2018, the Board amended the 2018 Plan to increase (i) the total shares authorized for repurchase to 187,500 and (ii) the maximum authorized share repurchase price per share to $31.50. Furthermore, on November 6, 2018, the Board authorized the amendment of the 2018 Plan to increase (i) the total shares authorized for repurchase to 218,750 and (ii) the maximum authorized share repurchase price per share to $32.96, which represents the Company’s Book Value per share at September 30, 2018.

 

In the second quarter of 2018, the Company repurchased 121,027 common shares at an average price of $27.60. In the third quarter of 2018, the Company repurchased 28,473 common shares at an average price of $27.11. Between October 1, 2018 and November 1, 2018, the Company repurchased 34,350 common shares at an average price of $26.26. After taking into consideration the number of shares purchased through November 1, 2018, the number of shares that remains available for purchase under the amended 2018 Plan is 34,900.

 

In conjunction with the Disposition, the Company agreed to issue, and Hunt agreed to acquire, 250,000 of the Company’s common shares in a private placement at an average purchase price of $33.50 per share. On March 9, 2018, the Company issued 125,000 common shares to Hunt for $4.1 million, representing a price per share of $33.00. On June 26, 2018, the Company issued the remaining 125,000 shares to Hunt for $4.3 million, or $34.00 per share.

 

Dividend Policy

 

The Board makes determinations regarding dividends based on management’s recommendation, which is based on an evaluation of a number of factors, including our common shareholders’ equity, business prospects and available cash. We do not expect to pay a dividend for the foreseeable future.

 

 23 

 

 

Tax Benefits Rights Agreement

 

Effective May 5, 2015, the Company adopted a Tax Benefits Rights Agreement (the “Rights Plan”) designed to help preserve the Company’s NOLs.  In connection with adopting the Rights Plan, the Company declared a distribution of one right per common share to shareholders of record as of May 15, 2015.  The rights do not trade apart from the current common shares until the distribution date, as defined in the Rights Plan. Under the Rights Plan, the acquisition by an investor (or group of related investors) of greater than a 4.9% stake in the Company, could result in all existing shareholders other than the new 4.9% holder having the right to acquire new shares for a nominal cost, thereby significantly diluting the ownership interest of the acquiring person. The Rights Plan runs for five years, or until the Board determines the plan is no longer required, whichever comes first.

 

On January 3, 2018, the Board approved a waiver of the 4.9% ownership limitation with respect to Hunt, increasing such limitation to 9.9% of the Company’s issued and outstanding shares in any rolling 12-month period.

 

At September 30, 2018, we had two shareholders with a greater than a 4.9% stake in the Company. Additionally, as of September 30, 2018, two of the Company’s executive officers, Michael L. Falcone and Gary A. Mentesana could each have a greater than 4.9% stake in the Company for purposes of the Rights Plan following their prospective exercise of their vested option awards. In anticipation of these officers becoming greater than 4.9% shareholders, the Board of Directors has named each of them as an exempted person in accordance with the Rights Plan and determined that the exercise of the options and the required share award purchases will not, in and of themselves, constitute a triggering event for purposes of our Rights Plan.

 

 24 

 

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

 

 

The preparation of our consolidated financial statements is based on the application of U.S. GAAP, which requires us to make certain estimates and assumptions that affect the reported amounts and classification of the amounts in our consolidated financial statements. These estimates and assumptions require us to make difficult, complex and subjective judgments involving matters that are inherently uncertain. We base our accounting estimates and assumptions on historical experience and on judgments that we believe to be reasonable under the circumstances known to us at the time. Actual results could differ materially from these estimates. We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented and have discussed those policies with our Audit Committee.

 

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors. See “Item 1A - Risk Factors” in our 2017 Annual Report for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified three of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These policies govern:

 

·fair value measurement of financial instruments;
·consolidation; and
·income taxes.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our 2017 Annual Report for a discussion of these critical accounting policies and estimates.

 

 25 

 

 

ACCOUNTING AND REPORTING DEVELOPMENTS

 

 

 

We identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies.”

 

 26 

 

 

Item 1. Financial Statements

 

MMA Capital Management, LLC

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

   At   At 
   September 30,   December 31, 
   2018   2017 
ASSETS          
Cash and cash equivalents  $15,556   $35,693 
Restricted cash (includes $23,495 related to consolidated funds and ventures ("CFVs") at December 31, 2017)   10,944    44,766 
Investments in debt securities (includes $122,811 and $128,902 pledged as collateral)   147,808    143,604 
Investments in partnerships (includes $99,142 related to CFVs at December 31, 2017)   146,104    227,962 
Loans held for investment   58,299    736 
Loans held for sale   9,000      ─ 
Other assets (includes $5,175 related to CFVs at December 31, 2017)   16,187    17,905 
Assets of discontinued operations     ─    61,220 
Total assets  $403,898   $531,886 
           
LIABILITIES AND EQUITY          
Debt (includes $6,712 related to CFVs at December 31, 2017)  $187,172   $216,139 
Accounts payable and accrued expenses   3,166    6,098 
Unfunded equity commitments to lower tier property partnerships related to CFVs     ─    8,003 
Other liabilities (includes $35,850 related to CFVs at December 31, 2017)   20,013    57,332 
Liabilities of discontinued operations     ─    17,212 
Total liabilities  $210,351   $304,784 
           
Commitments and contingencies (see Note 10)          
           
Equity          
Noncontrolling interests in CFVs  $   $89,529 
Common shareholders’ equity:          
Common shares, no par value (5,728,838 and 5,525,687 shares issued and outstanding
and 101,320 and 92,282 non-employee directors' deferred shares issued at
September 30, 2018 and December 31, 2017, respectively)
   142,562    96,420 
Accumulated other comprehensive income ("AOCI")   50,985    41,153 
Total common shareholders’ equity   193,547    137,573 
Total equity   193,547    227,102 
Total liabilities and equity  $403,898   $531,886 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 27 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Interest income                    
Interest on bonds  $2,178   $2,194   $7,425   $7,049 
Interest on loans and short-term investments (includes $3 and $8 related to CFVs for the three months and nine months ended September 30, 2017, respectively)   1,055    94    3,196    646 
Total interest income   3,233    2,288    10,621    7,695 
Interest expense                    
Asset related debt   630    471    1,914    1,326 
Total interest expense   630    471    1,914    1,326 
Net interest income   2,603    1,817    8,707    6,369 
                     
Non-interest revenue                    
Other income (includes $239 related to CFVs for the nine months ended September 30, 2017)   204    793    717    1,541 
Total non-interest revenue   204    793    717    1,541 
Total revenues, net of interest expense   2,807    2,610    9,424    7,910 
                     
Operating and other expenses                    
Interest expense (includes $121 and $307 related to CFVs for the three months and nine months ended September 30, 2017, respectively)   1,166    1,074    3,353    3,638 
Salaries and benefits   33    4,204    1,128    9,471 
External management fees and reimbursable expenses   1,059     ─    5,762     ─ 
General and administrative   328    411    1,032    1,184 
Professional fees (includes $487 and $589 related to CFVs for the three months and nine months ended September 30, 2017, respectively)   1,230    2,564    5,031    4,997 
Impairments (includes $9,671 and $21,071 related to CFVs for the three months and nine months ended September 30, 2017, respectively)    ─    10,551    388    21,951 
Asset management fee expense (includes $1,016 and $3,206 related to CFVs for the three months and nine months ended September 30, 2017, respectively)   19    1,053    62    3,281 
Other expenses (includes $459 and $1,370 related to CFVs for the three months and nine months ended September 30, 2017, respectively)   772    783    1,343    2,049 
Total operating and other expenses   4,607    20,640    18,099    46,571 
                     
Equity in income from unconsolidated funds and ventures (includes ($1,863) and ($9,125) related to CFVs for the three months and nine months ended September 30, 2017, respectively)   3,273    4,668    5,655    2,347 
Net gains on bonds   5,080    620    5,080    620 
Net gains (losses) on loans    ─    805     ─    (4,530)
Net gains on real estate and other investments   1,092    1,526    1,092    1,700 
Net gains on derivatives   1,102    1,430    5,464    2,501 
Net (losses) gains on extinguishment of liabilities   (14)   1,009    (14)   4,838 
Net income (loss) from continuing operations before income taxes   8,733    (7,972)   8,602    (31,185)
Income tax expense   (122)   (384)   (86)   (550)
Net income from discontinued operations, net of tax   13    5,095    21,210    11,787 
Net income (loss)   8,624    (3,261)   29,726    (19,948)
Loss allocable to noncontrolling interests:                    
Net losses allocable to noncontrolling interests in CFVs:                    
Related to continuing operations    ─    12,717     ─    32,327 
Related to discontinued operations    ─    465     ─    1,515 
Net income allocable to common shareholders  $8,624   $9,921   $29,726   $13,894 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 28 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS – (continued)

(Unaudited)

(in thousands, except per share data)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Basic income per common share:                
Income from continuing operations  $1.48   $0.74   $1.49   $0.10 
Income from discontinued operations   0.01    0.95    3.71    2.26 
Income per common share  $1.49   $1.69   $5.20   $2.36 
                     
Diluted income per common share:                    
Income from continuing operations  $1.41   $0.74   $1.49   $0.10 
Income from discontinued operations       0.95    3.71    2.26 
Income per common share  $1.41   $1.69   $5.20   $2.36 
                     
Weighted-average common shares outstanding:                    
Basic   5,804    5,871    5,717    5,890 
Diluted   6,087    5,871    5,717    5,890 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 29 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

   For the three months ended   For the nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Net income allocable to common shareholders  $8,624   $9,921   $29,726   $13,894 
Net loss allocable to noncontrolling interests    ─    (13,182)    ─    (33,842)
Net income (loss)  $8,624   $(3,261)  $29,726   $(19,948)
                     
Other comprehensive (loss) income allocable to common shareholders                    
Bond related changes:                    
Net unrealized gains  $1,025   $623   $2,143   $1,969 
Reclassification of realized gains on sold or redeemed bonds into the Consolidated Statements of Operations   (5,080)   (620)   (5,080)   (620)
Reclassification of realized losses to the Consolidated Statements of Operations related to bond investments assessed as other- than-temporary-impairment ("OTTI")   141    39    6    39 
Reinstatement of unrealized bond gains due to deconsolidation of Consolidated Lower Tier Property Partnerships    ─     ─    9,415     ─ 
Net change in other comprehensive income due to bonds   (3,914)   42    6,484    1,388 
Income tax benefit   14     ─     ─     ─ 
Foreign currency translation adjustment   525   19    3,348    (207)
Other comprehensive (loss) income allocable to common shareholders  $(3,375)  $61   $9,832   $1,181 
                     
Comprehensive income to common shareholders  $5,249   $9,982   $39,558   $15,075 
Comprehensive loss to noncontrolling interests    ─    (13,182)    ─    (33,842)
Comprehensive income (loss)  $5,249   $(3,200)  $39,558   $(18,767)

 

The accompanying notes are an integral part of these consolidated financial statements

 

 30 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)

 

   For the nine months ended September 30, 2018 
   Common Equity Before
AOCI
   AOCI    Total Common
Shareholders’
Equity
   Noncontrolling
Interest in
CFVs 
   Total Equity  
   Shares   Amount             
Balance, January 1, 2018   5,617   $96,420   $41,153   $137,573   $89,529   $227,102 
Net income    ─    18,340      ─    18,340      ─    18,340 
Other comprehensive income    ─      ─    9,160    9,160      ─    9,160 
Purchase of shares in a subsidiary (including price adjustments on prior purchases)    ─    (73)     ─    (73)     ─    (73)
Common shares (restricted and deferred) issued under employee and non-employee director share plans   3    82      ─    82      ─    82 
Net change due to deconsolidation    ─      ─      ─      ─    (89,529)   (89,529)
Cumulative change due to change in accounting principles    ─    9,206      ─    9,206      ─    9,206 
Common shares issued   125    4,125      ─    4,125      ─    4,125 
Balance, March 31, 2018   5,745   128,100   50,313   178,413    ─   178,413 
Net income    ─    2,762      ─    2,762      ─    2,762 
Other comprehensive income    ─      ─    4,047    4,047      ─    4,047 
Options exercised   30    784      ─    784      ─    784 
Common shares (restricted and deferred) issued under employee and non-employee director share plans   3    82      ─    82      ─    82 
Common shares issued   125    4,250      ─    4,250      ─    4,250 
Options tendered for payment of withholding taxes   (13)   (315)     ─    (315)     ─    (315)
Common share repurchases   (121)   (3,341)     ─    (3,341)     ─    (3,341)
Balance, June 30, 2018   5,769   132,322   54,360   186,682    ─   186,682 
Net income    ─    8,624      ─    8,624      ─    8,624 
Other comprehensive loss    ─      ─    (3,375)   (3,375)     ─    (3,375)
Options exercised   158    4,057      ─    4,057      ─    4,057 
Common shares (restricted and deferred) issued under employee and non-employee director share plans   3    82      ─    82      ─    82 
Options tendered for payment of withholding taxes   (72)   (1,751)     ─    (1,751)     ─    (1,751)
Common share repurchases   (28)   (772)     ─    (772)     ─    (772)
Balance, September 30, 2018   5,830   $142,562   $50,985   $193,547   $ ─   $193,547 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 31 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)

 

   For the nine months ended September 30, 2017 
   Common Equity Before
AOCI
   AOCI   Total Common
Shareholders’
Equity 
   Noncontrolling
Interest in
CFVs 
   Total Equity  
   Shares   Amount             
Balance, January 1, 2017   6,007   $87,506   $37,818   $125,324   $134,999   $260,323 
Net loss    ─    (3,444)    ─    (3,444)   (9,137)   (12,581)
Other comprehensive income    ─     ─    352    352     ─    352 
Purchase of shares in a subsidiary (including price adjustments on prior purchases)    ─    (207)    ─    (207)    ─    (207)
Common shares (restricted and deferred) issued under employee and non-employee director share plans   2    44     ─    44     ─    44 
Common share repurchases   (88)   (1,770)    ─    (1,770)    ─    (1,770)
Balance, March 31, 2017   5,921   82,129   38,170   120,299   125,862   246,161 
Net income (loss)    ─    7,417     ─    7,417    (11,523)   (4,106)
Other comprehensive income    ─     ─    768    768     ─    768 
Distributions    ─     ─     ─     ─    (30)   (30)
Common shares (restricted and deferred) issued under employee and non-employee director share plans   2    45     ─    45     ─    45 
Common share repurchases   (42)   (982)    ─    (982)    ─    (982)
Balance, June 30, 2017   5,881   88,609   38,938   127,547   114,309   241,856 
Net income (loss)    ─    9,921     ─    9,921    (13,182)   (3,261)
Other comprehensive income    ─     ─    61    61     ─    61 
Distributions    ─     ─     ─     ─    (10)   (10)
Purchase of shares in a subsidiary (including price adjustments on prior purchases)    ─    (724)    ─    (724)   (65)   (789)
Common shares (restricted and deferred) issued under employee and non-employee director share plans   3    82     ─    82     ─    82 
Common share repurchases   (49)   (1,161)    ─    (1,161)    ─    (1,161)
Balance, September 30, 2017   5,835   $96,727   $38,999   $135,726   $101,052   $236,778 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 32 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

   For the nine months ended 
   September 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $29,726   $(19,948)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
          
Provisions for credit losses and impairment (1)   388    21,951 
Net equity in income from investments in partnerships   (5,655)   (2,047)
Net gains on bonds   (5,080)   (620)
Net gains on real estate and other investments   (1,157)   (1,962)
Gain on disposal of discontinued operations   (20,420)    ─ 
Net losses on loans    ─    4,530 
Net gains on derivatives   (3,208)   (515)
Net losses (gains) on extinguishment of liabilities   14    (4,838)
(Advances on) and proceeds received on loans held for sale   (9,000)   805 
Distributions received from investments in partnerships   7,810    4,487 
Subordinated debt effective yield amortization and interest accruals   (238)   (500)
Depreciation and other amortization (1)   (516)   1,960 
Foreign currency losses   531   132 
Stock-based compensation expense   1,176    2,651 
Decrease (increase) in asset management fees receivable   275    (6,167)
Increase in asset management fees payable    ─    1,269 
Other, net   1,360    2,508 
Net cash (used in) provided by operating activities   (3,994)   3,696 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Principal payments and sales proceeds received on bonds and loans held for
investment
   7,466    23,828 
Advances on and originations of loans held for investment   (1,000)   (15,528)
Investments in partnerships and real estate   (49,611)   (26,197)
Proceeds from the sale of real estate and other investments   1,678    6,213 
Cash and restricted cash derecognized in the Disposition   (23,009)    ─ 
Restricted cash related to deconsolidated guaranteed LIHTC funds   (23,487)    ─ 
Capital distributions received from investments in partnerships   21,595    12,663 
Net cash (used in) provided by investing activities   (66,368)   979 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from borrowing activity   12,189    15,248 
Repayment of borrowings   (17,709)   (26,495)
Purchase of treasury stock   (4,113)   (3,913)
Options tendered for payment of withholding taxes   (2,066)    ─ 
Issuance of treasury stock   8,375     ─ 
Other, net    ─    (1,363)
Net cash used in financing activities   (3,324)   (16,523)
Net decrease in cash, cash equivalents and restricted cash   (73,686)   (11,848)
Cash, cash equivalents and restricted cash at beginning of period (includes $19,727 of assets of discontinued operations as of December 31, 2017)   100,186    103,029 
Cash, cash equivalents and restricted cash at end of period  $26,500   $91,181 

 

(1)These amounts primarily relate to CFVs for the nine months ended September 30, 2017.

 

The accompanying notes are an integral part of these consolidated financial statements

 

 33 

 

 

MMA Capital Management, LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(Unaudited)

(in thousands)

 

   For the nine months ended 
   September 30, 
   2018   2017 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
Interest paid  $5,547   $5,804 
Income taxes paid   281    260 
           
Non-cash investing and financing activities:          
Unrealized gains included in other comprehensive income   9,832    1,181 
Debt and liabilities extinguished through sales and collections on bonds and loans   15,578    1,641 
Increase in common shareholders' equity and decrease in other liabilities due to change in accounting principles   9,206     ─ 
Increase in loans from the Disposition   57,000     ─ 
Increase in investments in debt securities from the Disposition   17,986     ─ 
Increase in other assets from the Disposition   2,142     ─ 
Increase in deferred revenue from the Disposition   (13,000)    ─ 
Increase in accumulated other comprehensive income from the Disposition   (9,415)    ─ 
Increase in loans held for investment, interest receivable and other liabilities and decrease in investment in partnerships   6,138     ─ 
Increase in common shareholders' equity and decrease in other liabilities due to stock options exercised   4,841     ─ 
           
Net change in assets, liabilities and equity due to deconsolidation of guaranteed LIHTC funds:          
Net decrease in investment in partnerships   (98,760)    ─ 
Decrease in other assets   (5,174)    ─ 
Decrease in debt   6,712     ─ 
Decrease in unfunded equity commitments to lower tier property partnerships   8,003     ─ 
Decrease in other liabilities   35,850     ─ 
Decrease in noncontrolling interests   83,909     ─ 

 

   At   At 
   September 30,   September 30, 
   2018   2017 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH          
Cash and cash equivalents  $15,556   $29,356 
Restricted cash   10,944    42,723 
Assets of discontinued operations    ─    19,102 
Total cash, cash equivalents and restricted cash shown in statement of cash flows  $26,500   $91,181 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 34 

 

 

MMA Capital Management, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 Summary of Significant Accounting Policies

 

Organization

 

MMA Capital Management, LLC was organized in 1996 as a Delaware limited liability company.  Unless the context otherwise requires, and when used in these Notes, the “Company,” “MMA,” “we,” “our” or “us” refers to MMA Capital Management, LLC and its subsidiaries.

 

The Company invests in debt associated with renewable energy infrastructure and real estate. We focus on investments with attractive risk-adjusted returns that generate positive environmental or social impacts. Our investments, other assets and liabilities are organized into three portfolios:

  

·Energy Capital – This portfolio includes investments that we have made directly or through joint ventures with an institutional capital partner in loans that finance renewable energy projects;

 

·Leveraged Bonds – This portfolio primarily includes tax-exempt mortgage revenue bonds that are leveraged; and

 

·Other Assets and Liabilities – This portfolio includes certain loan receivables, cash, real estate-related investments, subordinated debt and the balance of the Company’s assets and liabilities.

 

Commencing on January 8, 2018, we became externally managed by Hunt Investment Management, LLC, an investment adviser registered with the SEC (our “External Manager”). In conjunction with this change, and as further discussed in the 2017 Annual Report, we completed the sale of the following businesses and assets to Hunt (Hunt Companies, Inc. and/or its affiliates are herein referred to as “Hunt” and this sale transaction is hereinafter referred to as the “Disposition”):

 

·our Low Income Housing Tax Credit (“LIHTC”) business;

 

·our international asset and investment management business;

 

·the loan origination, servicing and management components of our Energy Capital business (including certain management, expense reimbursement and other contractual rights that were held by the Company with respect to this business line);

 

·our bond servicing platform; and

 

·certain miscellaneous investments.

 

Given these changes to our business model and effective the first quarter of 2018, we operate as a single reporting segment. As a result, we no longer operate, or present the results of our operations, through three reportable segments that, as of December 31, 2017, included United States (“U.S.”) Operations, International Operations and Corporate Operations.  

 

Proposed Conversion to a Corporation

 

On August 7, 2018, the Board of Directors (“Board”) approved the conversion of our legal form of organization from a limited liability company to a corporation. Since its inception, the Company has followed a corporate form of governance and, in July 2013, elected to be taxed as a corporation. The proposed conversion would conform our legal form of organization to that of our tax and governance attributes.

 

If the conversion is approved by our shareholders, our common shares will be converted on a one-for-one basis from common shares of a limited liability company to common shares of a corporation and our current governance framework, including Board of Directors, will remain in place. Similarly, the measurement of our assets, liabilities and other tax, financial and accounting attributes for financial reporting purposes will be unchanged. However, upon conversion, we will be governed by the Delaware General Corporation Law (the “DGCL”) and a new certificate of incorporation instead of by the Delaware Limited Liability Company Act (the “LLC Act”) and our current limited liability company operating agreement.

 

The proposed conversion of the Company’s legal form to that of a corporation is subject to the approval of our shareholders. Accordingly, the Company will hold a special shareholders’ meeting on November 20, 2018 at which shareholders will be provided an opportunity to vote on the Company’s proposed conversion. The Company filed a proxy statement with the SEC on September 28, 2018 that provides more information about the Company’s proposed conversion including the differences between the DGCL and our proposed corporate documents as compared with the LLC Act and our current limited liability company operating agreement.

 

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Basis of Presentation

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S.

 

The unaudited interim consolidated financial statements as of, and for the three months and nine months ended September 30, 2018, should be read in conjunction with our audited consolidated financial statements and related notes included in our 2017 Annual Report.

 

The Company evaluates subsequent events through the date of filing with the Securities and Exchange Commission (“SEC”).

 

Changes in Presentation

 

We have revised the presentation of our Consolidated Balance Sheets and Consolidated Statements of Operations for all reporting periods presented as a result of certain discontinued operations occurring in the first quarter of 2018 as a result of the Disposition. We have also made certain reclassifications to the prior year’s financial statements to enhance comparability with the current year’s financial statements.

 

Use of Estimates

 

The preparation of the Company’s financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, commitments and contingencies, and revenues and expenses. Management has made estimates in certain areas, including the determination of fair values for bonds, derivative instruments, guarantee obligations, and in prior periods certain assets and liabilities of CFVs. Management has also made estimates in the determination of impairment on bonds and real estate investments. Actual results could differ materially from these estimates.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and of entities that are considered to be variable interest entities in which the Company is the primary beneficiary, as well as those entities in which the Company has a controlling financial interest, including wholly owned subsidiaries of the Company. All intercompany transactions and balances have been eliminated in consolidation. Equity investments in unconsolidated entities where the Company has the ability to exercise significant influence over the operations of the entity, but is not considered the primary beneficiary, are accounted for using the equity method of accounting.

 

New Accounting Guidance

 

Adoption of New Accounting Standards

 

Accounting for Revenue from Contracts with Customers

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12 and 2016-20 (collectively “Topic 606”). Topic 606 superseded existing revenue recognition standards with a single model unless those contracts are within the scope of other accounting standards. The revenue recognition principle in Topic 606 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Only our asset management fee revenue is subject to Topic 606, which represents an insignificant portion of the Company’s total revenue. The adoption of Topic 606 did not have a material impact on the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date or for the three or nine months ended September 30, 2018.

 

Accounting for Derecognition of Nonfinancial Assets

 

In February 2017, ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” was issued. This guidance clarifies that the derecognition of all businesses should be accounted for in accordance with the derecognition and deconsolidation guidance of Topic 810-10 – Consolidations. In addition, this guidance eliminates the scope exception in authoritative literature that governs transfers of financial assets related to transfers of investments (including equity method investments) in real estate entities and supersedes guidance related to the exchange of a nonfinancial asset for a noncontrolling ownership interest as set forth in Topic 845 – Nonmonetary Transactions. The effective date of ASU 2017-05 is aligned with Topic 606. We adopted ASU No. 2017-05 in conjunction with our adoption of Topic 606 as of January 1, 2018 and we recognized a cumulative effect adjustment of $9.2 million to retained earnings on January 1, 2018.

 

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Statement of Cash Flows

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). The objective of this update was to provide additional guidance and reduce diversity in practice when classifying certain transactions within the statement of cash flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This new standard requires that the statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted these new accounting standards on their effective date of January 1, 2018 utilizing the retrospective transition method. These new standards resulted in presentation changes of restricted cash within our Consolidated Statements of Cash Flows and in certain tables within our “Liquidity and Capital Resources” discussion in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Accounting for Business Combinations

 

In January 2017, ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” was issued. This guidance clarifies the definition of a business and provides guidance to assist reporting entities in the evaluation as to whether a transaction should be accounted for as an asset acquisition or business combination. We adopted this new guidance on its effective date of January 1, 2018. The adoption of this guidance did not impact the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date or for the nine months ended September 30, 2018.

 

Accounting for Stock Compensation

 

In May 2017, ASU No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” was issued. This guidance amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718, “Compensation – Stock Compensation.” Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. We adopted this new guidance on its effective date of January 1, 2018. The adoption of Topic 718 did not have an impact on the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date or for the nine months ended September 30, 2018.

 

Accounting for Financial Instruments

 

In February 2018, the FASB issued ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This guidance makes technical corrections to certain aspects of ASU 2016-01. We adopted this new guidance on its effective date of June 30, 2018. The adoption of this guidance did not impact the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date.

 

Issued Accounting Standards Not Yet Adopted

 

Accounting for Financial Instruments

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Improvements.” This guidance is intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. This guidance establishes an impairment methodology that reflects lifetime expected credit losses rather than incurred losses. This guidance requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This new guidance is effective for us on January 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance eliminates certain disclosure requirements for fair value measurements, requires public entities to disclose certain new information and modifies some disclosure requirements. This new guidance is effective for us on January 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our consolidated financial statements

 

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Accounting for Income Taxes

 

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This new guidance permits companies to reclassify stranded tax effects caused by the Tax Cuts and Jobs Act of 2017 (the “Act”) from AOCI to retained earnings. This new guidance, which also requires new disclosures, is effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our consolidated financial statements.

 

Accounting for Stock Compensation

 

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” This guidance expands the scope of Accounting Standards Codification (“ASC”) Topic 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. This new guidance is effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our consolidated financial statements.

 

Note 2—Investments in Debt Securities

 

The Company’s investments in debt securities primarily consist of multifamily tax-exempt bonds and other real estate-related bond investments. These investments are classified as available for sale for reporting purposes and are measured on a fair value basis in our Consolidated Balance Sheets.

 

Multifamily tax-exempt bonds are issued by state and local governments or their agencies or authorities to finance affordable multifamily rental housing. Generally, the only source of security on these bonds is either a first mortgage or a subordinate mortgage on the underlying properties.

 

The Company’s investments in other real estate-related bonds consists of municipal bonds that finance the development of infrastructure for a mixed-use town center development and are secured by incremental tax revenues generated from the development.

 

The weighted-average pay rate on the Company’s bond portfolio was 6.4% and 6.2% at September 30, 2018 and December 31, 2017, respectively. Weighted-average pay rate represents the cash interest payments collected on the bonds (excluding subordinated cash flow bonds) as a percentage of the bonds’ average unpaid principal balance (“UPB”) for the preceding 12 months for the population of bonds at September 30, 2018 and December 31, 2017.

 

The following tables provide information about the UPB, amortized cost, gross unrealized gains, gross unrealized losses and fair value (“FV”) associated with the Company’s investments in bonds that are classified as available-for-sale:

 

   At 
   September 30, 2018 
           Gross   Gross         
       Amortized   Unrealized   Unrealized       FV as a % 
(in thousands)  UPB   Cost (1)   Gains   Losses (2)   FV   of UPB 
Multifamily tax-exempt bonds  $116,870   $75,976   $50,256   $ ─   $126,232    108%
Other real estate-related bond investments   26,825    20,889    750    (63)   21,576    80%
Total  $143,695   $96,865   $51,006   $(63)  $147,808    103%

 

   At 
   December 31, 2017 
           Gross   Gross         
       Amortized   Unrealized   Unrealized       FV as a % 
(in thousands)  UPB   Cost (1)   Gains   Losses (2)   FV   of UPB 
Multifamily tax-exempt bonds  $105,472   $67,982   $43,587   $ ─   $111,569    106%
Other real estate-related bond investments   37,050    31,163    1,203    (331)   32,035    86%
Total  $142,522   $99,145   $44,790   $(331)  $143,604    101%

 

(1)Amortized cost consists of the UPB, unamortized premiums, discounts and other cost basis adjustments, as well as net OTTI recognized in “Impairments” in our Consolidated Statements of Operations.

 

(2)Includes one bond that was in a gross unrealized loss position for more than 12 consecutive months and that had a fair value of $15.0 million at September 30, 2018 and December 31, 2017.

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See Note 8, “Fair Value,” which describes factors that contributed to the $4.2 million increase in the reported fa