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MMAB > SEC Filings for MMAB > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for MUNICIPAL MORTGAGE & EQUITY LLC

Form 10-Q for MUNICIPAL MORTGAGE & EQUITY LLC


14-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General Overview

The Company operates through two reportable segments: US Operations and International Operations.

We own and manage a range of real estate related assets. Our primary holdings include a portfolio of tax-exempt bonds, a substantial portion of which are backed by affordable multifamily rental properties. We also manage tax credit equity funds for third party investors which invest in similar affordable multifamily rental properties. Finally, we own a variety of direct investments in multifamily rental properties and land. Outside of the United States ("US"), we are in the business of raising, investing in and asset managing private real estate funds which invest in affordable for-sale and rental housing in South Africa and, to a lesser extent, Sub-Saharan Africa.

US Operations

The Company's bond portfolio consisted of 45 bonds and interests in bonds totaling $321.4 million (based on the fair value of all bonds, including those that have been eliminated due to consolidation), collateralized by 28 real estate properties at September 30, 2013. This bond portfolio is comprised primarily of multifamily tax-exempt bonds as well as community development district ("CDD") bonds. At September 30, 2013, approximately 55% of this portfolio was unleveraged.

MuniMae is also the general partner ("GP") and manager of 13 low income housing tax credit funds ("LIHTC Funds") which have $852.9 million in capital invested at September 30, 2013, which hold limited partnership interests in 117 affordable multifamily rental properties in the US. The Company's ownership interest in the LIHTC Funds is negligible; however, the Company is entitled to asset management fees as well as contingent asset management fees based on several factors including the residual value of the LIHTC Funds' underlying multifamily rental properties.

International Operations

Substantially all of the Company's International Operations take place through a subsidiary, International Housing Solutions S. r.l. ("IHS") which is in the business of raising, investing in and asset managing private real estate funds which invest in affordable for-sale and rental housing in South Africa and, to a lesser extent, Sub-Saharan Africa. At September 30, 2013, the Company's ownership interest in IHS is approximately 83%. In addition to earning asset management fees, IHS as the managing member is entitled to special distributions based on returns generated by the funds it sponsors. IHS currently manages a single fund (South Africa Workforce Housing Fund SA I - "SA Fund"), and expects to raise capital for and manage additional funds in the near future.

Liquidity and Capital Resources

As a result of the Company's sale of MuniMae TE Bond Subsidiary, LLC ("TEB") to Merrill Lynch Portfolio Management, Inc. (together with its affiliates, the "Purchaser") and the total return swap ("TRS") agreements with the Purchaser executed during third quarter of 2013, the Company's cash and cash equivalents increased by $19.2 million ($78.7 million cash proceeds received on TEB sale (of which $16.3 million was used to collateralize borrowings with the Purchaser) less $43.2 million of TEB cash and cash equivalents transferred to the Purchaser). See Note 2, "Bonds" for more information. Subsequent to the TEB sale and during third quarter 2013, the Company repurchased certain bonds from the Purchaser using cash of $29.3 million.

On March 28, 2013, the Company sold 100% of its preferred stock investments for $36.6 million plus accrued interest. Separately, the Company entered into three TRS agreements with an affiliate of the purchaser of the preferred stock investments. The primary uses of the sales proceeds were to:
repurchase subordinate debt ($17.4 million in cash was used to repurchase $45.5 million of unpaid principal) on March 28, 2013;

pledge collateral against a guarantee obligation ($14.0 million of cash was used to replace a letter of credit posted on the Company's behalf to secure a guarantee obligation); and

pledge collateral of $3.7 million against the TRS.

During the first quarter of 2013 and through a series of transactions, TEB generated $73.3 million of net cash proceeds through a preferred share issuance all of which was used to repurchase and retire preferred shares with higher distribution rates. During the second quarter of 2013, TEB used $9.5 million of cash to repurchase and retire $11.0 million of preferred shares. See "Notes to Consolidated Financial Statements - Note 6, "Debt" and Note 12, "Equity" for more information.

We believe we have sufficient liquidity to meet our obligations as they become due.

Sources of Liquidity

We consolidate certain funds and ventures in which we have no (or nominal) equity interest, therefore we are required to reflect the cash flow activities for those funds and ventures as part of our consolidated statements of cash flows. As reflected on our consolidated balance sheets, the cash held by these Consolidated Funds and Ventures ("CFVs") are reported in "Restricted cash", outside of the Company's cash and cash equivalents given that the Company does not have legal title to this cash. Therefore, the overall increase to cash and cash equivalents is solely related to MuniMae (i.e., without CFVs); however, the individual operating, investing and financing categories include cash flow activity for both MuniMae as well as the CFVs. The tables below provide, by category, the amount of cash activity related to MuniMae as compared to its CFVs.

                                                  For the nine months ended September 30, 2013
(in thousands)                                   MuniMae             CFVs               Total
Unrestricted cash and cash equivalents at    $
  beginning of period                                 50,857                       $        50,857
Net cash provided by (used in):
Operating activities                                   4,081              3,850              7,931
Investing activities                                  34,160              7,351             41,511
Financing activities                                (43,493)           (11,201)           (54,694)
Net decrease in cash and cash equivalents            (5,252)                  -            (5,252)
Cash and cash equivalents at end of period   $        45,605                       $        45,605



                                                For the nine months ended September 30, 2012
(in thousands)                                   MuniMae               CFVs             Total
Unrestricted cash and cash equivalents at
  beginning of period                        $         42,116                        $    42,116
Net cash provided by (used in):
Operating activities                                   16,222               (559)         15,663
Investing activities                                    6,738            (34,776)       (28,038)
Financing activities                                 (21,977)              35,335         13,358
Net increase in cash and cash equivalents                 983                   -            983
Cash and cash equivalents at end of period   $         43,099                        $    43,099

Operating activities

Cash flows provided by operations for MuniMae were $4.1 million and $16.2 million for the nine months ended September 30, 2013 and 2012, respectively. The $12.1 million decrease in cash provided by operating activities was primarily due to:

a decrease in interest income of $17.6 million primarily as a result of the TEB sale, a $2.0 million increase in operating expenses ($1.5 million related to legal and other professional fees paid related to the TEB sale) and a $1.5 million increase in other expense ($0.4 million related to the remarketing of TEB preferred shares in the first quarter of 2013, $0.3 million in fees related to bond repurchases and $0.3 million related to additional interest expense on solar related debt), partially offset by:

a $5.4 million reduction in interest expense primarily as a result of the TEB sale and a $3.3 million increase in other income received ($2.0 million related to income tax refunds).

Investing activities

Cash flows provided by investing activities for MuniMae were $34.2 million and $6.7 million for the nine months ended September 30, 2013 and 2012, respectively. The $27.5 million increase in cash provided by investing activities was primarily due to:

a $19.2 million increase in proceeds received from the sale of real estate, net proceeds of $19.2 million from the sale of TEB (inclusive of the increase in restricted cash of $16.3 million used to collateralize borrowings with the Purchaser) and a $6.2 million decrease in advances on bonds, partially offset by:

a $10.0 million increase in restricted cash (primarily a result of cash used to replace a letter of credit posted on the Company's behalf to secure a guarantee obligation and excluding the increase in restricted cash related to the TEB sale), a $5.0 million decrease in proceeds received from the redemption of preferred stock and a $1.8 million decrease in principal payments received on loans held for investment.

Financing activities

Cash flows used in financing activities for MuniMae were $43.5 million and $22.0 million for the nine months ended September 30, 2013 and 2012, respectively. The $21.5 million increase in cash used in financing activities was primarily due to:

a $72.1 million increase in the cash used to repurchase preferred shares, $28.6 million of cash used to repurchase bonds, but treated as repayment of borrowings because we consolidate the related borrowing partnerships, a $12.8 million increase in the repayment of subordinate debentures and a $9.7 million increase in the repayment of other debt, partially offset by:

a $100.0 million net increase in proceeds from borrowings primarily a result of $73.3 million in proceeds from the issuance of preferred shares and $36.6 million in proceeds from the transfer of our preferred stock investments that did not meet the criteria for sale accounting partially offset by a $9.9 million decrease in proceeds from general borrowings. There was also a $2.4 million decrease in distributions paid to perpetual preferred shareholders.

Debt

The following table summarizes the outstanding balances and weighted-average
interest rates at September 30, 2013. See "Notes to Consolidated Financial
Statements - Note 6, Debt" for more information on our debt.

                                                                              Weighted-Average
                                                             September 30,    Interest Rate at
(dollars in thousands)                                           2013        September 30, 2013
Asset Related Debt (1)
Notes payable and other debt - bond related (2)            $       146,304                  5.0 %
Notes payable and other debt - non-bond related                      8,602                  9.8
Total asset related debt                                           154,906                  5.2

Other Debt (1)
Subordinate debentures (3)                                         142,899                  7.2
Notes payable and other debt (4)                                    67,179                  5.7
Total other debt                                                   210,078                  6.7

Total asset related debt and other debt                            364,984                  6.1

Debt related to CFVs                                                96,142                  4.5

Total debt                                                 $       461,126                  5.7

(1) Asset related debt is debt which finances interest-bearing assets and the interest expense from this debt is included in "Net interest income" on the consolidated statements of operations. Other debt is debt which does not finance interest-bearing assets and the interest expense from this debt is included in "Interest expense" under" Operating and other expenses" on the consolidated statements of operations.

(2) Included in notes payable and other debt were unamortized discounts of $1.7 million at September 30, 2013.

(3) Included in the subordinate debt balance were unamortized discounts of $1.3 million at September 30, 2013.

(4) This amount includes $3.8 million of debt that has come due and remains payable; however, the Company has a forbearance agreement with the lender such that it is not pursuing any remedies.

Asset Related Debt

Senior Interests in and Debt Owed to Securitization Trusts

On July 3, 2013, all but $2.5 million of the Company's unpaid principal of $577.1 million in senior interests and debt owed to securitization trusts at June 30, 2013, was transferred to the Purchaser of the Company's common shares in TEB. During the second quarter of 2013, the Company recognized $4.6 million of unamortized debt issuance costs associated with this debt that was recorded within other assets. During the third quarter of 2013, the remaining $2.5 million in senior interests and debt owed to securitization trust was repaid.

Mandatorily Redeemable Preferred Shares

All of the Company's mandatorily redeemable preferred shares were transferred to the Purchaser of the Company's common shares in TEB at the liquidation amount of $121.0 million. During the second quarter of 2013, the Company recognized the remaining unamortized issuance discounts ($2.3 million) previously recorded as a net discount against the debt balance in order to carry the debt at its liquidation amount. In addition, the Company recognized $0.9 million of unamortized debt issuance costs associated with this debt that was recorded within other assets.

Notes Payable and Other Debt - Bond Related

This debt is comprised of proceeds received on bond or bond interest transfers that did not qualify for sale accounting treatment because the Company either transferred a participation interest or the Company entered into a performance guarantee at the time of transfer. This debt also includes financing proceeds received on TRS agreements where the related bond did not receive sale accounting treatment.

Other Debt

Subordinate debt

At September 30, 2013, the Company had $141.6 million of subordinate debt (principal) with a carrying value of $142.9 million and a weighted average effective interest rate of 7.2%.

During March of 2013, the Company repurchased the remaining unpaid principal balance ($45.5 million) of the MFH subordinate debt due May 2034 for a cash payment of $17.4 million plus accrued interest. As a result of this transaction, the Company recognized a gain on debt extinguishment of $37.9 million, comprised of the difference between the cash payment of $17.4 million and the carrying value of the debt of $56.9 million, reduced by the acceleration of $1.6 million of debt issuance costs. The gain on debt extinguishment is recorded in "Net gains on early extinguishment of liabilities" on the consolidated statements of operations for the first nine months of 2013.

See "Notes to Consolidated Financial Statements - Note 6, Debt" for further information.

Notes payable and other debt

At September 30, 2013, this debt includes $36.6 million related to the TRS entered into during March of 2013 in connection with the Company's sale of its preferred stock investment. See "Notes to Consolidated Financial Statements - Note 3, Investment in Preferred Stock" for more information. The debt is non-amortizing, matures on March 31, 2015 and bears an interest rate of 3-month LIBOR plus 400 bps (4.25% at September 30, 2013) and resets quarterly. The Company recorded debt issuance costs of $0.8 million associated with the transaction, of which $0.4 million was paid at inception and $0.4 million is payable at termination.

See "Notes to Consolidated Financial Statements - Note 6, Debt" for further information.

Covenant Compliance and Debt Maturities

At September 30, 2013, the Company had $3.8 million of debt remaining that had come due that continues to be governed by a forbearance agreement that expires April 30, 2015. The Company is complying with the terms of the agreement such that the lender is not pursuing any remedies.

Letters of Credit

On July 1, 2013, a letter of credit in the amount of $0.1 million expired unused and on July 31, 2013, a letter in the amount of $2.9 million was canceled unused. As a result, the Company had no letters of credit outstanding at September 30, 2013.

Guarantees

The following table summarizes guarantees by type at September 30, 2013:

                               September 30, 2013
                              Maximum       Carrying
(in thousands)               Exposure        Amount
Indemnification contracts   $    26,178    $    1,281

The indemnification contracts are with the purchaser of the TCE business and are related to guarantees of investor yields on their investment in certain LIHTC Funds and indemnifications related to property performance on certain Lower Tier Property Partnerships. We made no cash payments under these indemnification agreements for the nine months ended September 30, 2013.

Our maximum exposure under the indemnification contracts is not indicative of the likelihood of the expected loss under the guarantees. The carrying amount represents the amount of unamortized fees received related to these guarantees with no additional amounts recognized as management does not believe it is probable that it will have to make payments under these indemnifications. However, it is possible that one of the specific property performance guarantees could result in us having to pay up to $1.5 million between now and 2017.

In addition to the above guarantees, the Company has guaranteed the investor yields on certain LIHTC Funds in which the Company continues to hold general partner interests and as a result, the Company consolidates these funds. The maximum exposure under these guarantees is estimated to be approximately $659.7 million at September 30, 2013. The Company does not expect to have any payouts related to these guarantees as the funds are now meeting and are expected in the future to meet investor yield requirements. See "Notes to Consolidated Financial Statements - Note 16, Consolidated Funds and Ventures."

Debt Related to CFVs

The creditors of CFVs do not have recourse to the assets or general credit of
MuniMae. At September 30, 2013, the debt related to CFVs had the following
terms:

                                                    September 30, 2013
                            Carrying      Face      Weighted-average
(in thousands)               Amount      Amount      Interest Rates           Maturity Dates
SA Fund                    $   49,621   $  49,621                 2.6 %   April 2018
Lower Tier Property                                                       Various dates through
Partnerships                   46,521      46,648                 6.4     March 2049
Total debt                 $   96,142   $  96,269

SA Fund

The SA Fund has an agreement with the Overseas Private Investment Corporation, an agency of the US, to provide loan financing not to exceed $80.0 million. The SA Fund has drawn a total of $49.1 million of debt against this financing arrangement as of September 30, 2013. This debt is an obligation of the SA Fund and there is no recourse to the Company.

This debt is denominated in US dollars; however, the SA Fund's functional currency is the South African rand. Therefore, the SA Fund is exposed to foreign currency risk. In order to hedge this risk, from an economic standpoint, the SA Fund has entered into certain foreign exchange derivative contracts. These derivative instruments are carried at fair value. The SA Fund does not designate these derivatives as accounting hedges and therefore, changes in fair value are recognized through the consolidated statements of operations. The change of value in the debt obligation due to currency fluctuation is also recognized through the consolidated statements of operations.

Lower Tier Property Partnerships

During the third quarter of 2013, the Company sold 10 bonds and bond interests to the Purchaser of TEB. For these bonds, our consolidated balance sheet reflected real estate instead of bond investments because a non-profit that we consolidate was deemed to be the primary beneficiary of Lower Tier Property Partnerships that held the real estate serving as collateral to the bonds.
Therefore, upon the sale of TEB, the cash proceeds received on the 10 bonds and bond interests were recorded as debt owed by the Lower Tier Property Partnerships of $75.2 million. Subsequent to the TEB sale, we repurchased four of these bond interests thereby causing the outstanding debt obligation to decline by $28.9 million.

Company Capital

Common Shares

On July 10, 2013, the Company converted from a partnership to a corporation for federal and state income tax purposes. As a result of the conversion, the Company will (i) be a direct corporate taxpayer, (ii) no longer pass through its income and loss to its shareholders for tax purposes, and (iii) no longer issue each shareholder an annual tax statement on Schedule K-1 (although there will be investor K-1s for the partial year January 1, 2013 through July 9, 2013).

During November 2012, our Board of Directors authorized a one year stock repurchase program of up to $1.0 million. The program was terminated and replaced with a new stock repurchase program as authorized by our Board of Directors on August 8, 2013. Specifically, the Board authorized management to enter into an amended and restated stock repurchase program effective subsequent to the Company's filing of the June 30, 2013 quarterly report on Form 10-Q, and in any event not earlier than August 15, 2013. Pursuant to this authorization the Company amended and restated the plan on August 16, 2013, to provide for the Company to purchase up to four million shares, and up to 800,000 shares in any one calendar month at a price up to 100% of its common shareholders' equity per share as shown on its most recently filed periodic report. During September 2013, the Board authorized further amendments to the plan to increase the aggregate shares authorized for repurchase to five million shares, to remove the monthly limit of 800,000 shares and to allow for block trades. The Company has repurchased 386,236 shares at an average price of $1.31 during the nine months ended September 30, 2013.

Dividend Policy

Our 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. Our Board has not declared a dividend since the fourth quarter of 2007. In the future our Board will determine whether and in what amounts to declare dividends based on our earnings and cash flows, cash needs and any other factors our Board deems appropriate. It is unlikely that we will pay a dividend for the foreseeable future.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements is based on the selection and application of US generally accepted accounting principles ("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 are believed to be reasonable under the circumstances available to us at the time. Actual results could materially differ 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 believe the following accounting policies involve a higher degree of judgment and complexity and represent the critical accounting policies and estimates used in the preparation of our consolidated financial statements.

Valuation of Bonds

Bonds available-for-sale include mortgage revenue bonds and other municipal bonds. We account for investments in bonds as available-for-sale debt securities under the provisions of ASC No. 320, "Investments - Debt and Equity Securities." Accordingly, these investments in bonds are carried at fair value with changes in fair value (excluding other-than-temporary impairments) recognized in other comprehensive income. For most of our performing bonds, we estimate fair value using a discounted cash flow methodology; specifically, the Company discounts contractual principal and interest payments, adjusted for expected prepayments. The discount rate for each bond is based on expected investor yield requirements adjusted for bond attributes such as the expected term of the bond, debt service coverage ratios, geographic location and bond size. If observable market quotes are available, we will estimate the fair value based on such quoted prices. For non-performing bonds (i.e., defaulted bonds as well as certain non-defaulted bonds that we deem at risk of default in the near term), we estimate the fair value by discounting the property's expected cash flows and residual proceeds using estimated discount and capitalization rates, less estimated selling costs. However, to the extent available, the Company may estimate fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value as available. There are significant judgments and estimates associated with forecasting the estimated cash flows related to the bonds or the underlying collateral for non-performing bonds, including macroeconomic conditions, interest rates, local and regional real estate market conditions and individual property performance. In addition, the determination of the discount rates applied to these cash flow forecasts involves significant judgments as to current credit spreads and investor return expectations. We had $24.3 million of net unrealized losses reflected in our bond portfolio on the Consolidated Balance Sheets at September 30, 2013. Given the size of our portfolio, different judgments as to credit spreads and investor return expectations could result in materially different valuations.

Consolidated Funds and Ventures

We have numerous investments in partnerships and other entities that primarily hold or develop real estate. In most cases our direct or indirect legal interest in these entities is minimal; however, we apply ASC No. 810 "Consolidation" in order to determine if we need to consolidate any of these entities. There is considerable judgment in assessing whether to consolidate an entity under these accounting principles. Some of the criteria we are required to consider include:

The determination as to whether an entity is a variable interest entity ("VIE").

If the entity is considered a VIE, then the determination of whether we are the primary beneficiary of the VIE is needed and requires us to make judgments regarding: (1) our power to direct the activities of the VIE that most significantly impact the VIE's economic performance, and (2) our obligation to absorb losses of the VIE that could potentially be significant to the VIE or our right to receive benefits from the VIE that could potentially be significant to the VIE. These assessments require a significant analysis of all of the variable interests in an entity, any related party considerations and other features that make such an analysis difficult and highly judgmental.

If the entity is required to be consolidated, then upon initial consolidation, . . .

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