Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MMAB > SEC Filings for MMAB > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for MUNICIPAL MORTGAGE & EQUITY LLC

Form 10-Q for MUNICIPAL MORTGAGE & EQUITY LLC


15-May-2014

Quarterly Report


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

General Overview

We own and manage a portfolio of real estate related assets. Our primary holdings include a portfolio of bonds and bond-related investments ("bonds"), a substantial portion of which are tax-exempt and backed by affordable multifamily rental properties. We also manage tax credit equity funds for third party investors that 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 that invest primarily in affordable for-sale and rental housing primarily in South Africa.

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

US Operations

The Company's bond portfolio consisted of 33 bonds totaling $224.7 million (based on fair value and including $39.8 million of bonds eliminated due to consolidation), collateralized by 20 real estate properties at March 31, 2014. This bond portfolio is comprised primarily of multifamily tax-exempt bonds as well as community development district ("CDD") bonds.

MuniMae is also the general partner ("GP") and manager of 13 low-income housing tax credit funds ("LIHTC Funds") which had $852.5 million of capital invested at March 31, 2014. These funds hold limited partnership interests in 117 affordable multifamily rental properties in the US. The Company's ownership interest in the LIHTC Funds is nominal (ranging from 0.01% to 0.04%); 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 that invest in affordable for-sale and rental housing primarily in South Africa. At March 31, 2014, the Company's ownership interest in IHS was 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 one multi-investor fund (South Africa Workforce Housing Fund SA I - "SA Fund"), and a real estate partnership for a single investor (International Housing Solutions Residential Partners Partnership - "SA Partnership"), and is in the process of raising capital for a second multi-investor fund.

Liquidity and Capital Resources

Our principal sources of liquidity include cash and cash equivalents and cash flows from investing activities. At March 31, 2014 and December 31, 2013, we had unrestricted cash and cash equivalents of $97.6 million and $66.8 million, respectively and we believe we have sufficient liquidity to meet our obligations as they become due.

We consolidate certain funds and ventures even though we have no (or nominal) equity interest, and we therefore reflect the cash flow activities for those funds and ventures as part of our consolidated statements of cash flow. As reflected on our consolidated balance sheets, the cash held by these Consolidated Funds and Ventures ("CFVs") was 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 net increase to cash and cash equivalents is representative of the change only to MuniMae's cash (i.e., without the cash of CFVs); however, the individual operating, investing and financing categories include cash flow activity for MuniMae and the CFVs. The tables below provide the cash activity related to MuniMae and the CFVs.

                                                        For the three months ended March 31, 2014
(in thousands)                                       MuniMae              CFVs               Total
Unrestricted cash and cash equivalents at
beginning of period                               $       66,794                         $       66,794
Net cash (used in) provided by:
Operating activities                                      (4,070 )             941               (3,129 )
Investing activities                                      39,340              (845 )             38,495
Financing activities                                      (4,475 )             (96 )             (4,571 )
Net increase in cash and cash equivalents                 30,795                 -               30,795
Cash and cash equivalents at end of period        $       97,589                         $       97,589

                                                        For the three months ended March 31, 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                                      8,437                (966 )             7,471
Investing activities                                      4,833               2,984               7,817
Financing activities                                     (6,132 )            (2,018 )            (8,150 )
Net increase in cash and cash equivalents                 7,138                   -               7,138
Cash and cash equivalents at end of period        $      57,995                           $      57,995

Operating activities

Cash flows used by operations for MuniMae were $4.1 million for the three months ended March 31, 2014, compared to cash flows provided by operations of $8.4 million for the three months ended March 31, 2013. The $12.5 million decrease in cash provided by operating activities was primarily due to:

a decrease in interest income of $13.2 million primarily as a result of the MuniMae TE Bond Subsidiary, LLC ("TEB") sale in 2013, a $1.2 million decrease in asset management fees received, a $1.1 million decrease in other income received, a $0.9 million decrease in principal payments received on loans held for sale, a $0.8 million increase in cash used to purchase an interest rate cap during the first quarter 2014 and a $0.6 million decrease in preferred stock dividends received, partially offset by:

a $5.3 million reduction in interest expense primarily as a result of the TEB sale in 2013.

Investing activities

Cash flows provided by investing activities for MuniMae were $39.3 million and $4.8 million for the three months ended March 31, 2014 and 2013, respectively. The $34.5 million increase in cash provided by investing activities was primarily due to:

a $37.7 million increase in proceeds received from the sale of real estate and a $19.6 million decrease in restricted cash investing activities (primarily a result of cash used to replace a letter of credit posted on the Company's behalf to secure a guarantee obligation in the first quarter of 2013), partially offset by:

a $22.7 million decrease in principal payments and sales proceeds received on bonds.

Financing activities

Cash flows used in financing activities for MuniMae were $4.5 million and $6.1 million for the three months ended March 31, 2014 and 2013, respectively. The $1.6 million decrease in cash used in financing activities was primarily due to:

$71.2 million of cash used to repurchase TEB preferred shares in the first quarter of 2013, a $20.0 million decrease in repayment of senior interests and general borrowings, a $17.2 million decrease in the repayment of subordinate debentures and a $2.8 million decrease in distributions paid to perpetual preferred shareholders, partially offset by:

a decrease of $73.3 million in proceeds generated from the issuance of TEB preferred shares during the first quarter of 2013 and $36.6 million in proceeds from a total return swap financing entered into in connection with the transfer of our preferred stock investments during the first quarter of 2013.

Debt



The following table summarizes the outstanding balances and weighted-average
interest rates at March 31, 2014. See "Notes to Consolidated Financial
Statements - Note 6, Debt" for more information on our debt.



                                                                               Weighted-Average
                                                              March 31,        Interest Rate at
(dollars in thousands)                                          2014            March 31, 2014
Asset Related Debt (1)
Notes payable and other debt - bond related (2)              $   130,175                       3.1 %
Notes payable and other debt - non-bond related debt:              7,431                      10.0
Total asset related debt                                         137,606                       3.5

Other Debt (1)
Subordinate debentures (3)                                       145,969                       7.2
Notes payable and other debt (4)                                  62,097                       5.4
Total other debt                                                 208,066                       6.7

Total asset related debt and other debt                          345,672                       5.4

Debt related to CFVs                                              91,312                       4.3

Total debt                                                   $   436,984                       5.2

(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 $1.6 million at March 31, 2014 and December 31, 2013.

(3) Included in the subordinate debt balance were $4.8 million and $3.0 million of net premiums and effective interest rate payable (i.e., the difference between the current pay rate and the effective interest rate) at March 31, 2014 and December 31, 2013, respectively.

(4) This amount includes $2.6 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

Notes Payable and Other Debt - Bond Related

This debt is primarily comprised of total return swap ("TRS") financing agreements on bonds available-for-sale ($99.4 million at March 31, 2014). This amount also includes secured borrowings of $30.8 million related to two bonds transferred with a performance guarantee that failed to receive accounting sale treatment.

Other Debt

Subordinate debt

At March 31, 2014, the Company had $141.2 million of subordinate debt (principal) with a carrying value of $146.0 million and a weighted average effective interest rate of 7.2%. See "Notes to Consolidated Financial Statements
- Note 6, Debt" for more information.

Notes payable and other debt

At March 31, 2014, this debt includes $36.6 million of TRS financing agreements on the Company's 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 (4.23% at March 31, 2014) 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 more information.

Covenant Compliance and Debt Maturities

At March 31, 2014, the Company had $2.6 million of debt that had come due and remains payable; however, the Company has a forbearance agreement with the lender such that it is not pursuing any remedies. The Company is not in default under any of its other debt arrangements.

Letters of Credit

The Company had no letters of credit outstanding at March 31, 2014.

Guarantees

The following table summarizes guarantees by type at March 31, 2014:

March 31, 2014 (in thousands) Maximum Exposure Carrying Amount Indemnification contracts $ 20,224 $ 1,114

The indemnification contracts are with the purchaser of the tax credit equity ("TCE") business and are related to the 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 three months ended March 31, 2014.

Our maximum exposure under the indemnification contracts represents the maximum loss the Company could incur under its guarantee agreements and 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.

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 $614.4 million at March 31, 2014. 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 15, 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 March 31, 2014, the debt related to CFVs had the following terms:



                                                                March 31, 2014
                                                                       Weighted-average
(in thousands)                 Carrying Amount       Face Amount        Interest Rates          Maturity Dates
SA Fund (1)                   $          49,886     $      49,886              2.6%          April 2018
Consolidated Lower Tier                                                                      Various dates
Property Partnerships                    41,426            40,513               6.3          through March 2049
Total debt                    $          91,312     $      90,399

(1) This amount includes $0.8 million of capitalized interest for the period ended March 31, 2014.

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 March 31, 2014. 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. As required, 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 "Net gains related to CFVs" on the consolidated statements of operations. The change of value in the debt obligation due to currency fluctuation is recognized through "Expenses from CFVs" on the consolidated statements of operations.

Company Capital

Common Shares

As of March 31, 2014, through a series of actions, our Board of Directors authorized a stock repurchase program of up to 5.0 million shares at a price of up to 95% of the Company's reported common shareholders' equity per share as shown on the Company's most recent filed periodic report at the time of repurchase. On May 8, 2014, the Board of Directors further amended the plan to increase the number of shares authorized to be repurchased under the plan from 5.0 million to 7.0 million, while maintaining the maximum price at 95% of the Company's reported common shareholders' equity per share as of the most recent filed periodic report. The Company has been making its purchases pursuant to a 10b5-1 plan, which provides for the automatic placement of purchase orders pursuant to preset criteria that cannot be changed except during open trading periods for insiders. Because brokers are not generally willing to manage 10b5-1 plans for companies whose shares trade on the over the counter market, the Board has authorized the Company to use open market purchases in lieu of the 10b5-1 plan. As a result, effective May 9, 2014, the Company will now make purchases only during open trading periods for insiders.

During the three months ended March 31, 2014, the Company repurchased 0.7 million shares at an average price of $1.28. On April 2, 2014, the Company acquired 0.8 million shares at $1.53 per share from an unaffiliated seller, in a block purchase pursuant to the Company's stock repurchase program. As of May 9, 2014, the Company has capacity to repurchase an additional 3.5 million shares.

The Company's common equity at March 31, 2014 was $80.7 million resulting in an equity per common share of $2.02. As a result, the maximum price the Company may pay to repurchase stock upon the filing of this report until the maximum price is reset upon the filing of its 2014 second quarter filing, or the plan is amended, is $1.92.

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 known 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 ratio, 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. The bonds reflected on the Consolidated Balance Sheets at March 31, 2014 were priced on average at approximately 89% of the portfolio's unpaid principal balance ("UPB"). 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 ("CFVs")

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, we record the assets, liabilities and noncontrolling interests at fair value. Substantially all of our consolidated entities are investment entities that own real estate or real estate related investments and, as such, there are judgments related to the forecasted cash flows to be generated from the investments such as rental revenue and operating expenses, vacancy, replacement reserves and tax benefits (if any). In addition, we must make judgments about discount rates and capitalization rates.

Income Taxes

The Company is a limited liability company that has elected to be taxed as a corporation for income tax purposes. All of our business activities, with the exception of our foreign investments and managing member interests in the LIHTC Funds, are conducted by entities included in our consolidated corporate federal income tax return. The Company has significant net operating losses ("NOLs") that we expect will be sufficient to offset federal taxable income and gains for the foreseeable future; however we currently maintain a valuation allowance against our entire deferred tax asset, in accordance with accounting literature.

ASC No. 740, "Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Significant judgment is required in determining and evaluating income tax positions, including assessing the relative merits and risks of various tax treatments considering statutory, judicial and regulatory guidance available regarding the tax position. We establish additional provisions for income taxes when there are certain tax positions that could be challenged and it is more likely than not these positions will not be sustained upon review by taxing authorities. Judgment is also required in assessing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns as well as the recoverability of our deferred tax assets. In assessing our ability to realize the benefit of our deferred tax assets we consider information such as forecasted earnings, future taxable income and tax planning strategies in measuring the required valuation allowance.

Results of Operations

The following discussion of our consolidated results of operations 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.

The table below summarizes our consolidated financial performance for the three months ended March 31, 2014 and 2013:

                                                                 For the three months ended
                                                                         March 31,
(in thousands)                                                    2014                2013
Total interest income                                        $        5,305       $      15,938
Total interest expense                                                1,203               6,289
Net interest income                                                   4,102               9,649

Total fee and other income                                            2,150               1,838
Revenue from CFVs                                                     5,050               2,788

Total revenues, net of interest expense                              11,302              14,275
Operating expenses:
Interest expense                                                      3,573               4,129
Operating expenses                                                    6,585               9,459
Net impairment on bonds and loan losses                                   -                 353
Total expenses from CFVs                                             11,649              11,431
Total operating expenses                                             21,807              25,372

. . .
  Add MMAB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MMAB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.