ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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 HOLDINGS, INC.
(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 21224 (Address of principal executive offices,
including zip code)
(443) 263‑2900 (Registrant’s telephone number, including area code)
MMA CAPITAL MANAGEMENT, LLC
(Former name, former address and former fiscal year if changed since last report)
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ 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 ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 K or any amendment to this Form 10 K. ☑
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
Smaller reporting company
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 ☑
The aggregate market value of our common shares held by non-affiliates was $132,851,120 based on the closing sale price as reported on the Nasdaq Capital Market on June 29, 2018.
There were 5,881,680 shares of common shares outstanding at March 7, 2019.
Portions of the registrant’s Proxy Statement to be filed on or about April 11, 2019 have been incorporated by reference into Part III of this report.
This Annual Report on Form 10‑K for the year ended December 31, 2018 (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.”
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” in evaluating these forward-looking statements. We do not undertake to update any forward-looking statements contained herein, except as required by law.
MMA Capital Holdings, Inc. invests in debt associated with renewable energy infrastructure and real estate. Unless the context otherwise requires, and when used in this Report, the “Company,” “MMA,” “we,” “our” or “us” refers to MMA Capital Holdings, Inc. and its subsidiaries. We were originally organized as a Delaware limited liability company in 1996 and converted to a Delaware corporation on January 1, 2019.
We focus on investments with attractive risk-adjusted returns that generate positive environmental or social impacts, with an emphasis on renewable energy debt investments. Our assets and liabilities are organized into two 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; and
Other Assets and Liabilities (“OA&L”) – This portfolio includes our investments in bonds and related financing, certain loan receivables, cash, real estate-related investments, subordinated debt and the balance of the Company’s assets and liabilities (at December 31, 2018, investments in bonds and related financing, which were previously identified as their own portfolio in each Quarterly Report on Form 10-Q that was filed in 2018, were reallocated to the OA&L portfolio).
In emphasizing renewable energy debt investments, our objective is to grow the Company’s return on equity by further recycling equity out of existing investments, such as bond-related investments with premiums that will otherwise decrease with the passage of time and other assets that are generating lower returns, into the Energy Capital portfolio, which we believe will generate higher returns.
Commencing on January 8, 2018, we became externally managed by Hunt Investment Management, LLC (our “External Manager”), an affiliate of Hunt Companies, Inc. (Hunt Companies, Inc. and its affiliates are hereinafter referred to as “Hunt”), which is an investment adviser registered with the United States (“U.S.”) Securities and Exchange Commission (“SEC”). In conjunction with this change, we completed the sale of the following businesses and assets to Hunt (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.
On October 4, 2018, Hunt exercised its option as set forth in the Master Transaction Agreement dated January 8, 2018, between the Company and Hunt, to take assignment of the Company’s agreements to acquire (i) the LIHTC business of Morrison Grove Management, LLC (“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”). In connection with the closing of the MGM Agreements, the Company executed a series of additional transactions completing the Company’s disposition of its MGM and LIHTC related assets. Such transactions are further discussed below within “Interests in MGM” and Notes to Consolidated Financial Statements — Note 13, “Related Party Transactions and Transactions with Affiliates.”
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 U.S. Operations, International Operations and Corporate Operations.
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 through Renewable Energy Lending, LLC (“REL”), a wholly owned subsidiary of the Company, or 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”). The investment period with our institutional capital partner extends to July 15, 2023, for SDL, SCL and SPL.
Our External Manager provides loan origination, servicing, asset management and other management services to the Solar Ventures. Loans are typically underwritten to generate internal rates of return (“IRR”) ranging from 10% to 15%, before expenses, range in size from $2 million to over $50 million, and have durations of three months to five years. Through December 31, 2018, the Solar Ventures have made over 100 project-based loans that total $1.3 billion of debt commitments for the development of over 430 renewable energy project sites, which will generate over 2.7 gigawatts of renewable energy.
On June 1, 2018, the Company became the sole owner of REL and consolidated this entity for reporting purposes at December 31, 2018. Our buyout of our prior investment partner’s interest in REL enabled us to increase the amount of equity we are able to deploy into renewable energy investments through the Solar Ventures, provided us with full decision-making control over REL and eliminated the preferred return that was payable to our prior investment partner. Subsequent to the buyout of our prior investment partner, the Solar Ventures have been able to increase loan originations, and thus reduce the amount of uninvested equity within the ventures, resulting in an increase in returns to the Company.
Investment Carrying Value
The carrying value of MMA’s equity investment in the Solar Ventures was $126.3 million and $97.0 million at December 31, 2018, and December 31, 2017, respectively. The $29.3 million year-over-year increase in the carrying value of such investment was comprised of the following: (i) $55.9 million of capital contributions; (ii) $33.5 million of distributions received and (iii) $6.9 million of equity in income earned during the year ended December 31, 2018. See Notes to Consolidated Financial Statements – Note 3, “Investments in Partnerships” for additional information.
The Company earned $6.9 million and $9.2 million of equity in income from the Solar Ventures for the year ended December 31, 2018 and December 31, 2017, respectively. The year-over-year decrease in equity in income from the Solar Ventures was primarily the result of three factors: (i) the Company sold its loan origination, servicing and management components of its Energy Capital business as part of the Disposition and, as a result, the Company did not earn management fees in 2018 (during 2017 $1.1 million of management fees were classified as equity in income from the Solar Ventures for reporting purposes); (ii) the preferred return earned by the Company’s former investment partner in REL increased during the five months ended May 31, 2018, compared to the year ended December 31, 2017, due to an increase in the amount of capital invested by the Company’s former investment partner and (iii) amortization of the purchase premium paid by the Company on June 1, 2018 to buyout our former investment partner’s interest in REL, which is reported as a reduction to equity in income earned by the Company. The impact of the aforementioned factors that caused a reduction in the total amount of equity in income earned by the Company from the Solar Ventures was partially offset by a year-over-year increase in equity in income from SDL that was primarily driven by an increase in the Company’s allocable share of the venture’s net income for the year ended December 31, 2018. Refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes to Consolidated Financial Statements – Note 3, “Investments in Partnerships” for additional information on the Company’s equity investments.
Financial Position of the Solar Ventures
Table 1 provides information about the carrying amount of total assets, other liabilities and noncontrolling interests of the Solar Ventures at December 31, 2018 and December 31, 2017.
Table 1: Assets, Other Liabilities and Noncontrolling Interests of the Solar Ventures
Noncontrolling interests (1)
On June 1, 2018, the Company bought out its investment partner in REL and consolidated such entity for reporting purposes in all subsequent reporting periods in 2018. As a result, the Company’s equity investment in REL was eliminated for reporting purposes and equity in income associated with REL’s equity investment in SCL and SPL were reported in the Company’s financial statements.
Lending Activities of the Solar Ventures
At December 31, 2018, the loans that were funded through the Solar Ventures had an aggregate unpaid principal balance (“UPB”) of $250.8 million, a weighted-average remaining maturity of seven months and a weighted-average coupon of 9.2%. These loans generated origination fees that ranged from 1.0% to 2.0% on committed capital and had fixed-rate coupons that ranged from 7.0% to 13.8%.
As of December 31, 2018, 80 of the Solar Ventures’ project loans, totaling $929.6 million of commitments, had been repaid. These loans were all paid in full, resulting in a weighted-average IRR (“WAIRR”) of 15.8%, which was on average higher than originally underwritten. WAIRR was measured as the total return in dollars of all repaid loans divided by the total commitment amount associated with such loans, where (i) the total return for each repaid loan was calculated as the product of each loan’s IRR and its commitment amount and (ii) IRR for each repaid loan was established by solving for a discount rate that made the net present value of all loan cash flows equal zero. WAIRR is higher than the net return on the Company's investments in the Solar Ventures because it is a measure of gross returns earned by the Solar Ventures on repaid loans and does not include the effects of: (i) operating expenses of the Solar Ventures; (ii) the preferred return earned by the Company’s former investment partner in REL; (iii) the amortization of the purchase premium paid by the Company to buyout our former investment partner’s interest in REL and (iv) the opportunity cost of idle capital.
In our OA&L portfolio, we manage the Company’s cash, investment in bonds and related financing, 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.
As of December 31, 2018, we had $28.2 million of unrestricted cash and $5.6 million of restricted cash that was primarily pledged as collateral in connection with financial risk management and financing agreements.
Investments in Bonds and Related Financing
Our investments in bonds finance affordable housing and infrastructure in the U.S. and are fixed rate and unrated. Our bonds are also tax-exempt and primarily 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 one municipal bond that finances the development of infrastructure (“Infrastructure Bond”) for a mixed-use town center development and is secured by incremental tax revenues generated from the development.
The Company has financed a portion 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 2 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-Related Investments”). 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.
Table 2: Bond-Related Investments – Summary
At December 31, 2018
(dollars in thousands)
Pay Rate (6)
Multifamily tax-exempt bonds
Subordinated cash flow (2)
Total multifamily tax-exempt bonds
Infrastructure Bond (3)
Total Bond-Related Investments (4)
Includes bond investments that are 30 days or more past due in either principal or interest payments.
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.
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.
Includes two bonds with a combined UPB and fair value of $17.7 million and $19.4 million, respectively, that were financed with TRS agreements that had a combined notional amount of $18.3 million and that were accounted for as derivatives at December 31, 2018. Our Bond-Related Investments also includes four bonds that are accounted for as a secured borrowing with a combined UPB and fair value of $38.7 million and $40.9 million, respectively, of which three of such bonds were financed with TRS agreements that had a combined notional amount of $31.7 million.
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 all Bond-Related Investments would have been 6.61% and 6.54%, respectively, at December 31, 2018, and the weighted-average pay rate for total multifamily tax-exempt bonds and for all Bond-Related Investments would have been 5.73% and 5.87%, respectively, at December 31, 2018.
Reflects cash interest payments collected as a percentage of the average UPB of corresponding bond investments for the preceding 12 months at December 31, 2018.
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. The Infrastructure Bond’s debt service coverage represents proforma coverage based on the terms of the October 30, 2018 restructure.
For comparative purposes, at September 30, 2018, our Bond-Related Investments were comprised of 27 bonds, which included 25 multifamily tax-exempt bonds that were collateralized by 20 affordable multifamily rental properties. The fair value of our Bond-Related Investments as a percentage of its UPB increased from 103.7% at September 30, 2018 to 106.0% at December 31, 2018, while the weighted-average debt service coverage ratio of our Bond-Related Investments was 1.12x and 1.20x at September 30, 2018 and December 31, 2018, respectively.
The fair value of our Bond-Related Investments as a percentage of its UPB increased from 102.5% at December 31, 2017, to 106.0% at December 31, 2018, while the weighted-average debt service coverage ratio associated with our Bond-Related Investments improved to 1.20x at December 31, 2018, from 1.10x at December 31, 2017. The year-over-year increase in these two metrics was primarily attributable to the Company’s Infrastructure Bond investment and a non-performing multifamily tax-exempt bond investment. In the fourth quarter of 2018, the Company’s Infrastructure Bond investment was restructured, which increased its contractual maturity, the amount of contractual cash flows that are expected to be paid and its fair value (a decrease in the market yield of this investment also contributed to its increase in fair value). Additionally, through the restructuring, the community development district (“CDD”) in which the mixed-use development is located will assess owners of undeveloped land parcels an undeveloped land license fee that will supplement tax revenues that are generated from the mixed-use town center development, thereby increasing the amount of funds available to the CDD to make principal and interest payments to the Company on our Infrastructure Bond. Separately, the fair value of the Company’s non-performing multifamily tax-exempt bond investment increased in 2018 in consideration of third-party indications of value that were obtained in connection with the pending sale of such property. See Notes to Consolidated Financial Statements – Note 2, “Investments in Debt Securities” and Note 8, “Fair Value” for additional information.
Between December 18, 2018 and December 20, 2018, the Company entered into a series of transactions that involved: (i) the termination of 15 TRS agreements that had a total notional amount of $102.6 million; (ii) the sale of one multifamily tax-exempt bond and one subordinate certificate interest in a multifamily tax-exempt bond with an aggregate UPB of $10.8 million; (iii) the termination of a pay-fixed interest rate swap agreement that had a notional amount of $65 million and (iv) the termination of a basis interest rate swap agreement that had a notional amount of $10.5 million. Additionally, on January 3, 2019, the Company entered into additional agreements with this same counterparty to sell one multifamily tax-exempt bond and one subordinate certificate interest in a multifamily tax-exempt bond with an aggregate UPB and fair value of $8.5 million and $8.6 million, respectively. These transactions were entered into for the purpose of both making more capital available to fund renewable energy lending investments and monetizing premiums on our Bond-Related Investments before they amortized, which would cause projected returns over that period to be lower than prospective investments in the Energy Capital portfolio. In the aggregate, these transactions provided the Company with total net cash proceeds of $22.7 million. The portion of such net proceeds that is attributable to the Company's TRS and other bond interests reflects the realization of a 4.8% premium above the UPB of such TRS and bond interests. The settlement of the transactions executed in December resulted in the reclassification of $16.8 million of fair value gains on bond investments into earnings from accumulated other comprehensive income during the fourth quarter of 2018 while the settlement of the transactions executed in January will result in the reclassification of $3.6 million fair value gains on bond investments into earnings from accumulated other comprehensive income during the first quarter of 2019.
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 had an initial term of seven years, is prepayable at any time and bears interest at the rate of 5.0% per annum. On October 4, 2018, the Company’s note receivable from Hunt increased to $67.0 million as part of Hunt’s settlement under the MGM Agreements. The UPB on the note will amortize in 20 equal quarterly payments of $3.35 million beginning on March 31, 2020. Refer to “Interests in MGM” and Notes to Consolidated Financial Statements — Note 13, “Related Party Transactions and Transactions with Affiliates” for more information.
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 $8.8 million at December 31, 2018.
At December 31, 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 $3.8 million as of December 31, 2018.
At December 31, 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 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 December 31, 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, 2018, the carrying value of our DTAs was $124.5 million; however, 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 OA&L portfolio includes the Company’s asset related debt, subordinated debt, notes payable and other debt. The carrying value and weighted-average yield of these debt obligations was $149.2 million and 4.3%, respectively, at December 31, 2018. Refer to Table 25, “Asset Related Debt and Other Debt” for more information.
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 $4.5 million at December 31, 2018.
Interests in MGM
As consideration for the sale of our LIHTC business to 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. On January 8, 2018, as part of the Disposition transaction the Company executed a series of agreements to: (i) convert the MGM purchase option into a purchase and sale agreement that required the Company to complete the purchase of MGM subject to certain conditions precedent; (ii) acquire certain assets pertaining to a specific LIHTC property from affiliates of MGM and (iii) purchase a senior loan with a UPB of $9.0 million from an MGM affiliate that was secured by assets of MGM and bore interest at 11% payable quarterly.
On October 4, 2018, Hunt exercised its option to take assignment of, and close under, the MGM Agreements, which resulted in the Company recognizing an increase in common shareholders’ equity of $14.2 million during the fourth quarter of 2018.
In connection with the closing under 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.
Carrying Values of the OA&L Portfolio
Table 3 provides financial information about the carrying values associated with the Company’s OA&L portfolio reported within the Company’s Consolidated Balance Sheets at December 31, 2018 and December 31, 2017. For presentation purposes, assets, liabilities and equity attributable to noncontrolling interest holders of CFVs and discontinued operations are excluded from the comparative discussion of our OA&L portfolio because (i) the Company generally had a minimal ownership interest in these consolidated entities and (ii) 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, including previously consolidated property partnerships, that were recognized in our Consolidated Balance Sheets at December 31, 2017. Additionally, assets and liabilities that were attributable to businesses or assets that were conveyed by the Company in the Disposition were reclassified for all reporting periods and are presented as discontinued operations. See Notes to Consolidated Financial Statements – Note 15, “Discontinued Operations” and Note 16, “Consolidated Funds and Ventures,” for more information about CFVs and the Company’s reported discontinued operations. Furthermore, given the changes to the Company’s business model noted within Part I, Item 1. “Business,” we now operate as a single reporting segment. As such, certain corporate assets and liabilities of the Company (deferred compensation, accounts payable and accrued expenses, prepaid expenses and state tax receivable) have been excluded from our comparative discussion of our OA&L portfolio because such items have not been allocated to the OA&L portfolio and will only be reported on a consolidated basis.
Table 3: Carrying Values of the OA&L Portfolio
Restricted cash (1)
Investments in debt securities (2) (includes $85,347 and $128,902 pledged as collateral)
Investment in partnerships (3)
Loans held for investment (4)
Derivative assets (5)
Real estate owned
Total assets of the Other Assets and Liabilities portfolio
Other liabilities (7)
Total liabilities of the Other Assets and Liabilities portfolio
Net assets (8) of the OA&L portfolio
Reflects that portion of the Company’s restricted cash balances that supports the execution of a financial guarantee and derivative instruments of the Other Assets and Liabilities portfolio.
See Notes to Consolidated Financial Statements – Note 2, “Investments in Debt Securities” for more information about the Company’s investments in debt securities.
See Notes to Consolidated Financial Statements – Note 3, “Investments in Partnerships” for more information about the Company’s investments in partnerships.
See Notes to Consolidated Financial Statements – Note 4, “Loans HFI and Loans HFS” for more information about the Company’s loans.
See Notes to Consolidated Financial Statements – Note 7, “Derivative Instruments” for more information about the Company’s derivative instruments.
See Table 25 and Notes to Consolidated Financial Statements – Note 6, “Debt” for more information about the Company’s debt obligations.
Includes deferred revenue associated with the Company’s sale of its LIHTC business.
The reported amount of net assets does not include the effects of operating and other expenses incurred by the Company in connection with the management of such portfolio.
Sources of Comprehensive Income from the OA&L Portfolio
Table 4 provides financial information about sources of comprehensive income associated with the Company’s OA&L portfolio for the years ended December 31, 2018 and December 31, 2017. Consistent with the presentation of Table 3, “Balance Sheet Summary of the OA&L portfolio,” for presentation purposes, income (loss) that was attributable to noncontrolling interest holders of CFVs, discontinued operations and operating expenses (salaries and benefits, external management fees and reimbursable expenses, general and administrative, professional fees and tax related expenses) that were not directly attributable to the Other Assets and Liabilities portfolio have been excluded from our comparative discussion of our results of operations. See Notes to Consolidated Financial Statements – Note 15, “Discontinued Operations” and Note 16, “Consolidated Funds and Ventures,” for more information about CFVs and the Company’s reported discontinued operations.
Table 4: Sources of Comprehensive Income Associated with the OA&L Portfolio
For the year ended
Interest on bonds (1)
Interest on loans and short-term investments (2)
Total interest income
Asset related debt (1)
Total interest expense
Net interest income
Total non-interest revenue
Total revenues, net of interest expense
Other interest expense (1)
Total other expenses
Other sources of comprehensive income
Net gains on bonds
Net gains (losses) on loans
Net gains on real estate and other investments
Equity in income from unconsolidated funds and ventures (3)
Net gains on derivatives (4)
Net (losses) gains on extinguishment of debt
Other comprehensive (loss) income (5)
Total other sources of comprehensive income
Net impact of sources of comprehensive income from the OA&L portfolio
Excludes accrued interest associated with the investment and financing components of TRS agreements that are accounted for as derivatives; such accrued interest is classified in the Consolidated Statements of Operations as “Net gains on derivatives.”
Includes interest income earned in connection with restricted cash that is pledged in support of TRS agreements.
Equity in income is generated from real estate partnerships.
Primarily includes fair value adjustments associated with TRS agreements that the Company’s accounts for as derivative instruments and interest rate derivatives that are used to hedge interest rate risk associated with the bond investments.
Reflects fair value adjustments recognized in connection with investments in debt securities and foreign currency translation adjustments reported in the Company’s Consolidated Balance Sheets for such reporting periods. Refer to Table 9, “Other Comprehensive (Loss) Income Allocable to Common Shareholders” for more information.
Refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information about reported changes in sources of comprehensive income from the OA&L portfolio.
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 a base management fee, which is payable quarterly in arrears in an amount equal to (i) 0.50% of the Company’s first $500 million of common shareholders’ equity determined in accordance with generally accepted accounting principles in the U.S. (“GAAP”) on a fully diluted basis, adjusted to exclude the effect of (a) the value of the Company’s net operating loss carryforwards, and (b) any gains or losses attributable to noncontrolling interests (“GAAP Common Shareholders’ Equity”); and (ii) 0.25% of the Company’s GAAP Common Shareholders’ Equity in excess of $500 million. Additionally, the Company agreed to pay the External Manager an annual incentive fee equal to 20% of the total annual return of diluted common shareholders’ equity per share in excess of 7%. The Company also agreed to reimburse the External Manager for certain allocable overhead costs including an allocable share of the costs of (i) noninvestment personnel of the External Manager and an affiliate thereof 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. Reimbursement of compensation-related expenses is, however, subject to an annual cap of $2.5 million through 2019 and $3.5 million thereafter, until the Company’s GAAP common shareholders’ equity exceeds $500 million.
The current term of the Management Agreement extends to December 31, 2022 and automatically renews thereafter for additional two-year terms. Either of the Company or the External Manager may, upon written notice, decline to renew or terminate the Management Agreement without cause, effective at the end of the initial term or any renewal term. If the Company declines to renew or terminates the Management Agreement without cause or the External Manager terminates for cause, the Company is required to pay a termination fee to the External Manager equal to three times the sum of the average annual base and incentive management fees, plus one times the sum of the average Energy Capital business expense reimbursements and the employee cost reimbursement expense, in each case, during the prior two-year period. The Company may also terminate the Management Agreement for cause, including in the event of a payment default under the Hunt note which causes the Hunt note to become immediately due and payable. No termination fee is payable upon a termination by the Company for cause or upon a termination by the Manager without cause.
In our Energy Capital portfolio, we face competition from banks and other renewable energy lenders related to new investments.
In our OA&L portfolio, the properties that collateralize our debt and equity investments compete against other companies and properties that seek similar tenants and offer similar services as our real estate-related investments.
While we have historically been able to compete effectively as a result of our service, reputation, access to investor capital and longstanding relationships with developers, many of our competitors benefit from substantial economies of scale in their business and have other competitive advantages.
We have no employees. The Company engaged Hunt to externally manage the Company’s continuing operations on January 8, 2018 and, as further discussed in Part I of this Report, all former employees of the Company were at the time hired by the External Manager.
Other Information Concerning Our Business
At December 31, 2018, our principal office was located at 3600 O’Donnell Street, Suite 600, Baltimore, MD 21224. Our telephone number at this office was (443) 263-2900. Our corporate website is www.mmacapitalholdings.com, and our filings under the Exchange Act are available through that site, as well as on the SEC website at www.sec.gov. The information contained on our corporate website is not a part of this Report.
Investing in our common shares involves various risks and uncertainties. The risks described in this section are among those that, as of the filing date of this Report, could, directly or indirectly, have a material adverse effect on our business, financial condition or results of operations, as well as on the value of our common shares.
Risks Related to Our Business
We face risks associated with our investments in the Energy Capital portfolio.
Our Energy Capital portfolio invests in late-stage development, construction and permanent loans, directly or through the Solar Ventures, 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. This portfolio is subject to construction risk, permanent financing risk, repayment risk and collateral risks (such as value and ability to foreclose). In addition, federal and state governments have established various incentives and financial mechanisms to accelerate the adoption of renewable energy. These incentives include tax credits, tax abatements and rebates among others. These incentives help catalyze private sector investments in solar and other renewable energy. Changes in government incentives, whether at the federal or local level, could adversely affect our renewable energy finance business. In addition, changes in federal law, including the 2018 tariff on solar panels, could adversely affect our renewable energy lending business. Furthermore, the ability of the Solar Ventures and the Company to fund our development or construction loan commitments is currently and may become increasingly dependent upon the repayment of other, similar loans in which we invest. Repayment of such loans is often dependent upon permanent loans, tax credit equity and other monetization events whose funding is outside of our control. Furthermore, lenders of permanent loans and syndicators of tax credit equity may require access to the credit markets, which could impact their ability to finance the take-out of loans of the Solar Ventures. Moreover, there are risks associated with the nature of the Solar Ventures including: (i) we do not control SCL, SDL and SPL, and our investment partner may not consent to decisions that may be in our best interest; (ii) either the Company or our investment partner may fail to meet its funding obligations to SCL, SDL and SPL to fund new or unfunded loan commitments of such ventures (as of December 31, 2018, SCL, SDL and SPL had $89.1 million of unfunded loan commitments to borrowers); (iii) repaid investments of the Solar Ventures may be unable to be reinvested at attractive risk adjusted returns and (iv) lower than expected returns may be generated by the Solar Ventures due to idle capital costs.
We are exposed to the risk that Hunt may fail to meet its payment obligations to us in connection with financing that we provided to facilitate the Disposition.
On January 8, 2018, the Company provided seller financing associated with the Disposition and received a $57.0 million note from Hunt that had an initial term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum. The UPB of the Company’s receivable from Hunt increased by $10.0 million on October 4, 2018, upon the closing under the MGM Agreements. The Company’s total receivable from Hunt will amortize in 20 equal quarterly payments of $3.35 million beginning on March 31, 2020. This note has certain net worth, leverage ratio, debt service coverage ratio and interest coverage ratio covenants. Notwithstanding these financial covenants, to the extent Hunt does not meet its payment obligations under the terms of the note it could result in a decrease in our anticipated cash flow which could impact our ability to make new investments, or a decline in the rate of growth of such investments, any of which could adversely impact our revenues, cash flows and financial condition. If Hunt fails to repay the note and we are unable to realize the value of the collateral, our business, cash flows and financial condition would be adversely affected.
Increases in interest rates and credit spreads may adversely affect the fair value of our assets and increase our costs of borrowing.
Our Bond-Related Investments and other fixed rate financial instruments, which include loans held-for-sale and derivative financial instruments, are reported at fair value in our financial statements based upon, in part, estimated market yields and credit spreads for comparable investments. Consequently, the fair value of such instruments expose us to changes in interest rates and credit spreads.
Interest rates can fluctuate for a number of reasons, including as a result of changes in the fiscal and monetary policies of the federal government and its agencies. Interest rates can also fluctuate as a result of geopolitical events or changes in general economic conditions, including events or conditions that alter investor demand for Treasury or other fixed-income securities.
Changes in market conditions, including changes in interest rates, liquidity, prepayment and/or default expectations, and the level of uncertainty in the market for a particular asset class, may cause fluctuations in credit spreads.
If interest rates increase or credit spreads widen, the fair value of our investments in bonds and other fixed rate financial instruments (whose fair value measurements are based upon contractual cash flows) will generally decline and, therefore, have a negative effect on our financial results and our shareholders’ equity. Declines in the fair value of these instruments could be significant in such circumstances.
If short-term interest rates rise, our borrowing costs would increase and our net income would decline as interest payments associated with a significant portion of our debt obligations are indexed to short-term interest rates and, therefore, would increase. However, the Company may, from time to time, enter into agreements with third parties that are designed to manage a portion of this risk.
Changes in capitalization and discount rates may adversely impact the fair value of our investments in non-performing bonds, investments in subordinated cash flow bonds and other real estate-related investments.
For non-performing bonds and subordinated cash flow bonds that are reported at fair value in our financial statements, the Company generally measures the fair value of such instruments based upon internally-generated, 10 year projections of future net operating income from the underlying properties that serve as collateral for such instruments (a terminal value is added to these projections to estimate remaining property value that is expected to be realized at the end of the projection period). In this regard, an increase in capitalization and discount rates generally would cause a decline in the fair value of these investments, as well as that of our other real estate-related investments.
The magnitude of changes in the value of our real estate-related interests could vary from market to market as a result of differences in capitalization and discount rates.
The London Interbank Offered Rate (“LIBOR”) may not be available after 2021, which creates uncertainty around the future value and cost of certain interest rate derivative instruments and debt obligations.
The payment terms of our subordinated debt and certain interest rate derivative instruments that we use to hedge our exposure to interest rate risk are indexed to LIBOR. However, it is widely expected that LIBOR will not be quoted or available after 2021. It is also widely expected that an alternate reference rate will be adopted on an industry-wide basis in the derivatives market and that market participants will adopt the alternate rate and agree to apply it to existing, as well as future, interest rate derivative contracts, but there can be no assurance this will happen or that we and the counterparty to our interest rate derivative contracts will be in agreement on the new rate. In any event, it is unlikely that the new rate will be exactly equal to what LIBOR would have been, so the amount paid to us under our cap and interest rate swap agreements might be less than it would have been had LIBOR continued.
Our subordinated debt documents contain alternative reference bank quotation mechanisms in the event LIBOR is discontinued, but there can be no assurance that such banks will quote an alternate rate. If they do not, and we do not otherwise reach agreement with the servicers or the lenders on such debt, the debt will convert to a fixed rate equal to the last quoted LIBOR plus our existing spread. Accordingly, it is impossible at this time to predict what our interest cost will be after 2021. The cost could be greater than it would have been had LIBOR continued and the difference could be material to our financial results.
TRSs are important to financing our bond investments and for other purposes and we are exposed to various risks associated with such agreements.
A TRS is an agreement that requires one party to make interest payments based on either a fixed or floating rate of interest in exchange for payments from its counterparty that are based on the return of a referenced asset that is typically an index, a loan or a bond. The Company has financed its ownership of a majority of its investments in bonds through such agreements, which are all with one financial institution. All payments under this type of agreement are calculated based upon contractually-specified notional amounts. In a typical TRS agreement, we are required to make interest payments that are based on a floating rate of interest and our counterparty is required to make payments to us that reflect the total return associated with a referenced asset. Cash flows associated with this type of agreement are subject to risks associated with the referenced asset (including interest rate and real estate-related risks) and are exposed to the credit risk of both the obligor on the referenced asset and our counterparty to a TRS agreement. To the extent the fair value of a referenced asset
declines, we are at risk of having to provide additional collateral to our TRS counterparty. If we were unable to post additional collateral in such circumstances, the referenced asset might be sold at a time when its full value could not be achieved and our existing collateral would be at risk of being retained by our TRS counterparty. As the TRS agreements mature or are terminated, we need to make our counterparty whole and to the extent that the referenced asset value is less than the notional amount of the TRS, we would need to pay the difference in cash and if we are unable to do so, we have the risk of our collateral being retained.
Cash flows from our bond investments and our other real estate-related investments are exposed to various risks associated with real estate to which our investments are related.
Because a substantial portion of our investments in bonds and other real-estate related investments are secured by real estate or consist of real estate or investments in entities that own real estate, the value of these investments is exposed to various real estate-related risks. Most of these investments are directly or indirectly secured by multifamily rental properties and, therefore, the value of these investments may be adversely affected by changes in macroeconomic conditions or other developments in real estate markets. These factors include (but are not limited to): (i) increasing levels of unemployment and other, adverse regional or national economic conditions; (ii) decreased occupancy and rent levels due to supply and demand imbalances; (iii) changes in interest rates that affect the value of the real estate we own or in which we have an interest and (iv) lack of or reduced availability of mortgage financing.
The value of most of our real estate-related investments is based upon cash flows generated by tenant leases. The majority of the properties that we have financed or in which we have invested have rent limitations that could adversely affect the ability to increase rents. The majority of such properties also have tenant income restrictions that may reduce the number of eligible tenants and, as a result, occupancy rates at such properties could decline. If tenants move out or cannot pay the rents charged on the specific units they lease, the owners (our borrowers and partners) may be unable to lease the units to replacement tenants at full rent (or at all). In such circumstances, cash flows from such properties may not be sufficient to pay interest on our bonds or loans, which would cause the value of our investments to decline.
Real estate may also decline in value because of adverse changes in market conditions, environmental problems, casualty losses for which insurance proceeds are not sufficient to cover the loss, or condemnation proceedings. The value of our real estate-related investments and our ability to conduct business also may be adversely affected by changes in local or national laws or regulatory conditions that affect significant segments of the real estate market, especially the multifamily housing market. These local or national laws or regulatory conditions specifically include environmental, land use and other laws and regulations that affect the cost of maintaining and operating the properties in which we have an interest.
We are exposed to various risks associated with agreements that we use to manage interest rate risk.
From time to time, we may execute agreements that are designed to reduce our interest rate risk. For example, we may enter into interest rate swaps whereby we agree to pay a fixed rate of interest and the counterparty agrees to pay us a floating rate of interest in order to synthetically fix our variable rate debt to better match assets that pay on a fixed rate basis. We also may enter into interest rate caps whereby we pay the counterparty an upfront premium and the counterparty pays us if the benchmark rate on the cap reaches a certain level. As further discussed above, derivative instruments are exposed to changes in fair value as a result of changes in interest rates. Additionally, interest rate swaps and caps expose the Company to the risk of counterparty default (including counterparty failure to meet its payment obligations). Further, there is a risk that these contracts do not perform as expected and may cost more than the benefits we receive. Moreover, in the case of interest rate swaps, we are exposed to the risk of collateral calls if the fair value of such agreements declines.
Our ability to maintain and grow our shareholder value over the long term would be adversely affected if we are unable to raise capital, if our capital partners fail to meet their funding commitments to us or if we are unable to make new investments.
We need to identify, attract and obtain new capital in order to increase the number and size of the investments that we make. Our ability to raise capital depends on a number of factors, including certain factors that are outside our control. There can be no assurances that we can find or secure commitments for new capital or that new or existing capital partners will meet their funding commitments to us. The failure to obtain or maintain capital in sufficient amounts, or to realize sufficient returns on the Company’s current investments, as well as the failure to reinvest investment or capital proceeds into new higher yielding investments could result in a decrease in the number and dollar value of our investments, or a decline in the rate of growth of such investments, any of which could adversely impact our revenues, cash flows and financial condition. In addition, we and our Solar Venture partner may need to contribute additional funds to the Solar Ventures to enable them to meet their funding commitments to borrowers. If we do not have the capital to meet our funding obligations, or if our capital partner fails to meet its funding obligations, our Solar Ventures could default on their lending commitments and our reputation, our ability to make new investments and our cash flows could all be adversely affected.
Additionally, there is a risk that we will not be able to deploy our cash or the cash held by the Solar Ventures or expand our leverage to make investments that generate risk-adjusted returns that grow shareholder value. Furthermore, because there are no restrictions as to the nature of our investments, our investments in the future may result in additional or new risks that we do not face today.
We have been, and may continue to be, directly and indirectly affected by disruptions in credit markets.
Disruptions in credit markets may cause significant deterioration in the market for tax-exempt mortgage revenue bonds and other debt instruments that are part of our assets and may play a role in our reinvestment strategy. This has in the past and may in the future result in our having to reduce the carrying value of our bonds and other receivables associated with our lending activities. We are also dependent upon our capital partner to extend existing TRS agreements upon their maturity. If we were unsuccessful in renewing such agreements, we may be forced to create liquidity in an unfavorable market which could have a material adverse effect on our business, financial condition or results of operations.
Virtually all of our non-cash assets are illiquid and may be difficult to sell at their reported carrying values.
Our renewable energy investments, bonds, direct and indirect investments in real estate and other debt investments are illiquid and difficult to value. In particular, our investments in bonds are unenhanced and unrated and, as a consequence, there is a relatively small trading market for these instruments. The relative lack of liquidity in the market for our bond investments complicates our ability to measure their fair value and that of other debt investments. Therefore, there is a risk that if we need to sell any of these assets, the price that we are able to realize may be lower than their carrying value in our financial statements.
Comprehensive tax reform and other legislation could adversely affect our business and financial condition.
On December 22, 2017, the Tax Cut and Jobs Act of 2017 (the “Tax Act”) was signed into law. The Tax Act introduced significant changes to the Internal Revenue Code.
The Tax Act provides, among other things, for a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, which could adversely affect the market for and value of our tax-exempt bond related investments and the desire of tax credit investors to invest in solar tax credits that support our Energy Capital portfolio. In addition, the majority of our tax-exempt bonds produce income that has traditionally been subject to the alternative minimum tax (“AMT”) for both individuals and corporations. Although the corporate AMT was eliminated by the Tax Act, the individual AMT continues, though with a higher AMT exemption beginning in tax years after December 31, 2017. Marginal tax brackets for individuals were changed with a new maximum marginal tax rate of 37% versus the prior 39.6%. These changes may also impact the value of our investments.
In addition, the government could make further changes in tax or other laws, such as affordable housing incentive programs, that while not directly affecting our tax-exempt bonds, could make them less valuable to investors. For example, if tariffs on solar panels were increased, or if federal or state incentives were reduced or eliminated, our renewable energy business could be adversely affected. Similarly, if the federal government were to further lower marginal federal income
tax rates or phase out the tax-exempt nature of the interest income for all or higher income taxpayers, our bonds would likely decline in value. Congress could also pass laws that make competing investments more attractive than our solar projects and tax-exempt bonds, which could also make our investments less valuable.
Our Bond-Related Investments may not retain their tax-exempt status.
On the date of initial issuance of any tax-exempt bond that we hold, bond counsel or special tax counsel rendered its opinion that interest on the bond is excludable from gross income for federal income tax purposes. However, under certain circumstances, our bonds could lose their tax-exempt status subsequent to issuance. While we take steps to ensure that these circumstances do not occur, there can be no guarantees that the tax-exempt status will be maintained. If our bonds were to lose their tax-exempt status, then the fair value of these investments would decline. In this case, if a bond was the referenced asset in a TRS financing, the TRS would terminate, thereby causing us to reacquire such bonds at fair value while we would also be obligated to pay any difference required to settle the TRS. If we did not purchase a bond in such circumstances, our counterparty could sell it and, if its value at the inception of the TRS agreement was not realized upon sale, we would also be obligated to pay any difference required to settle a TRS agreement and our TRS collateral would be at risk.
One of our Bond-Related Investments is 30 or more days past due while other bond investments are at risk of becoming 30 or more days past due in payment of principal and/or interest.
As of December 31, 2018, the aggregate UPB of the bond investment that was 30 or more days past due in either principal and/or interest was $9.9 million, or approximately 10.7% of our bond investments. We report this defaulted bond investment at its fair value, which takes into consideration a borrower’s default. However, amounts we realize could be even less than such estimates if foreclosures were pursued or if our borrower filed for bankruptcy protection. Additionally, properties collateralizing certain performing bonds have net operating income (as represented in operating statements provided by the borrowing partnerships), which is less than the debt service owed to us. These bonds are at risk of default if the partners of the borrowing partnerships are unable or unwilling to continue to cover the shortfall in order to pay the full debt service.
We could lose the tax benefit of our NOLs.
As of December 31, 2018, we had an estimated $396.1 million of federal NOLs that were subject to a full valuation allowance at such reporting date. Our federal NOLs can be used to offset federal taxable income for the foreseeable future. However, there are events that could cause us to lose, or to otherwise limit, the amount of NOLs available to us. For example, our NOLs could be lost if we suffer a change of control event as defined by the Internal Revenue Code. A change of control event may occur when a shareholder, or a collection of shareholders, owning at least five percent of our shares, acquire more than 50% of our outstanding shares within a three-year period. The Company adopted a Tax Benefits Rights Agreement on May 5, 2015 (the “Rights Plan”) in an attempt to avoid a change of control event as defined by the Internal Revenue Code, although the Company cannot guarantee the effectiveness of the Rights Plan. Changes in tax laws could also cause us to lose, or could otherwise limit, the amount of NOLs available to us.
Our NOLs are also subject to a 20-year carryforward limitation that limits the time that we have to generate the income necessary to fully utilize our NOLs. In this regard, it is possible that some of our NOLs will become permanently impaired if the Company is unable to generate the income required to utilize all of our NOLs before their expiration period begins in 2028.
If we become subject to the Investment Company Act of 1940 (the “Investment Company Act”), we could be required to sell substantial portions of our assets at a time when we might not otherwise want to do so, and we could incur significant losses as a result.
We continuously monitor our business activities to ensure that we do not become subject to regulation as an investment company under the Investment Company Act. We currently rely on exemptions from the Investment Company Act for companies that are primarily engaged in the business of certain types of financings or of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Because of changes in the nature and number of companies that rely on the exemption for real estate, as well as given that most of the guidance surrounding this exemption comes from “no action” letters issued by the SEC staff, the SEC on August 31, 2011 issued a concept release requesting comment directed to the scope and use of this exemption. We do not know what action, if any, the SEC may take in response to the
comments that it received. If we were to become regulated as an investment company under the Investment Company Act, either due to a change in the SEC’s interpretation of that Act or due to a significant change in the value and composition of our assets, we would be subject to extensive regulation and restrictions. Among other restrictions, we would not be able to incur borrowings, which would limit our ability to fund certain investments. Accordingly, either we would have to restructure our assets so that we would not be subject to the Investment Company Act or we would have to materially change the way we do business. Either course of action could require that we sell substantial portions of our assets at a time when we might not otherwise want to do so, and we could incur significant losses as a result. Any of these consequences could have a material adverse effect on our business, financial condition or results of operations.
The value of certain investments and cash flows are dependent on the quality of the management of the underlying properties.
Inadequate property management can adversely impact the performance, cash flows and value of properties held by funds in which we have invested or that secure our bond investments.
Our accounting policies and methods require management to make judgments and estimates about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. In addition, many of our accounting methods involve substantial use of models, which are based on assumptions, including assumptions about future events. Our management must exercise judgment in applying many of these accounting policies and methods so that these policies and methods comply with GAAP and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the appropriate accounting policy or method from two or more alternatives, any of which might be reasonable under the circumstances but might affect the amounts of assets, liabilities, revenues and expenses that we report. See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” and Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies” for a description of our significant accounting policies.
Further, we have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. These policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.
Because of the uncertainty surrounding management’s judgments, assumptions and estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements.
Risks Associated with Our Relationship with Our External Manager
We no longer have any employees and we are therefore dependent upon the External Manager to provide all of the services we need, including finding suitable investments, conducting our operations and maintaining regulatory compliance.
Because we have no employees, we are dependent on the External Manager to find and close suitable investments on our behalf and to conduct all of our operations. Although our former employees became employees of the External Manager, the External Manager is not obligated to require these, or any other, employees to devote their time exclusively to us. As a result, the employees may not devote sufficient time to the management of our business operations, and in particular to sourcing and placing investments with us. Further, the Management Agreement does not require the External Manager to dedicate specific personnel to our operations and none of our former employees’ continued service is guaranteed. If these individuals leave the External Manager or an affiliate thereof or are reallocated to other activities of the External Manager or its affiliates, the External Manager may be unable to replace them with persons with appropriate experience, or at all, and we may not be able to execute our business plan or maintain compliance with applicable regulatory requirements.
Various termination provisions in the Management Agreement, including termination by us without cause, require us to pay the External Manager a substantial termination fee, which could deter termination or adversely affect our results of operations.
The initial term of our Management Agreement extends to December 31, 2022 and, unless terminated, the Management
Agreement automatically renews thereafter for successive two-year terms. Either party may elect not to renew the Management Agreement effective upon the expiration of the initial term or any automatic renewal term, both upon 12 months’ prior written notice. However, if we elect not to renew the Management Agreement on this basis, we are required to pay the External Manager a termination fee equal to three times the average annual management fee and incentive compensation earned by, plus one times the average annual amount of certain reimbursements received by, the External Manager during the 24-month period immediately preceding the effective date of termination, which could cause the termination fee to be substantial. These provisions may make it costly and difficult for us not to renew the Management Agreement. If we are required to pay the termination fee as a result of a termination, our results of operations and our shareholders’ equity will be adversely affected.
If we terminate the Management Agreement without cause, we cannot hire the External Manager’s employees, including our former employees, which could make it difficult for us to conduct our operations following any such termination.
If we terminate the Management Agreement without cause, we may not, for a period of two years, without the consent of the External Manager, employ any employee of the External Manager or any of its affiliates, or any person who was employed by the External Manager or any of its affiliates at any time within the two-year period immediately preceding the date we hire such person. This restriction applies to all of our former employees except that, if we have paid the termination fee described above, we may hire persons serving in the capacity of Chief Executive Officer, Chief Operating Officer/President and Chief Financial Officer. The inability to hire the External Manager’s employees could make it difficult for us to terminate the Management Agreement since we will need to find a new external manager or hire all new employees.
The fixed percentage component of the management fee payable to the External Manager is payable regardless of our performance.
The External Manager is entitled to receive a management fee from us that is based on a fixed percentage of our GAAP common shareholders’ equity, regardless of the performance of our investment portfolio. For example, we would owe the External Manager a management fee for a specific period even if we experienced a net loss during that period. The External Manager’s entitlement to a fee based on a fixed percentage of our GAAP Common Shareholders’ Equity may encourage the External Manager to invest in riskier assets in order to grow the equity base upon which the fee is paid and may reduce its incentive to find investments that provide appropriate risk-adjusted returns for our investment portfolio. Similarly, the incentive compensation payable to the External Manager is based on year-over-year increases in diluted GAAP common shareholders’ equity per share, which could also encourage the External Manager to invest in riskier assets.
External Manager’s liability is limited under the Management Agreement and we have agreed to indemnify the External Manager against certain liabilities.
Under the terms of the Management Agreement, the External Manager does not assume any responsibility other than to render the services called for thereunder in good faith and is not responsible for any action of our board of directors in following or declining to follow any advice or recommendations of the External Manager, including as set forth in the investment guidelines. Under the terms of the Management Agreement, the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders are not liable to us, our directors, stockholders or any subsidiary of ours, or their equity holders or partners for any acts or omissions performed in accordance with and pursuant to the Management Agreement, whether by or through attempted piercing of the corporate veil, by or through a claim, by the enforcement of any judgment or assessment or any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, or otherwise, except by reason of acts or omissions constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. We have agreed to indemnify the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from their acts or omissions not constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. As a result, we could experience poor performance or losses for which the External Manager would not be liable.
Affiliates of the External Manager are engaged, or may engage, in similar businesses to ours and the External Manager may have conflicts of interest which could result in decisions that are not in the best interests of our shareholders.
We are subject to conflicts of interest arising out of our relationship with Hunt, including the External Manager and its affiliates. The External Manager may be presented with investment opportunities that we would find attractive, but which it offers instead to its affiliates, some of which are engaged in businesses similar to ours. There is no guarantee that the policies and procedures adopted by us, the terms and conditions of the Management Agreement or the policies and procedures adopted by the External Manager, will enable us to identify, adequately address or mitigate all potential conflicts of interest. These factors could adversely impact our ability to make investments with attractive risk adjusted returns.
A breach of the security of our External Manager’s systems or those of other third parties with which we do business, including as a result of cyber-attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, increase our costs and cause losses.
Our business is reliant upon the security and efficacy of our External Manager’s information technology (“IT”) environment, as well as those of other third parties with whom we interact or upon whom we rely. Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in the computer and data management systems and networks of third parties, particularly our External Manager.
Our ability to conduct business may be adversely affected by any significant disruptions to our External Manager’s IT systems or to third parties with whom we interact or upon whom we rely. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than if those systems were our own. In the event that backup systems are utilized, they may not process data as quickly as needed and some data might not have been backed up.
As cyber threats continue to evolve, third parties with whom we interact or upon whom we rely, particularly our External Manager, may be subject to computer viruses, malicious codes, phishing attacks, unauthorized access and other cyber-attacks. Our External Manager may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of systems and implement controls, processes, policies and other protective measures, third parties with whom we interact or upon whom we rely, particularly our External Manager, may not be able to anticipate all security attacks or to implement appropriate preventative measures against such security breaches. Any such security breach or unauthorized access could disrupt our operations, result in the loss of assets or harm our reputation. In addition, any such event could have a material adverse effect on our business, financial condition or results of operations.
Risks Related to Ownership of Our Shares
Our Rights Plan could depress our share price.
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. By discouraging acquisitions of greater than a 4.9% stake in the Company, the Rights Plan might limit takeover opportunities and, as a result, could depress our share price. At December 31, 2018, we had three shareholders, including one of our executive officers, Michael L. Falcone, that held greater than a 4.9% stake in the Company. The Board of Directors named Mr. Falcone an exempt person in accordance with the Rights Plan. The Board determined that Mr. Falcone’s exercise of his options and the required share purchases did not constitute a triggering event for purposes of our Rights Plan. In accordance with the Master Transaction Agreement dated January 8, 2018, Hunt remains an exempt person for purposes of the Rights Plan and may purchase up to 9.9% of the Company’s shares in any rolling 12-month period, without causing a triggering event.
Provisions of our Certificate of Incorporation may discourage attempts to acquire us.
Our Certificate of Incorporation contains at least three groups of provisions that could have the effect of discouraging people from trying to acquire control of us. Those provisions are:
If any person or group acquires 10% or more of our shares, that person or group cannot, with a very limited exception (i) engage in a business combination with us (including an acquisition from us of more than 10% of our assets or more than 5% of our shares) within five years after the person or group acquires the 10% or greater interest, unless our Board approved the business combination or acquisition of a 10% or greater interest in us before it took place, or the business combination is approved by two-thirds of the members of our Board and holders of two-thirds of the shares that are not owned by the person or group that owns the 10% or greater interest or (ii) engage in a business combination with us until more than five years after the person or group acquires the 10% or greater interest, unless the business combination is recommended by our Board and approved by holders of 80% of our shares or of two-thirds of the shares that are not owned by the person or group that owns the 10% or greater interest.
If any person or group makes an acquisition of our shares that causes the person or group to be able to exercise one-fifth or more but less than one-third of all voting power of our shares, one-third or more but less than a majority of all voting power of our shares, or a majority or more of all voting power of our shares, the acquired shares will lose their voting power, except to the extent approved at a meeting by the vote of two-thirds of the shares not owned by the person or group, and we will have the right to redeem, for their fair market value, any of the acquired shares for which the shareholders do not approve voting rights.
Since one-third of our directors are elected each year to three-year terms this could delay the time when someone who acquires voting control of us could elect a majority of our directors.
The above provisions could deprive our shareholders of acquisition opportunities that might be attractive to many of them.
Our shares are thinly traded and, as a result, the price at which they trade may not reflect their full intrinsic value.
Although we are traded on Nasdaq Capital Market, our shares are thinly traded and we do not have analysts actively tracking and publishing opinions on the Company and our stock. Additionally, when we have repurchased our shares, the number of shares outstanding is reduced, which has the effect over time of further decreasing the trading volume of our shares. Accordingly, the trading price of our shares may not reflect their full intrinsic value.
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
We do not own any of the real property where we conduct our business. Our corporate headquarters is located in Baltimore, Maryland, where we occupy approximately 6,400 square feet of office space pursuant to a lease that expires in March 2024. As part of the Disposition, Hunt assumed all of the Company’s property leases in 2018. Refer to Part I, Item I. “Business” of this Report for more information about the Disposition.
ITEM 3. LEGAL PROCEEDINGS
We are not, nor are any of our subsidiaries, a party to any material pending litigation or other legal proceedings. Furthermore, to the best of our knowledge, we are not party to any threatened litigation or legal proceedings, which, in the opinion of management, individually or in the aggregate, would be likely to have a material adverse effect on our results of operations or financial condition.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common shares currently trade on the Nasdaq Capital Market under the symbol “MMAC.”
Table 5 shows the high and low sales prices for our common shares during the years ended December 31, 2018 and December 31, 2017 as reported by the Nasdaq Capital Market.
Table 5: Common Share Prices
The Board makes determinations regarding dividends based on our Manager’s recommendation, which is based on an evaluation of a number of factors, including our common shareholders’ equity, business prospects and available cash. The Board does not believe paying a dividend is appropriate at the current time.
On March 7, 2019, there were approximately 401 holders of record of our common shares.
Recent Sales of Unregistered Securities
None for the three months ended December 31, 2018.
Use of Proceeds from Registered Securities
None for the three months ended December 31, 2018.
Issuer Purchases of Equity Securities
Table 6 provides information on the Company’s purchases of its common shares during the three months ended December 31, 2018.
Table 6: Common Shares Repurchases
Number of Shares
as Part of
that May Yet be
(in thousands, except for per share data)
Plans or Programs
Plans or Programs (1)
10/1/2018 - 10/31/2018
11/1/2018 - 11/30/2018
12/1/2018 - 12/31/2018
On March 13, 2018, the Board approved a 2018 share repurchase program (“2018 Plan”), which authorized the repurchase of up to 125,000 common shares at a maximum price of $30.00 per share. 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. 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 represented the Company’s diluted common shareholders’ equity per share at September 30, 2018. The 2018 Plan expired on December 31, 2018.
Information in response to this Item 6 can be found in the “Consolidated Financial Highlights” table that is located on page 2 of this Report. That information is incorporated into this item by reference.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY OF FINANCIAL PERFORMANCE
Common shareholders’ equity increased to $212.9 million at December 31, 2018, from $137.6 million at December 31, 2017. This $75.3 million increase was driven by $57.5 million in comprehensive income that was allocable to common shareholders and by $17.8 million of other increases in common shareholders’ equity.
Diluted common shareholders’ equity (“Book Value”) per share increased to $36.20 per share at December 31, 2018, representing an $11.72 per share increase during 2018.
Refer to “Consolidated Balance Sheet Analysis” for more information about changes in common shareholders’ equity and other components of our Consolidated Balance Sheets.
We recognized comprehensive income that was allocable to common shareholders of $57.5 million during the year ended December 31, 2018, which consisted of $61.0 million of net income that was allocable to common shareholders and $3.5 million of other comprehensive loss that was allocable to common shareholders. In comparison, we recognized $22.7 million of comprehensive income that was allocable to common shareholders during the year ended December 31, 2017, which consisted of $19.4 million of net income that was allocable to common shareholders and $3.3 million of other comprehensive income that was allocable to common shareholders.
Net income that we recognized during the year ended December 31, 2018, was primarily driven by the gains realized from the Disposition, 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 for the year ended December 31, 2018, was primarily attributable to the reclassification of fair value 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 fair value gains that we recognized in AOCI during 2018 in connection with our Bond-Related Investments. Refer to “Consolidated Balance Sheet Analysis” for more information about other comprehensive income.
As further discussed in Part I, Item 1. “Business” 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 no longer recognizes revenues, expenses, assets, liabilities and noncontrolling interests associated with such CFVs.
In place of the aforementioned revenues and expenses, the Company recognizes interest income associated with its loan receivable from Hunt and recognizes various costs set forth in the Management Agreement, including base management fees and reimbursements to the External Manager for certain allocable overhead costs. The Company may also incur incentive management fees.
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.
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 7 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 7 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 15, “Discontinued Operations,” and Note 16, “Consolidated Funds and Ventures,” for more information about CFVs.
Table 7: Balance Sheet Summary
(in thousands, except per share data)
Cash and cash equivalents
Restricted cash (without CFVs)
Investments in debt securities (without CFVs)
Investments in partnerships (without CFVs)
Loans held for investment
Other assets (without CFVs)
Assets of discontinued operations
Assets of CFVs (1)
Liabilities and Noncontrolling Interests
Debt (without CFVs)
Accounts payable and accrued expenses
Other liabilities (without CFVs) (1), (2)
Liabilities of discontinued operations
Liabilities of CFVs
Noncontrolling interests related to CFVs
Total liabilities and noncontrolling interests
Common Shareholders' Equity
Common shares outstanding
Common shareholders' equity per common share
Diluted common shareholders' equity (3)
Diluted common shares outstanding
Diluted common shareholders' equity per common share
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 January 8, 2018, and, as a result, related deferred revenue balances were derecognized from the Company’s Consolidated Balance Sheets as of such reporting date.
Includes $10.3 million of deferred revenue as of December 31, 2017, associated with the Company’s sale of its LIHTC business to MGM in 2014. On October 4, 2018, Hunt exercised its option set forth in the Master Transaction Agreement dated January 8, 2018, to take assignment of and close under the MGM Agreements; and, as a result, the Company recognized $14.5 million of deferred revenue as comprehensive income during the fourth quarter of 2018.
Diluted common shareholders’ equity measures common shareholders’ equity assuming that all outstanding employee common share options that are dilutive were exercised in full at 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 zero at December 31, 2018, as all options had been exercised as of December 31, 2018, and $9.3 million at December 31, 2017.
Common Shareholders’ Equity
Table 8 summarizes the changes in common shareholders’ equity for the periods presented.