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EX-31.2 - EXHIBIT 31.2 - MMA CAPITAL MANAGEMENT, LLCv392144_ex31-2.htm
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EX-32.2 - EXHIBIT 32.2 - MMA CAPITAL MANAGEMENT, LLCv392144_ex32-2.htm
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EX-32.1 - EXHIBIT 32.1 - MMA CAPITAL MANAGEMENT, LLCv392144_ex32-1.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

OR

 

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

 

For the transition period from __________________ to __________________

 

Commission File Number 001-11981

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

 

Delaware
(State or other jurisdiction of incorporation or organization)
52-1449733
(I.R.S. Employer Identification No.)

621 East Pratt Street, Suite 600

Baltimore, Maryland
(Address of principal executive offices)

21202
(Zip Code)

 

(443) 263-2900
(Registrant's telephone number, including area code)

 

MUNICIPAL MORTGAGE & EQUITY, LLC
(Former name, former address and former fiscal year if changed since last report)

 

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

Securities registered pursuant to Section 12(g) of the Act: Common Shares

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files) Yes þ No ¨

 

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

There were 7,279,545 shares of common shares outstanding at November 5, 2014.

 

 
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

TABLE OF CONTENTS

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 1
   
Part I – FINANCIAL INFORMATION 2
     
Item 1. Financial Statements 2
     
  (a) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 2
     
  (b) Consolidated Statements of Operations for the three months and nine months ended September 30, 2014 and 2013 3
     
  (c) Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2014 and 2013 5
     
  (d) Consolidated Statements of Equity for the nine months ended September 30, 2014 6
     
  (e) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 7
     
  (f) Notes to the Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 47
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 63
     
Item 4. Controls and Procedures 63
     
PART II – OTHER INFORMATION 64
     
Item 1. Legal Proceedings 64
     
Item 1A. Risk Factors 64
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 64
     
Item 3. Defaults Upon Senior Securities 65
     
Item 4. Mine Safety Disclosures 65
     
Item 5. Other Information 65
     
Item 6. Exhibits 65
     
SIGNATURES   S-1
     
EXHIBITS   E-1

 

I
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This 2014 Quarterly Report on Form 10-Q (“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 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. They include the factors discussed in Part 1, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 Form 10-K”).

 

Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we make from time to time, and to consider carefully the factors discussed in Part I, Item 1A. “Risk Factors” of the 2013 Form 10-K in evaluating these forward-looking statements. We have not undertaken to update any forward-looking statements.

 

1
 

 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

   September 30, 2014
(Unaudited)
   December 31,
2013
 
ASSETS          
Cash and cash equivalents  $46,607   $66,794 
Restricted cash (includes $40,974 and $52,897 related to CFVs)   65,456    87,903 
Bonds available-for-sale (includes $102,979 and $134,769 pledged as collateral and/or restricted)   171,094    195,332 
Investments in Lower Tier Property Partnerships related to CFVs   248,811    286,007 
SA Fund investments related to CFVs   165,760    158,325 
Real estate held-for-use, net (includes $4,822 and $15,644 pledged as collateral and $78,836 and $102,314 related to CFVs)   96,928    120,576 
Real estate held-for-sale, net   11,693    24,090 
Investment in preferred stock (pledged as collateral)   31,371    31,371 
Other assets (includes $6,306 and $11,907 pledged as collateral and $23,347 and $23,664 related to CFVs)   54,159    44,960 
Total assets  $891,879   $1,015,358 
           
LIABILITIES AND EQUITY          
Debt (includes $69,564 and $91,602 related to CFVs)  $348,305   $441,963 
Accounts payable and accrued expenses   4,895    8,723 
Unfunded equity commitments to Lower Tier Property Partnerships related to CFVs   9,597    13,461 
Other liabilities (includes $4,836 and $4,043 related to CFVs)   14,859    12,352 
Total liabilities  $377,656   $476,499 
           
Commitments and contingencies          
           
Equity:          
Noncontrolling interests in CFVs and IHS (net of $575 of subscriptions receivable)  $432,813   $473,513 
Common shareholders’ equity:          
Common shares, no par value (7,279,689 and 7,855,919 shares issued and outstanding and 64,882 and 256,216 non-employee directors’ and employee deferred shares issued at September 30, 2014 and December 31, 2013, respectively)   42,906    28,687 
Accumulated other comprehensive income   38,504    36,659 
Total common shareholders’ equity   81,410    65,346 
Total equity   514,223    538,859 
Total liabilities and equity  $891,879   $1,015,358 

 

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

 

2
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands)

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2014   2013   2014   2013 
Interest income                    
Interest on bonds  $5,240   $4,215   $13,029   $34,677 
Interest on loans and short-term investments   208    166    569    500 
Total interest income   5,448    4,381    13,598    35,177 
                     
Interest expense (1)                    
Bond related debt   347    1,975    2,111    21,167 
Non-bond related debt   179    224    563    1,046 
Total interest expense   526    2,199    2,674    22,213 
Net interest income   4,922    2,182    10,924    12,964 
                     
Non-interest revenue                    
Income on preferred stock investment   1,326    1,326    3,935    3,935 
Other income   2,486    809    4,243    1,866 
Revenue from CFVs   3,841    7,029    14,501    16,149 
Total non-interest revenue   7,653    9,164    22,679    21,950 
Total revenues, net of interest expense   12,575    11,346    33,603    34,914 
                     
Operating and other expenses                    
Interest expense (2)   3,400    3,628    10,462    11,374 
Salaries and benefits   2,973    2,895    9,398    10,045 
General and administrative   737    1,102    2,594    3,528 
Professional fees   1,507    1,375    3,872    6,777 
Net impairment on bonds recognized in earnings   113    939    113    1,772 
Net loan loss   751    5    751    5 
Other expenses   1,258    1,178    3,167    4,965 
Expenses from CFVs   17,296    14,377    41,604    39,214 
Total operating and other expenses   28,035    25,499    71,961    77,680 
                     
Net gains on assets and derivatives   9,193    76,404    9,979    78,509 
Net gains (losses) on extinguishment of liabilities   1,476    (84)   1,878    36,179 
Net gains due to initial real estate consolidation and foreclosure       2,411    2,003    10,895 
Net gains related to CFVs   12,627    3,812    16,779    27,732 
Equity in losses from Lower Tier Property Partnerships of CFVs   (4,346)   (6,343)   (18,812)   (20,129)
Net income (loss) from continuing operations before income taxes   3,490    62,047    (26,531)   90,420 
Income tax (expense) benefit   (1,919)   (123)   (171)   1,309 
Income from discontinued operations, net of tax   3,903    371    17,941    6,524 
Net income (loss)   5,474    62,295    (8,761)   98,253 
Income allocable to noncontrolling interests:                    
Income allocable to perpetual preferred shareholders of a subsidiary company       (36)       (3,714)
Net losses (income) allocable to noncontrolling interests in CFVs and IHS:                    
Related to continuing operations   7,138    11,089    32,412    18,847 
Related to discontinued operations       (32)   150    (1,244)
Net income to common shareholders  $12,612   $73,316   $23,801   $112,142 

 

(1)Represents interest expense related to debt which finances interest-bearing assets. See Note 6, “Debt.”

 

(2)Represents interest expense related to debt which does not finance interest-bearing assets. See Note 6, “Debt.”

 

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

 

3
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF OPERATIONS – (continued)

(Unaudited)

(in thousands, except per share data)

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2014   2013   2014   2013 
Basic income per common share:                    
Income from continuing operations  $1.17   $8.63   $0.74   $12.61 
Income from discontinued operations   0.52    0.04    2.33    0.62 
Income per common share  $1.69   $8.67   $3.07   $13.23 
                     
Diluted income per common share:                    
Income from continuing operations (1)  $1.12   $8.31   $0.74   $12.38 
Income from discontinued operations   0.50    0.04    2.33    0.60 
Income per common share  $1.62   $8.35   $3.07   $12.98 
                     
Weighted-average common shares outstanding:                    
Basic   7,454    8,458    7,760    8,476 
Diluted (2)   7,772    8,783    7,760    8,765 

 

(1)Includes an adjustment for liability classified awards. For the nine months ended September 30, 2014, no adjustment was made as it caused the incremental income per common share to be anti-dilutive.

 

(2)For the nine months ended September 30, 2014, any incremental shares would be anti-dilutive.

 

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

 

4
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2014   2013   2014   2013 
                 
Net income to common shareholders  $12,612   $73,316   $23,801   $112,142 
Net loss allocable to noncontrolling interests   (7,138)   (11,021)   (32,562)   (13,889)
Net income (loss)  $5,474   $62,295   $(8,761)  $98,253 
                     
Other comprehensive (loss) income allocable to common shareholders:                    
Bond related changes:                    
Net unrealized gains (losses) arising during the period  $3,370   $(5,259)  $11,184   $(16,792)
Reversal of net unrealized gains on sold/redeemed bonds   (6,450)   (76,362)   (7,228)   (76,960)
Reclassification of unrealized bond losses to operations
   due to impairment
   113    939    113    1,772 
Reclassification of unrealized bond gains to operations due
   to consolidation and foreclosure
       (2,411)   (2,003)   (10,895)
Net change in other comprehensive income due to bonds   (2,967)   (83,093)   2,066    (102,875)
Income tax expense   458             
Foreign currency translation adjustment for SA Fund and IHS   (134)   43    (221)   44 
Other comprehensive (loss) income allocable to common shareholders  $(2,643)  $(83,050)  $1,845   $(102,831)
                     
Other comprehensive loss allocable to noncontrolling interests:                    
Foreign currency translation adjustment for SA Fund and IHS  $(8,032)  $(2,212)  $(9,366)  $(20,674)
                     
Comprehensive income (loss) to common shareholders  $9,969   $(9,734)  $25,646   $9,311 
Comprehensive loss to noncontrolling interests   (15,170)   (13,233)   (41,928)   (34,563)
Comprehensive loss  $(5,201)  $(22,967)  $(16,282)  $(25,252)

 

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

 

5
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(in thousands)

 

   Common Equity Before
Accumulated Other
Comprehensive Income
   Accumulated
Other
Comprehensive
Income
   Total Common
Shareholders’
Equity
   Noncontrolling
Interest in CFVs
and IHS
   Total
Equity
 
   Number   Amount                 
Balance, January 1, 2014   8,112   $28,687   $36,659   $65,346   $473,513   $538,859 
Net income (loss)       23,801        23,801    (32,562)   (8,761)
Other comprehensive income (loss)           1,845    1,845    (9,366)   (7,521)
Distributions                   (1,621)   (1,621)
Common shares (restricted and deferred) issued under employee and non-employee director share plans   34    172        172        172 
Mark-to-market activity for liability classified awards previously classified as equity       33        33        33 
Net change due to consolidation (1)       (2,849)       (2,849)   2,849     
Common share repurchases   (801)   (6,938)       (6,938)       (6,938)
Balance, September 30, 2014   7,345   $42,906   $38,504   $81,410   $432,813   $514,223 

 

(1)For more information see Note 12, “Equity.”

 

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

 

6
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

   For the nine months ended September 30, 
   2014   2013 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net (loss) income  $(8,761)  $98,253 
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:          
Net gains on assets and derivatives (1)   (8,549)   (79,220)
Net gains due to initial real estate consolidation and foreclosure   (2,003)   (10,895)
Net gains related to CFVs   (15,987)   (32,964)
Provisions for credit losses and impairment (2)   20,555    16,962 
Net equity in losses from equity investments in partnerships (2)   19,248    20,323 
Subordinate debt effective yield amortization and interest accruals   5,321    6,188 
Net gains on extinguishment of liabilities   (1,878)   (36,179)
Net gains on sales of real estate and other investments   (17,671)    
Depreciation and other amortization (2)   7,310    15,742 
Foreign currency loss (2)   3,525    9,136 
Stock-based compensation expense   1,808    2,137 
Other   (3,946)   (1,552)
Net cash (used in)/provided by operating activities   (1,028)   7,931 
CASH FLOWS FROM INVESTING ACTIVITIES:          
Advances on and purchases of bonds   (8,380)    
Principal payments and sales proceeds received on bonds   9,480    15,203 
Advances on and originations of loans held for investment   (8,125)   (278)
Principal payments received on loans held for investment   107    563 
Investments in property partnerships and real estate (2)   (24,537)   (20,509)
Proceeds from the sale of real estate and other investments   61,195    39,437 
Net proceeds from the sale of a subsidiary company   -    19,151 
Decrease (increase) in restricted cash and cash of CFVs   21,216    (24,784)
Capital distributions received from investments in partnerships of CFVs   13,922    12,728 
Net cash provided by investing activities   64,878    41,511 
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from borrowing activity   -    116,461 
Repayment of borrowings   (75,478)   (136,639)
Payment of debt issuance costs   -    (1,202)
Contribution from holders of noncontrolling interests   -    8,051 
Distributions paid to holders of noncontrolling interests   (1,621)    
Purchase of treasury stock   (6,938)   (516)
Distributions paid to perpetual preferred shareholders of a subsidiary company   -    (4,636)
Redemption of perpetual preferred shares   -    (36,213)
Other   -     
Net cash used in financing activities   (84,037)   (54,694)
Net decrease in cash and cash equivalents   (20,187)   (5,252)
Cash and cash equivalents at beginning of period   66,794    50,857 
Cash and cash equivalents at end of period  $46,607   $45,605 

 

(1)Includes $0.8 million of net mark-to-market gains on derivatives for the nine months ended September 30, 2013 which were previously included within Other operating activities.

 

(2)Majority of the activity was related to CFVs.

 

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

 

7
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

CONSOLIDATED STATEMENTS OF CASH FLOWS– (continued)

(Unaudited)

(in thousands)

 

   For the nine months ended September 30, 
   2014   2013 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION          
Interest paid  $10,171   $26,868 
Income taxes paid   302    254 
           
Non-cash investing and financing activities:          
Unrealized losses included in other comprehensive income   (7,521)   (123,505)
Debt and liabilities extinguished through sales and collections on bonds and loans   22,552    4,252 
Decrease in common equity and increase in noncontrolling equity due to purchase of noncontrolling interest   (2,849)    
Increase in real estate assets due to foreclosure or initial consolidation of funds and ventures   11,058    43,943 
Decrease in bond assets due to foreclosure or initial consolidation of funds and ventures   11,058    37,833 
Increase in noncontrolling interest equity due to consolidation of funds and ventures       6,737 
           
Net change in assets and liabilities due to the sale of a subsidiary company:          
Net decrease in interest receivable       4,612 
Net decrease in interest payable       (1,052)
Net decrease in bonds available-for-sale       678,983 
Net increase in restricted cash       (14,672)
Increase related to new borrowing activities       169,601 
Net decrease in perpetual preferred shares and related distribution       (122,669)
Decrease related to borrowings transferred to purchaser       (695,652)

 

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

 

8
 

 

MMA Capital Management, LLC

(Formerly Municipal Mortgage & Equity, LLC)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1—description of the business and BASIS OF PRESENTATION

 

MMA Capital Management, LLC, the registrant, was organized in 1996 as a Delaware limited liability company.  When used in this report, the “Company,” “MMA Capital,” “we,” “our,” or “us” may refer to the registrant, the registrant and its subsidiaries, or one or more of the registrant’s subsidiaries depending on the context of the disclosure.

 

On September 29, 2014, the Company announced a name change from Municipal Mortgage & Equity, LLC to MMA Capital Management, LLC.

 

Description of the Business

 

The Company uses its experience, expertise and capital to create attractive alternative investment opportunities for its own account and for others. The Company operates through two reportable segments: United States (“US”) Operations, which currently includes corporate overhead, assets and liabilities (“Corporate”), and International Operations. The Company anticipates that in 2015 it will operate through three reportable segments – US Operations, International Operations and Corporate. Because of net operating loss carryforwards, the Company does not expect to pay federal income tax for the foreseeable future.

 

US Operations

 

Our US Operations consists of three business lines; Leveraged Bonds, Low-Income Housing Tax Credits (“LIHTCs”) and Other Investments and Obligations.

 

Leveraged Bonds consists of the vast majority of the Company’s bonds and bond related investments (“bonds”) and associated financings. This bond portfolio is comprised primarily of multifamily tax-exempt bonds, but also includes community development district (“CDD”) bonds and other real estate related bond investments.

 

On October 8, 2014, the Company sold its LIHTC asset management operations to Morrison Grove Management, LLC (“MGM”). Post closing, we retain secured loans to MGM plus the option to purchase MGM, including both the legacy MMA and legacy MGM LIHTC asset management operations in five years. We also retained our ownership interests in two funds. This sale did not include the transfer of our investor yield guarantee on the 11 guaranteed LIHTC funds nor the associated cash collateral. See Note 17, “Subsequent Events” for more information.

 

Other Investments and Obligations primarily includes investments and obligations that the Company retained related to business units sold as a result of the financial crisis. This portfolio includes a preferred stock investment in a national mortgage lender and servicer that we received as compensation as a result of the sale our multifamily delegated underwriting and servicing business in 2009. This portfolio also includes solar facilities that we retained because they were not transferred as part of the sale of our solar business in 2009 as well as certain real estate related investments.

 

Currently, the US Operations reportable segment also includes our Corporate activities. See Note 16, “Segment Information” for more information.

 

International Operations

Substantially all of the Company’s International Operations take place through a 96% owned subsidiary, International Housing Solutions S.à r.l. (“IHS”) which is in the business of raising, investing in and asset managing private real estate funds that invest in affordable for-sale and rental housing for Sub Saharan Africa, primarily in South Africa. In addition to earning asset management fees, IHS, as the managing member, is entitled to special distributions based on returns generated by the funds it sponsors. As of September 30, 2014, IHS managed three investment vehicles including two multi-investor funds (South Africa Workforce Housing Fund SA I – “SA Fund” and IHS Fund II – “Fund II”) and a real estate partnership for a single investor (International Housing Solutions Residential Partners Partnership – “SA Partnership”).

 

Common Stock Split

 

Effective September 29, 2014, the Company executed a one-for-five reverse stock split to shareholders. All share and per share information has been retroactively adjusted to reflect the reverse stock split.

 

Use of Estimates

 

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

 

9
 

 

Basis of Presentation and Significant Accounting Policies

 

The consolidated financial statements include the accounts of the Company and of entities that are considered to be variable interest entities in which the Company is the primary beneficiary, as well as those entities in which the Company has a controlling financial interest, including wholly owned subsidiaries of the Company. All intercompany transactions and balances have been eliminated in consolidation. Investments in unconsolidated entities where the Company has the ability to exercise significant influence over the operations of the entity are accounted for using the equity method of accounting.

 

The Company consolidates IHS and eliminates all intercompany transactions and balances in consolidation. The activity and balances for IHS are reflected in the Company’s consolidated financial statements. Because the Company has a majority interest in IHS, the activity and balances for IHS are not included in the Company’s CFVs. The balances and activity included in the Company’s CFVs are for funds and ventures for which the Company has minimal to no ownership interests, but the Company has consolidated them due to the Company being the primary beneficiary.

 

The Company consolidates the SA Fund because IHS is deemed to be the primary beneficiary, and we eliminate all intercompany transactions balances in consolidation. The activity and balances for the SA Fund are identified as part of the Company’s CFVs because the Company has a minimal ownership interest in the SA Fund. See Note 1, “Description of Business and Basis of Presentation” to the consolidated financial statements in our 2013 Form 10-K, which discusses our consolidation presentation and our significant accounting policies. The Company does not consolidate Fund II because the fund provides a dissolution right upon a simple majority vote of non-IHS affiliated limited partners such that the presumption of control by IHS is overcome. The Company does not consolidate the SA Partnership because neither IHS nor the Company is deemed to be the primary beneficiary.

 

Reclassifications

 

The Company made reclassifications to discontinued operations on its previously issued 2013 consolidated statements of operations as a result of certain discontinued operations occurring during the first quarter of 2014, prior to the Company’s election to early adopt ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)(“ASU 2014-08”), issued April 2014, which changes the requirements for reporting discontinued operations. Consequently, individually significant properties that have been sold or classified as held-for-sale after the first quarter of 2014 were not reclassified to discontinued operations in the consolidated financial statements. See Note 4, “Real Estate” and Note 14, “Discontinued Operations” for more information.

 

Note 2—BONDs available-for-sale

 

Bonds Available-for-Sale

 

The following table summarizes the Company’s bonds and related unrealized losses and unrealized gains at September 30, 2014 and December 31, 2013.

 

   September 30, 2014 
(in thousands)  Unpaid
Principal
Balance
   Amortized
Cost (1)
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses (2),(3)
   Fair Value 
Mortgage revenue bonds  $130,996   $93,455   $24,580   $(440)  $117,595 
Other bonds   57,056    38,705    14,794        53,499 
Total  $188,052   $132,160   $39,374   $(440)  $171,094 

 

   December 31, 2013 
(in thousands)  Unpaid
Principal
Balance
   Amortized
Cost (1)
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses (4),(5)
   Fair Value 
Mortgage revenue bonds  $143,617   $103,194   $19,245   $(1,085)  $121,354 
Other bonds   79,970    55,270    19,540    (832)   73,978 
Total  $223,587   $158,464   $38,785   $(1,917)  $195,332 

 

(1)Represents the unpaid principal balance (“UPB”), net of discounts, deferred costs and fees as well as impairments recognized in earnings.

 

(2)At September 30, 2014, this amount represents the non-credit loss component for certain unrealized losses deemed to be other-than-temporarily impaired.

 

(3)These bonds had been in a gross unrealized loss position for less than 12 consecutive months and had a fair value of $6.1 million at September 30, 2014.

 

(4)At December 31, 2013, the majority of this amount represents unrealized losses that were not considered other-than-temporarily impaired; however, this amount also includes the non-credit loss component for certain unrealized losses deemed to be other-than-temporarily impaired.

 

10
 

 

(5)These bonds had been in a gross unrealized loss position for less than 12 consecutive months and had a fair value of $40.1 million at December 31, 2013 ($16.2 million for mortgage revenue bonds and $23.9 million for other bonds).

 

In addition, the Company had bonds with an UPB of $61.7 million ($47.0 million fair value) and $68.0 million ($50.3 million fair value) at September 30, 2014 and December 31, 2013, respectively, which were eliminated due to consolidation of the real estate partnerships where the real estate served as collateral for the Company’s bonds and thus is not included in the table above. See Note 15, “Consolidated Funds and Ventures” for more information.

 

The fair value of the Company’s bonds declined by $24.2 million from December 31, 2013 to September 30, 2014 mainly due to the third quarter redemption of a bond with a fair value of $14.9 million at December 31, 2013. Additionally, the Company foreclosed on a multifamily real estate property serving as collateral to one of its bonds during the first quarter of 2014. Upon foreclosure, the Company reclassified $11.1 million of bonds available-for-sale to $11.1 million of real estate held-for-sale. See Note 4, “Real Estate” for more information. Partially offsetting these declines was the purchase of a bond during the third quarter of 2014 with a fair value of $5.4 million.

 

Mortgage Revenue Bonds

 

Mortgage revenue bonds are issued by state and local governments or their agencies or authorities to finance multifamily rental housing; typically however, the only source of recourse on these bonds is the collateral, which is either a first mortgage or a subordinate mortgage on the underlying properties. The Company’s rights under the mortgage revenue bonds are defined by the contractual terms of the underlying mortgage loans, which are pledged to the bond issuer and assigned to a trustee for the benefit of bondholders to secure the payment of debt service (any combination of interest and/or principal as set forth in the trust indenture) on the bonds.

 

At September 30, 2014, the Company’s subordinate bonds had an aggregate unpaid principal balance of $13.6 million ($5.6 million fair value). The payment of debt service on our subordinate bonds occurs only after payment of senior obligations which have priority to the cash flow of the underlying collateral.

 

The interest income from the mortgage revenue bonds is exempt from federal income tax. However, a significant portion of the tax-exempt income generated from the mortgage revenue bonds is subject to the alternative minimum tax (“AMT”) calculation for federal income tax purposes.

 

Other Bonds

 

Other bonds consists primarily of municipal bonds issued by community development districts or other municipal issuers to finance the development of community infrastructure supporting single-family housing and mixed-use and commercial developments such as storm water management systems, roads and utilities. In some cases these bonds are secured by specific payments or assessments pledged by the issuers or incremental tax revenue generated by the underlying properties. The income on these bonds is exempt from federal income tax and is generally not included in the AMT calculation.

 

Maturity

 

Principal payments on bonds are based on amortization tables set forth in the bond documents. If no principal amortization is required during the bond term, the outstanding principal balance is required to be paid in a lump sum payment at maturity or at such earlier time as may be provided under the bond documents. At September 30, 2014, three bonds (amortized cost of $3.2 million and fair value of $3.6 million) were non-amortizing with principal due in full February 2030 and April 2046. The remaining bonds are amortizing with stated maturity dates between September 2017 and June 2056.

 

11
 

 

Bonds with Lockouts, Prepayment Premiums or Penalties

 

Substantially all of the Company’s bonds include provisions that allow the borrowers to prepay the bonds at a premium or at par after a specified date that is prior to the stated maturity date.  The following table provides the amount of bonds that were prepayable without restriction, premium or penalty at September 30, 2014, as well as the year in which the remaining portfolio becomes prepayable without restriction, premium or penalty at each period presented.

 

(in thousands)  Amortized Cost   Fair Value 
September 30, 2014  $5,015   $16,816 
October 1 through December 31, 2014        
2015        
2016   10,070    13,756 
2017        
2018   7,472    8,299 
Thereafter   85,634    106,751 
Bonds that may not be prepaid   23,969    25,472 
Total  $132,160   $171,094 

 

Non-Accrual Bonds

 

The carrying value of bonds on non-accrual was $55.5 million and $77.7 million at September 30, 2014 and December 31, 2013, respectively.  During the period in which these bonds were on non-accrual, the Company recognized interest income on a cash basis of $3.4 million and $1.4 million for the three months ended and $4.6 million and $3.2 million for the nine months ended September 30, 2014 and 2013, respectively. Interest income not recognized during the period in which these bonds were on non-accrual was $0.9 million and $1.7 million for the three months ended and $2.3 million and $3.6 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Bond Aging Analysis

 

The following table provides the fair value of bonds available-for-sale that were current with respect to principal and interest payments, as well as those that were past due with respect to either principal or interest payments at September 30, 2014 and December 31, 2013.

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Total current  $140,661   $117,666 
30-59 days past due        
60-89 days past due        
90 days or greater   30,433    77,666 
Total  $171,094   $195,332 

 

Bond Sales and Redemptions

 

The Company recorded cash proceeds on sales and redemptions of bonds of $7.4 million and $10.1 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Provided in the table below are net impairment on bonds recognized in earnings on bonds still in the Company’s portfolio at each period end and realized gains recognized on bonds at the time of sale or redemption reported through “Net gains on assets and derivatives.”

 

   For the three months
ended September 30,
   For the nine months
ended September 30,
 
(in thousands)  2014   2013   2014   2013 
Net impairment recognized on bonds held at each period-end  $(113)  $(939)  $(113)  $(1,242)
Net impairment recognized on bonds sold/redeemed during each period               (530)
Gains recognized at time of sale or redemption   7,450    76,362    8,218    76,960 
Total net gains on bonds  $7,337   $75,423   $8,105   $75,188 

 

Note 3—INVESTMENTS IN PREFERRED STOCK

 

These investments are prepayable at any time and are comprised of preferred stock investments in a private national mortgage lender and servicer specializing in affordable and market rate multifamily housing, senior housing and healthcare. At September 30, 2014, the carrying value of the preferred stock investments was $31.4 million and the UPB and estimated fair value was $36.6 million with a weighted average distribution rate of 14.4%. The Company accounts for the preferred stock using the historical cost approach and tests for impairment at each balance sheet date. An impairment loss is recognized if the carrying amount of the preferred stock is not deemed recoverable. The Company did not have impairments on the preferred stock for the nine months ended September 30, 2014 and 2013.

 

12
 

 

On March 28, 2013, the Company sold 100% of its interests in the preferred stock investments for $36.6 million plus accrued interest. Separately, the Company entered into three total return swap (“TRS”) agreements with an affiliate of the purchaser of the preferred stock investments.  The notional amount of the TRS was set based on the preferred stock investments as the reference asset.  Under the terms of the TRS, the Company receives an amount equal to the distributions on the preferred stock as outlined above and the Company pays a quarterly rate of 3-month London Interbank Offered Rate (“LIBOR”) plus a spread of 400 bps, 4.2% at September 30, 2014, on the notional amount, currently an aggregate of $36.6 million.  The TRS interest payments settle on a “net” basis. If and when the preferred stock is redeemed in part or in full, the notional amount on the TRS will be reduced by the same amount.  At September 30, 2014, the Company held 25% of the notional amount ($9.2 million) in the form of cash and bonds in a restricted collateral account as security for the TRS.

 

The TRS agreements have a termination date of March 31, 2015, and a termination fee equal to 1% of the notional amount.  The Company may elect to terminate any or all of the TRS at any time.  The counterparty to the TRS has the right to terminate the TRS upon the occurrence of certain events.  Under any termination event, if the fair values of the preferred stock are above par, the Company will receive the premium value above par.  If the fair values of the preferred stock are below par, the Company will be required to pay the difference between fair value and par.

 

The Company recorded the $36.6 million of proceeds from the transfer of its interest in the preferred stock investments as debt on the consolidated balance sheets secured by the preferred stock as the sale transaction did not meet the criteria for sale accounting. See Note 6, “Debt.”

 

Note 4—REAL ESTATE

 

The following table summarizes the Company’s real estate at September 30, 2014 and December 31, 2013.

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Real estate held-for-use          
Real estate held-for-use (1)  $18,092   $18,262 
Real estate held-for-use related to CFVs (2)   78,836    102,314 
Total real estate held-for-use  $96,928   $120,576 
           
Real estate held-for-sale          
Real estate held-for-sale  $11,693   $24,090 
Real estate held-for-sale related to CFVs (2)        
Total real estate held-for-sale  $11,693   $24,090 

 

(1)MMA Capital’s real estate held-for-use was comprised of two investments in undeveloped land with a combined carrying value of $6.2 million and an affordable multifamily property with a carrying value of $11.9 million at September 30, 2014. MMA Capital’s real estate held-for-use was comprised of three investments in undeveloped land with a combined carrying value of $7.9 million and an affordable multifamily property with a carrying value of $10.4 million at December 31, 2013.

 

(2)For more information see Note 15, “Consolidated Funds and Ventures.”

 

During the first quarter of 2014, the Company sold the two real estate properties and related assets and obligations that were classified as held-for-sale at December 31, 2013 for $35.8 million which resulted in a gain on sale of real estate of $14.0 million that was reported through discontinued operations, consistent with the accounting guidance prior to the issuance and adoption of ASU 2014-08 by the Company.  The sales proceeds repaid the Company’s related unpaid bond principal in full and paid approximately 80% of the interest due on these debt financings.

 

During the first quarter of 2014, the Company foreclosed on three properties. Two of the three properties served as collateral to two of the Company’s bonds, which had been eliminated in consolidation. Prior to foreclosure, these properties had been reported as real estate held-for-use related to Consolidated Funds and Ventures.  At the time of foreclosure, the two real estate properties had a carrying amount of $9.8 million and a net equity deficit attributable to a non-controlling interest holder in Consolidated Funds and Ventures of $0.3 million.  As a result of foreclosure, the Company reclassified the real estate from real estate related to Consolidated Funds and Ventures to real estate held-for-sale related to MMA Capital and reclassified the equity deficit from a non-controlling interest holder to the common shareholders. The third property was a multifamily real estate property serving as collateral to one of the Company’s bonds with a fair value of $11.1 million at the foreclosure date.

 

During the third quarter of 2014, the Company sold the three real estate properties and related assets and obligations that were classified as held-for-sale at June 30, 2014 for $22.9 million which resulted in a gain on sale of real estate of $2.3 million that was reported through discontinued operations, consistent with the accounting guidance prior to the issuance and adoption of ASU 2014-08 by the Company.

 

13
 

 

During the third quarter of 2014, the Company assumed the general partner and limited partner interest in a real estate partnership from a non-profit that the Company consolidates. The real estate owned by this real estate partnership serves as collateral to two of the Company’s bonds, which have been eliminated in consolidation. Prior to the transfer, the property had been reported as real estate held-for-use related to Consolidated Funds and Ventures. At the time of the transfer, the real estate had a carrying amount of $10.0 million and net equity attributable to a non-controlling interest holder in Consolidated Funds and Venture of $0.3 million. As a result of this transfer, the Company reclassified the real estate from real estate held-for-sale related to Consolidated Funds and Ventures to real estate held-for-sale related to MMA Capital, and also reclassified the equity deficit from the non-controlling interest holder to the common shareholders. Upon adoption of ASU 2014-08 after the first quarter of 2014, the results of operations for properties that are classified as held-for-sale were included within continuing operations in the consolidated financial statements.

 

Additionally, during the third quarter of 2014, the Company reclassified an undeveloped parcel of land located in Los Angeles County, California with a carrying value of $1.3 million from real estate held-for-use to real estate held-for-sale.

 

Note 5—OTHER ASSETS

 

The following table summarizes other assets at September 30, 2014 and December 31, 2013:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Other assets:          
Investments in real estate partnerships  $6,268   $6,270 
Investments in IHS-managed Funds and Ventures   1,979    1,194 
Solar facilities (includes other assets such as cash and other receivables)   3,251    5,344 
Debt issuance costs, net   3,084    3,579 
Accrued interest receivable   1,227    1,250 
Loans receivable   8,249    1,210 
Other assets   6,754    2,449 
Other assets held by CFVs (1)   23,347    23,664 
Total other assets  $54,159   $44,960 

 

(1)For more information see Note 15, “Consolidated Funds and Ventures.”

 

Investments in Real Estate Partnerships

 

At September 30, 2014, the majority of this balance ($6.1 million) represents a 33% interest in a partnership that was formed to take a deed-in-lieu of foreclosure on land that was collateral for a loan held by the Company. The Company accounts for its 33% interest as an equity investment and does not consolidate the partnership because the Company is not deemed to be the primary beneficiary.

 

The partnerships in which we hold investments had total assets of $26.3 million and $18.8 million at September 30, 2014 and December 31, 2013, respectively, and had total liabilities of $7.5 million at September 30, 2014. There were no outstanding liabilities at December 31, 2013. These partnerships had net losses of $0.4 million and $0.9 million for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2013, respectively.

 

Investments in IHS-managed Funds and Ventures

 

At September 30, 2014, the Company holds equity co-investments ranging from 2% to 5% in three IHS managed funds and ventures (SA Partnership, Fund II and SA Fund). IHS provides asset management services to each of these investment vehicles in return for asset management fees. For each investment vehicle, IHS also has rights to investment returns on its equity co-investment as well as carried interest which is contingent upon the residual values of the assets held by each investment vehicle.

 

The Company accounts for its interest in the SA Partnership as an equity investment and does not consolidate the venture because neither IHS nor the Company was deemed to be the primary beneficiary. At September 30, 2014, the carrying basis of this investment was $2.0 million and is reflected in the table above. The SA Partnership had total assets of $84.6 million and $67.6 million at September 30, 2014 and December 31, 2013, respectively, and had total liabilities of $44.9 million and $44.5 million at September 30, 2014 and December 31, 2013, respectively. The SA Partnership had net losses of $0.4 million and $1.4 million for the three and nine months ended September 30, 2014, respectively.

 

The Company accounts for its interest in Fund II as an equity investment and does not consolidate the fund because the fund provides a dissolution right upon a simple majority vote of non-IHS affiliated limited partners such that the presumption of control by IHS is overcome. Fund II began operations in July 2014 and had $64.8 million of committed capital, of which $63.5 million is from third party investors at September 30, 2014. As of September 30, 2014, Fund II had no assets and no capital had been called. As of September 30, 2014, Fund II had incurred asset management fees of $0.3 million and reimbursable expenses of $1.1 million payable to IHS. As a result, IHS recognized $1.4 million of revenue during the third quarter of 2014. However, IHS did not allocate its share of these expenses to itself (based on its equity co-investment interest of 2%) because no capital had been called by the fund as of September 30, 2014. Fund II had total liabilities of $1.4 million at September 30, 2014 as discussed above and net losses of $1.4 million from its inception in July 2014 through September 30, 2014.

 

14
 

 

The Company consolidates the SA Fund because IHS is deemed to be the primary beneficiary. The Company’s carrying basis in its co-investment in the SA Fund was $3.7 million at September 30, 2014 and it was eliminated in consolidation. See Note 15, “Consolidated Funds and Ventures” for more information.

 

Solar Facilities

 

At September 30, 2014, the Company owned five solar facilities. These facilities generate energy that is sold under long-term power contracts to the owner or lessee of the properties on which the projects are built. The useful life of these solar facilities is generally twenty years.

 

During the first quarter of 2014, the Company repaid $0.7 million of outstanding debt relating to one of the solar facilities. The lender and the Company agreed to an additional payment of $0.2 million in contingent interest which resulted in a $0.2 million loss which was recognized during the first quarter of 2014.

 

During the third quarter of 2014, Company entered into an agreement to settle its remaining solar related debt of $1.5 million whereby the lender forgave and legally extinguished the debt resulting in a gain on debt extinguishment of $1.5 million.

 

Also during the third quarter of 2014, the counterparty on a long-term purchase power agreement associated with a solar facility that had a carrying value of $1.5 million terminated the agreement and purchased the facility from the Company for a termination fee of $1.5 million.

 

Loans Receivable

 

During the second quarter of 2014, the Company entered into a loan agreement with a real estate partnership whereby the Company loaned the partnership $6.9 million at a rate of 5% per annum. The partnership used the majority of its loan proceeds to fully redeem its mortgage debt that the Company held in the form of bonds at the end of first quarter 2014. This loan is classified as held for investment.

 

During the third quarter of 2014, as part of a debt restructuring, the Company entered into a loan agreement with a real estate partnership whereby the Company loaned the partnership $1.1 million and purchased resized mortgage debt (in the form of a bond) of $5.3 million from the real estate partnership at par. At the time of these transactions, one of the Company’s guaranteed LIHTC funds held the equity interest in the real estate partnership. At closing, it was determined that the loan fair value was less than the $1.1 million loan funding, resulting in a $0.8 million loan loss to bring the loan investment down to its estimated fair value.

 

15
 

 

Note 6—DEBT

 

The table below summarizes outstanding debt balances and the associated weighted-average interest rate based on amounts due within one year or after one year at September 30, 2014 and December 31, 2013:

 

(dollars in thousands)  September 30,
2014
   Weighted-Average
Effective Interest
Rate at
September 30, 2014
  December 31,
2013
   Weighted-Average
Effective Interest
Rate at
December 31, 2013
Asset Related Debt (1)                
Notes payable and other debt – bond related (2)                
Due within one year  $778      1.4%  $21,261      1.8%
Due after one year   76,570   1.4   111,705   3.2
Notes payable and other debt – non-bond related                
Due within one year   2,223   9.8   1,667   9.1
Due after one year   4,681   10.0   6,613   9.9
                 
Total asset related debt  $84,252   2.1  $141,246   3.4
                 
Other Debt (1)                
Subordinate debentures (3)                
Due within one year  $16,230   7.0  $757   8.1
Due after one year   132,917   7.2   143,664   7.2
Notes payable and other debt                
Due within one year (4)   39,337   4.6   4,521   9.6
Due after one year   6,005   4.1   60,173   5.2
                 
Total other debt  $194,489   6.6  $209,115   6.7
                 
Total asset related debt and other debt  $278,741   5.2  $350,361   5.3
                 
Debt related to CFVs (5)                
Due within one year  $176   6.5  $14   6.0
Due after one year   69,388   3.7   91,588   4.3
Total debt related to CFVs  $69,564   3.7  $91,602   4.3
                 
Total debt  $348,305   4.9  $441,963   5.1

 

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

 

(2)Included in notes payable and other debt were unamortized discounts of $1.6 million at December 31, 2013. This debt was extinguished during the second quarter of 2014.

 

(3)Included in the subordinate debt balance were $8.3 million and $3.0 million of net premiums and effective interest rate payable (i.e., the difference between the current pay rate and the effective interest rate) at September 30, 2014 and December 31, 2013, respectively.

 

(4)This amount includes $1.5 million of debt that has come due and remains payable; however, the Company has a forbearance agreement with the lender such that it is not pursuing any remedies. 

 

(5)See Note 15, “Consolidated Funds and Ventures” for more information.

 

16
 

 

Covenant Compliance and Debt Maturities

 

The following table summarizes principal payment commitments across all debt agreements at September 30, 2014:

 

(in thousands)  Asset Related Debt
and Other Debt
   CFVs
Related Debt
   Total Debt 
2014  $2,924   $55   $2,979 
2015   56,616    163    56,779 
2016   16,435    174    16,609 
2017   17,131    185    17,316 
2018   50,776    50,347    101,123 
Thereafter   126,601    18,056    144,657 
Net premium   8,258    584    8,842 
Total  $278,741   $69,564   $348,305 

 

Included in the 2014 principal payments for asset related debt and other debt is $1.5 million of debt that has come due and remains payable; however, the Company has a forbearance agreement with the lender such that it is not pursuing any remedies. The forbearance agreement expires June 30, 2016. The Company is not in default under any of its other debt arrangements.

 

Asset Related Debt

 

Notes Payable and Other Debt – Bond Related

 

At September 30, 2014, this debt was comprised of TRS financing agreements on bonds available-for-sale.

 

During the second quarter of 2014, the Company repurchased a bond interest for $16.5 million (bond UPB of $18.0 million) that the Company had previously sold to a third party with a performance guarantee and therefore was treated as debt because the sale failed to receive accounting sale treatment. The repurchase resulted in a termination of the guarantee and an extinguishment of the debt. The Company recorded a gain on debt extinguishment of $0.2 million, representing the difference between the carrying value of the debt terminated ($16.7 million) and the cash paid to settle the debt ($16.5 million).

 

Also during the second quarter of 2014, the Company effectively repurchased another bond (UPB of $14.0 million) that had a performance guarantee and then subsequently entered into a TRS agreement using the repurchased bond as the reference asset for the TRS agreement. As a result, the Company extinguished debt of $13.6 million related to the performance guarantee and replaced it with TRS financing of $14.5 million, resulting in a loss on extinguishment of debt of $0.9 million.

 

During the third quarter of 2014, the TRS financing was terminated because the bond was redeemed and as a result, the Company derecognized the bond ($14.4 million fair value) and debt ($14.5 million carrying value) and paid $0.1 million in cash. This transaction had no impact on common shareholders’ equity. Also during the third quarter of 2014, the Company paid $17.1 million to terminate a bond related TRS financing carried at $17.1 million, thus extinguishing the debt and having no impact on shareholders’ equity.

 

Interest expense on notes payable and other debt – bond related totaled $2.1 million and $3.3 million for the nine months ended September 30, 2014 and 2013, respectively.

 

17
 

 

Other Debt

 

Subordinate Debt

 

The table below provides a summary of the key terms of the subordinate debt issued by MMA Financial Inc. (“MFI”) and MMA Financial Holdings, Inc. (“MFH”) and held by third parties at September 30, 2014:

 

(dollars in thousands)

Issuer  Principal   Net Premium   Carrying
Value
   Interim
Principal
Payments
  Maturity Date  Coupon Interest Rate
MFI  $28,909   $   $28,909   Amortizing  December 2027 and December 2033  8.0%
                         
MFH   33,286    2,702    35,988   $4,689 due April 2015  March 30, 2035  0.75% to March 2015, then 3-month LIBOR plus 3.3% (1)
                         
MFH   30,116    2,253    32,369   $4,242 due May 2015  April 30, 2035  0.75% to April 2015, then 3-month LIBOR plus 3.3% (1)
                         
MFH   17,219    1,190    18,409   $2,305 due May 2015  July 30, 2035   0.75% to April 2015, then 3-month LIBOR plus 3.3% (1)
                         
MFH   31,308    2,164    33,472   $4,191 due May 2015  July 30, 2035   0.75% to April 2015, then 3-month LIBOR plus 3.3% (1)
   $140,838   $8,309   $149,147          

 

(1)The pay rate on this debt is currently 75 bps; however, we recognize interest expense on an effective yield basis which was approximately 6.9% at September 30, 2014. See the first table within this note which provides weighted-average effective rate information for all of our debt.

 

Interest expense on the subordinate debt totaled $7.7 million and $8.2 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Notes Payable and Other Debt

 

At September 30, 2014, this debt includes $36.6 million of TRS financing agreements on the Company’s preferred stock investment. See Note 3, “Investment in Preferred Stock” for more information. The debt is non-amortizing, matures on March 31, 2015 and bears an interest rate of 3-month LIBOR plus 400 bps (4.2% at September 30, 2014), which resets quarterly. The Company recorded debt issuance costs of $0.8 million associated with the transaction, of which $0.4 million was paid at inception and $0.4 million is payable at termination. The majority of our remaining debt includes $1.5 million collateralized by real estate.

 

Letters of Credit

 

The Company had no letters of credit outstanding at September 30, 2014.

 

Note 7—DERIVATIVE FINANCIAL INSTRUMENTS

 

The following table summarizes the Company’s derivative assets and liabilities fair value balances at September 30, 2014 and December 31, 2013.

 

   Fair Value 
   September 30, 2014   December 31, 2013 
(in thousands)  Assets   Liabilities   Assets   Liabilities 
Total return swaps  $1,026   $177   $   $ 
Interest rate cap   330             
Interest rate swap       663        626 
Total derivative financial instruments  $1,356   $840   $   $626 

 

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The following table summarizes the derivative notional amounts at September 30, 2014 and December 31, 2013.

 

   Notional 
(in thousands)  September 30,
2014
   December 31,
2013
 
Total return swaps  $90,381   $ 
Interest rate cap   45,000     
Interest rate swap   7,767    7,820 
Total derivative financial instruments  $143,148   $7,820 

 

The following table summarizes derivative activity for the three months and nine months ended September 30, 2014 and 2013.

 

   Realized/Unrealized Gain
(Losses) for the three months
ended
September 30,
   Realized/Unrealized Gains for the
nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Total return swaps (1)  $1,856   $   $2,510   $ 
Interest rate cap   (38)       (463)    
Interest rate swap (2)   (60)   (76)   (268)   (156)
Other               215 
Total  $1,758   $(76)  $1,779   $59 

 

(1)The cash paid and received on total return swaps designated as derivatives is settled on a net basis and recorded through “Net gains on assets and derivatives.” Net cash received was $1.0 million and $1.7 million for the three months and nine months ended September 30, 2014, respectively.

 

(2)The cash paid and received on interest rate swap is settled on a net basis and recorded through “Net gains on assets and derivatives.” Net cash paid was $0.1 million for the three months ended September 30, 2014 and 2013. Net cash paid was $0.2 million and $0.7 million for the nine months ended September 30, 2014 and 2013, respectively.

 

Total return swaps

 

As of September 30, 2014, the Company had 10 bond related TRS agreements. Under the terms of the TRS agreements, the counterparty is required to pay the Company an amount equal to the interest payments received on the underlying bonds (notional amount of $89.1 million with a weighted average pay rate of 5.9% at September 30, 2014). The Company is required to pay the counterparty a rate of Securities Industry and Financial Markets Association (“SIFMA”) 7-day municipal swap index plus a spread. As of September 30, 2014, the weighted average spread was 138 bps resulting in a weighted average pay rate of 1.4%.

 

Interest rate cap

 

On January 2, 2014, the Company paid $0.8 million for an interest rate cap that terminates on January 2, 2019 to protect against rising interest rates associated with certain TRS agreements. The notional amount on the interest rate cap was $45.0 million at September 30, 2014 and protects us on $45.0 million of our floating rate debt in the event SIFMA rises to 250 bps or higher.

 

Interest rate swap

 

At September 30, 2014 and December 31, 2013, the Company had one interest rate swap contract. Under the terms of the agreement, the counterparty is required to pay the Company SIFMA plus 250 bps (pay rate of 2.5% at September 30, 2014) and the Company is required to pay the counterparty a fixed interest rate of 6.5%.

 

Note 8—Financial Instruments

 

The following table provides information about financial assets and liabilities not carried at fair value on the consolidated balance sheets. This table excludes non-financial assets and liabilities.

 

The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. A description of how the Company estimates fair values is provided below. These estimates are subjective in nature, involve uncertainties and significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

As required by generally accepted accounting principles (“GAAP”), assets and liabilities are classified into levels based on the lowest level of input that is significant to the fair value measurement. The determination of which level an asset or liability gets classified into is based on the following fair value hierarchy:

 

·Level 1: Quoted prices in active markets for identical instruments.

 

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·Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs or significant value drivers are observable in active markets.

 

·Level 3: Valuations derived from valuation techniques in which significant inputs or significant value drivers are unobservable.

 

   September 30, 2014 
   Carrying   Fair Value 
(in thousands)  Amount   Level 1   Level 2   Level 3 
Assets:                    
Investments in preferred stock  $31,371   $   $   $36,613 
Loans receivable   7,950            7,074 
                     
Liabilities:                    
Notes payable and other debt, bond related   77,348            79,217 
Notes payable and other debt, non-bond related   52,246            47,492 
Notes payable and other debt related to CFVs   69,564        50,479    18,803 
Subordinate debt issued by MFH   120,238            44,123 
Subordinate debt issued by MFI   28,909            28,909 
     
   December 31, 2013 
   Carrying   Fair Value 
(in thousands)  Amount   Level 1   Level 2   Level 3 
Assets:                    
Investments in preferred stock  $31,371   $   $   $36,613 
Loans receivable   1,200            271 
                     
Liabilities:                    
Notes payable and other debt, bond related   132,966            131,321 
Notes payable and other debt, non-bond related   72,974            65,253 
Notes payable and other debt related to CFVs   91,602        50,338    40,178 
Subordinate debt issued by MFH   114,950            42,869 
Subordinate debt issued by MFI   29,471            29,471 

 

Investment in preferred stockThe Company estimates fair value by using the terms and conditions of the preferred stock as compared to other, best available market benchmarks.

 

Loans receivable –The Company estimates fair value by discounting the expected cash flows using current market yields for similar loans. Loans receivable are recorded through “Other assets.”

 

Notes payable and other debt – The Company estimates fair value by discounting contractual cash flows using a market rate of interest or by estimating the fair value of the collateral supporting the debt arrangement, taking into account credit risk.

 

Subordinate debt – The Company estimates fair value by using best available market benchmarks, taking into account credit risk. The fair value of the subordinate debt issued by MFH was estimated using an internal valuation model, taking into consideration credit risk. There can be no assurance that the Company could repurchase the remaining subordinated debt issued by MFH at the estimated fair value reflected in the table above or that the debt would trade at that price.

 

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Note 9—FAIR VALUE MEASUREMENTS

 

Recurring Valuations

 

The following tables present assets and liabilities that are measured at fair value on a recurring basis at September 30, 2014 and December 31, 2013.

 

       Fair Value Measurement Levels 
(in thousands)  September 30,
2014
   Level 1   Level 2   Level 3 
Assets:                    
Bonds available-for-sale  $171,094   $   $   $171,094 
Derivative assets   1,356        330    1,026 
                     
Liabilities:                    
Derivative liabilities  $840   $   $   $840 
                     
       Fair Value Measurement Levels 
(in thousands)  December 31,
2013
   Level 1   Level 2   Level 3 
Assets:                    
Bonds available-for-sale  $195,332   $   $   $195,332 
                     
Liabilities:                    
Derivative liabilities  $626   $   $   $626 

 

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended September 30, 2014.

 

(in thousands)  Bonds
Available-
for-sale
   Derivative
Assets
   Derivative
Liabilities
 
Balance, July 1, 2014  $181,710   $477   $(1,127)
Net (losses) gains included in earnings   (389)   549    287 
Net change in other comprehensive income (1)   (2,967)        
Impact from purchases   5,300         
Impact from redemptions   (7,968)        
Impact from settlements   (4,592)        
Balance, September 30, 2014  $171,094   $1,026   $(840)

 

(1)This amount includes the reversal of $6.5 million of unrealized gains related to bonds that were redeemed, offset by $3.5 million of unrealized net holding gains arising during the period.

 

The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized losses recognized at bond redemption and derivative settlement for the three months ended September 30, 2014.

 

(in thousands)  Net gains on
bonds (1)
   Equity in Losses
from Lower Tier
Property
Partnerships
   Net gains on
derivatives (2)
 
Change in unrealized (losses) gains related to assets and liabilities still held at September 30 2014  $(113)  $(276)  $836 
Additional realized gains recognized   7,450        960 
Total gains (losses) reported in earnings  $7,337   $(276)  $1,796 

 

(1)Amounts are reflected through “Impairment on bonds” and “Net gains on assets and derivatives” on the consolidated statements of operations.

 

(2)Amounts are reflected through “Net gains on assets and derivatives” on the consolidated statements of operations.

 

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The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the three months ended September 30, 2013.

 

(in thousands)  Bonds
Available-for-
sale
   Derivative
Liabilities
 
Balance, July 1, 2013  $896,322   $(694)
Net (losses) gains included in earnings   (1,321)   32 
Net change in other comprehensive income (1)   (80,682)    
Impact from sales/redemption   (606,121)    
Bonds eliminated due to real estate consolidation and foreclosure   (10,168)    
Impact from settlements   (1,545)    
Balance, September 30, 2013  $196,485   $(662)

 

(1)This amount includes the reversal of $76.4 million of unrealized gains related to bonds that were redeemed plus $5.2 million of unrealized net holding losses arising during the period, offset by $0.9 million of unrealized bond losses reclassified into operations.

 

The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized (losses) gains recognized at bond redemption and derivative settlement for the three months ended September 30, 2013.

 

(in thousands)  Net losses on
bonds (1)
   Equity in Losses
from Lower Tier
Property
Partnerships
   Net losses on
derivatives (2)
 
Change in unrealized (losses) gains related to assets and liabilities still held at September 30, 2013  $(939)  $(382)  $32 
Additional realized gains (losses) recognized   76,362        (77)
Total gains (losses) reported in earnings  $75,423   $(382)  $(45)

 

(1)Amounts are reflected through “Impairment on bonds” and “Net gains on assets and derivatives” on the consolidated statements of operations.

 

(2)Amounts are reflected through “Net gains on assets and derivatives” on the consolidated statements of operations.

 

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2014.

 

(in thousands)  Bonds
Available-
for-sale
   Derivative
Assets
   Derivative
Liabilities
 
Balance, January 1, 2014  $195,332   $   $(626)
Net (losses) gains included in earnings   (2,296)   1,026    (214)
Net change in other comprehensive income (1)   4,069         
Impact from purchases   8,380         
Impact from redemptions   (13,620)        
Bonds eliminated due to real estate consolidation and foreclosure   (11,058)        
Impact from settlements   (9,713)        
Balance, September 30, 2014  $171,094   $1,026   $(840)

 

(1)This amount includes $11.3 million of unrealized net holding gains arising during the period, offset by the reversal of $7.2 million of unrealized bond losses related to bonds that were redeemed.

 

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The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized losses recognized at derivative settlement for the nine months ended September 30, 2014.

 

(in thousands)  Net losses on
bonds (1)
   Equity in Losses
from Lower Tier
Property
Partnerships
   Net gains on
derivatives (2)
 
Change in unrealized (losses) gains related to assets and liabilities still held at September 30, 2014  $(113)  $(2,183)  $812 
Additional realized gains recognized   8,218        1,429 
Total gains (losses) reported in earnings  $8,105   $(2,183)  $2,241 

 

(1)Amounts are reflected through “Impairment on bonds” and “Net gains on assets and derivatives” on the consolidated statements of operations.

 

(2)Amounts are reflected through “Net gains on assets and derivatives” on the consolidated statements of operations.

 

The following table presents activity for assets and liabilities measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2013.

 

(in thousands)  Bonds
Available-for-
sale
   Derivative
Liabilities
 
Balance, January 1, 2013  $969,394   $(1,067)
Net (losses) gains included in earnings   (4,589)   259 
Net change in other comprehensive income (1)   (91,980)    
Impact from sales/redemptions   (612,154)    
Bonds eliminated due to real estate consolidation and foreclosure   (55,275)    
Impact from settlements   (8,911)   146 
Balance, September 30, 2013  $196,485   $(662)

 

(1)This amount includes the reversal of $77.0 million of unrealized gains related to bonds that were redeemed plus $16.8 million of unrealized net holding losses arising during the period, offset by $1.8 million of unrealized bond losses reclassified into operations.

 

The following table provides the amount included in earnings related to the activity presented in the table above, as well as additional realized (losses) gains recognized at bond redemption and derivative settlement for the nine months ended September 30, 2013.

 

(in thousands)  Net losses on
bonds (1)
   Equity in Losses
from Lower Tier
Property
Partnerships
   Net gains on
derivatives (2)
 
Change in unrealized (losses) gains related to assets and liabilities held at January 1, 2013, but settled during the first nine months of 2013  $(530)  $   $ 
Change in unrealized (losses) gains related to assets and liabilities still held at September 30, 2013   (1,242)   (2,817)   259 
Additional realized gains (losses) recognized   76,960        (230)
Total gains (losses) reported in earnings  $75,188   $(2,817)  $29 

 

(1)Amounts are reflected through “Impairment on bonds” and “Net gains on assets and derivatives” on the consolidated statements of operations.

 

(2)Amounts are reflected through “Net gains on assets and derivatives” on the consolidated statements of operations.

 

The following methods or assumptions were used to estimate the fair value of these recurring financial instruments:

 

Bonds Available-for-sale If a bond is performing and payment of full principal and interest is not deemed at risk, then the Company estimates fair value using a discounted cash flow methodology; specifically, the Company discounts contractual principal and interest payments, adjusted for expected prepayments. The discount rate is based on expected investor yield requirements adjusted for bond attributes such as the expected term of the bond, debt service coverage ratio, geographic location and bond size.  The weighted average discount rate for the performing bond portfolio was 6.0% and 6.6% at September 30, 2014 and December 31, 2013, respectively, for performing bonds still held in the portfolio at September 30, 2014. If observable market quotes are available, the Company will estimate the fair value based on such quoted prices.

 

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For non-performing bonds and certain performing bonds where payment of full principal and interest is deemed at risk, the Company estimates fair value by discounting the property’s expected cash flows and residual proceeds using estimated market discount and capitalization rates, less estimated selling costs. The weighted average discount rate was 8.1% at September 30, 2014 and December 31, 2013, for the bonds remaining in our portfolio at September 30, 2014. The weighted average capitalization rate was 6.8% at September 30, 2014 and December 31, 2013, for the bonds remaining in our portfolio at September 30, 2014. However, to the extent available, the Company may estimate fair value based on a sale agreement, a letter of intent to purchase, an appraisal or other indications of fair value.

 

The discount rates and capitalization rates as discussed above are significant inputs to bond valuations and are unobservable in the market. To the extent discount rates and capitalization rates were to increase (decrease) in isolation the corresponding estimated bond values would decrease (increase).

 

Derivative Financial Instruments – At September 30, 2014, the Company had one interest rate swap contract, an interest rate cap contract and 10 total return swap contracts accounted for as derivatives. The interest rate swap contract was valued using an internal valuation model, taking into consideration credit risk. The interest rate cap contract was measured by a third party using observable market data, resulting in a Level 2 valuation classification. The total return swaps were measured by a third party using a Level 3 valuation approach.

 

Non-recurring Valuations

 

At September 30, 2014 and December 31, 2013, the Company had assets that were measured at fair value using a Level 3 fair value measurement on a non-recurring basis. At December 31, 2013, the Company held loans with non-recurring valuations; however, these loans were de minimis.

 

During the first quarter of 2014, the Company foreclosed on real estate previously classified as real estate held-for-use by a consolidated fund and venture. As a result of the foreclosure and the expected future sale, the Company reclassified the real estate to held-for-sale by MMA Capital.  Upon reclassification, it was determined that the fair value was less than the real estate’s carrying value resulting in a $0.2 million impairment to bring the real estate down to its fair value less estimated costs to sell.

 

During the third quarter of 2014, the Company entered into a loan agreement with a real estate partnership whereby the Company loaned the partnership $1.1 million. At closing, it was determined that the loan fair value was less than the $1.1 million loan funding, resulting in a $0.8 million loan loss to bring the loan investment down to its estimated fair value. See Note 5 “Other Assets” for more information.

 

Note 10—GUARANTEES AND COLLATERAL

 

Guarantees

 

Guarantee obligations are recorded through “Other liabilities.”

 

The following table summarizes guarantees, by type, at September 30, 2014 and December 31, 2013:

 

   September 30, 2014   December 31, 2013 
(in thousands)  Maximum
Exposure
   Carrying
Amount
   Maximum
Exposure
   Carrying
Amount
 
Indemnification contracts  $20,224   $948   $20,224   $1,198 

 

Through the indemnification contracts outlined in the table above, the Company guarantees the investor yields on certain third party LIHTC Funds and property performance on certain third party Lower Tier Property Partnerships (“LTPPs”). The Company made no cash payments related to these indemnification agreements for the nine months ended September 30, 2014 and 2013. The carrying amount represents the amount of unamortized fees received related to these guarantees with no additional amounts recognized as management does not believe it is probable that the Company will have to make payments under these indemnifications.

 

The Company’s maximum exposure under its indemnification contracts represents the maximum loss the Company could incur under its guarantee agreements and is not indicative of the likelihood of the expected loss under the guarantee.  The Company also has guarantees associated with certain LIHTC Funds managed by the Company as of September 30, 2014. See Note 15, “Consolidated Funds and Ventures” for information on these guarantees.

 

24
 

 

Collateral and restricted assets

 

The following table summarizes assets that are either pledged or restricted for the Company’s use at September 30, 2014 and December 31, 2013. This table also reflects certain assets held by CFVs in order to reconcile to the Company’s consolidated balance sheets.

 

   September 30, 2014 
(in thousands)  Restricted
Cash
   Bonds
Available-
for-sale
   Real Estate
Held-for-
Use
   Investment
in Preferred
stock
   Other
Assets
   Total
Assets
Pledged
 
Debt – notes payable  $   $   $4,822   $   $6,110   $10,932 
Debt and derivatives – total return swaps   9,489    102,979        31,371        143,839 
Other (1)   14,993                196    15,189 
CFVs (2)   40,974        78,836        23,347    143,157 
Total  $65,456   $102,979   $83,658   $31,371   $29,653   $313,117 
     
   December 31, 2013 
(in thousands)  Restricted
Cash
   Bonds
Available-
for-sale
   Real Estate
Held-for-Use
   Investment
in Preferred
stock
   Other
Assets
   Total
Assets
Pledged
 
Debt – notes payable  $   $   $15,644   $   $11,613   $27,257 
Debt – total return swap financing   20,006    105,511        31,371        156,888 
Other (1)   15,000    29,258            294    44,552 
CFVs (2)   52,897        102,314        23,664    178,875 
Total  $87,903   $134,769   $117,958   $31,371   $35,571   $407,572 

 

(1)The Company pledges collateral in connection with various guarantees that it has provided.  

 

(2)These are assets held by CFVs. The real estate serves as collateral to bonds eliminated in consolidation.

 

Note 11—Commitments and Contingencies

 

Operating Leases

 

During the third quarter of 2014, IHS entered into a new operating lease. As of September 30, 2014, the Company has three non-cancelable operating leases that expire between 2016 and 2018. These leases require the Company to pay property taxes, maintenance and other costs.

 

The following table summarizes rental expense and rental income from operating leases for the three months and nine months ended September 30, 2014 and 2013 reported through “General and administrative” on the consolidated statements of operations:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
   2014   2013   2014   2013 
Rental expense  $(118)  $(468)  $(466)  $(1,537)
Rental income       311    112    976 
Net rental expense  $(118)  $(157)  $(354)  $(561)

 

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The following table summarizes the future minimum rental commitments on the three non-cancelable operating leases at September 30, 2014:

 

(in thousands)    
2014  $109 
2015   438 
2016   112 
2017   81 
2018   36 
Total minimum future rental commitments  $776 

 

Litigation

 

From time to time, the Company and its subsidiaries are named as defendants in various litigation matters arising in the ordinary course of business. These proceedings may include claims for substantial or indeterminate compensatory or punitive damages, or for injunctive or declaratory relief.

 

The Company establishes reserves for litigation matters when those matters present loss contingencies that are probable and can be reasonably estimated. Once established, reserves may be adjusted when new information is obtained.

 

It is the opinion of the Company’s management that adequate provisions have been made for losses with respect to litigation matters and other claims that existed at September 30, 2014. Management believes the ultimate resolution of these matters is not likely to have a material effect on its financial position, results of operations or cash flows. Assessment of the potential outcomes of these matters involves significant judgment and is subject to change, based on future developments, which could result in significant changes.

 

Shareholder Matters

 

The Company is a defendant in a purported class action lawsuit and two derivative suits originally filed in 2008.  The plaintiffs in the class action lawsuit claim to represent a class of investors in the Company’s shares who allegedly were injured by misstatements in press releases and SEC filings between May 3, 2004, and January 28, 2008.  The plaintiffs sought unspecified damages for themselves and the shareholders of the class they purported to represent.  In the derivative suits, the plaintiffs claimed, among other things, that the Company was injured because its directors and certain named officers did not fulfill duties regarding the accuracy of its financial disclosures.  Both the class action and the derivative cases were brought in the United States District Court for the District of Maryland. The Company filed a motion to dismiss the class action and in June 2012, the Court issued a ruling dismissing all of the counts alleging any knowing or intentional wrongdoing by the Company or its affiliates, directors and officers. The plaintiffs appealed the Court’s ruling and on March 7, 2014, the United States Court of Appeals for the Fourth Circuit unanimously affirmed the lower Court’s ruling. As a result of these rulings, the only counts remaining in the class action relate to the Company’s dividend reinvestment plan and the plaintiffs in the derivative case have voluntarily dismissed their case outright. The Company expects to settle the remaining counts at an amount between $0.4 million and $0.9 million and had a contingent obligation of $0.5 million recorded at September 30, 2014.  The parties have reached an agreement in principle in the foregoing range, but there are numerous steps to be taken before the settlement can be considered final and binding. Assuming the agreement becomes final and binding, the resulting settlement amount is expected to be covered fully by insurance.

 

Note 12—EQUITY

 

Common Share Information

 

The following table provides a summary of net income to common shareholders as well as information pertaining to weighted average shares used in the per share calculations as presented on the consolidated statements of operations for the three months and nine months ended September 30, 2014 and 2013.

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Net income from continuing operations  $8,709   $72,977   $5,710   $106,862 
Net income from discontinued operations   3,903    339    18,091    5,280 
Net income to common shareholders  $12,612   $73,316   $23,801   $112,142 
                     
Basic weighted-average shares (1)   7,454    8,458    7,760    8,476 
Common stock equivalents (2) (3) (4)   318    325        289 
Diluted weighted-average shares   7,772    8,783    7,760    8,765 

 

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(1)Includes common shares issued and outstanding, as well as non-employee directors’ and employee deferred shares that have vested, but are not issued and outstanding.

 

(2)At September 30, 2014, 410,000 stock options were in the money and had a dilutive share impact of 296,882 and 290,150 for the three months and nine months ended September 30, 2014, respectively.  In addition, 41,667 unvested employee deferred shares had a dilutive share impact of 20,834 for the three months and nine months ended September 30, 2014. For the nine months ended September 30, 2014, the adjustment to net income for the awards classified as liabilities caused the common stock equivalents to be anti-dilutive.

 

(3)At September 30, 2013, 426,625 stock options were in the money and had a dilutive share impact of 294,040 and 274,768 for the three months and nine months ended September 30, 2013. In addition, 52,083 unvested employee deferred shares had a dilutive share impact of 31,250 and 13,965 for the three and nine months ended September 30, 2013.

 

(4)For the three months and nine months ended September 30, 2014, the average number of options excluded from the calculations of diluted earnings per share was 60,211, because of their anti-dilutive effect (i.e. these stock options were not in the money). For the three months and nine months ended September 30, 2013, the average number of options excluded from the calculations of diluted earnings per share was 60,457 and 91,361 because of their anti-dilutive effect (i.e. these stock options were not in the money).  

 

Common Shares

 

Effective September 29, 2014, the Company executed a one-for-five reverse stock split to shareholders. All share and per share information has been adjusted to reflect the reverse stock split.

 

As of September 30, 2014, through a series of actions, our Board of Directors authorized a stock repurchase program of up to 1.4 million shares. At its November 2014 meeting, the Board authorized the repurchase of an additional 350,000 shares. Further, the Board amended the maximum price at which management is authorized to purchase shares based on an assessment of the economic benefit of such purchases to the Company. Effective at the filing of this Report and until modified by further action by the Board, that price is $11.01 per share.

 

During the three months and nine months ended September 30, 2014, the Company repurchased 240,694 and 801,056 shares at an average price of $9.49 and $8.66, respectively. As of September 30, 2014, the Company had repurchased 1.2 million shares at an average price of $7.91 under its stock repurchase program since the plan’s inception, leaving 535,683 shares to be purchased under the existing program, inclusive of the increase to the program authorized at the November 2014 Board meeting.

 

Noncontrolling Interests

 

A significant component of equity is comprised of outside investor interests in entities that the Company consolidates. The Company reported the following noncontrolling interests within equity in entities that the Company did not wholly own at September 30, 2014 and December 31, 2013:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Noncontrolling interests in:          
LIHTC Funds  $287,948   $328,236 
SA Fund   133,701    130,839 
Consolidated Lower Tier Property Partnerships   11,561    16,086 
IHS   (397)   (1,648)
Total  $432,813   $473,513 

 

Substantially all of these interests represent limited partner interests in partnerships or the equivalent of limited partner interests in limited liability companies. In allocating income between the Company and the noncontrolling interest holders of the consolidated entities, the Company takes into account the legal agreements governing ownership, and other contractual agreements and interests the Company has with the consolidated entities. See Note 15, “Consolidated Funds and Ventures” for more information.

 

LIHTC Funds

 

The noncontrolling interest in the LIHTC Funds is comprised primarily of the LIHTC Funds’ investment in LTPPs as well as operating cash partially offset by the LIHTC Funds’ obligations, which primarily consist of unfunded equity commitments to LTPPs.  At September 30, 2014, there were $9.6 million of unfunded equity commitments. The vast majority of the equity in the LIHTC Funds is held by third parties as the Company’s equity interest is nominal (ranging from 0.01% to 0.04%).  A LIHTC Fund’s investment in LTPPs is accounted for under the equity method, which means the investment balance is impacted by its share of LTPP income or loss.  By design, the Lower Tier Property Partnerships typically generate net losses which are generally driven by depreciation of the rental property.  The investment balance is also impacted by impairment charges as well as investment disposition activity.  The decline in the noncontrolling interest balance was primarily a result of the decline in the LIHTC Funds’ investment balance mainly due to net operating losses and impairment charges recognized.  During the first nine months of 2014, the Funds’ investment balance declined by $37.2 million and the noncontrolling interest balance declined by $40.3 million.  See Note 15, “Consolidated Funds and Ventures” for more information.

 

27
 

 

On October 8, 2014, the Company sold its general partner and manager interests and asset management rights in these LIHTC Funds. See Note 17, “Subsequent Events” for more information.

 

SA Fund

 

The noncontrolling interest in the SA Fund is comprised primarily of the SA Fund’s investment in for-sale and rental properties as well as operating cash partially offset by the SA Fund’s debt obligations.  The vast majority of the equity in the SA Fund is held by third parties as the Company’s equity interest is 2.7%.  The SA Fund’s investments in for-sale and rental properties are accounted for at fair value.  During the first nine months of 2014, the SA Fund’s noncontrolling interest balance increased by $2.9 million, which was due to $12.3 million of net operating income offset by $9.4 million of foreign currency translation loss. Because the SA Fund’s functional currency is the South African rand and the Company’s functional currency is the US dollar, the Company translates the SA Fund’s rand balance sheet into a dollar denominated balance sheet as part of consolidating the SA Fund into the Company’s balance sheet.  The translation losses recorded for the nine months ended September 30, 2014 were a result of the weakening of the South African rand as compared to the US dollar. The Company recorded $0.3 million of foreign currency translation losses through accumulated other comprehensive income allocable to common shareholders for the nine months ended September 30, 2014.

 

Consolidated Lower Tier Property Partnerships

 

At September 30, 2014, a non-profit, consolidated by the Company, consolidated eight LTPPs because the non-profit held the GP interest in each LTPP.

 

IHS

 

During the second quarter of 2014, the Company purchased an additional 13.2% interest in IHS for $1.6 million which was recorded as a distribution of noncontrolling equity. As a result of this purchase, the Company transferred the deficit equity balance of $2.8 million associated with these shares (including the $1.6 million distribution) out of noncontrolling equity and into common equity (reported within “Net change due to consolidation” on the Consolidated Statements of Equity). The purchase and the transfer caused noncontrolling equity to increase by $1.2 million, common shareholders’ equity to decline by $2.8 million and total equity to decline by the cash paid of $1.6 million.

 

At September 30, 2014 and December 31, 2013, 3.7% and 17%, respectively, of IHS was held by third parties.

 

Accumulated Other Comprehensive Income Allocable to Common Shareholders

 

The following table summarizes the net change in accumulated other comprehensive income allocable to common shareholders for the three months ended September 30, 2014.

 

(in thousands)  Bonds
Available-for-
Sale
   Income
Tax
(Expense)
Benefit
   Foreign
Currency
Translation
   Accumulated
Other
Comprehensive
Income
 
Balance at July 1, 2014  $41,901   $(458)  $(296)  $41,147 
Unrealized net holding gains (losses) arising during period   3,370    458    (134)   3,694 
Reversal of unrealized gains on redeemed bonds   (6,450)           (6,450)
Reclassification of unrealized losses to operation   113            113 
Net change in other comprehensive income   (2,967)   458    (134)   (2,643)
Balance at September 30, 2014  $38,934   $   $(430)  $38,504 

 

28
 

 

The following table summarizes the net change in accumulated other comprehensive income allocable to the common shareholders for the three months ended September 30, 2013.

 

   Bonds
Available-for-
Sale
   Foreign
Currency
Translation
   Accumulated
Other
Comprehensive
Income
 
Balance at July 1, 2013  $119,239   $(333)  $118,906 
Unrealized net holding (losses) gains arising during period   (5,259)   43    (5,216)
Reversal of unrealized gains on sold/redeemed bonds   (76,362)       (76,362)
Reclassification of unrealized losses to operations   939        939 
Reclassification of unrealized gains to operations due to consolidation of funds and ventures   (2,411)       (2,411)
Net change in other comprehensive income   (83,093)   43    (83,050)
Balance at September 30, 2013  $36,146   $(290)  $35,856 

 

The following table summarizes the net change in accumulated other comprehensive income allocable to common shareholders for the nine months ended September 30, 2014.

 

(in thousands)  Bonds
Available-for-
Sale
   Foreign
Currency
Translation
   Accumulated
Other
Comprehensive
Income
 
Balance at January 1, 2014  $36,868   $(209)  $36,659 
Unrealized net holding gains (losses) arising during period   11,184    (141)   11,043 
Reversal of unrealized gains on redeemed bonds   (7,228)       (7,228)
Reclassification of unrealized losses to operations   113        113 
Reclassification of unrealized gains to operations due to consolidation of funds and ventures   (2,003)       (2,003)
Other (1)       (80)   (80)
Net change in other comprehensive income   2,066    (221)   1,845 
Balance at September 30, 2014  $38,934   $(430)  $38,504 

 

(1)Transfer of unrealized loss from noncontrolling interest due to IHS share purchase.

 

The following table summarizes the net change in accumulated other comprehensive income allocable to the common shareholders for the nine months ended September 30, 2013.

 

   Bonds Available-
for-Sale
   Foreign
Currency
Translation
   Accumulated
Other
Comprehensive
Income
 
Balance at January 1, 2013  $139,021   $(334)  $138,687 
Unrealized net holding (losses) gains arising during period   (16,792)   44    (16,748)
Reversal of unrealized gains on sold/redeemed bonds   (76,960)       (76,960)
Reclassification of unrealized losses to operations   1,772        1,772 
Reclassification of unrealized gains to operations due to consolidation of funds and ventures   (10,895)       (10,895)
Net change in other comprehensive income   (102,875)   44    (102,831)
Balance at September 30, 2013  $36,146   $(290)  $35,856 

 

Note 13—STOCK-BASED COMPENSATION

 

The Company has stock-based compensation plans (“Plans”) for Non-employee Directors (“Non-employee Directors’ Stock-Based Compensation Plan”) and stock-based incentive compensation plans for employees (“Employees’ Stock-Based Compensation Plan”).

 

29
 

 

Total compensation expense recorded for these Plans was as follows for the three months and nine months ended September 30, 2014 and 2013:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Employees’ Stock-Based Compensation Plan  $62   $279   $1,714   $1,937 
Non-employee Directors’ Stock-Based Compensation Plan   50    75    188    200 
Total  $112   $354   $1,902   $2,137 

 

Employees’ Stock-Based Compensation Plan

 

As of September 30, 2014, there were approximately 374,187 share awards available to be issued under Employees’ Stock-Based Compensation Plans. While each existing Employees’ Stock-Based Compensation Plan has been approved by the Company’s Board of Directors, not all of the Plans have been approved by the Company’s shareholders; the non-shareholder approved Plans are currently restricted to the issuance of stock options. As a result, of the 374,187 shares available under the plans, only 10,047 are available to be issued in the form of either stock options or shares; all remaining share awards must be issued in the form of stock options.

 

Employee Common Stock Options

 

The Company measures the fair value of options granted with solely time-based vesting and options granted with a specific stock price that have vested because the performance condition has been achieved, using a lattice model for purposes of recognizing compensation expense.  The Company believes the lattice model provides a better estimate of the fair value of time-based options as, according to FASB’s Accounting Standards Codification Topic 718, “the design of a lattice model more fully reflects the substantive characteristics of a particular employee share option.” The Company measures the fair value of unvested options granted with specific stock price targets using a Monte Carlo simulation for purposes of recognizing compensation expense.  Because the options granted with stock price targets contain a “market condition” under FASB’s Accounting Standards Codification Topic 718, a Monte Carlo simulation is used to simulate future stock price movements for the Company.  The Company believes a Monte Carlo simulation provides a better estimate of the fair value of performance-based options as the model’s flexibility allows for the fair value to account for the vesting provisions as well as the different probabilities of stock price outcomes.

 

The following table summarizes option activity under the Employees’ Stock-Based Compensation Plans:

 

(in thousands, except per option data)  Number of
Options
   Weighted-
average
Exercise
Price per
Option
   Weighted-
average
Remaining
Contractual Life
per Option 
(in years)
  Aggregate
Intrinsic
Value (1)
   Period End
Liability (2)
 
Outstanding at January 1, 2013 (1)   469   $18.04   7.8  $58   $355 
Forfeited/Expired in 2013   (53)   132.50              
Outstanding at December 31, 2013 (1)   416    3.52   7.3   1,644    1,785 
Forfeited/Expired in 2014                      
Outstanding at September 30, 2014 (1)   416    3.52   6.6   3,172    3,295 
                        
Number of options that were exercisable at:                       
December 31, 2013   287    4.29   6.9          
September 30, 2014   325    4.00   6.4          

 

(1)Intrinsic value is based on outstanding options.

 

(2)Only options that were amortized based on a vesting schedule have a liability balance. These options were 406,988; 378,173; and 297,269 at September 30, 2014, December 31, 2013 and January 1, 2013, respectively.

 

The value of employee options increased by $1.5 million during the nine months ended September 30, 2014 and was recognized as additional compensation expense.

 

Employee Deferred Shares

 

The following table summarizes the deferred shares granted to employees. The grants outstanding at September 30, 2014, have both time and price vesting requirements. A portion of the shares vest over the next two years and a portion of the shares vest if the average price requirement of $10.00 per share and $12.50 per share is met, respectively.

 

30
 

 

(in thousands, except  per share data)  Deferred Share
Grants
   Weighted-
 average Grant
Date Share
Price
   Period End
Liability
 
Balance, January 1, 2014   58   $16.44   $218 
Granted in 2014              
Issued in 2014   16    47.41      
Balance, September 30, 2014   74           

 

The Company recognized $0.2 million of additional compensation expense related to employee deferred shares during the nine months ended September 30, 2014 mainly driven by the increase in MMA Capital’s share price and amortization of the 2013 grants.

 

Non-employee Directors’ Stock-Based Compensation Plan

 

The Non-employee Directors’ Stock-based Compensation Plans authorize a total of 1,130,000 shares for issuance, of which 440,612 were available to be issued at September 30, 2014. The Non-employee Directors’ Stock-based Compensation Plans provide for grants of non-qualified common stock options, common shares, restricted shares and deferred shares.

 

At December 31, 2013 there were 15,625 director options that were vested and outstanding with a weighted average strike price of $1.80 and an aggregate intrinsic value of $58,984.  All of these options were exercised on March 25, 2014 leaving no outstanding director options as of September 30, 2014.

 

See the table below which summarizes the director options that vested as well as the common shares and deferred shares granted to the directors for services rendered for the nine months ended September 30, 2014 and 2013. The directors are fully vested in the deferred shares at the grant date.

 

(in dollars)  Common
Shares
Granted
   Deferred
Shares
Granted
   Weighted-
average Grant
Date Share Price
   Options
Vested
   Directors’ Fees
Expense
 
September 30, 2014   4,604    7,162   $7.97       $187,500 
September 30, 2013   959    12,424    6.05    11,719    200,000 

 

Directors are paid $50,000 per year for their services; 50% of their compensation is paid in cash and 50% is paid in share based grants. For the nine months ended September 30, 2014 and 2013, the Company recognized $187,500 and $200,000 in Director fees, of which $93,750 and $100,000 was paid in cash and the balance in common shares, deferred shares and vested options. Director fees are reflected in “General and administrative” on the consolidated statements of operations.

 

Note 14—discontinued operations

 

The table below reflects the activity related to the Company’s discontinued operations.  The revenues, expenses and all other statement of operations activity in discontinued operations, including the gains and losses on dispositions, have been classified as “Income from discontinued operations, net of tax” and “Net losses (income) allocable to noncontrolling interests in CFVs and IHS – related to discontinued operations” on the consolidated statements of operations. 

 

During the first quarter of 2014, the Company sold the two real estate properties and related assets and obligations that were classified as held-for-sale at December 31, 2013 for $35.8 million which resulted in a gain on sale of real estate of $14.0 million that was reported through discontinued operations, consistent with the accounting guidance prior to the issuance and adoption of ASU 2014-08 by the Company.

 

During the third quarter of 2014, the Company sold the three real estate properties and related assets and obligations that were classified as held-for-sale at June 30, 2014, for $22.9 million which resulted in a gain on sale of real estate of $2.3 million that was reported through discontinued operations, consistent with the accounting guidance prior to the issuance and adoption of ASU 2014-08 by the Company.

 

31
 

 

At September 30, 2014, the Company had one real estate property and one parcel of land classified as held-for-sale; however, as a result of the Company adopting ASU 2014-08 after the first quarter of 2014, the results of operations for these properties are included within continuing operations in the consolidated financial statements. See Note 4, “Real Estate” for more information.

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Sublease income  $   $   $   $492 
Income from CFVs (primarily rental income)       3,957    279    11,699 
Income from REO operations           1,148     
Rent expense               (492)
Expenses from CFVs (primarily operating expenses)       (4,071)   (244)   (10,886)
Expenses from REO operations           (1,112)    
Other income   83    84    250    375 
Other expense   (5)   (39)   (68)   (412)
Net gain on property acquisition       320        320 
Income tax benefit   1,448             
Net income before disposal activity   1,526    251    253    1,096 
Disposal:                    
Net gains related to REO   2,368    95    17,671    176 
Net gains related to CFVs   9    25    17    5,252 
Net income from discontinued operations   3,903    371    17,941    6,524 
(Income) loss from discontinued operations allocable to noncontrolling interests       (32)   150    (1,244)
Net income to common shareholders from discontinued operations  $3,903   $339   $18,091   $5,280 

 

The details of net income to common shareholders from discontinued operations for the three months and nine months ended September 30, 2014 and 2013 are as follows:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Interest income  $   $61   $185   $1,174 
Other income   83    404    1,398    1,186 
Other expense   (5)   (246)   (1,180)   (1,161)
Income tax benefit   1,448             
Net gains on disposal of REO   2,368    95    17,671    176 
Net gains on redemption of bonds   9    25    17    3,905 
Net income to common shareholders from discontinued operations  $3,903   $339   $18,091   $5,280 

 

Note 15—CONSOLIDATED FUNDS AND VENTURES

 

Due to the Company’s minimal equity ownership interests in certain consolidated entities, the assets, liabilities, revenues, expenses, equity in losses from those entities’ unconsolidated Lower Tier Property Partnerships and the losses allocated to the noncontrolling interests of the consolidated entities have been separately identified on the consolidated balance sheets and statements of operations. Third-party ownership in these CFVs is recorded in equity as “Noncontrolling interests in CFVs and IHS.”

 

The total assets, by type of consolidated fund or venture, at September 30, 2014 and December 31, 2013 are summarized as follows:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
LIHTC Funds  $284,929   $329,033 
SA Fund   188,194    184,649 
Consolidated Lower Tier Property Partnerships   82,694    107,362 
Other consolidated entities   1,911    2,163 
Total assets of CFVs  $557,728   $623,207 

 

32
 

 

The following provides a detailed description of the nature of these entities.

 

LIHTC Funds

 

At September 30, 2014, the Company consolidates 11 guaranteed LIHTC Funds. The LIHTC Funds’ primary assets are their investments in Lower Tier Property Partnerships, which are the owners of the affordable housing properties (see Investments in Lower Tier Property Partnerships in the Asset Summary below). The LIHTC Funds account for these investments using the equity method of accounting.

 

The Company guarantees the investor yield for each of these 11 LIHTC Funds. At September 30, 2014 and December 31, 2013, the Company’s maximum exposure under these guarantees was estimated to be approximately $614.4 million; however, the Company does not anticipate any losses under these guarantees.

 

On October 8, 2014, the Company sold its general partner and manager interests and asset management rights in these 11 LIHTC Funds; however, it retained its investor yield guarantee. See Note 17, “Subsequent Events” for more information.

 

SA Fund

 

The Company is the majority owner of the GP of the SA Fund, which is an investment fund formed to invest directly or indirectly in affordable for-sale and rental housing primarily in South Africa (see SA Fund investments in the Asset Summary below). The SA Fund has $112.3 million in equity commitments from investors, of which $107.3 million has been funded at September 30, 2014. As a 2.7% limited partner of the SA Fund, the Company’s portion of this equity commitment is $3.0 million. At September 30, 2014, the Company had funded all of this equity commitment. The SA Fund also has an agreement with Overseas Private Investment Corporation (“OPIC”), an agency of the US, to provide loan financing not to exceed $80.0 million, of which $49.1 million has been funded at September 30, 2014. Because the Company is deemed the primary beneficiary of the SA Fund through its majority owned GP interest in the SA Fund, the Company’s 2.7% equity investment is eliminated and the SA Fund is consolidated. The Company is allocated 2.7% of the SA Fund’s operating activities through an income or loss allocation.

 

Consolidated Lower Tier Property Partnerships

 

At September 30, 2014, the Company consolidates a non-profit entity for which it is deemed the primary beneficiary (see Other Consolidated Entities below). The non-profit consolidates certain Lower Tier Property Partnerships because it is deemed to be the primary beneficiary.  The Company does not have an equity interest in the Consolidated Lower Tier Property Partnerships or the non-profit entity. Generally, the assets held by these Consolidated Lower Tier Property Partnerships are affordable multifamily housing properties financed with tax credit equity and/or tax-exempt bonds.  In many cases, the Company owns an interest in the tax credit equity investment and/or the bond used to finance the property. The REO, which is the primary asset of the Consolidated Lower Tier Property Partnerships, is reported in “Real estate held-for-use, net” on the consolidated balance sheets. See the Asset Summary below.

 

Other Consolidated Entities

 

As of September 30, 2014, the Company consolidated a non-profit entity because it is deemed to be the primary beneficiary.

 

The following section provides more information related to the assets of the CFVs at September 30, 2014 and December 31, 2013.

 

Asset Summary:

(in thousands)  September 30,
2014
   December 31,
2013
 
Cash, cash equivalents and restricted cash  $40,974   $52,897 
Investments in Lower Tier Property Partnerships   248,811    286,007 
SA Fund investments   165,760    158,325 
Real estate held-for-use, net   78,836    102,314 
Other assets   23,347    23,664 
Total assets of CFVs  $557,728   $623,207 

 

Substantially all of the assets of the CFVs are restricted for use by the specific owner entity and are not available for the Company’s general use.

 

33
 

 

LIHTC Funds’ Investments in Lower Tier Property Partnerships

 

The Lower Tier Property Partnerships of the LIHTC Funds are considered variable interest entities; although in most cases it is the third party GP who is the primary beneficiary. Therefore, substantially all of the LIHTC Funds’ investments in Lower Tier Property Partnerships are accounted for under the equity method. The following table provides the LIHTC Funds’ investment balances in the unconsolidated Lower Tier Property Partnerships, as well as the assets and liabilities of the Lower Tier Property Partnerships at September 30, 2014 and December 31, 2013:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
LIHTC Funds’ investment in Lower Tier Property Partnerships  $248,811   $286,007 
Total assets of Lower Tier Property Partnerships (1)  $1,286,839   $1,324,704 
Total liabilities of Lower Tier Property Partnerships (1)   1,037,932    1,038,983 

 

(1)The assets of the Lower Tier Property Partnerships are primarily real estate and the liabilities are predominantly mortgage debt.

 

The Company’s maximum exposure to loss from the LIHTC Funds and the underlying Lower Tier Property Partnerships relate to the guarantee exposure associated with the LIHTC Funds discussed above and the Company’s bonds which represent the primary mortgage debt obligation owed by certain LTPPs of the LIHTC Funds. The fair value of the Company’s bonds secured by properties owned by the Lower Tier Property Partnerships at September 30, 2014 and December 31, 2013, was $75.3 million and $64.9 million, respectively.

 

SA Fund Investments

 

The SA Fund was organized under South African law in a similar manner to US investment companies and therefore follows accounting guidance specific to investment companies which requires fair value accounting for investments. The Company calculates such fair value based on estimates because there are no readily available market values. In establishing fair values of its investments, the Company considers financial conditions and operating results, local market conditions, market values of comparable companies and real estate, the stage of each investment, and other factors as appropriate, including obtaining appraisals from independent third-party appraisers.

 

As required by GAAP, assets and liabilities are classified into levels based on the lowest level of input that is significant to the fair value measurement. See Note 9, “Fair Value Measurements” for more information. The SA Fund investments are carried at their fair value of $165.8 million and $158.3 million at September 30, 2014 and December 31, 2013, respectively and are considered Level 3 valuations. As noted in the table below, during the first nine months of 2014, the SA Fund recorded purchases of $17.0 million, sales and distributions of $12.6 million and fair value gains of $14.7 million based on internal fair value estimates; however, these gains were partially offset by $11.7 million of foreign currency translation losses. Because the SA Fund’s functional currency is the South African rand and the Company’s functional currency is the US dollar, the Company translates the SA Fund’s rand balance sheet into a dollar denominated balance sheet as part of consolidating the SA Fund into the Company’s balance sheet.  The translation losses recorded during the first nine months of 2014 were a result of the weakening of the South African rand as compared to the US dollar. The Company’s economic share of the SA Fund’s operating activities and the related foreign currency translation loss was 2.7%, resulting in $0.1 million of net comprehensive income allocable to the common shareholders for the first nine months of 2014.

 

The following table presents the activity for the SA Fund investments at fair value on a recurring basis using Level 3 inputs for the three months ended September 30, 2014 and 2013:

 

   For the three months ended
September 30,
 
(in thousands)  2014   2013 
Balance, July 1,  $163,458   $156,723 
Net gains included in earnings related to CFVs   10,195    2,882 
Net foreign currency translation losses included in other comprehensive income attributable to CFVs   (9,934)   (2,658)
Impact from purchases   2,433    8,029 
Impact from sales and distributions   (392)   (7,185)
Balance, September 30,  $165,760   $157,791 

 

34
 

 

The following table presents the activity for the SA Fund investments at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2014 and 2013:

 

   For the nine months ended 
September 30,
 
(in thousands)  2014   2013 
Balance, January 1,  $158,325   $161,433 
Net gains included in earnings related to CFVs   14,683    20,178 
Net foreign currency translation losses included in other comprehensive income attributable to CFVs   (11,654)   (27,226)
Impact from purchases   17,000    15,699 
Impact from sales and distributions   (12,594)   (12,293)
Balance, September 30,  $165,760   $157,791 

 

The SA Fund has committed $161.4 million of capital to the project entities that in turn invest that capital into affordable for-sale and rental properties of which $138.4 million was funded at September 30, 2014.

 

Consolidated Lower Tier Property Partnerships’ Real estate held-for-use, net

 

The real estate held-for-use by Consolidated Lower Tier Property Partnerships was comprised of the following at September 30, 2014 and December 31, 2013:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Building, furniture and fixtures  $89,305   $108,424 
Accumulated depreciation   (20,468)   (17,997)
Land   9,999    11,887 
Total  $78,836   $102,314 

 

Depreciation expense was $4.9 million and $6.5 million for the nine months ended September 30, 2014 and 2013, respectively, of which $0.1 million and $2.2 million was recorded in discontinued operations for the nine months ended September 30, 2014 and 2013, respectively. Buildings are depreciated over a period of 40 years. Furniture and fixtures are depreciated over a period of six to seven years. The Company did not recognize any impairment losses for the nine months ended September 30, 2014 and 2013.

 

The Consolidated Lower Tier Property Partnerships which own the real estate held-for-use (affordable multifamily properties) were consolidated by a non-profit entity that is in turn consolidated by the Company. The Company does not have an equity interest in the Consolidated Lower Tier Property Partnerships or the non-profit entity. However, the Company provided debt financing to the Consolidated Lower Tier Property Partnerships. In consolidation, because the Company consolidates the Lower Tier Property Partnerships, the real estate held by the Consolidated Lower Tier Property Partnerships is reflected on the Company’s balance sheet. The Company’s bonds have been eliminated against the related mortgage debt obligations of the Consolidated Lower Tier Property Partnerships. The Company’s maximum loss exposure is the fair value of its bonds. At September 30, 2014, the fair value of these bonds was $47.0 million, including $0.7 million of net unrealized losses occurring since consolidation that have not been reflected in the Company’s common shareholders’ equity given that the Company is required to consolidate and account for the real estate, which prohibits an increase in value from its original cost basis until the real estate is sold.

 

During the first quarter of 2014, the Company foreclosed on two properties that were reported as real estate held-for-use related to Consolidated Funds and Ventures at December 31, 2013.  At the time of transfer, the two real estate properties had a carrying amount of $9.8 million.  As a result of this foreclosure, the Company reclassified the real estate from real estate related to Consolidated Funds and Ventures to real estate related to MMA Capital.

 

During the third quarter of 2014, a non-profit entity consolidated by the Company transferred a property to a wholly owned subsidiary of the Company, which had provided bond financing to this property. See Note 4, “Real Estate” for more information. At the time of transfer, this rental property had a carrying value of $10.0 million. As a result of this transfer, the Company reclassified the real estate from real estate related to Consolidated Funds and Ventures to real estate related to MMA Capital.

 

35
 

 

Liability Summary:

 

The following section provides more information related to the liabilities of the CFVs at September 30, 2014 and December 31, 2013.

 

(in thousands)  September 30,
2014
   December 31,
2013
 
Liabilities of CFVs:          
Debt  $69,564   $91,602 
Unfunded equity commitments to unconsolidated Lower Tier Property Partnerships   9,597    13,461 
Other liabilities   4,836    4,043 
Total liabilities of CFVs  $83,997   $109,106 

 

Debt

 

At September 30, 2014 and December 31, 2013, the debt of the CFVs had the following terms:

 

   September 30, 2014
(in thousands)  Carrying
Amount
   Face
Amount
   Weighted-average
Effective Interest
Rates
   Maturity Dates
SA Fund (1)  $50,150   $50,150   2. 6%   April 2018
Consolidated Lower Tier Property Partnerships   19,414    19,028   6. 4   Various dates through March 2049
Total  $69,564   $69,178         
    
   December 31, 2013
(in thousands)  Carrying
Amount
   Face
Amount
   Weighted-average
Effective Interest
Rates
   Maturity Dates
SA Fund (1)  $49,886   $49,886   2. 6%   April 2018
Consolidated Lower Tier Property Partnerships   41,716    40,987   6. 3   Various dates through March 2049
Total  $91,602   $90,873         

 

(1)This amount includes $1.1 million and $0.8 million of capitalized interest for the period ended September 30, 2014 and December 31, 2013, respectively.

 

SA Fund

 

The SA Fund has an agreement with OPIC to provide loan financing not to exceed $80.0 million.  The SA Fund has drawn a total of $49.1 million of debt against this financing arrangement as of September 30, 2014. This debt is an obligation of the SA Fund and there is no recourse to the Company.

 

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

 

As required by GAAP, assets and liabilities are classified into levels based on the lowest level of input that is significant to the fair value measurement. See Note 9, “Fair Value Measurements” for more information. The SA Fund derivative assets were carried at $10.4 million and $8.5 million at September 30, 2014 and December 31, 2013, respectively, based on Level 2 Fair Value measurements as determined by a third party.  The SA Fund derivatives increase in value when the South African rand declines in value in comparison to the US dollar.  The South African rand is the functional currency of the Fund; as such, the derivatives (as well as all SA Fund assets) are subject to foreign currency translation adjustment when translated to the Company’s dollar denominated balance sheet and lose value as the South African rand declines in value in comparison to the US dollar.

 

At September 30, 2014, the SA Fund had $2.1 million of cash pledged as collateral for the foreign exchange derivative contracts.

 

36
 

 

Other

 

The following section provides more information related to the income statement of the CFVs for the three months and nine months ended September 30, 2014 and 2013.

 

Income Statement Summary:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Revenue:                    
Rental and other income from real estate  $3,159   $3,315   $10,210   $8,404 
Interest and other income   682    3,714    4,291    7,745 
Total revenue from CFVs   3,841    7,029    14,501    16,149 
                     
Expenses:                    
Depreciation and amortization   2,069    2,207    6,460    5,919 
Interest expense   715    1,253    2,628    2,228 
Other operating expenses   3,823    3,399    9,658    8,118 
Foreign currency loss   3,030    840    3,556    8,390 
Asset impairments   7,659    6,678    19,302    14,559 
Total expenses from CFVs   17,296    14,377    41,604    39,214 
                     
Net gains (losses) related to CFVs:                    
Investment gains   10,195    3,554    15,491    20,849 
Derivative (losses) gains   2,432    258    1,426    6,883 
Net loss on sale of properties           (138)    
Equity in losses from Lower Tier Property Partnerships of CFVs   (4,346)   (6,343)   (18,812)   (20,129)
Net loss   (5,174)   (9,879)   (29,136)   (15,462)
Net losses allocable to noncontrolling interests in CFVs (1)   7,138    10,949    32,335    18,358 
Net income allocable to the common shareholders related to CFVs  $1,964   $1,070   $3,199   $2,896 

 

(1)Net losses allocable to noncontrolling interests in CFVs have been adjusted to exclude noncontrolling interests related to IHS because the Company’s equity interest in IHS is substantial. The Company has little to no equity interest in the other CFVs including the non-profit entity, the LTPPs, the LIHTC Funds and the SA Fund.

 

The details of Net income allocable to the common shareholders related to CFVs for the three months and nine months ended September 30, 2014 and 2013 are as follows:

 

   For the three months ended
September 30,
   For the nine months ended
September 30,
 
(in thousands)  2014   2013   2014   2013 
Interest income  $598   $208   $1,524   $1,714 
Asset management fees   1,844    888    3,514    2,629 
Guarantee fees   331    331    993    993 
Equity in losses from Lower Tier Property Partnerships   (277)   (384)   (2,187)   (2,821)
Equity in income from SA Fund   246    152    388    643 
Other expense   (778)   (125)   (1,033)   (262)
Net income allocable to the common shareholders related to CFVs  $1,964   $1,070   $3,199   $2,896 

 

Note 16—segment Information

 

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

 

US Operations

 

Our US Operations consists of three business lines; Leveraged Bonds, LIHTCs and Other Investments and Obligations. For purposes of the reportable segment results, our Corporate activity is currently included in US Operations.

 

37
 

 

International Operations

 

Outside of the US, we are in the business of raising, investing in and asset managing private real estate funds which invest in affordable for-sale and rental housing for Sub Saharan Africa, primarily in South Africa. The Company’s International Operations take place through a subsidiary, IHS.

 

Consolidated Funds and Ventures

 

CFVs are entities for which the Company is deemed to be the primary beneficiary. The Company earns revenue from these CFVs mainly through asset management fees, interest income (primarily from interest on bonds) and guarantee fees.

 

The following tables reflect the results of the business segments for the three months and nine months ended September 30, 2014 and 2013. The segment results have been adjusted to include revenues and expenses related to transactions between CFVs and the two reportable segments that are eliminated in consolidation and are provided for through an allocation of income. We have revised the presentation for the three months and nine months ended September 30, 2013 for comparability purposes. This presentation change had no impact on “Net income to common shareholders.”

 

38
 

 

   For the three months ended September 30, 2014 
(in thousands)  US
Operations
   International
Operations
   CFVs   Income
Allocation
Reclasses
   MMA
Consolidated
 
Total interest income  $6,031   $15   $   $(598) (1)  $5,448 
Total interest expense   (526)               (526)
Net interest income   5,505    15        (598)   4,922 
                          
Total fee and other income   3,531    2,456        (2,175) (2)   3,812 
Revenue from CFVs           3,841        3,841 
Total non-interest revenue   3,531    2,456    3,841    (2,175)   7,653 
                          
Total revenues, net of interest expense   9,036    2,471    3,841    (2,773)   12,575 
                          
Operating and other expenses:                         
Interest expense   (3,364)   (36)           (3,400)
Operating expenses   (3,201)   (2,016)           (5,217)
Impairment on bonds and recovery of loan losses   (864)               (864)
Other expenses, net   (2,061)   25        778 (3)   (1,258)
Expenses from CFVs           (19,537)   2,241 (5)   (17,296)
                          
Total operating and other expenses   (9,490)   (2,027)   (19,537)   3,019    (28,035)
Net gains on assets, derivatives and extinguishment of liabilities   10,669                10,669 
Net gains related to CFVs           12,627        12,627 
Equity in (losses) gains from Lower Tier Property Partnerships of CFVs   (277) (6)   246    (4,069) (6)   (246) (4)   (4,346)
Income (loss) from continuing operations before income taxes   9,938    690    (7,138)       3,490 
Income tax expense   (1,919)               (1,919)
Income from discontinued operations, net of tax   3,903                3,903 
Net income (loss)   11,922    690    (7,138)       5,474 
                          
Income allocable to noncontrolling interests:                         
Net losses allocable to noncontrolling interests in CFVs:                         
Related to continuing operations           7,138        7,138 
Net income to common shareholders  $11,922   $690   $   $   $12,612 

 

39
 

 

(1)Represents interest on bonds that the Company recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.6 million is reflected in total interest income for the US Operations.

 

(2)This amount includes $0.6 million of asset management fees recognized by IHS through an income allocation (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.6 million is reflected in total fee and other income for the International Operations. This amount also includes $1.2 million of asset management fees and $0.4 million of guarantee fees both related to the Company’s LIHTC Funds, both of which were recognized during the third quarter of 2014 through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, both are included in total fee and other income for the US Operations.

 

(3)Represents net expenses recognized by the Company through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, these expenses are reflected as additional other expenses for the US Operations.

 

(4)Represents the Company’s share of its equity interest in the SA Fund (i.e., 2.7% of the SA Fund’s third quarter of 2014 net income) which is recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.2 million is reflected as equity in income of unconsolidated ventures for the International Operations.

 

(5)The sum of the income highlighted in notes 1, 2 and 4 above, partially offset by the expenses discussed in note 3 above, total $2.2 million of net income to the Company which is then reflected as an overall net expense to the CFVs.

 

(6)Represents equity in losses from the Lower Tier Property Partnerships that the Company recognized as an allocation (see Note 15, “Consolidated Funds and Ventures”) because of bonds held by the Company associated with the Lower Tier Property Partnerships in situations where the carrying amount of the limited partnership investment had reached zero. For purposes of the table above, the Company recognized $0.3 million of losses in US Operations and reduced the CFVs losses by the same amount.

 

40
 

 

   For the three months ended September 30, 2013 
(in thousands)  US
Operations
   International
Operations
   CFVs   Income
Allocation
Reclasses
   MMA
Consolidated
 
Total interest income  $4,579   $10   $   $(208) (1)  $4,381 
Total interest expense   (2,199)               (2,199)
Net interest income   2,380    10        (208)   2,182 
                          
Total fee and other income   2,651    703        (1,219) (2)   2,135 
Revenue from CFVs           7,029        7,029 
Total non-interest revenue   2,651    703    7,029    (1,219)   9,164 
                          
Total revenues, net of interest expense   5,031    713    7,029    (1,427)   11,346 
                          
Operating and other expenses:                         
Interest expense   (3,593)   (35)           (3,628)
Operating expenses   (4,016)   (1,356)           (5,372)
Impairment on bonds and recovery of loan losses   (939)   (5)           (944)
Other expenses   (1,079)   (224)       125 (3)   (1,178)
Expenses from CFVs           (15,831)   1,454 (5)   (14,377)
                          
Total operating and other expenses   (9,627)   (1,620)   (15,831)   1,579    (25,499)
Net gains on assets, derivatives and extinguishment of liabilities   76,304    16            76,320 
Net gains due to real estate consolidation and foreclosure   2,411                2,411 
Net gains related to CFVs           3,812        3,812 
Equity in (losses) gains from Lower Tier Property Partnerships of CFVs   (384) (6)   152    (5,959) (6)   (152) (4)   (6,343)
Income (loss) from continuing operations before income taxes   73,735    (739)   (10,949)       62,047 
Income tax expense   (123)               (123)
Income from discontinued operations, net of tax   339        32        371 
Net income (loss)   73,951    (739)   (10,917)       62,295 
                          
Income allocable to noncontrolling interests:                         
                          
Income allocable to perpetual preferred shareholders of a subsidiary company   (36)               (36)
Net losses (income) allocable to noncontrolling interests in CFVs:                         
                          
Related to continuing operations       140    10,949        11,089 
                          
Related to discontinued operations           (32)       (32)
                          
Net income (loss) to common shareholders  $73,915   $(599)  $   $   $73,316 

 

41
 

 

(1)Represents interest on bonds that the Company recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.2 million is reflected in total interest income for the US Operations.

 

(2)This amount includes $0.7 million of asset management fees recognized by IHS through an income allocation (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.7 million is reflected in total fee and other income for the International Operations. This amount also includes $0.2 million of asset management fees and $0.3 million of guarantee fees both related to the Company’s LIHTC Funds, both of which were recognized during the third quarter of 2013 through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, both are included in total fee and other income for the US Operations.

 

(3)Represents net expenses recognized by the Company through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, these expenses are reflected as additional other expenses for the US Operations.

 

(4)Represents the Company’s share of its equity interest in the SA Fund (i.e., 2.7% of the SA Fund’s third quarter of 2013 net income) which is recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.2 million is reflected as equity in income of unconsolidated ventures for the International Operations.

 

(5)The sum of the income highlighted in notes 1, 2 and 4 above, partially offset by the expenses discussed in note 3 above, total $1.5 million of net income to the Company which is then reflected as an overall net expense to the CFVs.

 

(6)Represents equity in losses from the Lower Tier Property Partnerships that the Company recognized as an allocation (see Note 15, “Consolidated Funds and Ventures”) because of bonds held by the Company associated with the Lower Tier Property Partnerships in situations where the carrying amount of the limited partnership investment had reached zero. For purposes of the table above, the Company recognized $0.4 million of losses in US Operations and reduced the CFVs losses by the same amount.

 

42
 

 

   For the nine months ended September 30, 2014 
(in thousands)  US
Operations
   International
Operations
   CFVs   Income
Allocation
Reclasses
   MMA
Consolidated
 
Total interest income  $15,086   $36   $   $(1,524) (1)  $13,598 
Total interest expense   (2,674)               (2,674)
Net interest income   12,412    36        (1,524)   10,924 
                          
Total fee and other income   8,467    4,218        (4,507) (2)   8,178 
Revenue from CFVs           14,501        14,501 
Total non-interest revenue   8,467    4,218    14,501    (4,507)   22,679 
                          
Total revenues, net of interest expense   20,879    4,254    14,501    (6,031)   33,603 
                          
Operating and other expenses:                         
Interest expense   (10,351)   (111)           (10,462)
Operating expenses   (11,404)   (4,460)           (15,864)
Impairment on bonds and recovery of loan losses   (864)               (864)
Other expenses, net   (4,142)   (58)       1,033 (3)   (3,167)
Expenses from CFVs           (46,990)   5,386 (5)   (41,604)
                          
Total operating and other expenses   (26,761)   (4,629)   (46,990)   6,419    (71,961)
Net gains on assets, derivatives and extinguishment of liabilities   11,857                11,857 
Net gains due to real estate consolidation and foreclosure   2,003                2,003 
Net gains related to CFVs           16,779        16,779 
Equity in (losses) gains from Lower Tier Property Partnerships of CFVs   (2,187) (6)   388    (16,625) (6)   (388) (4)   (18,812)
Gains (losses) from continuing operations before income taxes   5,791    13    (32,335)       (26,531)
Income tax expense   (171)               (171)
Income (loss) from discontinued operations, net of tax   18,091        (150)       17,941 
Net income (loss)   23,711    13    (32,485)       (8,761)
                          
Income allocable to noncontrolling interests:                         
Net losses allocable to noncontrolling interests in CFVs:                         
Related to continuing operations       77    32,335        32,412 
Related to discontinued operations           150        150 
Net income to common shareholders  $23,711   $90   $   $   $23,801 

 

43
 

 

(1)Represents interest on bonds that the Company recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $1.5 million is reflected in total interest income for the US Operations.

 

(2)This amount includes $1.9 million of asset management fees recognized by IHS through an income allocation (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $1.9 million is reflected in total fee and other income for the International Operations. This amount also includes $1.6 million of asset management fees and $1.0 million of guarantee fees both related to the Company’s LIHTC Funds, both of which were recognized during the first nine months of 2014 through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, both are included in total fee and other income for the US Operations.

 

(3)Represents net expenses recognized by the Company through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, these expenses are reflected as additional other expenses for the US Operations.

 

(4)Represents the Company’s share of its equity interest in the SA Fund (i.e., 2.7% of the SA Fund’s 2014 net income) which is recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.4 million is reflected as equity in income of unconsolidated ventures for the International Operations.

 

(5)The sum of the income highlighted in notes 1, 2 and 4 above, partially offset by the expenses discussed in note 3 above, total $5.4 million of net income to the Company which is then reflected as an overall net expense to the CFVs.

 

(6)Represents equity in losses from the Lower Tier Property Partnerships that the Company recognized as an allocation (see Note 15, “Consolidated Funds and Ventures”) because of bonds held by the Company associated with the Lower Tier Property Partnerships in situations where the carrying amount of the limited partnership investment had reached zero. For purposes of the table above, the Company recognized $2.2 million of losses in US Operations and reduced the CFVs losses by the same amount.

 

44
 

 

   For the nine months ended September 30, 2013 
(in thousands)  US
Operations
   International
Operations
   CFVs   Income
Allocation
Reclasses
   MMA
Consolidated
 
Total interest income  $36,866   $25   $   $(1,714) (1)  $35,177 
Total interest expense   (22,213)               (22,213)
Net interest income   14,653    25        (1,714)   12,964 
                          
Total fee and other income   7,203    2,220        (3,622) (2)   5,801 
Revenue from CFVs           16,149        16,149 
Total non-interest revenue   7,203    2,220    16,149    (3,622)   21,950 
                          
Total revenues, net of interest expense   21,856    2,245    16,149    (5,336)   34,914 
                          
Operating and other expenses:                         
Interest expense   (11,273)   (101)           (11,374)
Operating expenses   (15,843)   (4,507)           (20,350)
Impairment on bonds  and recovery of loan losses   (1,772)   (5)           (1,777)
Other expenses   (4,444)   (783)       262 (3)   (4,965)
Expenses from CFVs           (44,931)   5,717 (5)   (39,214)
Total operating and other expenses   (33,332)   (5,396)   (44,931)   5,979    (77,680)
                          
Net gains on assets, derivatives and extinguishment of liabilities   114,672    16            114,688 
Net gains due to real estate consolidation and foreclosure   10,895                10,895 
Net gains related to CFVs           27,732        27,732 
Equity in (losses) gains from Lower Tier Property Partnerships of CFVs   (2,821) (6)   643    (17,308) (6)   (643) (4)   (20,129)
Income (loss) from continuing operations before income taxes   111,270    (2,492)   (18,358)       90,420 
Income tax benefit   1,309                1,309 
                          
Income from discontinued operations, net of tax   5,280        1,244        6,524 
Net income (loss)   117,859    (2,492)   (17,114)       98,253 
                          
Income allocable to noncontrolling interests:                         
Income allocable to perpetual preferred shareholders of a subsidiary company   (3,714)               (3,714)
Net losses (income) allocable to noncontrolling interests in CFVs:                         
Related to continuing operations       489    18,358        18,847 
Related to discontinued operations           (1,244)       (1,244)
Net income (loss) to common shareholders  $114,145   $(2,003)  $   $   $112,142 

 

45
 

 

(1)Represents interest on bonds that the Company recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $1.7 million is reflected in total interest income for the US Operations.

 

(2)This amount includes $2.1 million of asset management fees recognized by IHS through an income allocation (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $2.1 million is reflected in total fee and other income for the International Operations. This amount also includes $0.5 million of asset management fees and $1.0 million of guarantee fees both related to the Company’s LIHTC Funds, both of which were recognized during the first nine months of 2013 through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, both are included in total fee and other income for the US Operations.

 

(3)Represents net expenses recognized by the Company through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, these expenses are reflected as additional other expenses for the US Operations.

 

(4)Represents the Company’s share of its equity interest in the SA Fund (i.e., 2.7% of the SA Fund’s 2013 net income) which is recognized through an allocation of income (see Note 15, “Consolidated Funds and Ventures”) and for purposes of the table above, the $0.6 million is reflected as equity in income of unconsolidated ventures for the International Operations.

 

(5)The sum of the income highlighted in notes 1, 2 and 4 above, partially offset by the expenses discussed in note 3 above, total $5.7 million of net income to the Company which is then reflected as an overall net expense to the CFVs.

 

(6)Represents equity in losses from the Lower Tier Property Partnerships that the Company recognized as an allocation (see Note 15, “Consolidated Funds and Ventures”) because of bonds held by the Company associated with the Lower Tier Property Partnerships in situations where the carrying amount of the limited partnership investment had reached zero. For purposes of the table above, the Company recognized $2.8 million of losses in US Operations and reduced the CFVs losses by the same amount.

 

The total assets by segment at September 30, 2014 and December 31, 2013 are presented in the table below:

 

(in thousands)  September 30,
2014
   December 31,
2013
 
ASSETS          
US Operations  $377,755   $443,664 
International Operations   10,231    6,681 
Total segment assets   387,986    450,345 
Bonds eliminated in consolidation   (47,761)   (47,745)
Net unrealized mark-to-market losses (gains) not recorded in consolidation   739    (2,543)
Other adjustments   (6,813)   (7,906)
Assets of CFVs   557,728    623,207 
Total MMA consolidated assets  $891,879   $1,015,358 

 

Note 17—sUBSEQUENT EVENT

 

On October 8, 2014, the Company sold its wholly-owned subsidiary, MMA Financial TC, LLC (“TC”), to MGM for $15.9 million. At the time of the sale, TC held the Company’s general partner and manager interests and asset management rights in 11 guaranteed LIHTC funds. The Company also engaged MGM as its agent with respect to the asset management of two non-guaranteed LIHTC funds. The $15.9 million sale price was financed by the Company and was comprised of a $17.3 million senior bridge loan (“Senior Loan”) and a $13.0 million subordinate loan (“Subordinate Loan”), resulting in an overall reduction to cash of $14.4 million. MGM also holds another LIHTC asset management business which it acquired from one of its affiliates at the same time. The Company also entered into an option contract (“Option”) that gives it the option to acquire MGM for $12.0 million, beginning on October 1, 2019 and ending on September 30, 2024, subject to various acceleration and price adjustments.

 

The Senior Loan has an initial term maturity date of December 31, 2014, an interest rate of 10% and amortizes based on MGM’s excess cash flows. The Senior Loan can be extended for up to nine quarters for quarterly extension fees of 1%. If the Senior Loan is not refinanced by March 31, 2017, then the Company has the right to accelerate the Option exercise date subject to an adjusted Option price. The Subordinate Loan is non-amortizing, has a maturity date of September 30, 2024 and has an interest rate of 12% of which 8% is to be paid quarterly and 4% is capitalized, added to principal and payable at the loan’s maturity.

 

At the time of sale, the Company had a carrying basis of $0.3 million in the asset management fees that were sold as part of the transaction.  The Company did not achieve sale accounting for