UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018

OR

For the transition period from __________________ to __________________



Commission File Number 001-11981

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



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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑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 ☑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 definitions of “large accelerated filer,”  “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

There were 5,701,423 shares of common shares outstanding at May 3, 2018.



 

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Cautionary Statement Regarding Forward Looking Statements

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

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

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



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PART I – FINANCIAL INFORMATION



MMA Capital Management, LLC

Consolidated Financial Highlights

(Unaudited)

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



INTRODUCTION

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Overview

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

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

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

The Company received a $57 million note from Hunt FS Holdings II, LLC, an affiliate of Hunt, as consideration for the sale of the aforementioned businesses and assets (this sale transaction is hereinafter referred to as the “Disposition”).

In conjunction with the Disposition, the Company’s option to purchase the LIHTC business of Morrison Grove Management, LLC (“MGM”) was also converted into a purchase and sale agreement pursuant to which the Company agreed to complete the purchase of MGM subject to certain conditions precedent.  In addition, the Company signed an agreement to acquire from an affiliate of MGM certain assets pertaining to a specific LIHTC property and acquired a $9.0 million senior note from affiliates of MGM.  Hunt has the right to elect to take assignment of the purchase agreements related to MGM and, subject to the terms of such agreements, could acquire the MGM LIHTC business and property directly from MGM and its affiliates.  If this were to occur, Hunt would acquire the $9.0 million senior note from us.

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

Leveraged Bonds Portfolio

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

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

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The Company also has a smaller portfolio of other real estate bonds.  This portfolio includes: (i) municipal bonds that finance the development of infrastructure for a mixed-use town center development and are secured by incremental tax revenues generated from the development, (ii) a subordinated investment in a collateralized mortgage-backed security that finances a mixed-use multifamily housing property and (iii) a tax-exempt bond that is fully secured by U.S. Treasury notes. 

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

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



Table 1:  Bond Portfolio - Summary









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The fair value of the Bond Portfolio as a percentage of its UPB decreased from 102.5% at December 31, 2017 to 101.0% at March 31, 2018, while the weighted-average debt service coverage ratio of the Bond Portfolio was 1.10x at December 31, 2017 and March 31, 2018.   

Interest Rate  Risk Hedge Positions

We use interest rate swaps and caps to hedge interest rate risk associated with this portfolio.  The net fair value of these financial instruments was $2.2 million at March 31, 2018.

Energy Capital Portfolio

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

In November 2016, the Company made an initial $75.0 million non-cash capital contribution into REL that was comprised of solar energy loan investments, including our membership interests in SCL and SPL, in exchange for a membership interest in REL.  As a result of this exchange, our interest in REL provides us with an indirect interest in SCL and SPL.  As stipulated in the governing documents of REL, our partner will make 100% of the incremental capital contributions to REL until it has funded 85% of the equity invested and will receive 100% of the capital distributions from REL until it has received a return of all of its contributed capital, thereby causing our ownership interest in REL to fluctuate.  At March 31, 2018, our investment in REL had a carrying value of $76.6 million, which represented a 57% ownership interest.    

Upon the formation of SDL, the Company and its capital partner each agreed to contribute 50% of the initial and incremental capital contributions to the partnership.  However, during the third quarter of 2017, the partners agreed that the Company would fund 10% and our capital partner would fund the remaining 90% for a particular portfolio of loans, thereby causing our ownership interest in SDL to decrease in percentage terms.  At March  31, 2018, the Company’s investment in SDL had a carrying value of $9.6 million, representing a 10% ownership interest.     

At March 31, 2018, the UPB of loans that were funded through the Solar Ventures was $205.5 million.  Loans outstanding at March 31, 2018, had a weighted-average remaining maturity and coupon of 10 months and 8.9%, respectively.

Other Assets and Liabilities Portfolio

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

Cash

As of March 31, 2018, we had $33.4 million of unrestricted cash and $15.9 million of restricted cash.

Hunt Note

As consideration for the Disposition, Hunt agreed to pay the Company $57 million and to assume certain liabilities of the Company.  The Company provided seller financing to Hunt through a $57 million note receivable from Hunt that has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum.  The unpaid principal balance on the note will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020.  

Real Estate-Related Investments

When the Company conveyed its international asset and investment management business to Hunt, it retained an 11.85% ownership interest in the South Africa Workforce Housing Fund (“SAWHF”), along with related financing for that investment and a foreign currency hedge agreement for risk management purposes.  SAWHF is a multi-investor fund managed by IHS that began operations in April 2008, and is currently in the process of exiting its investments by its amended maturity date of April 2019.  The carrying value of the Company’s investment in SAWHF was $13.6 million at March 31, 2018.

At March 31, 2018, we owned one direct investment in real estate consisting of a land parcel.  This investment had a carrying value of $3.5 million as of March 31, 2018. 

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At March 31, 2018, we were an equity partner in five real estate-related investments consisting of (i) a 68.4% ownership interest in a mixed-use town center development whose incremental tax revenues secure our infrastructure bond investments and (ii) four limited partner (“LP”) interests in partnerships that owned affordable housing and in which the ownership percentage associated with these investments ranged from 74.25% to 98.99%.  The carrying value of these five investments was $22.7 million at March 31, 2018. 

Deferred Tax Assets

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

Debt Obligations

This portfolio includes the Company’s subordinated debt, notes payable and other debt.  The carrying value and weighted-average yield of these debt obligations at March 31, 2018 is provided below in Table 20.

Interest Rate Risk Hedge Positions

We use interest rate swaps and caps to hedge interest rate risk associated with debt obligations in this portfolio.  The net fair value of these financial instruments was $4.2 million at March 31, 2018.

Interests in MGM 

As consideration for the sale of our LIHTC business to MGM in 2014, the Company received an option to acquire the LIHTC business of MGM, which primarily manages LIHTC investments on behalf of third party investors and for its own account.   As noted above, this purchase option was converted on January 8, 2018, into a purchase and sale agreement that requires the Company to complete the purchase of MGM subject to certain conditions precedent.  On January 8, 2018, the Company also (i) executed agreements to acquire from an affiliate of MGM certain assets pertaining to a specific LIHTC property and (ii) purchased a $9.0 million senior loan from an MGM affiliate.  This senior loan, which is secured by assets of MGM, bears interest at 11% payable quarterly.  The unpaid principal balance of this loan, which was $9.0 million as of March 31, 2018, is payable in full in June 2020.  Hunt has the right to elect to take assignment of these agreements and settle directly with MGM, including purchase of the $9.0 million senior loan from the Company. 

Our External Manager

In conjunction with the Disposition, we entered into a management agreement with the External Manager (the “Management Agreement”) that took effect on January 8, 2018.  At the time of the Disposition, all employees of the Company were hired by the External Manager.  In consideration for the management services to be provided by the External Manager, the Company will pay the External Manager (i) a base management fee, which is payable quarterly in arrears and is calculated as a percentage of the Company’s GAAP common shareholders’ equity, with certain annual true-ups, and (ii) an incentive fee equal to 20% of the total annual return of diluted common shareholders’ equity per share in excess of 7%.  However, for the first and second quarters of 2018, the base management fee is fixed at $1 million per quarter.  The Company also agreed to reimburse the External Manager for certain allocable overhead costs.



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SUMMARY OF FINANCIAL PERFORMANCE

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Net Worth

Common shareholders’ equity increased from $137.6 million at December 31, 2017 to $178.4 million at March 31, 2018.  This change was driven by $27.5 million in comprehensive income that was allocable to common shareholders and by $13.3 million of other increases in common shareholders’ equity. 

Diluted common shareholders’ equity (“Book Value”) per share increased $6.34 per share in the first quarter of 2018 to $30.82 at March 31, 2018. 

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

Comprehensive Income

We recognized comprehensive income that was allocable to common shareholders of $27.5 million in the first quarter of 2018, which consisted of $18.3 million of net income that was allocable to common shareholders and $9.2 million of other comprehensive income that was allocable to common shareholders.  In comparison, we recognized $3.1 million of comprehensive loss that was allocable to common shareholders during the first quarter of 2017, which consisted of $3.4 million of net loss that was allocable to common shareholders and $0.3 million of other comprehensive income that was allocable to common shareholders. 

Net income that we recognized in the first quarter of 2018 was primarily driven by the Disposition.  In this regard, $20.6 million of net income that we reported in the first quarter of 2018 was attributable to discontinued operations.  Refer to “Consolidated Results of Operations” for more information about changes in common shareholders’ equity that is attributable to net income allocable to common shareholders.

Other comprehensive income that we reported in the first quarter of 2018 was also primarily attributable to the Disposition.  Refer to “Consolidated Balance Sheet Analysis” for more information about other comprehensive income.

Other Considerations

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

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

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

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

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CONSOLIDATED BALANCE SHEET ANALYSIS

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

Table 2 provides a balance sheet summary for the periods presented.  For presentation purposes, assets, liabilities and equity that were attributable to noncontrolling interest holders of CFVs are presented in Table 2 as separate line items because the Company generally has a minimal ownership interest in these consolidated entities.  For the periods presented, CFVs were comprised of consolidated property partnerships and certain LIHTC funds in which we guaranteed minimum yields on investment to investors and for which we agree to indemnify the purchaser of our GP interest in such funds from investor claims related to those guarantees.  However, the Disposition resulted in the deconsolidation from the Company’s Consolidated Balance Sheets in the first quarter of 2018, of all guaranteed LIHTC funds and derecognition of nearly all other CFVs that were recognized in our Consolidated Balance Sheets at December 31, 2017.  See Notes to Consolidated Financial Statements – Note 14, “Discontinued Operations,” and Note 15,  “Consolidated Funds and Ventures,” for more information about CFVs.  

Table  2:  Balance Sheet Summary 



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Common Shareholders’ Equity

Table 3  summarizes the changes in common shareholders’ equity for the periods presented.

Table 3:  Changes in Common Shareholders’ Equity

Other Comprehensive Income Allocable to Common Shareholders

Table 4 summarizes other comprehensive income that was allocable to common shareholders for the periods presented.

Table 4:  Other Comprehensive Income Allocable to Common Shareholders





Other comprehensive income that was allocable to common shareholders for the three months ended March 31, 2018, increased compared to other comprehensive income for the three months ended March 31, 2017, primarily as a result of (i) the recognition of unrealized holding gains associated with bond investments that were no longer eliminated for reporting purposes in the first quarter of 2018 due to the derecognition of corresponding lower tier property partnerships and (ii) the reversal of a $3.4 million cumulative translation adjustment due to the sale of our international asset and investment management business in the first quarter of 2018.  These increases were partially offset by $3.3 million of unrealized holding losses associated with bond investments that we recognized in the first quarter of 2018.             



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Other Changes in Common Shareholders’ Equity

Table 5 summarizes other changes in common shareholders’ equity for the periods presented.

Table 5:  Other Changes in Common Shareholders’ Equity





The amount of other changes in common shareholders’ equity for the three months ended March 31, 2018 increased compared to that reported for the three months ended March 31, 2017, primarily as a result of (i) a $9.2 million transition adjustment to retained earnings that we recognized in connection with the adoption of new accounting standards on January 1, 2018 (see “Adoption of New Accounting Standards” within Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies”) and (ii) the issuance of 125,000 common shares to Hunt in the first quarter of 2018. 

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CONSOLIDATED RESULTS OF OPERATIONS

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This section provides a comparative discussion of our Consolidated Results of Operations for the three months ended March 31, 2018 and March 31, 2017 and should be read in conjunction with our financial statements, including the accompanying notes.  See “Critical Accounting Policies and Estimates” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.

For presentation purposes, income (losses) that were attributable to noncontrolling interest holders of CFVs are excluded from our comparative discussion of our results of operations because (i) the Company has a minimal ownership interest in these consolidated entities and (ii) such income (losses) do not affect the measurement of diluted common shareholders’ equity per common share, which is a key metric that is used by management to evaluate the Company’s financial performance.

In this regard, the discussion and analysis of consolidated results of operations herein is focused on income (losses) that are allocable to common shareholders.  Additionally, income (loss) that was attributable to businesses or assets that were conveyed by the Company in the Disposition were reclassified for all reporting periods and are presented as discontinued operations.  See Notes to Consolidated Financial Statements – Note 15, “Consolidated Funds and Ventures,” for more information about income (losses) that were attributable to noncontrolling interest holders of CFVs. 

Net Income Allocable to Common Shareholders

Table 6 summarizes net income allocable to common shareholders for the periods presented.

Table 6:  Net Income Allocable to Common Shareholders

Net Interest Income

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

Table 7  summarizes net interest income for the periods presented.

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Table 7:  Net Interest Income





Net interest income for the three months ended March 31, 2018 increased compared to that reported for the three months ended March 31, 2017 primarily due to (i) interest income on a $57 million note receivable that we recognized in the first quarter of 2018 in connection with the Disposition and (ii) the recognition of interest income on a $9.0 million senior loan in the first quarter of 2018 that we acquired from an MGM affiliate.  These increases were partially offset by the reclassification of bond related debt that was reflected in Other interest expense in the first quarter of 2017.

Fee and Other Income 

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

Table 8  summarizes fee and other income for the periods presented. 

Table 8:  Fee and Other Income



Fee and other income for the three months ended March 31, 2018 declined compared to that reported for the three months ended March 31, 2017 primarily due to the recognition in the first quarter of 2017 of non-recurring fees that we earned in connection with extending the maturity date of certain loan receivables.   

Other Interest Expense

Other interest expense represents our cost of funding associated with senior and subordinated debt that does not finance our interest earning assets.

Table 9 summarizes other interest expense for the periods presented.

Table 9:  Other Interest Expense





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Other interest expense for the three months ended March 31, 2018 declined compared to that reported for the three months ended March 31, 2017 primarily as a result of our discounted purchase of $26.4 million of the Company’s subordinated debt in 2017.  This decline was partially offset by increases in cost of funding that were driven by (i) the issuance of debt in the third quarter of 2017 that was used to finance our purchase of an 11.85% ownership interest in SAWHF and (ii) an increase in variable interest rates associated with our subordinated debt.

Operating Expenses

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

Table 10 summarizes operating expenses for the periods presented. 

Table 10:  Operating Expenses





Operating expenses for the three months ended March 31, 2018 increased compared to those reported for the three months ended March 31, 2017 primarily due to (i) the recognition in the first quarter of 2018 of management fees and reimbursable expenses that were payable to our External Manager, (ii) an increase in professional fees that was largely driven by the Disposition and (iii) the recognition of a $0.4 million impairment loss on certain equity investments.  Net increases in operating expenses associated with these items were partially offset by a reduction in salaries and benefits due to our conversion to an externally managed business model as all Company employees were transferred to the External Manager at the time of the Disposition.

Net Gains (Losses) Relating to Derivatives and Loans

Net gains (losses) relating to derivatives and loans (collectively, “Net Gains”)  includes losses on loans and unrealized holding gains or losses associated with our derivative instruments that result from fair value adjustments.

Table 11 summarizes Net gains (losses) for the periods presented.

Table 11:  Net Gains  



Net Gains for the three months ended March 31, 2018 increased compared to those reported for the three months ended March 31, 2017 primarily due to $5.3 million of non-recurring fair value losses that we recognized in the first quarter of 2017 associated with a subordinated loan that the Company made to a residential solar power provider that filed for bankruptcy protection in March 2017.  This net increase was also partially attributable to an increase in net gains on derivatives, which was primarily driven by a net increase in the fair value of derivative instruments that we use to hedge interest rate risk. 

Equity in Income from Unconsolidated Funds and Ventures

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

Table 12 summarizes equity in income from unconsolidated funds and ventures for the periods presented.

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Table 12:  Equity in Income from Unconsolidated Funds and Ventures





Equity in income from unconsolidated funds and ventures for the three months ended March 31, 2018 declined compared to that reported for the three months ended March 31, 2017 primarily due to a decline in the amount of loan origination and related fees that were earned by the Solar Ventures.

Net Income to Common Shareholders from Discontinued Operations 

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

Table 13 summarizes our income from discontinued operations, net of tax related to the sale of certain businesses and assets.

Table 13:  Net Income to Common Shareholders from Discontinued Operations    



Net income to common shareholders from discontinued operations for the three months ended March 31, 2018 increased compared to that reported for the three months ended March 31, 2017 primarily due to a net gain of $20.4 million that we recognized in the first quarter of 2018 in connection with the Disposition.  The impact of this net gain was partially offset by a decline in income from discontinued operations that was primarily driven by (i) the short duration of the Company’s ownership in the first quarter of 2018 of the businesses and assets that were conveyed in the Disposition, while corresponding amounts reported for the three months ended March 31, 2017 reflect ownership of such items for a full reporting period and (ii) the derecognition upon settlement of the Disposition of noncontrolling interests associated with previously consolidated property partnerships.  See Notes to Consolidated Financial Statements – Note 14, “Discontinued Operations,” for more information.

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Net Loss from CFVs Allocable to Common Shareholders

Table 14 allocates the net loss from CFVs to noncontrolling interests in CFVs and common shareholders for the periods presented.

Table 14:  Net Loss from CFVs Allocable to Common Shareholders





Table 15 further attributes the reported net loss from CFVs that was allocable to common shareholders for the periods presented.

Table 15:  Net Loss from CFVs Allocable to Common Shareholders





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

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LIQUIDITY AND CAPITAL RESOURCES 

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Liquidity

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

Summary of Cash Flows

For purposes of presenting the Company’s summary of cash flows and changes thereto, Tables 16 – 19 of the Report have been retrospectively adjusted to reflect the Company’s adoption on January 1, 2018, of Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”  This guidance requires the Company to include amounts that are deemed to be restricted cash and restricted cash equivalents together with its cash and cash equivalent balances for purposes of preparing its Consolidated Statements of Cash Flows.  

Table 16 provides a consolidated view of the change in cash, cash equivalents and restricted cash of the Company for the periods presented, though changes in such balances that were attributable to CFVs are separately identified in such disclosure.  However, changes in net cash flows that are reported in Tables 17, 18 and 19 are exclusive of changes in restricted cash of CFVs.  

As a result of the Disposition, $19.7 million and $20.5 million of cash, cash equivalents and restricted cash were classified in the Consolidated Balance Sheets as “Assets of discontinued operations” at December 31, 2017 and March 31, 2017, respectively.

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



Table 16:  Net Decrease in Cash, Cash Equivalents and Restricted Cash









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Operating Activities

Table 17 provides information about net cash flows provided by, or used in, operating activities for the periods presented.  Cash flows from operating activities include, but are not limited to, interest income on our investments and asset management fees.

Table 17:  Net Cash Flows Associated With Operating Activities





Net cash flows used in operating activities increased by $7.9 million during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.  This net increase was primarily driven by the following: (i) the purchase of a $9.0 million senior loan from an MGM affiliate that is reported as advances on and originations of loans held for sale; (ii) a $2.3 million increase in net cash flows used for professional fees that was primarily driven by professional services rendered in connection with the sale of certain businesses and assets to Hunt in the first quarter of 2018; and (iii) a $2.0 million decrease in asset management fees received as a result of the Disposition, which included certain management, expense reimbursement and other contractual rights that were previously held by the Company with respect to its Energy Capital, LIHTC and International Operations.  The effects of these items were partially offset by an $8.4 million decrease in cash flows used for salaries and benefits as a result of the Company’s conversion to an externally managed business model in the first quarter of 2018.



Investing Activities

Table 18 provides information about net cash flows provided by investing activities for the periods presented.  Cash flows from investing activities include, but are not limited to, principal payments and sales proceeds received on bonds and proceeds from the sale of real estate and other investments.  

Table 18:  Net Cash Flows Associated With Investing Activities





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Net cash flows used in investing activities during the three months ended March 31, 2018 increased by $1.3 million compared to those reported for the three months ended March 31, 2017.  This net increase was primarily driven by the following: (i) $21.9 million of cash and restricted cash that was derecognized upon settlement of the Disposition; and (ii) an increase in investments in partnerships that was primarily driven by a $3.3 million purchase in the first quarter of 2018 of three limited partnership interests in partnerships that own affordable housing.  The effects of these items were partially offset by (i) a $15.5 million decrease in loan originations and advances; and (ii) a $9.4 million increase in capital distributions received from investments in partnerships, primarily related to the Solar Ventures.   

 

Financing Activities

Table 19 provides information about net cash flows provided by, or used in, financing activities for the periods presented. 

Table 19:  Net Cash Flows Associated With Financing Activities



Net cash flows used in financing activities during the three months ended March 31, 2018 decreased by $2.7 million compared to those reported during the three months ended March 31, 2017.  This decrease in net cash flows used for such activities was primarily attributable to (i) $12.2 million of proceeds generated from total return swap financing arrangements that were entered into during the first quarter of 2018; and (ii) $4.1 million of proceeds generated from the private placement of 125,000 of the Company’s common shares to Hunt.  The effects of these items were partially offset by a $15.6 million increase in the amount of cash used to repay borrowings and that was primarily driven by $16.3 million of cash that was used to terminate a total return swap that financed one of our leveraged bond investments. 

Capital Resources

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

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Table 20 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at March 31, 2018 and December 31, 2017.  See Notes to Consolidated Financial Statements –  Note 6, “Debt,” for more information about these contractual commitments.



Table 20:  Asset Related Debt and Other Debt





Notes Payable and Other Debt – Bond Related

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

Subordinated Debt

At March 31, 2018 and December 31, 2017, the Company had subordinated debt with a  UPB of $91.2 million and $91.6 million, respectively.  The carrying value and weighted-average yield of this debt at March 31, 2018 and December 31, 2017 is provided above in Table 20.  See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information.      

Notes Payable and Other Debt

At March 31, 2018 and December 31, 2017, the Company had notes payable and other debt with a UPB of $9.3 million and $26.0 million, respectively.  See Notes to Consolidated Financial Statements – Note 6, “Debt,” for more information.



Debt Related to CFVs

The Company’s sale of its LIHTC business to Hunt on January 8, 2018 resulted in the derecognition from the Company’s Consolidated Balance Sheets of all CFVs that had recognized debt obligations.  Consequently, the Company had no recognized debt related to CFVs as of March 31, 2018.

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

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Covenant Compliance and Debt Maturities

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

Off-Balance Sheet Arrangements

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

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

Other Contractual Commitments

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

The Company had no unfunded loan commitments at March 31, 2018 and December 31, 2017.  Refer to Notes to Consolidated Financial Statements - Note 4, “Loans,” for more information.

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

Other Capital Resources

Common Shares

On March  13, 2018, the Board authorized a 2018 share repurchase program (“2018 Plan”) for up to 125,000 shares and the Company adopted a Rule 10b5-1 Plan implementing the Board’s authorization.  From the date of the Board’s authorization through May 3, 2018, the Company repurchased 44,527 shares at an average price of $27.80.  Until modified by further action by the Board, the maximum price at which management is currently authorized to purchase shares is $30.00 per share.   

In conjunction with the Disposition, the Company agreed to issue, and Hunt agreed to acquire, 250,000 of the Company’s common shares in a private placement at an average purchase price of $33.50 per share.  In this regard, on March 9, 2018, the Company issued 125,000 common shares to Hunt for $4.1 million, representing a price per share of $33.00.  Hunt is obligated to purchase the remaining 125,000 shares for $4.3 million, or $34.00 per share, within six months of January 8, 2018. 

Dividend Policy

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

Tax Benefits Rights Agreement

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

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

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At March  31, 2018, we had two shareholders with a greater than a 4.9% stake in the Company.  Additionally, as of March 31, 2018, two former employees of the Company could each have a greater than 4.9% stake in the Company for purposes of the Rights Plan following their required 2018 bonus award share purchases and prospective exercise of their vested option awards.  However, these former employees have not completed their required purchases or exercised those option awards as of the date of this filing.  In advance of the option exercise, the Board of Directors has named each former employee an exempted person in accordance with the Rights Plan and determined that the exercise of the options and the required share award purchases will not, in and of themselves, constitute a triggering event for purposes of our Rights Plan.



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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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



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

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



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ACCOUNTING AND REPORTING DEVELOPMENTS

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