Tuesday, November 17, 2015

MMA Capital: Update, Balance Sheet Revealing Itself

Another update on a big position I haven't mentioned in 2015, quick background:
  • MMA Capital Management (MMAC) is essentially a pile of assets (mostly tax advantaged low income housing bonds) selling well below their true net asset value.
  • In 2015, the company has been recognizing large gains by selling off low basis real estate acquired during the financial crisis via foreclosure and then starting up a solar energy lending business with a JV partner where they'll ultimately park $50MM dollars while also earning a management fee.
  • Cost accounting, consolidation rules, and it's inability to recognize the sale of the LIHTC business for GAAP purposes has artificially reduced the reported book value of the company.
  • Some of my earlier posts from 2014: http://clarkstreetvalue.blogspot.com/2014/10/mma-capital-update-new-name-up-listing.htmlhttp://clarkstreetvalue.blogspot.com/2014/03/municipal-mortgage-equity.html
MMA Capital released their Q3 results on Friday (11/13), they're hosting a call on Thursday (11/19) so if there's anything new that comes out of that I'll update this post as well.  The company's reported book value is up to $15.55/share, this time last year it was $9.25/share, the increase is mostly a result of monetizing low basis real estate, but if you take the time to read the 10-Q (not an easy read), there are two additional items that happened after 9/30 that increase their book value even higher making the current share price a bargain even after an impressive run this year.

Preferred Stock Investment
MMA Capital owned $36.6MM in preferred shares in a mortgage servicer, it had been held on the books for $31.4MM, but in the 10-Q, MMAC revealed that it been redeemed at par:
On October 30, 2015, the Company's investment in preferred stock were fully redeemed by the issuer at par value of $36.6 million and, as a result, the Company terminated the two aforementioned total return swaps and will recognize a gain of $5.2 million during the fourth quarter of 2015.  Refer to Note 6, "Debt", for more information.
Now $5.2MM might not seem like a lot, but on an $89MM market cap it's pretty significant, it's an additional $0.79/share in book value and also reduces the company's debt, and confusing TRS arrangements.

IHS Bankruptcy Estate
International Housing Solutions is MMAC's South African investment/property manager arm, up until recently there was a small minority ownership that was collapsed and wrapped up into MMAC during the second quarter.  In the latest 10-Q, another sizable gain occurred:
On November 12, 2015, the Company reached an agreement to acquire at a significant discount from the bankruptcy estate of one of the co-founders of IHS, all interests held by such estate in the Company's subsidiaries or affiliates, including notes payable and other debt obligations of the Company that had a carrying value in the Consolidated Balance Sheets of approximately $4.4 million as of September 30, 2015.  Among other provisions, such purchase agreement provides for the release and discharge of the company from its payment obligations associated with such deb instruments.  As a result, and based on all consideration to be exchanged under the agreement, the Company will recognize during the fourth quarter of 2015 a net gain in its Consolidated Statements of Operations that is estimated to be between $3.0 million and $3.5 million.
Let's call it $3MM on the low side, or another $0.45 per share in book value.  So without anything additional, and assuming no big market disruptions/losses, we know the year book value will be at least $16.79 per share.  It's trading at $13.79 or 82% of that adjusted/current book value.

Additional Items Not Included in GAAP Book Value:
  • $418.2MM in NOLs, at a 35% tax rate that could be worth ~$145MM, more than the entire company. It's hard to imagine them utilizing in current form, but on previous conference calls they've emphasized their understanding of its potential value and back in May adopted a Rights Plan to reduce the change of control risk.
  • In 2014, they sold their LIHTC asset management business to Morrison Grove Management, but retained the yield guarantee and included an option to purchase Morrison Grove starting in 2019. They provided seller financing to Morrison Grove, the balance of which is now $13 million, but that's off balance sheet (I forget the reason, either the yield guarantee or the option to buy). The option to buy the company in 2019 could be valuable in itself and another operating business to generate taxable income.
  • The carrying amount of their remaining real estate is $25.1 million, they estimate it to be worth $29.2 million, it could be worth more as they've put some of their real estate into JV's with developers who are re-purposing the assets and hopefully generating more value.
The MGM seller financing and the real estate at fair value would add another $2.61/share to the BV above the two post quarter adjustments we made earlier for an all-in value of $19.40/share.

The same management that created all this mess is still in place, MMA Capital seems to be the one example of management knowing where all the bodies were buried and actually being able to extract significant value out for shareholders.  There's still a lot to be done, the ongoing businesses are basically break even, they still need to develop a sustainable business plan to move from being valued as an NAV pile to more of an operating business.  The new MMA Energy Capital business might be a step in that direction.

Disclosure: I own shares of MMAC

24 comments:

  1. I missed these gains as the company strangely hid them deep in the Q notes. Kudos to you for digging them up. Based on the data from Table 3 on pg 45 of the 10-Q, I still don't view these guys as breakeven. Looks like they burned about $2.4M excluding gains during the quarter. Obviously they keep getting gains out of the cookie jar to offset this but the business should only trade at economic BVPS (which is higher than GAAP BVPS) if they can earn a decent return on that equity, which they aren't now. Maybe IHS Fund 2 and the solar biz fees could fix that (and G&A may have been $1M high related to CFO departure) but they weren't there in Q3. Still long and strong however.

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    1. I think this essentially is a asset play, if they can get ventures that allow them to show operating earnings with a business that gets a multiple its a home run. Economic BVPS is much, much higher than even the adjustments here would suggest.

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    2. I think this essentially is a asset play, if they can get ventures that allow them to show operating earnings with a business that gets a multiple its a home run. Economic BVPS is much, much higher than even the adjustments here would suggest.

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    3. I'm very dubious of asset plays unless there is some reason to believe those assets will be earning a return for shareholders (or bought by someone else, which won't happen here). MMAC seems to recognize that and they are taking steps to fix the problem so I'm happy to be long but IMO a lot of money has been frittered away on low ROE asset plays. Valuing equity but not deducting capitalized G&A is one of the common errors in most asset-play analysis. Another is that if the economic value per share is growing at a low rate (land companies) and a takes a while to sell the asset you get killed on the NPV (assuming you want a ~10% return).

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  2. I agree, there has to be something going on or a reason to think the value will be realized over time. I think this is slightly different than the usual asset play in the sense that they're being monetized and assets are being revealed over time as the complicated accounting unwinds. I think of it as almost as a strip tease. They're actively buying in the float 10%/yr (which I hope they continue) at prices below GAAP BV when Economic BV is much higher, so it is incredibly accretive to the future BV on a per share basis.

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  3. I was looking at page 51, if you remove the $6.75MM for the solar loans, they're a little better than break even on an operating basis. I'll take a look at the other table and see if I can square the difference.

    Fair point on the not capitalizing G&A, I've been in a few of those asset traps, but agree that MMAC seems to recognize that, I'm not super excited about the solar energy business but it's a start. If they could figure out a way to either acquire or quickly scale a legit asset management business to the point the NOLs matter it would be a game changer. Without a big sponsor shareholder to backstop a rights offering, don't know if they could make a sizable acquisition to where the NOLs would come into play?

    Thanks for reading and the thoughtful comments.

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  4. I like the Table 3 on page 45 more than the table on page 51. I don't think Page 51 reflects the cash to common shareholders (I think it includes cash related to the CFV's which common shareholders don't own). In addition it ignores ~$600k in quarterly stock comp expense. Upshot is it seems to me like these guys are burning ~$1-2M per quarter and you think they are making ~$500k per quarter. Obviously we are getting to the same conclusion (own) but these differences will cause you to have a higher intrinsic value than me. SpecialSits sounds like he's much higher than me.

    ACAS has zoomed higher so I'm probably just a conservative fuddy duddy. I guess the market thinks 1) Elliot rode in on a white horse and will crush G&A and sky ROE or 2) Elliot will catalyze the sale of the assets to a better owner. $100 in cash is worth more than $100 if managed by Elliot but $50 if managed by Malon Wilkus.

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    1. Re: ACAS, couldn't ask for a better activist. Elliott is ruthless, original spinoff plan is likely out the door, maybe it gets modified to where ACAP has internal management, but sounds like an outright sale is more likely. Either way, I think it ends up in the same $19-20 range.

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    2. Since you guys changed the topic to ACAS...

      Why not hold a vote to replace management with any one of the hedge funds that hold major stakes? Pick the HF with the best credit team already in place and have them pay the company for the right to the mgmt agreement/fee stream. Lock in a more competitive fee structure and this thing will trade for BV+ in no time. They can figure out if there is any liability on the part of former mgmt for comp/governance practices after they are gone.

      I'm guessing I over-simplified something here? Otherwise they wouldn't need to get GS involved.

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  5. http://www.sec.gov/Archives/edgar/data/1003201/000114420415069050/mma-20151202x8k.htm

    Surprisingly, MMA Capital is getting in on the GE Capital asset shed bonanza. No details on the size. But interesting that they're moving back into the LIHTC business and that they're managing the assets for a third party (good operating leverage, generate taxable income with the dream goal to utilize the NOL).

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  6. I think the GE transaction looks all good on the surface. MMA hardly put up any money and guaranteeing the remaining credits shouldn't be that risky since the properties are up and running. I'm still not as convinced always that the residuals are that significant on many tax credit properties. However, it's a large portfolio so there has got to be come.

    I also agree with all the comments on the NAV. My history of investing in NAV companies is that they have to get a business model eventually or they just keep burning cash. I'm more optimistic on asset management of LIHTC investments versus the South Africa fund that I always think is a risky investment and hard to raise money for.

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  7. More insider buying last week @ $14.50. Great sign.

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  8. More insider buying at MMAC today

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    1. Nice, yeah these guys just don't stop the buybacks or the insider buys.

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    2. I agree the buybacks are good for the insider buys are kind of forced on upper management, right?

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    3. Forced might be a strong word, it is part of their compensation agreements but I'm sure that's by design. I'd imagine they had heavily influence on the structure of their compensation and are more than happy to be buying shares, I doubt it was forced on them. It's also optically a nice way to align their compensation with shareholders. Each individual purchase is less meaningful, especially the timing since they're mechanical, but in aggregate I think it still sends the same message.

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    4. I think the insider buys are a massively good sign and cannot be understated in the signal they send (further supported by the great Q4 results released today). The two major buyers have been CEO Michael Falcone and EVP Gary Mentesana, both of whom have been with the company since the pre-crisis days. Before the crisis, there was selling from both these individuals and never a single buy. They stock then collapsed (which they certainly bear responsibility for) but all of a sudden after the collapse the selling completely stopped, and the buying began in late 2011 and has been going strong ever since (at what now appear to be great prices for them). Say what you want about how they've managed shareholder money (terribly in my opinion - 2007 investors will never recover), with their own dollars history shows these insiders to be extremely shrewd investors. They did put out a press release this year saying they are "forced" to buy shares but clearly this is a new development and they have only been "forced" to buy shares once the stock got cheap. This buying pattern is in stark contrast to most other stocks on this blog and the market in general (even companies with buying like NXRT have insiders with less positive track records). Furthermore, this is on top of a massive stock buyback, so the % ownership of these MMAC insiders is going through the roof.

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  9. Are you trimming at these levels? A Jan '16 VIC article appears to argue economic BV is worth north of $40/shr with the two large kickers being below-market debt currently on the balance sheet (~$10/shr) and incentive fees from the GE transaction (PV $US200M!!). I don't buy the below market debt argument, and the GE residual fees may be substantial, but this number seems completely insane for a portfolio that size (on top of the management fee). So I don't really believe that either although clearly the residual is worth something. Any thoughts?

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    1. I think someone alerted me to the VIC posting when it first came out but since I only have guest access I must have forgot about it because this is my first time reading it. It's well done. I would also take a little issue with the below debt argument, MMAC is using a 20% discount rate to get their fair value numbers, that seems a little steep given the current shape of the business, maybe it was more appropriate several years ago? I have a hard time coming up with a value for the GE LIHTC, if you listen to the latest conference call I'm clearly not the only one as it was a sticking point for a few callers and management has been unable to find a way to describe the potential future value that would appease their lawyers. So the VIC author's guess is as good as any in my mind, but probably more in an abstract way of getting to the holy grail for MMAC of hitting the NOLs, but I wouldn't pay up for it now. Somehow MMAC has to move from a balance sheet NAV investment to a real operating business, I don't know if the two LIHTC businesses get it there? It's my understanding that market hasn't recovered, maybe it's a nice trade for them and we'll see backend residuals, but what's the long plan to generate an operating profit?

      But I'm not trimming here, still trading below GAAP book that excludes several items that don't require a leap of faith, relentless buyback and management seems to be the direct opposite of promotional. I've never heard shareholders complaining about management buying shares in the open market but there it was on the last call. They're getting too good of a deal? Who knows. Thanks for the good comment.

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    2. My concern is management has really been focused on the energy subsidiary the past few years. I have heard from lobbyists that the energy tax credit is one of the first on the chopping block but who knows right now. The end of the credit would not kill their loans BUT it would eliminate from them growing this business.

      I am sure the LIHTC residual GE portfolio has some value but it in no way is worth $200MM. Most residual values on LIHTC properties to LP's have no values for various reasons (I work in the business, and to management's credit, they have been stating this very clearly.

      I think management has created good shareholder value over the past few years but I am still concerned there is no true business line after 7-8 years of their downfall. I just don't think you can support a public firm like they are doing a small amount of hodgepodge things.

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    3. Thanks, good comment. Yes, they're still a long way from being a true operating business or being valued like one. It also appears there's less low hanging fruit to quickly monetize assets that are carried at below book value on the balance sheet. At 82% of book value, which has at least a few items of real value left out of book still seems like a good proposition to me. Especially if they reload their share repurchase plan in 2017. But yes, I agree with your concern about clean energy tax credits and its also good to point out that rising rates is going to hurt their bond portfolio to a certain degree.

      Curious, what's the outlook for the LIHTC industry in general? Any color you could give around future trends would be helpful. Thanks.

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  10. We are on the same page. I will be looking to see if management makes a pivot in direction after they digest the new administration and also a rising rate environment.

    As far as the LIHTC market trends, I'm not sure that totally matters to MMA. MMA and Morrison Grove play in the seasoned portfolio management of LIHTC. They are not doing new syndications and affected by the ups and downs of new market LIHTC activity (credit pricing, number of deals, syndicator competition, etc.). Instead, their performance is really backed on the performance of multifamily fundamentals and sale prices for their deals since they are a residual play. I feel it's too early to tell right now. You have deals in the market scheduled to close by year-end and will their be retrades? I'm not sure but I will say that the affordable multifamily market remains strong although I have been seeing a peak from 2Q (no decline) but fundamentals flat and sales prices flat.


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    1. I guess the question is if MMA and Morrison Grove are playing in the residual stuff, what's left after that runs off eventually? Just the clean energy lending business and IHS? I'm not sure that's an attractive public company either.

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  11. Yes, IHS doesn't sound like it is doing well so it's only energy. Their legacy bond stuff won't be around to any significant degree in a few years. I don't know if they think there is more of this LIHTC residual management business (which they don't have a lot of competitors) or they will become a normal syndicator again like in their old Boston Financial days.

    Part of me thinks they will keep buying back stock over the years and get the base small enough to go private.

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