Updates: MMAC, PFX, LUB & Others

This a liquidation value themed post, feel free to ignore if that's not your thing, but I wanted to put some updated thoughts on paper for a few small cap asset plays that are either trading well below liquidation value, should be liquidated, or are in the process of liquidating.  All in my assessment will result in attractive uncorrelated returns from current prices in this arguably frothy market.

MMA Capital Holdings

Readers are probably sick of my rantings on MMA Capital Holdings (MMAC), but the company has run into trouble, part self inflicted, part act of god, and the situation is quite different than it has been in recent history.  Approximately three years ago, MMAC sold their asset management business along with some other businesses to Hunt in a transaction that turned MMAC into an externally managed company primarily focused on loans to utility scale solar energy projects.  Some investors were smart enough to sell after that transaction, there's an excellent podcast "In the Market Trenches" where the hosts discuss MMAC prior to the Hunt transaction and why they decided to sell after the event, in hindsight that was the correct decision.  I should have as well.

The credit lending niche MMAC plays in is construction and development loans, permanent long-term financing on utility scale solar projects is a fairly competitive space, there are plenty of institutional investors and/or yieldco's willing to provide financing to solar projects with in-place long-term agreements to investment grade electric utilities.  

The average life of MMAC's loans is fairly short-term, so according to the company, it was slightly a timing coincidence that their portfolio was highly correlated (50+% of asset) to a single sponsor and a single energy market in ERCOT.  Reasonable risk management would suggest otherwise, but that was the situation the company found itself in going into covid where post project completion takeout financing (where MMAC's loan would get paid off) started to become scarce and then February's Texas winter storm hit and knocked out much of state's energy production causing the spot pricing of electricity to soar.  In one of MMAC's problem loans, "ERCOT Project 1" in their 10-K, the company reduced their gross dollar exposure before the February storm but increased their risk position by providing an equity sponsor loan to the developer in order for their original construction/development loan to attract take-out financing.  When February's storm hit, ERCOT Project 1 was impacted/damaged to the point where it could not meet its power obligations to its customer, forcing the equity (and thus MMAC as a lender directly to the equity) to purchase electricity in the spot market (at crazy high prices) for their end utility customer in order to meet the contracted amount.  Covering those losses along with other problem ERCOT loans ("Project 2" and "Project 3" in the 10-K) are estimated at "up to $4 per share" according the company. From the 10-K:

The ERCOT market remains volatile and uncertain primarily stemming from the February 2021 weather event and resulting energy crisis. There is litigation among various market participants and potential legislative reform is being considered, all of which remain uncertain. Assuming that the Company was unable to recover any of the additional advances made to ERCOT Project 1 (as outlined above), the Company’s allocable share of losses in the first quarter would, when taken together with loan-related interest income that is not expected to be accrued and other impacts stemming from the aforementioned actions taken to maximize the recovery of loans made to ERCOT Project 2, be $23.3 million, or approximately $4.00 per share (such loss would be recognized by the Company as a reduction in equity in income of the Solar Ventures). However, it is difficult to estimate first quarter impacts related to these exposures in absence of, among other things, the completion of fair value measurements of loans outstanding at the Solar Ventures at March 31, 2021, which require various valuation inputs that were not available as of the filing date of this Report. Further, additional events may occur that could cause this estimate to change by amounts that could be material.

Good time to mention that MMAC invests in solar loans alongside a "capital partner" as the company describes, that capital partner I believe is Fundamental.  The "Solar Ventures" started out as a 50/50 partnership where capital calls were contributed equally and investment decisions were shared amongst the two partners.  But in the last year or so, MMAC has been unable or unwilling to make their pro-rata contributions while their partner has continued to fund their own contributions as well as MMAC's to the point that MMAC is now a materially junior partner in the Solar Ventures (MMAC has a bit above a 1/3 stake in the larger 2 JVs, "Solar Development Lending" and "Solar Construction Lending").  

The split in the Solar Permanent Lending ("SPL") joint venture is 45% MMAC, 55% Fundamental, this is a less used JV as its not the construction/development lending focus, but the ERCOT Project 1 sponsor equity loan was basically transferred to this joint venture, the sponsor of Project 1 was only able to put $3MM to buy the shortfall amount of spot-rate electricity mentioned earlier, MMAC/Fundamental were on the hook for the additional $22.5MM, at a 45% pro-rata, MMAC is out $10+MM on ERCOT project 1.  This leaves about $13.3MM in additional losses the company has forecasted for Q1, which hopefully should be reasonably close given they released their 10-K at the last possible moment, 3/31/21, on quarter-end.

At year-end the company has an adjusted book value (only adjustment is removing the deferred tax asset) of $39.66/share before the estimated $4/share in ERCOT related losses, so the pro-forma book value is approximate $35.66 per share today versus a closing share price of $20.23 on Thursday before the Good Friday holiday.  If you believe the February storm is a one-time event and that the covid-reopening will loosen up the takeout financing channel, shares could be cheap.

I did make my debut appearance on a corporate earnings call with MMAC on Friday, excuse the number of times I say "I guess", but my underlying point I was trying to make is the Hunt transaction has been a failure and it might be time to either sell or liquidate the company.  Courtesy of tikr.com (an excellent resources BTW that I highly recommend), the whole Q&A was pretty good, but here's my part:

         Unknown Attendee

I saw in the 10-K that MMA ceded control of the workout process to the capital partner. Remind us how -- like new origination portfolio management decisions are handled at the Solar Ventures now that MMA is kind of certainly the minority partner in those ventures. And if the capital partner has made more pro rata contributions, I guess, in addition to you, does it become even more minority partners since the February storm?

Gary Mentesana

Sure. So I guess, a couple of different things on that, Matt. So the investor member partner and MMA jointly approved new investments, and the new investments do not find their way into the Solar Ventures, unless both partners approved. So that has been the case from the beginning of time. And I think that there's only been one instance where there was not a consensus to approve a loan. And in that instance, MMA approved it, and they made did the whole loan, MMA got repaid substantially as underwritten.

And I think I just want to kind of point that out that we generally view things very similarly through kind of a credit lens. You're correct that when MMA became a minority investor in the Solar Ventures, that decision control over workouts was ceded to that investor member. But I think it's also important to note that kind of Hunt has the expertise relative to this business, right?

The loans that got originated and asset managed are all done by Hunt on behalf of the Solar Ventures. And while decision control for workout has been ceded to the investor member, the investor member to date has kind of generally followed the lead of Hunt. And I think that we probably would have kind of made the same decisions if we were kind of co-decision makers throughout the process since we have been a minority investor.

With respect to your question as to where the investment ratio is since the February storm, there have been additional investments, and I'm working for it in the K, from the investor member disproportionately to MMA. And you can see it on Page 5 of our filing, we've noted that the MMA's investment interest -- economic investment interest in SCL and SDL has fallen to about 38% as of March 24.

Unknown Attendee

And did that happen since the February storm or before? I guess, my question is more, is your capital partner like still fully committed kind of after these events, I mean, if they're still inserting new capital into the Solar Ventures?

Gary Mentesana

Yes. They are.

Unknown Attendee

Okay. And then you kind of touched on this before, but kind of the risk management and guidelines and constraints that resulted in over half of the UPB being with a single sponsor in a single market. I guess, are there any changes that have happened to those 2? I guess, the portfolio management guidelines to kind of reduce this -- the chance of something like this happening in the future.

And then kind of alongside of that, is there any risk to the revolving credit facility going into the fall as a result of these 3, I guess, projects potentially being in workout status and no longer being eligible for the revolving credit facility kind of borrowing base?

Gary Mentesana

Sure. So I'll take the first part and maybe ask Megan to kind of fill in some of the color on the second.

So there are a variety of lessons learned. One is market based, right, with ERCOT kind of -- or cuts a little different than kind of the rest of the markets that facilitate solar projects that we lend to throughout the country. And we're currently not looking to originate any future investments in ERCOT until kind of we can get greater insight on potential legislative reform and also taking into account all sorts of litigation that is kind of active in that market right now.

I think the other thing that we've kind of learned from this process is that focused -- focusing on large projects at an early stage as we did in this kind of late-stage development loan for each of these projects carries risk relative to -- if there is not an ability to flip the project as was originally anticipated.

The sponsor, and not uniquely, but the sponsor had a business model where they basically gathered all of the puzzle pieces, so that kind of the puzzle, the final project could be put together, that they basically were looking to flip the project at NTP, notice to proceed, for construction. And they had been very successful and, as I said, successful with the first loan that we did with them.

But the lesson learned is that you may need to commit additional capital to keep the project on schedule if there isn't an ability to flip NTP and cause construction financing to kind of repay the late-stage development loan. There are other lessons learned, but that's probably the most significant, both with respect to the market and the product type.

With respect to the revolver, we're constantly kind of in discussions with the lenders in that credit facility to make sure that it works as we hope it would. Megan can kind of speak to the details relative to the impact of these loans to that facility, but I don't think you should necessarily be troubled at all by kind of that -- the standing of that facility. Megan?

Megan Sophocles

Yes, Thanks, Gary. I guess, generally, we're in compliance with all of our kind of debt covenants and managing the revolving credit facility and the borrowing base to appropriately capture the troubled status of the loan. And you're correct that we are not getting borrowing based credit for the loans, but can remain in compliance kind of with the borrowing base requirements and the facility in general. So it's actively being managed.

Unknown Attendee

Okay. And then I guess just one kind of broader question. So I've been an investor for 7 or 8 years at MMAC. And kind of since the Hunt transaction, I think that was done like $33.5. And now we're -- I guess, now we're pro forma $36.5 or a little less than that, $35.5 after the $4 potential hit.

And we've tried a persistent discount that kind of time. We haven't had any real benefit from the Hunt platform in terms of new investment verticals. We can't seem to market the stock to ESG investors, despite the incredible tailwinds in that theme.

There's about a $90 million gap now between kind of what I would call pro forma book value and where the market cap is. The termination fee at Hunt is about $25 million. I guess, what kind of strategic -- like what's the strategic plan? I mean, it almost looks like it makes sense to me that we could put this company into -- fully in the runoffs and make a considerable investment kind of from where the current share price is.

Gary Mentesana

So great question, Matt. I think that it's safe to say that the Board is constantly looking at opportunities to enhance shareholder value and is very focused on the gap between share price and kind of the value of the company, however you define that, whether that's adjusted book value per share or some other metric, right?

In the past, we had been thinking about kind of return of capital policy that has not been put in place at the moment, but the Board is looking at kind of -- all kind of avenues to enhance value and including raising the stock price. We're -- it's difficult in that the company is small, and it doesn't have a formal following among an analyst pool, and that has been a problem for quite some time.

With respect to the fact that we're not doing equity offerings, Hunt would very much -- just like the shareholders, would like to get the stock price up, so that additional equity could be offered in an accretive way since Hunt is compensated based upon a management fee on the adjusted book value.

But it's difficult, right? There are certain constraints relative to the NOLs as to trying to preserve that value, so that we don't have to pay tax liability in the near term, but it is difficult. And I think that the ESG tailwinds have been there for a bit. I think that they've probably gotten stronger since the new administration came in with respect to solar. But obviously, we have not been able to get traction on that, and kind of the events in February kind of make that somewhat difficult at the moment.

I hope there were a few bugs in the transcript software otherwise the few people that have asked me on podcasts hopefully understand why I'm probably better at writing than public speaking.  But either way, in the three years since the Hunt transaction, proforma book value has gone from $33.50/share to $35.66/share, a rather pathetic CAGR.  If you do the math, Hunt has earned management fees of $22.4MM (not including expense reimbursement) from 2018-2020, not a fair comparison since an internalized entity would still incur fees that Hunt is absorbing, but that's $3.90/share versus the $2.16/share shareholders have gained in book value (certainly not market value) in those three years.

Hunt's termination fee is 3x the average management fee of the last two years plus one year of average expense reimbursement, by my math that's roughly $25MM or $4.32/share.  Taking the $35.66/share proforma adjusted book value, subtracting the $4.32/share termination fee, gets you $31.34/share in liquidation value (let's pretend that ongoing net interest income cancels out liquidation expenses) which is 55% higher than the current stock price.

A straight liquidation might be unlikely to happen, this is an externally managed vehicle now after all, but the current structure doesn't appear to be work.  The company clearly doesn't have enough liquidity to continue with the Solar Ventures in its current construction, their revolver is being penalized due to the non-performing loans, and as confirmed by my question regarding their capital partner's eagerness to continue to invest post-February storm, it seems to me that a logical out would be to sell the Solar Ventures to Fundamental and then put the remaining legacy assets into a liquidating trust.

Other reasons why this makes sense:

• The Hunt platform has added no value to MMAC, the Solar Ventures all precede the Hunt transaction in 2018, no new investment verticals have been added that you could attribute to MMAC being apart of a larger investment platform.
• Former CEO Michael Falcone resigned unexpectedly, likely this was just a botched retirement, but given that there was no new blood at the Hunt level able or willing to come in and take leadership of entity (Falcone was months later named Chairman), might signal Hunt's wavering commitment to MMAC.
• The company has failed miserably at capturing the ESG trend.
• Due to the structure of the Solar Ventures and MMAC's minority interest now, their capital partner has the right to receive any distributions from the JV disproportionately until we're back to 50/50, which means that not only does MMAC not have cash flow to either pay a dividend and attract the yieldco crowd or repurchase stock like the good old days, but potentially as good loans roll off their capital partner could receive the full proceeds until the partnership is 50/50 leaving MMAC with more exposure to problem loans than they already have today.

Even if it doesn't voluntarily liquidate or pursue strategic alternatives, MMAC is fairly cheaper here.

PhenixFIN (f/k/a Medley Capital)

This is the old Medley Capital, PhenixFIN (PFX) is a BDC that internalized management as of the beginning of 2021.  Somewhat similar to ACRES Commercial Realty (ACR), this is a forgotten private credit lender that changed names and might not be on investors radar.  Book value as of year end was $52.94 versus a current share price of $33.15, or said another way, its trading at just 63% of book value.  No one would argue that PFX's assets are pristine, but the leveraged loan market (the asset class BDCs primarily own) has recovered substantially during covid, in fact, the riskiest of leveraged loans, those near default, rated CCC are currently trading at an average price of 91.4 cents on the dollar, a significant disconnect from where PFX's shares are trading.

But that analysis is a little too simple, PFX is basically running a shoe string operation right now, the CEO is a hedge fund manager without leveraged loan experience, they have indicated that PFX has hired an advisor to token oversee the portfolio without really naming a portfolio manager.  They don't appear to be originating new loans, I believe this portfolio is essentially in run off.  The balance sheet is atypical for a going concern BDC, at year-end they only had $14.8MM of net debt versus an investment portfolio of $160MM, making it if not the least levered BDC, close to it.  Just to emphasize the point, PFX has virtual no leverage and trades at nearly the biggest discount in the sector (and BDCs are supposed to mark-to-market their assets, but clearly these aren't Level 1 assets).

The company is buying back stock and recently entered into a 10b5-1 plan, presumably because they're not able to repurchase enough shares otherwise given the liquidity.  While not huge upside (my target is like ~80-85% of book, 25+% from here), PhenixFIN remains one of my higher conviction ideas, with limited downside and should either be formally put into liquidation or sold this year.  I've added shares in the first quarter.

Luby's
Luby's (LUB) is a restauranteur that is officially in liquidation now, LUB released its first filing under the liquidation method of accounting.  By making a few reasonable adjustments you can come up with a liquidation value higher than the stated $3.82/share versus the market price of $3.32/share today.

Liquidation accounting is nice because its simple, the company is tasked with valuing their net asset value assuming realized market value for the assets and subtracting their liabilities and any expenses they expect to incur during the liquidation.

The first obvious adjustment would be the PPP loan which LUB is considering a debt in the liquidation accounting, while they are under a current audit by the Small Business Administration, most believe that nearly all PPP loans made in good faith will be forgiven by the U.S. Government.  Forgiveness of the PPP loan is worth an additional $0.32 (or +9.6%) to the net assets in liquidation.

The other obviously conservative treatment is around the operating lease liabilities:

Under the going concern basis of accounting, we accounted for our operating leases as described below. Under the liquidation basis of accounting, we value the operating lease right-of-use assets at zero, since we do not expect to receive cash proceeds or other consideration for the right-of-use assets.

While they fully account for the operating lease liabilities at 100 cents on the dollar despite:

In fiscal year 2020, we terminated and settled our remaining lease obligation for 16 closed restaurant properties and negotiated an early termination date and reduced lease payment at one operating restaurant property. In the first quarter of fiscal year 2021, we terminated and settled our remaining lease obligation at seven closed restaurant properties. Subsequent to the first quarter of fiscal year 2021, we settled one addition lease obligation for a closed restaurant property. While the amounts paid to settle our lease liabilities varied, in the aggregate, we have settled these 24 leases for approximately 25% of the total undiscounted base rent payments that would otherwise have been due under the leases through their original contractual termination date. Although we can offer no assurances that we will continue to settle any lease obligation for less than its recorded values, any future settlements at less than the recorded value of the related lease obligation would increase our reported net assets in liquidation.

Per the company, all the restaurant and real estate assets are likely to be sold by the end of the fiscal year which is in August, with a final liquidation happening sometime in the early-to-mid 2022, my guess is the total distribution comes in at $4.25-$4.50 which is an attractive return from current prices.

ECA Marcellus Trust I & Sandridge Mississippian Trust I
Lastly, these are tiny nano-cap OTC oil and gas trusts, please be careful and do your own research before investing in either.  But I mentioned ECA Marcellus Trust I (ECTM) in my Year End 2020 post as a potential liquidation scenario, while the latest 10-K indicated that ECTM had not triggered the threshold for a liquidation as of year end, I still anticipate the trust doing so in the next several quarters, its current "NAV" is $0.97/unit versus a current price of $0.29/unit, leaving plenty of room for either bloated expenses or shenanigan's related to a liquidation auction.

Another similar vintage oil & gas trust is Sandridge Mississippian Trust I (SDTTU) which has already tripped its liquidation test threshold and is in the process of selling its assets and distributing the proceeds to unitholders.  As of 12/31/20, the trustee reported a net asset value of $0.31/unit versus a current price of approximate $0.22/unit.  $0.12 of that is cash, the rest is the remaining value of the oil & gas royalty, which the filings describe the valuation process as:

For December 31, 2020 as the Trust assets now meet the criteria for Held for Sale, the impairment was determined by taking the estimated fair value less the estimated cost to sell the assets. Fair value was derived from relevant market pricing related to the sale of a similar asset that was sold recently pursuant to a sale process conducted by a third-party advisor. 

So presumably the asset value is somewhat reasonably correlated to current market value, and then in terms of timing, it appears the trust should wrap up fairly quickly by the end of 2021:

The Trustee expects to complete the sale of the Trust’s assets by the end of the third quarter of 2021 and to distribute the net proceeds of the sale to the Trust unitholders on the following quarterly payment date. The Trust units are expected to be canceled shortly thereafter.

If all works perfectly, it likely won't, we're looking at a 40% upside from current prices.

Disclosure: I own shares of MMAC, PFX, LUB, ECTM and SDTTU

MMA Capital: Externalizing Management, Transforming into BDC-Like Vehicle

Woke up to some fun news Tuesday, MMA Capital (MMAC) is selling its asset management business and some other assets to Hunt Investment Management for $57 million resulting in Hunt becoming the external manager of MMA Capital.  Once the dust settles, if you squint hard enough, MMA Capital will look like a BDC or yieldco but maybe without the high dividend to attract in retail investors.  Even though my thesis is almost played out (original idea: this was a pile of assets that was hidden by GAAP accounting choices, maybe one day becomes an operating company), the current price may offer a short term opportunity as the series of transactions with Hunt are completed.

Here's the deal deck (try not to cringe, MMAC clearly didn't pay high priced advisers): https://mmacapitalmanagement.com/wp-content/uploads/docs/MMAC-Shareholder-Presentation.pdf

Who is Hunt Investment Management?

Hunt is a privately held asset manager that focuses on real estate and infrastructure sectors, they specifically mention they manage $12B in real estate related assets and have some expertise in public-partnerships, military housing, and other sectors that might have some parallels with MMA Capital's affordable housing and solar energy verticals.  All of MMAC's employees will move over to Hunt and keep their same employment contracts which still do call for much of management's bonuses to be invested in MMAC's stock in open market purchases.

The new management fee agreement is the biggest concern I see in the deal, it's 2% annually (0.5% quarterly is how its presented, hate that optics game) of shareholder equity up to $500MM and tiered down to 1% annually after that.  We're a long way from $500MM, so its effectively 2% for the foreseeable future.  Plus Hunt will get a 20% carry on shareholder returns above 7%, so this is a fairly standard (bad) external management agreement like you'd typically see in the BDC industry. There is a carve out for this year that adjusts the equity value up to the proforma book value of ~$33.50 shown in the presentation when calculating 2018 fees and will be adjusted to exclude the effects of the companies NOLs in the event the valuation allowance is removed and a deferred tax asset is recognized.  There's also a termination payment of 3 years fees, so yes, while this is standard and I assume Hunt required this to protect their $57 investment, its far from a shareholder friendly deal.

What's Left?
This transaction removes the main remaining 'hidden asset' the company had, the asset management platform it had built in affordable housing, South Africa multifamily, and solar energy.  What's remaining is the bonds themselves, their investment in one of the South African funds, and two real estate projects.  Additionally they have ~$400MM in NOLs that are worth less under the new tax code.  If they ever are realized it'll be because MMAC was able to raise capital, scale up, and generate some taxable income (their plan), but that also means a higher share count and the value of those NOLs will be significantly diluted to current shareholders by the time their realized.

In their own words:

The new strategy sounds very much like a specialized BDC (maybe the altruistic mandate will appeal to some people) attempting to earn a ~10% ROE, general rule of thumb is a 10% ROE financial should trade for roughly book value.  Today it trades for $28.60, leaving 17% upside to the proforma book value, maybe that discount is deserved for reasons discussed below, but I'll continue to hold for now and wait for the dust to settle.

Other thoughts:

• The company is doing a capital raise with Hunt, where Hunt will be purchasing $8.375MM worth of MMAC stock at $33.50, afterward Hunt will own a little more than 4% of the company.  This is in addition to the $57MM headline number, mostly for PR to show alignment of incentives with the public shareholders.  While not an arms length transaction, still shows someone is willing to pay book value.
• MMAC is providing seller financing to Hunt for the full $57MM amount, 7 year term at a 5% coupon.  Hunt will be receiving about a $4MM annual base management fee off of the proforma equity base of ~$200MM.  When coming up with a new NAV, might be reasonable to discount it, not necessarily for credit reasons (the base management fee easily covers the annual interest payments) but because MMAC's capital is now tied up in an asset that wouldn't meet its targeted return requirements even if levered up.  They'll have a little drag in the portfolio until its redeemed.
• CEO Michael Falcone owns over 182k shares (~3.15% of the company) and his lieutenant Gary Mentesana owns over 167k shares (~2.87%), they've been surprisingly transparent on conference calls, structured their compensation to align with shareholders, bought back as much stock as they legally could; they're mostly aligned with shareholders in this deal despite now being employees of Hunt.  I don't see this as a typical dirty BDC-like management stealing the company type move.
• They didn't specifically touch on it, but the company will likely need to pay a dividend in order to raise capital in the future, that's at odds with most NOL companies mantra to retain all earnings in order to grow and pull the NOL forward as much as possible.  I think a dividend would be the right move once the transactions are finalized, as mentioned earlier, the NOL is going to get diluted anyway, might as well get the valuation uplift from yield based investors.

I started this post with the idea that shares were unfairly undervalued after the deal, but maybe the price is approximately right given the deal closing risks, interest rate risk in the current environment, and the discount applied to externally managed companies.  Most of all, the deal is probably management signaling the heavy lifting is all but complete in bringing MMAC back from the brink after the financial crisis.  So this is more of an update and an interesting twist in this deep value micro cap story, would love to hear from other MMAC shareholders too.

Disclosure: I own shares of MMAC

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.html, http://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

MMA Capital Update: New Name, Up-Listing, Still Cheap

MuniMae recently changed its name to MMA Capital Management (MMAC), instituted a reverse split and up-listed to the NASDAQ from the pink sheets.  I invested in MMA Capital back in the spring with the basic thesis centered around GAAP accounting obscuring some of the underlying value in this post crisis busted financial.  Read the old post for the background story, but a couple transactions have happened since March to move items from the "grab bag" asset pile to the easy to value pile making balance sheet adjustments a little more straight forward.

International Housing Solutions Equity Investment
MMA Capital operates a multi-family real estate asset management company in South Africa called International Housing Solutions (IHS).  IHS closed on their second multi-investor fund ($70MM) in the second quarter, and at the same time MMA Capital increased their ownership stake in IHS from 83% to 96% for $1.6MM.  The GAAP balance sheet doesn't give credit for IHS at all, and the company conservatively only adjusts for their own investment ($3.7MM) in the South African funds along with the company's equity balance ($1.2MM) in the management company.  This understates the value of the management company greatly, by taking the $1.6MM valuation for 13% of IHS and interpolating it over the 96% ownership stake and MMA Capital's equity in IHS should be closer to $11.6MM.  Add the $3.7MM fund investment, and the company's total SA fund investment line item is worth $15.34MM.

Tax Credit Equity Business to Morrison Grove
Today MMA Capital announced they sold their LIHTC funds business to Morrison Grove Management for $15.9MM.  This is the tax credit business that causes most of the accounting problems, and unfortunately those won't be going away as MMA Capital will still be on the hook for the investor yield guarantees.  However it does unlock the value of the business that was previously hard to quantify and wasn't on the balance sheet.  MMA Capital is providing seller financing for the entire amount, including a $17.3MM senior bridge loan and in $13MM subordinated debt for a total cash outlay of $14.4MM.  MMA Capital is providing the bridge loan so Morrison Grove can buy out certain outside ownership interests, the loan is due in December with penalties if extended.  But the end net effect will be additional net $15.9MM added to the adjusted NAV.  The company also negotiated an option to purchase Morrison Grove starting in 5 years time, so the company monetizes the business today and maintains some of the future upside.

Below is the adjusted balance sheet as of 6/30/14:

Using the reverse-split adjusted share count of 7.9 million, the adjusted book value per share is $9.25, well above its close today of $8.41.  If you make the additional adjustments for IHS and the Morrison Grove transactions, the adjusted book value is roughly $12.50 per share.  This doesn't include the $400MM in NOLs and their REO assets which could have significant value.  The company has also been repurchasing stock regularly with a maximum price of $9.60, every time they buyback stock below book they drive the NAV up even further.

So why didn't the stock price react on today's news?  MuniMae/MMA Capital was already a forgotten company, but with the name and ticker change it almost seems like very few people are still paying attention anymore.  The up-listing and reverse split could potentially widen the investor base, which should make it easier to raise capital to expand the business and monetize those NOLs.  Management has made admirable progress in 2014, and I think it's arguably cheaper now than it was back in March at prices 40% lower due to value highlighting transactions made recently.

Disclosure: I own shares of MMAC

Municipal Mortgage & Equity

So I was browsing around for new ideas when I stumbled across a post by Olmsted at the Corner of Berkshire & Fairfax message board who compared a new name to me, Municipal Mortgage & Equity ("MuniMae"), to blog favorite Gramercy Property Trust.  And after reading through quite a few complicated balance sheets, I can agree the parallels are definitely there.

Before the credit crisis, MuniMae originated and managed debt and equity investments collateralized by affordable housing that offered attractive tax incentives.  Things went very wrong for the company in 2007 when the market for tax-exempt debt securities sharply declined forcing the company to meet all sorts of collateral calls by selling their assets at distressed prices just to stay alive.  The situation was compounded by some accounting issues and their accountant's assessment that there was significant doubt they could continue as a going concern.

Fast forward a few years and the company has sold off most of their assets and derisked their balance sheet, the most recent example being the sale of a huge bond portfolio, "MuniMae TE Bond Subsidiary LLC" or TEB, to an affiliate of Bank of America Merrill Lynch.  As part of the sale, they were able to shed much of their short term floating rate debt that was financing the long term fixed rate bonds which was presenting the company with interest rate risk scenarios where a small increase in rates could effectively wipe out the equity.  Another key aspect of the TEB sale is it allows the company to convert from a partnership to a corporation for tax purposes.  As a partnership, the company was forced to pay a lot of phantom gains out to shareholders due to the company repurchasing their own debt at a discount.  Now going forward, they'll be able to utilize their huge NOLs and essentially never pay income tax again.

So the bond portfolio that remains is now only 55% leveraged and much of it is non-performing, so the risk of the company switches from mostly interest rate risk to underlying asset performance risk.  The TEB sale also will dramatically reduce the net interest income spread they receive, putting pressure on the company to either cut operating expenses or find a new profitable venture.

In relating MuniMae back to pre-net lease Gramercy, MuniMae historically sponsored Low Income Housing Tax Credit Funds ("LIHTC Funds") where they sourced capital for the development of tax advantaged affordable housing developments.  The developer of the affordable housing project would start out as the General Partner, however during the credit crisis many of these projects and developers ran into financial trouble, causing MuniMae to step in become the General Partner to protect their investors interests in the project (also because MuniMae guaranteed certain investor's investments).  So even though MuniMae has a limited (0.01-0.03%) equity investment in these LIHTC Funds, as the GP, they're deemed for GAAP accounting reasons to be in control and must consolidate these funds on their balance sheet causing all sorts of problems.  In their quarterly press releases, MuniMae makes adjustments for the non-economical consolidation adjustments for us:

The cash and restricted cash portion of the balance sheet is pretty straight forward, the restricted cash is mostly collateral held in total return swaps that will expire in the next year or two.  $45MM in free cash is a nice position to be in when they have a share repurchase plan in place to buy up to 4 million shares at the book value per share as of the last quarterly, or $1.22 currently.  That's a nice floor under the current market price, and management and the company have been recently purchasing shares at higher levels.

But the most relevant footnote to their financials is regarding their bond portfolio and effects of consolidation:

(2) Represents the carrying basis of the bonds eliminated in consolidation. This amount excludes net unrealized gains 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 ($32.5 million at September 30, 2013 and $10.7 million at December 31, 2012).

So the fair value of the bonds is closer to $321.4 million dollars, a $32.5 million increase is a big adjustment for a ~$50 million market cap.  The big question then... are the marks correct?  Well during Q3 2013, MuniMae foreclosed on and sold the underlying real estate on two bonds in their portfolio for virtually the same amount as the fair value of the bonds.  Small sample size, but it provides a little reassurance that the fair values are reasonable.

In addition to cash and bonds, there's a grab bag of other assets MuniMae has on its balance sheet:

• REO assets: They have a few parcels of undeveloped land and a multi-family property that they've foreclosed on in the past that they're holding as real estate held-for-use.  On a few recent conference calls these have been discussed as potentially having value a few years down the line, and that they were valued at 7-10x their current book value at the time the original bonds were issued.  
• Solar assets: There are some leftover solar assets from a failed business purchase just before the credit crisis, value here is probably minimal.
• Some potential GP incentive income from the LIHTC Funds that could materialize, but not for several more years.
• International Housing Solutions (IHS): 83% stake in a South African asset manager that has one private equity fund which invests in affordable housing in South Africa.  MuniMae's equity stake in the one private equity fund shows up on the balance sheet, but not the ownership stake in the asset manager doesn't.  IHS is looking to raise capital for another fund and MuniMae might use some of their free cash to invest here.

If you assume the rest of the balance sheet is properly marked, the adjusted book value per share of MuniMae is closer to $2.00/share (currently $1.25), with a lot of management optionality in how they deploy their free cash (more stock and debt repurchases), manage the remaining bond portfolio, and any upside from the REO and LIHTC assets.

The obvious risks here are (1) the bond portfolio loses value and (2) this has been a historically mismanaged company with the same management still in place.  As for the bond portfolio, it's mostly unleveraged at this point, removing most of the dangerous impact from rising short term rates, and the bonds are collateralized by affordable apartments.  There's lots of talk about the disappearing middle class and people falling behind, tax advantage affordable housing will probably play a role in addressing the problem.  As for management, in reading their filings and conference call transcripts, they strike me as very transparent and fully acknowledging their past mistakes.  They even let individual investors ask questions!  So I agree that MuniMae could be a good place for people who have taken gains in Gramercy and looking to roll that money into a similar theme.

I've added a smallish position to my portfolio.

Disclosure: I own shares of MMAB