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

Mid Year 2014 Portfolio Review

In my year end 2013 portfolio review,  I planned to do this quarterly, but I don't think I'll have enough commentary or trades to give a full update each quarter.  Going forward, I'll do a portfolio performance review semi-annually.  Onto the results (there were no deposits or withdrawals into the blog portfolio during the period):

The first half of 2014 has been great, just about all of my ideas have been working, but I don't have any visions of this continuing at the current pace.

However, a lot of value investors get too caught up in the macro picture, trying to outsmart the market by holding large cash positions, tweeting links to examples of excess in the market, and attempting to call a market top.  It always sounds clever to be bearish and pessimistic, but it's not productive unless you're trying to build followers.  I'd rather focus on finding a handful of mispriced securities than constantly worrying about when the next market correction is going to happen, it will at some point, but for smallish investors it leads to bad decision making.

Current Portfolio

 Positions Closed

You'll see I disposed of the thrift/mutual bank conversions, I still like the strategy and will continue to highlight conversions I find attractive, but for now I'm going to pass until I increase the size of the portfolio or macro conditions change.  I'm finding too many other opportunities available that don't have 2-3 year opportunity costs like a thrift conversion.  I also work for a large bank and I'm fully aware of the headwinds facing the entire industry, especially those highly weighted towards net interest margin like small community banks.

There are so many spinoffs happening right now it's hard to keep them all straight.  Despite the value creation being fairly well known at this point, spinoffs still outperform as a group.  I'm going to try to identify a few that I find interesting in the back half of the year.  Then exploiting them either by buying a call option if I believe the spinoff is actually the more attractive asset (like OIS/CVEO), or wait until regular trading occurs and buy the spinoff if its the orphaned business that gets sold indiscrimately.  I also like the REIT conversion trend, curious to see if these conversions and tax inversions acquisitions will finally spark some corporate tax reform in Washington.

Position Thoughts/Updates

Howard Hughes Corporation
Lots to like at Howard Hughes Corporation, they're aggressively investing in their "strategic assets" which will make their way into operating asset bucket over the next few years.  At some point in the future, it doesn't make sense to have these stabilized operating properties in a C-Corp structure, so another REIT spinoff could be in the offering once the NOLs are used up.  I like this company as a long term compounder, they have quite a few levers to pull and a capital allocation/shareholder focused management.  At a recent investor presentation, management quipped that an analyst's $200 price target was too low, I would agree.

MuniMae
It's balance sheet has uncovered most of the hidden real estate value due to accounting consolidation rules already creating a quick gain.  The question is what's next?  I like the share repurchase program, but that doesn't really help the fact that they're too small to be a public company, and they're only breaking even on an operating basis.  MuniMae has an incredible amount of NOLs, they should be initiating a rights offering and buying an operating business that throws off taxable income.  It's no longer a screaming buy, but I'm going to hold and let the situation play out more.  However, it's towards the top of the sell list if I need cash for a better idea.

Ultra Petroleum
The Uinta Basin purchase is a nice bridge asset, its going to be cash flow positive right away and gives management and analysts something to focus on while waiting for natural gas to resume its climb up.  There's still a huge spread between natural gas prices in the United States and what it fetches in foreign markets.  Given the recent news about oil exports being allowed for the first time in 40 years, more LNG export terminal approvals might be in the offering as well, long term this spread should narrow.

Disclosure: Table above is my blog/hobby portfolio, its a taxable account, and a relatively small slice of my overall asset allocation which follows a more diversified low-cost index approach.  The use of margin debt/options/concentration doesn't represent my true risk tolerance.

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