UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September  30, 2016



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” and “smaller reporting company” in Rule 12b-2 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 5,961,721 shares of common shares outstanding at November 2, 2016.



 

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Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q for the period ending September 30, 2016 (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 operating or financial performance. 

Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results.  They are not guarantees of future performance.  By their nature, forward-looking statements are subject to risks and uncertainties.  Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements.  There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report.  They include the factors discussed in Part 1, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).

Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we make from time to time, and to consider carefully the factors discussed in Part I, Item 1A. “Risk Factors” of the 2015 Form 10-K 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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Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations



MMA Capital Management, LLC

Consolidated Financial Highlights

Summary Financial Data

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INTRODUCTION

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MMA Capital Management, LLC, the registrant, 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 partners with institutional capital to create and manage investments in affordable housing and renewable energy.  We invest for our own account and co-invest with our institutional capital partners.  We derive revenue from returns on our investments as well as asset management, performance and other fees from the investments, funds and ventures we manage.

The Company operates through three reportable segments – United States (“U.S.”) Operations, International Operations and Corporate Operations. 

U.S. Operations

Our U.S. Operations segment consists of three business lines: Leveraged Bonds, Low Income Housing Tax Credit (“LIHTC”)  and Energy Capital and Other Investments (previously referred to as “Other Investments and Obligations” in the Company’s 2015 Quarterly Reports on Form 10-Q).

Leveraged Bonds

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

The bonds held by the Company are primarily 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.     

The Company also has a smaller portfolio of other real estate bonds.  This portfolio includes municipal bonds that finance the development of infrastructure for a  mixed-use commercial development and is secured by incremental tax revenues generated from the development.  Our other real estate bonds also include senior investments in a trust collateralized by a pool of tax-exempt municipal bonds that finance a variety of non-profit projects such as healthcare and educational facilities, as well as a subordinated investment in a collateralized mortgage backed security that finances multifamily housing. 

The Company has financed its ownership of a majority of its investments in bonds through total return swap (“TRS”) agreements.  These financing arrangements, which enable the Company to retain the economic risks and rewards of underlying fixed rate bond positions, generally require the Company to pay a variable rate of interest that resets on a weekly basis.  The Company has also executed TRS agreements to synthetically acquire the total return of multifamily bonds that it did not own.  However, as further discussed in Notes to Consolidated Financial Statements – Note 5, “Debt” and Notes to Consolidated Financial Statements – Note 6, “Derivative Instruments,” the Company has hedged some of its interest rate risk.

Table 1 provides key metrics related to all bonds in which we have an economic interest, including bonds that are not recognized for financial statement purposes but for which the Company maintains economic risks and rewards through TRS agreements that the Company accounts for as derivatives as of September 30, 2016 (such bonds and TRS agreements are collectively referred to as the “Bond Portfolio”).  See Notes to Consolidated Financial Statements – Note 5, “Debt” and Notes to Consolidated Financial Statements – Note 6, “Derivative Instruments” for more information about how TRS agreements are reported in the Company’s financial statements.

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Table 1:  Bond Portfolio - Summary



The fair value of the Bond Portfolio as a percentage of its UPB improved from 102.4% as of June 30, 2016 to 104.9% as of September 30, 2016.  The weighted average debt service coverage ratio improved from  1.07x as of June  30, 2016 to 1.09x as of September 30, 2016.   



Exposure of the Bond Portfolio to Increases in Market Yields and Capitalization Rates

The Bond Portfolio is exposed to market risk, which is the potential for adverse changes in value resulting from changes in market variables such as interest rates or credit spreads.    The fair value of the bonds is influenced both by the performance of the underlying real estate assets (i.e., as a proxy for creditworthiness) and long-term tax-exempt interest rates and credit spreads (i.e., generally as long-term rates and/or credit spreads rise, bonds become less valuable).

In Table 2, we measure the Bond Portfolio’s sensitivity to increases in market yields and terminal capitalization rates by measuring how its fair value would hypothetically change as a result of an instantaneous 100 basis point increase in the market yield and terminal capitalization rate assumptions that were originally used to measure the fair value of our Bond Portfolio as reported in our Consolidated Balance Sheets at September 30, 2016 and December 31, 2015.  In estimating such impacts, we also assumed that expected future cash flows and the credit quality associated with the Bond Portfolio remained constant relative to projections that were assumed in fair value measurements used to report carrying values in our Consolidated Balance Sheets at September 30, 2016 and December 31, 2015. 

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The fair value sensitivity of the Bond Portfolio is calculated using internal models that require standard assumptions regarding market yields and other inputs that are used to measure the fair value of such instruments for financial reporting purposes.  Valuation assumptions are derived based on the characteristics of the underlying structure of instruments in the Bond Portfolio and other factors.  Refer to Notes to Consolidated Financial Statements – Note 7, “Fair Value” for more information about our methods that are used to measure fair value.

Table 2 displays the change in fair value of the Bond Portfolio as measured on the last day of each period presented using the assumptions described above.



Table 2:  Exposure of the Bond Portfolio to Increases in Market Yields and Capitalization Rates







LIHTC 

In our LIHTC business line, we primarily own and manage limited partner (“LP”) and general partner (“GP”) investments in affordable housing communities in the U.S.  In this regard, we provide asset management and administrative services to a limited liability company formed in 2015 by the Company and a commercial bank (“TC Fund I”) that acquired limited partnership interests either directly or through fund investments in approximately 650 affordable properties.  We also acquired several direct real estate investments in connection with the formation of TC Fund I.  Through this business line, we also have loan receivables from, and an option to purchase, a tax credit asset manager.  We have made other guarantees through this business line to some of our institutional clients related to the receipt of tax credits and the performance of the underlying assets.    

TC Fund I

As consideration for providing asset management and administrative services to TC Fund I, the Company is entitled to an asset management fee of 2% per annum on the initial capital contribution of $211 million by an investor with whom the Company partnered to form TC Fund I.  This amount accrues quarterly in advance, bears interest at 6% per annum compounded annually and is to be paid solely from cash flows received by TC Fund I from its portfolio of limited partnership investments.  Asset management fees are generally payable to the Company by TC Fund I after payments are made by TC Fund I to: 1) repay any tax credit losses funded by the investor; 2) redeem any investor member voluntary loans; 3) to repay any mandatory loans made by the Company to fund investor tax credit losses; 4) to pay any expense loans; 5) to establish any required reserves; and 6) to pay any accrued guarantee fees.  By their nature, investments of TC Fund I are expected to break-even from an operating cash flow perspective.  In this regard, excess cash flows to limited partners are generated primarily from residual events that come at the end of the tax compliance period and are generally outside of the control of the Company in terms of if, and when, they occur.

As of September 30, 2016, the Company was contractually due $3.2 million for asset management and administrative services rendered to TC Fund I through such date.  However, such amount has not yet been recognized in the Company’s financial statements because it was assessed to not be reasonably assured of collection.  The Company’s assessment in this case considers various factors that include, but are not limited to, the length of time until the Company expects to receive payment and the priority of payment of such fees relative to other interests in TC Fund I.  The Company assesses each reporting period whether asset management fees that are legally due are reasonably assured of collection.

In connection with the formation of TC Fund I, the Company has also provided a limited guarantee of tax credits that are expected to be generated by TC Fund I’s portfolio of investments.  In consideration for providing this guarantee, the Company is contractually entitled to receive $4.2 million in guarantee fees from TC Fund I.  The Company recognized a guarantee fee receivable for such amount in its financial statements on December 31, 2015.  This receivable bears interest at 6% per annum, compounds annually, and will be paid solely from cash flows received by TC Fund I from its portfolio of limited partnership investments.   

To cover certain costs associated with the organization of TC Fund I, the Company lent $5.3 million to TC Fund I upon its formation.  This loan legally accrues interest at 9.5% per annum, compounds annually and will be repaid solely from cash flows that are received by TC Fund I from its portfolio of limited partnership interests.  As of September 30, 2016, this loan, which had a carrying value of $0.2 million, was on non-accrual status given, among other factors, the timing and amount of cash flow projections for this loan and its payment priority in TC Fund I’s waterfall.  The non-accrual status of this loan is re-assessed by the Company each reporting period.

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Direct Real Estate Investments

As of September 30, 2016, the Company owned three real estate investments that it acquired on December 31, 2015 in connection with the formation of TC Fund I.  These investments, which consisted of three 99% limited partnership interests, had a carrying value of $8.3 million at September 30, 2016.

As of September 30, 2016, the Company also owned a 1.0% general partnership interest in an entity that owns an affordable multifamily property that served as collateral for one of our bond investments.  The acquisition of such general partner interest resulted in the consolidation of this partnership and, as a result, the Company recognized the affordable multifamily property, which had a carrying value of $14.5 million at September 30, 2016.

Interests in a Tax Credit Asset Manager

In 2014, prior to the formation of TC Fund I, the Company sold substantially all of its LIHTC business to a tax credit asset manager.  As part of this transaction, the Company provided a subordinated loan and received an option to purchase the tax credit asset manager in the future.

The UPB of the subordinated loan to the tax credit asset manager was $13.0 million as of September 30, 2016.  This loan is non-amortizing and has a maturity date of June 30, 2025.  This loan bears interest at a base rate of 11% that is paid quarterly and contingent interest up to an additional 13%.  Since origination, the Company has received principal and interest payments of $6.3 million.  The receipt of such amounts are reported by us as a deferred gain in the Company’s Consolidated Balance Sheets (or classified in “Other Liabilities”) since the conveyance could not be treated as a sale for financial reporting purposes.     

The option price to acquire the tax credit asset manager is $12.0 million, subject to various purchase price adjustments.  The tax credit asset manager originates and manages debt and equity investments on behalf of third party investors and for its own account.  Our purchase option of the tax credit manager may be exercised between September 30, 2019 and September 30, 2024, though it may be accelerated for certain events.

Other Guarantees

Prior to the sale of substantially all of our tax credit equity business in 2014, we “syndicated” tax credits by forming LIHTC Funds that purchased directly or indirectly the limited partnership interests in multiple Lower Tier Property Partnerships (“LTPPs”).  We raised capital from institutional investors, which comprised virtually all of the equity of the LIHTC Funds, and the LIHTC Funds used this capital, and sometimes interim debt financing, to purchase the limited partner interests in the LTPPs.  We were the general partner of, and managed, the LIHTC Funds, and usually retained an interest of between 0.01% and 1.0% in each of them.  The remaining 99.0% to 99.99% interest in each LIHTC Fund was typically held by one or more large financial institutions.

We provided two general types of guarantees in connection with these transactions: (1) LIHTC Fund level guarantees where the Company, directly and indirectly, guaranteed the investors’ return on investment (“Guaranteed Funds”); and (2) individual indemnifications to specific investors in non-guaranteed LIHTC Funds related to the performance of specific LTPPs.   Because the LTPPs and the LIHTC Funds (as well as any intermediate entities) are pass-through entities for federal income tax purposes, the equity owners of the LIHTC Funds receive the tax benefit of the credits generated by the Lower Tier Property Partnerships. In order for the investors in the Guaranteed Funds to benefit from low-income housing tax credits, the LTPPs in which these entities invest must operate affordable housing properties in compliance with a number of requirements in the Code and the regulations under it.  Failure to comply continuously with these requirements throughout a 15-year recapture period could result in loss of the right to those low-income housing tax credits, including recapture of credits that were already taken, potentially creating a liability under our guarantees.  The execution of these guarantees caused the Company to consolidate the Guaranteed Funds for financial reporting purposes.

As consideration for providing these guarantees, the Company received upfront guarantees fees of $28.9 million that were initially deferred for financial reporting purposes and that are amortized into earnings over the contractual life of such obligations.  However, because the Guaranteed Funds have been consolidated by the Company for reporting purposes, certain fees and other payments received from such consolidated entities are not classified as revenues in our Consolidated Statements of Operations but rather are reflected as income that is allocated to us from consolidated funds and ventures.

When the Company sold its tax credit equity business in 2014 to a tax credit asset manager, it agreed to indemnify the tax credit asset manager from investor claims related to those guarantees and, therefore, we continue to be obligated on our guarantees to investors in these funds.    

Refer to Notes to Consolidated Financial Statements – Note 7, “Fair Value” for more information about the fair value measurement of certain of our contractual rights and obligations that we maintain through our LIHTC business line.

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Energy Capital and Other Investments

In our Energy Capital and Other Investments business line, our wholly owned subsidiary, MMA Energy Capital, (“MEC”) provides debt capital to develop, build and operate renewable energy systems.  We originate solar loans directly and through a joint venture that we have with an alternative asset manager (our “Solar Joint Venture”).  MEC provides loan origination and servicing, asset management and other management services to the Solar Joint Venture and, in this regard, is entitled to reimbursement for most costs incurred by the Company in executing its responsibilities as administrative member of the Solar Joint Venture.  In this business line, we also manage legacy equity investments in real estate, solar assets and an investment in land. 

As of September 30, 2016, the Company had contributed $50.0 million in capital to the Solar Joint Venture.  This investment, which represents a 50% ownership interest, had a carrying value of $51.5 million as of September 30, 2016 and we received $4.1 million in related cash distributions during the first nine months of 2016. 

As of September 30, 2016, the UPB of loans reflected on the Consolidated Balance Sheets of the Company was $44.1 million, while the UPB of loans reflected on the balance sheet of the Solar Joint Venture was $64.0 million.  In connection with one of these loans, the Company received a five-year term contingently exercisable warrant to acquire convertible preferred shares in a residential solar power provider in the U.S.

As of September 30, 2016, all of the outstanding loans originated by MEC, whose average tenor ranged from one to fifty-nine months and whose weighted average coupon was  10.8%, were performing pursuant to their contractual terms.

At September 30, 2016, we owned, or were an equity partner in, four direct investments in real estate consisting of two land parcels, a town center development and one affordable multifamily property partnership.  We also owned four legacy solar installations.  The carrying value of these investments was $27.6 million as of such reporting date.

Refer to Notes to Consolidated Financial Statements – Note 7, “Fair Value” for more information about the fair value measurement of certain of our contractual rights and obligations that we maintain through our Energy Capital and Other Investments business line.

New Solar Joint Venture

On November 7, 2016, the Company entered into a venture with an affiliate of a leading global private investment firm.  Refer to Notes to Consolidated Financial Statements – Note 3, “Investments in Partnerships” for more information.

International Operations

We manage our International Operations segment through our wholly owned subsidiary, International Housing Solutions  S.à r.l. (“IHS”).  IHS’s strategy is to raise, invest in and manage private real estate funds that invest in residential real estate.  In addition to earning asset management fees, IHS invests as a limited partner and is entitled to special distributions based on returns generated by the funds it sponsors.

IHS currently manages three funds. 





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In managing these funds, we are paid asset management fees, earn a return on our co-investment and have the opportunity to earn performance fees after various investment hurdles are met.

MMA also owns a 60% interest in IHS Property Management Proprietary Limited (“IHS PM”), which provides property management services to the properties of IHS-managed funds. 

Corporate Operations

Our Corporate Operations segment is responsible for supporting accounting, reporting, compliance and financial planning and analysis.

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SUMMARY OF FINANCIAL PERFORMANCE

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Net Worth

Common shareholders’ equity increased from $122.1 million at June  30, 2016 to $132.1 million at September 30, 2016.  This change was driven by $11.1 million in comprehensive income that is allocable to common shareholders and $1.2 million in other reductions in common shareholders’ equity. 

Diluted common shareholders’ equity (“Book Value”) per share increased to $21.34 at September 30, 2016, which represents an increase of 8.8%, or $1.72 per share of Book Value, compared to what we reported at June  30,  2016.  Most of this growth, or $1.69 per share, was attributable to comprehensive income from core operations and bond valuations while the balance, or $0.03 per share, was driven by purchases of common shares made by the Company at prices below its Book Value per share. 

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 is allocable to common shareholders of $11.1 million in the third quarter of 2016, consisting of $4.2 million of net income that is allocable to common shareholders and $6.9 million of other comprehensive income that is allocable to common shareholders.  In comparison, we recognized $11.3 million of comprehensive income allocable to common shareholders in the third quarter of 2015, which consisted of $3.6 million of net income that is allocable to common shareholders and $7.7 million of other comprehensive income that is allocable to common shareholders.

Refer to “Consolidated Results of Operations” for more information about changes in common shareholders’ equity that is attributable to changes in net income that is allocable to common shareholders.

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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 3 provides a balance sheet summary for the periods presented.  For presentational purposes, assets, liabilities and equity that are attributable to noncontrolling interest holders of CFVs are presented in Table 3 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.  See Notes to Consolidated Financial Statements –  Note 13,  “Consolidated Funds and Ventures,” for more information about CFVs.  

Table 3:  Balance Sheet Summary  

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Common Shareholders’ Equity

Table 4 summarizes the changes in common shareholders’ equity for the periods presented.

Table 4:  Changes in Common Shareholders’ Equity

Other Comprehensive Income (Loss) Allocable to Common Shareholders

Table 5 summarizes other comprehensive income (loss) that is allocable to common shareholders for the periods presented.

Table 5:  Other Comprehensive Income (Loss) Allocable to Common Shareholders



Other comprehensive income (loss) that is allocable to common shareholders for the three months ended September 30, 2016, declined compared to amounts reported for the three months ended September 30, 2015 primarily as a result of sales or redemptions in the Bond Portfolio during the twelve months ended September 30, 2016.

Other comprehensive income (loss) that is allocable to common shareholders for the nine months ended September 30, 2016 declined compared to amounts reported for the nine months ended September 30, 2015 primarily as a result of (i) the financial statement consolidation of a partnership in the second quarter of 2016 that resulted in the derecognition of an investment in bonds and for which $4.2 million of unrealized holding gains were reclassified out of AOCI and into our Consolidated Statements of Operations and (ii) the foreclosure and sale in the first quarter of 2016 of a multifamily property that secured a nonperforming bond investment that resulted in a $11.4 million reclassification of unrealized bond holding gains out of AOCI and into our Consolidated Statements of Operations. 

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Other Changes in Common Shareholders’ Equity

Table 6 summarizes other changes in common shareholders’ equity for the periods presented.

Table 6:  Other Changes in Common Shareholders’ Equity



Other changes in common shareholders’ equity reported for the three months ended September 30, 2016 decreased compared to that reported for the three months ended September 30, 2015, primarily as a result of a decrease in the number of common shares that the Company repurchased during the three months ended September 30, 2016    

Other changes in common shareholders’ equity reported for both the nine months ended September 30, 2016 increased compared to that reported for the nine months ended September 30, 2015 primarily as a result of an increase in the average price at which the Company repurchased its common shares during the nine months ended September 30, 2016. 



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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 and nine months ended September 30, 2016 and 2015 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.

Net Income Allocable to Common Shareholders

Table 7 summarizes net income allocable to common shareholders for the periods presented.

Table 7:  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 8 summarizes net interest income for the periods presented.

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Table 8:  Net Interest Income



Net interest income reported for the three months ended September 30, 2016 increased compared to that reported for the three months ended September 30, 2015 primarily due to an increase in the UPB of solar loans that were directly invested in by the Company in 2016.

Net interest income reported for the nine months ended September  30, 2016 declined compared to that reported for the nine months ended September 30, 2015 primarily as a result of (i) the sale or redemption of certain bond holdings and (ii) the full redemption of a bridge loan in the second quarter of 2015.  This decline was partially offset by an increase in interest income that was driven by an increase in the UPB of solar loans that were directly invested in by the Company in 2016.        

Fee and Other Income

Fee and Other Income includes income on our preferred stock investment, asset management fees and reimbursements as well as other miscellaneous income.

Table 9 summarizes fee and other income for the periods presented. 

Table 9:  Fee and Other Income

Fee and other income reported for the three months ended September 30, 2016 declined compared to that reported for the three months ended September 30, 2015 primarily as a result of the redemption of the Company’s investment in preferred stock in the fourth quarter of 2015.    This decline was partially offset by an increase in asset management fees and reimbursements that was primarily attributable to $0.3 million of property management fees earned by IHS PM and $0.3 million in reimbursements that were recognized in the third quarter of 2016 from our Solar Joint Venture.       

Fee and other income reported for the nine months ended September  30, 2016 declined compared to that reported for the nine months ended September  30, 2015 primarily as a result of the redemption of the Company’s investment in preferred stock in the fourth quarter of 2015.    This decline was partially offset by an increase in asset management fees and reimbursements that was driven primarily by $1.2 million of property management fees earned by IHS PM and $0.8 million in reimbursements recognized from our Solar Joint Venture during the nine months ended 2016.    

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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 10 summarizes other interest expense for the periods presented.

Table 10:  Other Interest Expense





Other interest expense reported for the nine months ended September  30, 2016 declined compared to that reported for the nine months ended September  30, 2015 primarily as a result of a decrease in our cost of funding associated with MMA Financial Holdings, Inc. (“MFH”) subordinated debt, which was restructured during the second quarter of 2015.  The reported decline in other interest expense was also partially attributable to the paydown of certain debt outstanding that was used to fund the Company’s investment in preferred stock, which was redeemed in full in the fourth quarter of 2015.      

Operating Expenses

Operating expenses include salaries and benefits, general and administrative expense, professional fees and other miscellaneous expenses.

Table 11 summarizes operating expenses for the periods presented.    

Table 11:  Operating Expenses



Operating expenses reported for the three months ended September 30, 2016 decreased compared to that reported for the three months ended September 30, 2015 primarily due to (i) a $1.6 million impairment loss that we recognized on our co-investment in SAWHF during the third quarter of 2015 and (ii) foreign currency gains due to the strengthening of the South African Rand against the U.S. Dollar during the three months ended September 30, 2016.  

Operating expenses reported for the nine months ended September 30, 2016 declined compared to that reported for the nine months ended September 30, 2015 primarily due to (i) a $1.6 million impairment loss that we recognized on our co-investment in SAWHF during the third quarter of 2015, (ii) the strengthening of the South African Rand against the U.S. Dollar during the twelve months ended September 30, 2016 and (iii) $1.0 million of nonrecurring expenses that we incurred in the second quarter of 2015 relating to the restructuring of MFH subordinate debt.     

Net Gains on Bonds, Loans, Derivatives, Real Estate, Other Assets and Extinguishment of Liabilities

Net gains on bonds, loans, derivatives, real estate, other assets and extinguishment of liabilities includes unrealized gains or losses on loans, realized gains or losses associated with the sale of bonds and loans and the early redemption of bonds and loans.  Such amounts also include unrealized holding gains or losses associated with our derivative instruments that result from fair value adjustments.

Table 12 summarizes net gains on bonds, loans, derivatives, real estate, other assets and extinguishment of liabilities for the periods presented. 

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Table 12:  Net Gains on Bonds, Loans, Derivatives, Real Estate, Other Assets and Extinguishment of Liabilities

Net gains on bonds, loans, derivatives, real estate,  other assets and extinguishment of liabilities that were reported for the three months ended September  30, 2016 declined compared to that reported for the three months ended September 30, 2015 primarily due to (i) $4.3 million of net gains on real estate associated with the sale of undeveloped land during the third quarter of 2015.             

Net gains on bonds, loans, derivatives, real estate, other assets and extinguishment of liabilities that were reported for the nine months ended September 30, 2016 declined compared to that reported for the nine months ended September 30, 2015 primarily due to (i) $5.1 million of net gains on real estate associated with the sale of an affordable multifamily property during the second quarter of 2015, (ii)  $4.3 million of net gains on real estate associated with the sale of undeveloped land during the third quarter of 2015 and  (iii) $3.8 million net gains on bonds due to the redemption of a bond investment during the second quarter of 2015.     

Equity in Income from Unconsolidated Funds and Ventures

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

Table 13 summarizes equity in income from unconsolidated funds and ventures for the periods presented.

Table 13:  Equity in Income from Unconsolidated Funds and Ventures



Equity in income from unconsolidated funds and ventures that were reported for the three months ended September 30, 2016 increased compared to that reported for the three months ended September 30, 2015 primarily due to the Company’s equity in income from the Solar Joint Venture established in the third quarter of 2015.

Equity in income from unconsolidated funds and ventures that were reported for the nine months ended September 30, 2016 increased compared to that reported for the nine months ended September 30, 2015 primarily due to (i) $4.6 million of equity in income from the Solar Joint Venture established in the third quarter of 2015, (ii) $2.7 million of equity in income from the sale of real estate in the first quarter of 2016 that was owned by a partnership in which the Company held a 50% limited partner interest and (iii) $0.6 million of equity in income from the sale of real estate in the second quarter of 2016 that was owned by a partnership in which the Company held a 98.99% limited partner interest.

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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 is allocable to common shareholders for the periods presented. 

Table 15:  Net Loss from CFVs Allocable to Common Shareholders





The net loss from CFVs allocable to common shareholders for the nine months ended September 30, 2016 increased compared to that reported for the nine months ended September 30, 2015 primarily due to a $0.6 million lower of cost or market adjustment that was recognized in the second quarter of 2016 related to a property held for sale.



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LIQUIDITY AND CAPITAL RESOURCES 

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Liquidity

Our principal sources of liquidity include: (1) cash and cash equivalents; (2) cash flows from operating activities; and (3) cash flows from investing activities. 

Summary of Cash Flows

At September  30, 2016 and December 31, 2015, we had unrestricted cash and cash equivalents of $21.7 million and $21.8 million, respectively, and we believe that cash generated from operating and investing activities, along with available cash and cash equivalents will be sufficient to fund our normal operating needs and meet our obligations as they become due.

During periods presented in this Report, we consolidated certain funds and ventures for financial reporting purposes and, therefore, cash flow activities for such funds and ventures were reflected in our Consolidated Statements of Cash Flows.  In this regard, cash balances of CFVs are classified as “Restricted cash” in our Consolidated Balance Sheets because the Company does not have legal title to such balances.

Table 16 provides a consolidated view of the change in cash and cash equivalents of the Company for the periods presented, though changes in such balances that are attributable to CFVs are separately identified in such disclosure.  

Changes in net cash flows that are reported in Tables 17,  18 and 19 are exclusive of changes in restricted cash balances of CFVs.



Table 16:  Net Increase (Decrease) in Cash and Cash Equivalents





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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 provided by operating activities during the nine months ended September 30, 2016 increased by $12.2 million compared to that reported for the nine months ended September 30, 2015.  This increase was primarily attributable to distributions from investments in partnerships, a decline in originations of loans held for sale and an increase in asset management fees received.

During the first nine months of 2016, we received $7.4 million of distributions from investments in partnerships while we received no distributions from such investments in the nine months ended September 30, 2015.  These distributions included $2.6 million that we received from the sale of real estate that was owned by a partnership in which the Company held a 50% limited partner interest and $4.1 million that we received in connection with our equity investment in the Solar Joint Venture.

Through the nine months ended September 30, 2016, the Company has not funded any loans held for sale.  As a result, net cash flows used in such operating activities have declined. 

The Company experienced an increase in asset management fees and reimbursements received of $2.2 million for the nine months ended September 30, 2016 compared to amounts received during the nine months ended September 30, 2015.  This increase was driven primarily by additional fees of $1.2 million relating to IHS PM and an additional $1.0 million in reimbursements from our Solar Joint Venture that were received during the nine months ended September 30, 2016.

Increases in cash flows provided by operating activities were partially offset by a $3.9 million decrease in preferred stock dividends.  This decline is attributable to the redemption of the Company’s investment in preferred stock in the fourth quarter of 2015. 

The Company also experienced a $1.4 million increase in cash used in operating activities attributable to salaries and benefits.  This increase was primarily a result of higher employee incentive compensation paid by the Company in the first quarter of 2016, as well as the hiring of new employees associated with our Energy Capital and Other Investments business line.

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Investing Activities

Table 18 provides information about net cash flows used in, or 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



Net cash flows provided by investing activities during the nine months ended September 30, 2016 decreased by $51.3 million compared to that reported for the nine months ended September 30, 2015.  This decrease was primarily attributable to originations of loans held for investment, changes in restricted cash and proceeds from the sale of real estate, which were partially offset by a decline in cash used for investments in property partnerships and real estate.

Through the first nine months of 2016, the Company used $41.1 million of cash for originations of loans held for investment while the Company only used $0.4 million for such assets during the nine months ended September 30, 2015. 

The Company received proceeds from the sale of real estate and other investments of $27.0 million for the nine months ended September 30, 2016.  The decline in proceeds received is due to less sales activity in the first nine months of 2016 compared to the first nine months of 2015.  

Through the first nine months of 2016, the Company’s balance of restricted cash increased $18.8 million.  This increase was primarily attributable to cash collateral that was pledged during the third quarter of 2016 in connection with execution of a total return swap.    

Decreases in cash flows provided by investing activities were partially offset by a $23.6 million decrease in cash flows used in investments in property partnerships and real estate for the nine months ended September 30, 2016 compared to amounts used during the nine months ended September 30, 2015.  This decrease was primarily attributable to a $25.0 million investment in our Solar Joint Venture during the third quarter of 2015. 

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 nine months ended September 30, 2016 decreased by $11.7 million compared to that reported for the nine months ended September 30, 2015.  This decrease was primarily due to $37.2 million of cash used for repayment of borrowings during the first nine months of 2015 compared to only $14.8 million that was used for the same purpose during the first nine months of 2016.

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Decreases in cash flows used in financing activities during the nine months ended September 30, 2016 were partially offset by a $9.0 million decrease in proceeds received from borrowing activity.    This decrease was primarily the result of a decrease in proceeds generated from total return swap financing arrangements entered into by the Company during the nine months ended September 30, 2016 as compared to the amount of cash generated by the Company from such purposes during the nine months ended September 30, 2015.  Additionally, cash used by the Company for the purchase of treasury stock increased by $1.2 million for the first nine months of 2016 compared to that reported for the first nine months of 2015.

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 notes payable that were not incurred for purposes other than to finance our interest-bearing assets.  Each of the major types of our debt obligations is further discussed below.

Table 20 summarizes the carrying values and weighted average effective interest rates of the Company’s debt obligations that were outstanding at September 30, 2016.  See Notes to Consolidated Financial Statements –  Note 5, “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 5, “Debt,” for more information. 



Notes Payable and Other Debt – Non-Bond Related

At September  30, 2016, this debt obligation relates primarily to amounts recognized by the Company in connection with a conveyance of solar loans to the Solar Joint Venture.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information. 



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Subordinated debt

At September  30, 2016, the Company had subordinated debt with a UPB of $121.2 million and carrying value of $130.0 million.  The weighted average yield of this debt was 3.3%.  The carrying value of this debt includes $11.5 million of net premiums that will amortize into net interest income as a reduction to debt expense over the life of the debt.  These impacts will be offset by $2.7 million of unamortized debt issuance costs that will amortize as an increase to interest expense over the remaining life of the debt. 



Notes payable and other debt

At September 30, 2016, the Company had notes payable and other debt with a UPB of $13.8 million.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.



Debt Related to CFVs



At September  30, 2016, debt related to CFVs included  $6.7 million debt obligations associated with one of the Guaranteed Funds that we consolidate for reporting purposes.  At September  30, 2016, the carrying value of this debt, which is due on demand, equaled its UPB and its weighted average effective interest rate is 5.5%. 

The remaining $6.8 million of debt related to CFVs relates to three consolidated property partnerships and had a UPB of $5.9 million as of September  30, 2016.  This debt had a weighted average effective interest rate at September  30, 2016 of 4.6% and has various maturity dates that run through May 1, 2039. 

Covenant Compliance and Debt Maturities

At September  30, 2016, the Company was in compliance with all covenants under its debt arrangements.   

Off-Balance Sheet Arrangements

The Company has guaranteed minimum yields on investment to investors in 11 Guaranteed Funds that are consolidated for reporting purposes, along with two additional Guaranteed Funds that are not consolidated for reporting purposes.  The Company has also agreed to make annual mandatory loans to TC Fund I for distribution in connection with interests in TC Fund I that are protected by a tax credit guarantee provided by the Company.  Refer to Notes to Consolidated Financial Statements – Note 8, “Guarantees and Collateral” for more information about our guarantees and certain other contingent arrangements.

Other Contractual Commitments

The Company is committed to make additional capital contributions to one of the real estate partnerships in which it has an interest and to one of the funds that it manages through its International Operations.  Refer to Notes to Consolidated Financial Statements - Note 3, “Investments in Partnerships,” for information about these commitments.

The Company had no unfunded loan commitment as of September 30, 2016.  Refer to Notes to Consolidated Financial Statements - Note 4, “Other Assets.”

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 Statement - Note 6, “Derivative Instruments,” for more information about these instruments.

The Company has two non-cancelable operating leases that expire in 2020 and 2024.  Refer to Notes to Consolidated Financial Statement - Note 9, “Commitments and Contingencies,” for more information about these commitments.

Other Capital Resources

Common Shares

On December 14, 2015, the Board authorized a 2016 share repurchase program (“2016 Plan”) for up to 600,000 shares and on December 31, 2015, the Company adopted a Rule 10b5-1 Plan implementing the Board’s authorization.  During the third quarter of 2016, the Company repurchased 64,762 shares at an average price of $18.38.  Between October 1, 2016 and November 2, 2016, we repurchased 92,052 shares at an average price of $18.17.    As of November 2, 2016, the Company had repurchased 564,022 million shares at an average of $16.68 since the inception of the 2016 Plan.  Effective at the filing of this Report and until modified by further action by the Board, the maximum price at which management is authorized to purchase shares is $21.34 per share. 



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.

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Tax Benefits Rights Agreement

Effective  May 5, 2015, the Company adopted a Tax Benefits Rights Agreement (“Rights Plan”) designed to help preserve the Company’s net operating losses (“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 a period of five years, or until the Board determines the plan is no longer required, whichever comes first. 

As of September  30, 2016, there was one shareholder whose ownership interest in the Company exceeded 4.9% (5.5%).  This shareholder’s ownership stake grew to exceed the 4.9% threshold as a result of the Company’s repurchase of its own shares and, as a result, did not trigger a distribution of rights under the 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. generally accepted accounting principles (“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 “Risk Factors” in our 2015 Form 10-K 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 2015 Form 10-K 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.”