UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2017



OR

For the transition period from __________________ to __________________



Commission File Number 001-11981

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



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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ☑No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,”  “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

There were 5,898,479 shares of common shares outstanding at May 4, 2017.





 

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Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q for the period ended March 31, 2017 (this “Report”) contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements often include words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “seek,” “would,” “could,” and similar words or expressions and are made in connection with discussions of future events and future operating or financial performance. 

Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results.  They are not guarantees of future performance.  By their nature, forward-looking statements are subject to risks and uncertainties.  Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements.  There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report.  They include the factors discussed in Part I, Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 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 2016 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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PART I – FINANCIAL INFORMATION



MMA Capital Management, LLC

Consolidated Financial Highlights

(Unaudited)

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Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations 

INTRODUCTION

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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.  Refer to Notes to Consolidated Financial Statements – Note 14,  “Segment Information” for more information about the revenues, operating profit and loss and total assets for each of our reportable segments.    

U.S. Operations

Our U.S. Operations segment consists of three business lines: Leveraged Bonds, Low Income Housing Tax Credit (“LIHTC”) and Energy Capital.  The Other Investments component of “Energy Capital and Other Investments” was re-allocated to our Leveraged Bonds business line in the fourth quarter of 2016.    

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 we hold 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 are secured by incremental tax revenues generated from the development.  This portfolio also includes 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 enable the Company to retain the economic risks and rewards of the fixed rate bonds that are referenced in such agreements and generally require the Company to pay a variable rate of interest that resets on a weekly basis.  The Company has also executed TRS agreements to synthetically acquire the total return of multifamily bonds that it does not own.    The Company has hedged a portion of the interest rate risk associated with its TRS agreements and other sources of interest rate exposure using various interest rate risk management agreements.  

Table 1 provides key metrics related to all bonds in which we have an economic interest, including bonds in which we acquired an economic interest through TRS agreements (such bonds and TRS agreements are hereinafter referred to collectively as the “Bond Portfolio”).  See Notes to Consolidated Financial Statements – Note 5, “Debt” and Notes to Consolidated Financial Statements – Note 6, “Derivative Instruments” for more information about how TRS and interest rate risk management 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 increased from 102.5%  at December 31, 2016 to 103.0%  at March 31, 2017 primarily as a result of a decrease in the first quarter of 2017 of both market yields on certain bonds and capitalization and discount rates on certain properties that collateralize our bond investments.  The weighted-average debt service coverage ratio of the Bond Portfolio improved from 1.05x  at December 31, 2016 to 1.07x  at March 31, 2017.   



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Other Investments of the Leveraged Bonds Business Line

At March 31, 2017, we owned, or were an equity partner in, three direct investments in real estate consisting of two land parcels and a town center development.  The carrying value of these investments was $26.8 million as of such reporting date.    

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.  At March 31, 2017, the tax credit asset manager had approximately 240 properties under management.  Additionally, we made guarantees through this business line to some of our institutional investors related to the yield on the funds, 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 the investor with which 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) repay any mandatory loans made by the Company to fund investor tax credit losses; 4) pay any expense loans; 5) establish any required reserves; and 6) pay any accrued guarantee fees.  By their nature, investments of TC Fund I are generally expected to break-even from an operating cash flow perspective.  In this regard, excess cash flows to TC Fund I are generated primarily from residual events that generally occur 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.

At March 31, 2017, the Company was contractually due $5.4 million for asset management and administrative services rendered to TC Fund I through such date.  The realization of this receivable is dependent upon the occurrence of residual events relating to affordable properties that are outside of our control in terms of when, and if, such events will occur and are highly subjective in terms of projected value.  As a result, this receivable has not yet been recognized in the Company’s financial statements because it was assessed at March 31, 2017 not to be reasonably assured of collection.  This assessment, which the Company makes each reporting period, 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 amounts in TC Fund I’s cash distribution waterfall. 

In connection with the formation of TC Fund I, the Company 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 and, on December 31, 2015, recognized a guarantee fee receivable for this amount in conjunction with recognizing a liability of equal size related to its obligation to stand ready to perform under this guarantee.  The guarantee fee 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.    At March 31, 2017, the Company had been paid $3.1 million in connection with this receivable (including accrued interest) while the carrying value of our guarantee obligation to TC Fund I was $3.7 million.   

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 accrues interest at 9.5% per annum, compounds annually and will be repaid by TC Fund I after it pays accrued guarantee and asset management fees.  At March 31, 2017, 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.

Interests in and Obligations to a Tax Credit Asset Manager

Prior to the sale of substantially all of our LIHTC 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,

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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 LTPPs.  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 Internal Revenue Code (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 these entities are not classified as revenues in our Consolidated Statements of Operations but rather as income that is allocated to us from CFVs.

When the Company sold its LIHTC 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.    As part of this transaction, the Company also 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 at March 31, 2017.  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%.  From the time of the sale of our LIHTC business through March 31, 2017, the Company received principal and interest payments of $8.7 million from the tax credit asset manager.  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 corresponding conveyance of the Company’s LIHTC business 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 primarily manages LIHTC investments on behalf of third party investors and for its own account.  Our purchase option for the tax credit manager may be exercised between September 30, 2019 and September 30, 2024, though it may be accelerated for certain events.

Direct Real Estate Investments

At March 31, 2017, the Company owned two real estate investments that it acquired on December 31, 2015 in connection with the formation of TC Fund I.  These investments, which consist of two 99% LP interests, had a carrying value of $4.7 million at March 31, 2017.

At March 31, 2017, the Company also owned a 0.01% and 1.0% GP interest in two partnerships that own affordable multifamily properties that collateralize three of our bond investments that we financed with TRS that had a combined notional balance of $14.9 million.  The acquisition of such general partner interests in 2016 resulted in the consolidation of these partnerships for reporting purposes and, as a result, the Company recognized the affordable multifamily properties on its Consolidated Balance Sheets, which had a combined carrying value of $25.9 million at March 31, 2017.  See “Table 1:  Bond Portfolio Summary” for more information.

Other Investments of the LIHTC Business Line

At March 31, 2017, the Company owned taxable senior mortgage debt with a UPB of $13.2 million that primarily finances various affordable housing investments in TC Fund I.

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

In our Energy Capital business line, our wholly owned subsidiary, MMA Energy Capital, LLC (“MEC”), originates debt capital directly and through multiple ventures with a leading global private investment firm and an alternative asset manager (hereinafter, the “Solar Ventures”) to develop, build and operate renewable energy systems throughout North America.  The Solar Ventures include Renewable Energy Lending, LLC (“REL”), Solar Construction Lending, LLC (“SCL”) and Solar Permanent Lending, LLC (“SPL”).  MEC provides loan origination, servicing, asset management and other management services to the Solar Ventures and is entitled to receive reimbursement for most costs the Company incurs in executing its responsibilities as administrative member for the Solar Ventures.  In this business line, we also manage legacy solar assets. 

The Company made an initial $75 million capital contribution into REL in November 2016 that was comprised of solar energy loan investments, including our membership interests in SCL and SPL, in exchange for a  membership interest in REL.  At March 31, 2017, the Company’s investment in REL, which represented  an 85% ownership interest, had a carrying value of $77.1 million.  We received $0.4 million in cash distributions from REL during the three months ended March 31, 2017.   

At March 31, 2017, the UPB of loans that were funded through the Solar Ventures was $131.1 million.  Such loans that were outstanding at March 31, 2017 had a weighted-average tenor and coupon of 19 months and 11.05%, respectively.

Additionally, at March 31, 2017, the Company had a subordinated loan receivable with a UPB of $11.5 million from a residential solar power provider in the U. S. that filed for bankruptcy protection on March 13, 2017 under Chapter 11 of the U.S. Bankruptcy Code.    On April 20, 2017, the bankruptcy court approved the sale of the borrower’s assets for an amount less than the UPB of borrower debt obligations that are senior to that held by the Company.  Given this development and other considerations, the Company does not expect to recover any of this loan’s UPB or its unpaid interest and related fees.  In this regard, the Company recognized an incremental fair value loss of $5.4 million in the first quarter of 2017 in conjunction with adjusting the carrying value of this loan to reflect revised expectations for no recovery.

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 business line.

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 funds and ventures that invest in residential real estate.  This includes four private real estate funds and a publicly-traded real estate investment trust (“REIT”).  IHS earns asset management fees from all five investment vehicles and also invests as a limited partner in the four funds it manages and is entitled to special distributions based on the funds’ returns.    

IHS currently manages five investment vehicles. 







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In managing these funds, we are paid asset management fees and,  in most cases, 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 a  substantial portion of the properties in our IHS-managed funds.

Corporate Operations

Our Corporate Operations segment is responsible for accounting, reporting, compliance and financial planning and analysis services.    This segment has interests in cash, certain interest rate derivative instruments, leases, furniture, fixtures, equipment and various prepaid assets.  The primary obligations of this segment include senior and subordinated debt that had a total UPB of $123.3 million as of March 31, 2017.  





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SUMMARY OF FINANCIAL PERFORMANCE

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Net Worth

Common shareholders’ equity decreased from $125.3 million at December 31, 2016 to $120.3 million at March 31, 2017.  This change was driven by $3.1 million in comprehensive loss that is allocable to common shareholders and $1.9 million in other reductions in common shareholders’ equity. 

Diluted common shareholders’ equity (“Book Value”) per share decreased to $20.32 at March 31, 2017, which represents a decrease of $0.43 per share of Book Value compared to what we reported at December 31, 2016.  This decline was primarily attributable to a net loss from operations. 

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

Comprehensive Loss

We recognized a  comprehensive loss that is allocable to common shareholders of $3.1 million in the first quarter of 2017,  which consisted of a  $3.4 million net loss that is allocable to common shareholders and $0.3 million of other comprehensive income that is allocable to common shareholders.  In comparison, we recognized $6.9 million of comprehensive income that is allocable to common shareholders in the first quarter of 2016, which consisted of $16.6 million of net income that is allocable to common shareholders and $9.7 million of other comprehensive loss 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 a  net loss from core operations 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 2 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 2 as separate line items because the Company generally has a minimal ownership interest in these consolidated entities.  For the periods presented, CFVs were comprised of consolidated property partnerships and certain LIHTC funds in which we guaranteed minimum yields on investment to investors and for which we agree to indemnify the purchaser of our GP interest in such funds from investor claims related to those guarantees.  See Notes to Consolidated Financial Statements –  Note 13,  “Consolidated Funds and Ventures,” for more information about CFVs.  

Table 2:  Balance Sheet Summary 





Common Shareholders’ Equity

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

Table 3:  Changes in Common Shareholders’ Equity

Other Comprehensive Income (Loss) Allocable to Common Shareholders

Table 4 summarizes other comprehensive income (loss) that is allocable to common shareholders for the periods presented.

Table 4:  Other Comprehensive Income (Loss) Allocable to Common Shareholders



Other comprehensive income (loss) that is allocable to common shareholders for the three months ended March 31, 2017,  increased compared to amounts reported for the three months ended March 31, 2016 primarily as a result of 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 5 summarizes other changes in common shareholders’ equity for the periods presented.

Table 5:  Other Changes in Common Shareholders’ Equity



Other changes in common shareholders’ equity reported for the three months ended March 31, 2017 increased compared to that reported for the three months ended March 31, 2016 as a result of price adjustments that were recognized in the first quarter of 2017 in connection with shares previously purchased in a subsidiary. 



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CONSOLIDATED RESULTS OF OPERATIONS

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This section provides a comparative discussion of our Consolidated Results of Operations for the three months ended March 31, 2017 and 2016 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 (Loss) Income Allocable to Common Shareholders

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

Table 6:  Net (Loss) Income Allocable to Common Shareholders



Net Interest Income

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

Table 7 summarizes net interest income for the periods presented.

Table 7:  Net Interest Income





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Net interest income reported for the three months ended March 31, 2017 declined compared to that reported for the three months ended March 31, 2016 primarily due to the financial statement consolidation of certain property partnerships in 2016, which caused certain bond investments of the Company to be eliminated for reporting purposes.  This decline was partially offset by a decline in our cost of funding associated with non-bond related debt, a decrease that was primarily driven by the early redemption in 2016 of senior debt of the Company.   

Fee and Other Income

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

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

Table 8:  Fee and Other Income

Fee and other income reported for the three months ended March 31, 2017 increased compared to that reported for the three months ended March 31, 2016 primarily as a result of an increase in management fees recognized in the first quarter of 2017 in connection with IHS Fund II SA and IHS Fund II SSA as the amount of capital committed to these funds increased during such reporting period.  The reported increase in asset management fees and reimbursements was also partially attributable to: (i) the strengthening of the South Africa rand (“ZAR”) relative to the U.S. dollar (“USD”), which increased the USD-equivalent of ZAR-denominated fee income; and (ii) increases in the amount of reimbursement income received by the Company from our Solar Ventures.    

Other Interest Expense

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

Table 9 summarizes other interest expense for the periods presented.

Table 9:  Other Interest Expense





Other interest expense reported for the three months ended March 31, 2017 increased compared to that reported for the three months ended March 31, 2016 primarily as a result of an increase in the UPB of non-asset related debt due to the (i) consolidation of certain property partnerships, which caused certain bond investments to be eliminated for reporting purposes and corresponding Company debt obligations to be reclassified as non-asset related debt and (ii) issuance of additional non-asset related debt to refinance certain other debt obligations of the Company.      

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Operating Expenses

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

Table 10 summarizes operating expenses for the periods presented. 

Table 10:  Operating Expenses



Operating expenses reported for the three months ended March 31, 2017 increased compared to those reported for the three months ended March 31, 2016 primarily due to an increase in the share price of the Company in the first quarter of 2017, which drove a $1.0 million increase in the amount of stock compensation expense that we recognized during such reporting period,  and an increase in the number of employees.        

Net (Losses) Gains on Bonds, Derivatives, Real Estate, Loans and Other Assets 

Net (losses) gains on bonds, derivatives, real estate, loans and other assets 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 11 summarizes net (losses) gains on bonds, derivatives, real estate, loans and other assets for the periods presented.

Table 11:  Net (Losses) Gains on Bonds, Derivatives, Real Estate, Loans and Other Assets

Net (losses) gains on bonds, derivatives, real estate, loans and other assets that were reported for the three months ended March 31, 2017 declined compared to that reported for the three months ended March 31, 2016 due to a $5.3 million decrease in the fair value of a subordinated loan that the Company made to a residential solar power provider who filed for bankruptcy protection in March 2017.   Additionally, in the first quarter of 2017, there were no redemptions in full of the Company’s bond investments, which drove the reported decline in net gains on bonds.     

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

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Table 12:  Equity in Income from Unconsolidated Funds and Ventures



Equity in income from unconsolidated funds and ventures that were reported for the three months ended March 31, 2017 declined compared to that reported for the three months ended March 31, 2016, primarily due to a non-recurring $2.7 million gain that was recognized in the first quarter of 2016 in connection with the sale of real estate that was owned by a partnership in which the Company held a 50% limited partner interest.

Net Loss from CFVs Allocable to Common Shareholders

Table 13 allocates the net loss from CFVs to noncontrolling interests in CFVs and common shareholders for the periods presented.

Table 13:  Net Loss from CFVs Allocable to Common Shareholders





Table 14 further attributes the reported net loss from CFVs that is allocable to common shareholders for the periods presented.

Table 14:  Net Loss from CFVs Allocable to Common Shareholders





The net loss from CFVs allocable to common shareholders for the three months ended March 31, 2017 declined compared to that reported for the three months ended March 31, 2016 primarily due to the allocation of $0.3 million of interest income that was recognized in connection with bond investments that were eliminated for reporting purposes.  The elimination of these investments was prompted as a result of the financial statement consolidation of certain property partnerships during the second and fourth quarters of 2016.

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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 March 31, 2017 and December 31, 2016, we had unrestricted cash and cash equivalents of $30.0 million and  $45.5 million, respectively.  We believe that cash generated from operating and investing activities, along with available cash and cash equivalents has been, and will continue to be, sufficient to fund our normal operating needs and meet our obligations as they become due.

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 15 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 16,  17 and 18 are exclusive of changes in restricted cash balances of CFVs.



Table 15:  Net Increase (Decrease) in Cash and Cash Equivalents









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Operating Activities

Table 16 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 16:  Net Cash Flows Associated With Operating Activities



Net cash flows used in operating activities during the three months ended March 31, 2017 increased by $7.3 million compared to those reported for the three months ended March 31, 2016.  This increase was primarily attributable to a decline in distributions from investments in partnerships and an increase in salaries and benefits:



Investing Activities

Table 17 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. 

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Table 17:  Net Cash Flows Associated With Investing Activities





Net cash flows used in investing activities during the three months ended March 31, 2017 increased by $31.2 million compared to those reported for the three months ended March 31, 2016.  This increase was primarily attributable to a decline in proceeds from the sale of real estate and other investments, a decline in principal payments and sales proceeds received on bonds and loans and an increase in advances on and originations of loans held for investment. 



Financing Activities

Table 18 provides information about net cash flows provided by, or used in, financing activities for the periods presented. 

Table 18:  Net Cash Flows Associated With Financing Activities



Net cash flows used in financing activities during the three months ended March 31, 2017 decreased by $7.9 million compared to those reported for the three months ended March 31, 2016.  This decrease was attributable to $9.2 million of cash used for repayment of borrowings during the first quarter of 2016 compared to only $1.1 million that was used for the same purpose during the first quarter of 2017.

Capital Resources

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

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Table 19 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at March 31, 2017.  See Notes to Consolidated Financial Statements –  Note 5, “Debt,” for more information about these contractual commitments.



Table 19:  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. 



Subordinated debt

At March 31, 2017, the Company had subordinated debt with a UPB of $119.8 million and a  carrying value of $128.4 million.  The weighted-average yield of this debt was 3.5%.  The carrying value of this debt includes $11.2 million of net premiums that will amortize into net interest income as a reduction to debt expense over the term of the debt.  These impacts will be offset by $2.6 million of unamortized debt issuance costs that will amortize as an increase to interest expense over the remaining term of the debt. 



Notes payable and other debt

At March 31, 2017, the Company had notes payable and other debt with a UPB of $18.3 million.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.



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Debt Related to CFVs

At March 31, 2017, debt related to CFVs included $6.7 million of debt obligations associated with one of the Guaranteed Funds that we consolidate for reporting purposes.  At March 31, 2017, the carrying value of this debt, which is due on demand, equaled its UPB and its weighted-average effective interest rate is 6.0%. 

The remaining $6.3 million of debt related to CFVs relates to two consolidated property partnerships with a UPB of $5.4 million at March 31, 2017.  This debt had a weighted-average effective interest rate of 4.0%  at March 31, 2017 and has various maturity dates that run through April 1, 2027. 

Covenant Compliance and Debt Maturities

At March 31, 2017, 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 also has agreed to make mandatory loans to TC Fund I for distribution to the fund investor in the event of certain tax credit shortfalls covered by a tax credit guarantee provided by the Company.  Refer to Notes to Consolidated Financial Statements – Note 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 certain of its investments in partnerships and ventures.  Refer to Notes to Consolidated Financial Statements - Note 3, “Investments in Partnerships,” for information about these commitments.

The Company had no unfunded loan commitments at March 31, 2017.  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 Statements - Note 6, “Derivative Instruments,” for more information about these instruments.

The Company has four non-cancelable operating leases that expire in 2017, 2020 and 2024.  Refer to Notes to Consolidated Financial Statements - Note 9, “Commitments and Contingencies,” for more information about these commitments.

Other Capital Resources

Common Shares

On December 1, 2016, the Board authorized a 2017 share repurchase program (“2017 Plan”) for up to 580,000 shares and the Company adopted a Rule 10b5-1 Plan implementing the Board’s authorization.  Between January 1, 2017 and May 4, 2017, the Company purchased 111,100 shares at an average price of $20.76.  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 $23.37 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.

Tax Benefits Rights Agreement

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

At March 31, 2017, we had two shareholders with a greater than a 4.9% stake in the Company.  Additionally, two employees of the Company would each have a greater than 4.9% stake in the Company for purposes of the Rights Plan to the extent that they exercised their vested option awards at March 31, 2017.  The Board of Directors has determined that these holdings do not constitute a triggering event for purposes of our Rights Plan. 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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



We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions.  Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board of Directors.  See “Item 1A - Risk Factors” 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 2016 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.”