UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June  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 6,099,535 shares of common shares outstanding at August 3, 2016.



 

---

 









 

---

 

Cautionary Statement Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q for the period ending June  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.







PART I – FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND    RESULTS OF OPERATIONS



Organization

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.  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 Credits (“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).

In our Leveraged Bonds business line, we primarily own and manage bonds that finance affordable housing and infrastructure in the U.S.  Within this business line, we manage most of the Company’s bonds and associated financings.  The bond portfolio is comprised primarily of multifamily tax-exempt bonds and total return swaps (“TRS”) that are referenced to these types of bonds, but also includes other real estate related bond investments. 

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.  We provide asset management and administrative services to a limited liability company formed by the Company and a commercial bank (“TC Fund I”) and have provided a limited guarantee of the tax credits expected to be generated by TC Fund I’s portfolio of investments.  As part of this business line, we have made other guarantees to third parties related to the receipt of tax credits and the performance of the underlying assets and we have loan receivables from, and an option to purchase, a tax credit asset manager.   

In our Energy Capital and Other Investments business line, our wholly owned subsidiary MMA Energy Capital (“MEC”) provides project capital to develop and build renewable energy systems primarily through a joint venture that we have with an alternative asset manager (our “Solar Joint Venture).  Within this business line, we also manage equity investments in real estate, land and solar assets retained from the sale of legacy businesses.  

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.  IHS currently manages three funds: the South Africa Workforce Housing Fund (“SAWHF”), which is a multi-investor fund and is fully invested; International Housing Solutions Residential Partners Partnership (“IHS Residential Partners”), which is a single-investor fund targeted at the emerging middle class in South Africa; and IHS Fund II (“IHS Fund II”), which is a multi-investor funds targeting investments in affordable housing, including green housing projects, within South Africa and Sub-Saharan Africa.  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 accounting, reporting, compliance and planning, which are fundamental to our success as a global fund manager and publicly traded company in the U.S.



Summary of Financial Performance

Common shareholders’ equity increased from $121.5 million at March 31, 2016 to $122.1 million at June 30, 2016.  This change was driven by $5.1 million in net income that is allocable to common shareholders, $0.3 million in other comprehensive income that is allocable to common shareholders and $4.8 million in other reductions in common shareholders’ equity. 

Diluted common shareholders’ equity per share increased to $19.62 at June 30, 2016, which represents a 5.4%, or $1.00 per share of book value, increase compared to what we reported at March 31, 2016.  Purchases of common shares in the second quarter of 2016

---

 

accounted for a $0.12 increase in diluted common shareholders’ equity per share, with the balance of growth in the Company’s book value per share being primarily attributable to a net increase in the fair value of our investments in bonds.

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

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.

Balance Sheet Analysis

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 1 provides a balance sheet summary for the periods presented.  For presentational purposes, assets, liabilities and equity that are attributable to noncontrolling interest holders of consolidated funds and ventures (“CFVs”) are presented in Table 1 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 (“Guaranteed Funds”).  See Notes to Consolidated Financial Statements –  Note 13,  “Consolidated Funds and Ventures,” for more information about CFVs.  

Table 1:  Balance Sheet Summary  

---

 

Common Shareholders’ Equity

Table 2  summarizes the changes in common shareholders’ equity for the periods presented.

Table 2:  Changes in Common Shareholders’ Equity

Other Comprehensive Income (Loss) Allocable to Common Shareholders

Table 3 summarizes other comprehensive income (loss) that is allocable to common shareholders for the periods presented.

Table 3:  Other Comprehensive Income (Loss) Allocable to Common Shareholders



Other comprehensive income (loss) that is allocable to common shareholders for the six months ended June 30, 2016 declined compared to amounts reported for the six months ended June 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 and that prompted the reclassification of unrealized bond holding gains out of AOCI and into our Consolidated Statements of Operations upon the derecognition of the Company’s investment in bonds. 

Other Changes in Common Shareholders’ Equity

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

Table 4:  Other Changes in Common Shareholders’ Equity



Other changes in common shareholders’ equity reported for both the three months and six months ended June 30, 2016 declined compared to that reported for the three months and six months ended June 30, 2015 primarily as a result of an increase in the average price at which the Company purchased its common shares during such reporting periods. 



Consolidated Results of Operations

This section provides a comparative discussion of our Consolidated Results of Operations for the three months and six months ended June 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 5 summarizes net income allocable to common shareholders for the periods presented.

---

 

Table 5:  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 6  summarizes net interest income for the periods presented.

Table 6:  Net Interest Income



Net interest income reported for the three months ended June 30, 2016 declined compared to that reported for the three months ended June 30, 2015 primarily as a result of the sale or redemption of certain bond holdings.

Net interest income reported for the six months ended June  30, 2016 declined compared to that reported for the six months ended June 30, 2015 primarily as a result of (i) the sale or redemption of certain bond holdings, (ii) the full redemption of a bridge loan in the

---

 

second quarter of 2015 and (iii) a decrease in the amount of unscheduled principal payments received on two bond investments received during the six months ended June  30, 2016 compared to that received for the six months ended June  30, 2015.     

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 7  summarizes fee and other income for the periods presented. 

Table 7:  Fee and Other Income

Fee and other income reported for the three months ended June 30, 2016 declined compared to that reported for the three months ended June 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 $0.4 million of fees relating to IHS PM and $0.2 million in reimbursements that were received in the second quarter of 2016 from our Solar Joint Venture.   

Fee and other income reported for the six months ended June  30, 2016 declined compared to that reported for the six months ended June  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 additional fees of $0.9 million relating to IHS PM and an additional $0.5 million in reimbursements from our Solar Joint Venture that were received during the six months ended 2016.   

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 8 summarizes other interest expense for the periods presented.

Table 8:  Other Interest Expense





Amounts reported for the three months and six months ended June  30, 2016 declined compared to that reported for the three months and six months ended June  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 9  summarizes operating expenses for the periods presented.    

Table 9:  Operating Expenses



Operating expenses reported for the three months and six months ended June 30, 2016 declined compared to that reported for the three months and six months ended June 30, 2015 primarily due to $1.0 million of nonrecurring expenses that we incurred in the second quarter of 2015 relating to the restructuring of MFH subordinate debt.  The impact of this decline for the six months ended June 30, 2016 compared to that reported for the six months ended June 30, 2015 was partially offset by (i) a $0.3 million increase in stock-based compensation expense that was driven by an increase in the market price for the Company’s common stock, (ii) a $0.6 million increase in cash-based compensation expense that was driven by an increase in employee headcount and (iii) a $0.5 million increase in professional fees primarily as a result of incremental audit fees that were incurred in the first quarter of 2016 in connection with the Company’s change in reporting status as an accelerated filer and that required our independent registered accountant to issue an audit report on the effectiveness on our internal controls over financial reporting at December 31, 2015.  

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

Net gains on bonds, loans, derivatives, real estate and other assets includes realized  gains or losses associated with the sale of such assets 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 10 summarizes net gains on bonds, loans, derivatives, real estate and other assets for the periods presented. 

Table 10:  Net Gains on Bonds, Loans, Derivatives, Real Estate and Other Assets

Net gains on bonds, loans, derivatives, real estate and other assets that were reported for the three months and six months ended June 30, 2016 declined compared to that reported for the three months and six months ended June 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 and (ii) $3.8 million net gains on bonds due to the redemption of a bond investment during the second quarter of 2015.  For the six months ended June 30, 2016, the effect of transactions that caused a decline in net gains reported was partially offset by $2.3 million of net gains associated with the sale or redemption of two investments in bonds during the first quarter of 2016.     

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

---

 

Table 11:  Equity in Income from Unconsolidated Funds and Ventures



Equity in income from unconsolidated funds and ventures that were reported for the three months ended June 30, 2016 increased compared to that reported for the three months ended June 30, 2015 primarily due to (i) $1.5 million of equity in income from the Solar Joint Venture that we established in the third quarter of 2015 and (ii) $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.

Equity in income from unconsolidated funds and ventures that were reported for the six months ended June 30, 2016 increased compared to that reported for the six months ended June 30, 2015 primarily due to (i) $3.3 million of equity in income from the Solar Joint Venture that we 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.

Net Loss from CFVs Allocable to Common Shareholders

Table 12 allocates the net loss from CFVs to noncontrolling interests in CFVs and common shareholders for the periods presented.

Table 12:  Net Loss from CFVs Allocable to Common Shareholders



Table 13 further attributes the reported net loss from CFVs that is allocable to common shareholders for the periods presented. 

Table 13:  Net Loss from CFVs Allocable to Common Shareholders





The net loss from CFVs allocable to common shareholders for the three months and six months ended June 30, 2016 increased 

---

 

compared to that reported for the three months and six months ended June 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.



Liquidity and Capital Resources

Our principal sources of liquidity include cash and cash equivalents and cash flows from operating and investing activities.  At June  30, 2016 and December 31, 2015, we had unrestricted cash and cash equivalents of $18.3 million and $21.8 million, respectively, and we believe that cash generated from 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 14 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 15, 16 and 17 are exclusive of changes in restricted cash balances of CFVs.



Table 14:  Net Increase (Decrease) in Cash and Cash Equivalents





---

 

Operating activities

Table 15 provides information about net cash flows provided by, or used in, operating activities for the periods presented.

Table 15:  Net Cash Flows Associated With Operating Activities



Net cash flows provided by operating activities during the six months ended June 30, 2016 increased by $9.7 million compared to that reported for the six months ended June 30, 2015.  This increase was primarily attributable to distributions from investments in partnerships and a decline in originations of loans held for sale.

During the first six months of 2016, we received $5.9 million of distributions from investments in partnerships while we received no distributions from such investments in the six months ended June 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 $2.6 million that we received in connection with our equity investment in the Solar Joint Venture.

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

Increases in cash flows provided by operating activities were partially offset by a $2.6 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 $1.3 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 Investment business line.

---

 

Investing activities

Table 16 provides information about net cash flows provided by, or used in investing activities for the periods presented.

Table 16:  Net Cash Flows Associated With Investing Activities



Net cash flows provided by investing activities during the six months ended June 30, 2016 decreased by $33.5 million compared to that reported for the six months ended June 30, 2015.  This decrease was primarily attributable to originations of loans held for investment and proceeds from the sale of real estate.

Through the first six months of 2016, the Company used $23.3 million of cash for originations of loans held for investment while the Company did not originate such assets during the six months ended June 30, 2015. 

During the first quarter of 2016, the Company foreclosed upon, and subsequently sold, a multifamily property that secured a nonperforming bond investment.  This was the only real estate sale that was closed by the Company in the first six months of 2016 while the Company had a higher volume of real estate sales during the six months ended June 30, 2015.     

Decreases to cash flows provided by investing activities were partially offset by an increase of $1.8 million in capital distributions received from investments in partnerships for the six months ended June 30, 2016 compared to amounts received during the six months ended June 30, 2015. 

Financing activities

Table 17 provides information about net cash flows provided by, or used in, financing activities for the periods presented. 

Table 17:  Net Cash Flows Associated With Financing Activities



Net cash flows used in financing activities during the six months ended June 30, 2016 increased by $8.4 million compared to that reported for the six months ended June 30, 2015.  This increase was primarily due to $25.6 million of proceeds generated from TRS financing arrangements that were entered into during the six months ended June 30, 2015.  Additionally, cash used by the Company for the purchase of treasury stock increased by $1.9 million for the six months ended June 30, 2016 compared to that reported for the six months ended June 30, 2015.

Increases in cash flows used in financing activities during the six months ended June 30, 2016 were partially offset by a $19.8 million decrease in cash used for the repayment of borrowings.  Such decrease was primarily the result of (i) $14.9 million more of principal payments made during the six months ended June 30, 2015 on the subordinate debt issued by MFH as compared to principal payments made during the six months ended June 30, 2016 and (ii) a $3.1 million decrease in cash used to terminate TRSs during 2016 as compared to the amount of cash used by the Company for such purposes during the six months ended June 30, 2015.



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.



Debt Obligations



Table 18 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at June 30, 2016.  See Notes to Consolidated Financial Statements –  Note 5, “Debt,” for more information about these contractual commitments.



Table 18:  Asset Related Debt and Other Debt





Asset Related 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 TRSs.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information. 



Notes Payable and Other Debt – Non-Bond Related

At June  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. 



---

 

Other Debt

Subordinated debt

At June  30, 2016, the Company had subordinated debt with an unpaid principal balance (“UPB”) of $121.9 million and carrying value of $130.8 million.  The weighted average yield of this debt was 3.2%.  The carrying value of this debt includes $11.6 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 June 30, 2016, the Company had notes payable and other debt with a UPB of $9.9 million.  See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.



Debt Related to CFVs



At June  30, 2016, debt related to CFVs includes a $6.7 million debt obligation of one of the Guaranteed Funds that we consolidate for reporting purposes.  At June  30, 2016, the carrying value of this debt, which is due on demand, equals its UPB and its weighted average effective interest rate is 5.5%. 

The remaining $3.1 million of debt related to CFVs relates to two consolidated property partnerships and had a UPB of $2.8 million as of June  30, 2016.  This debt has a weighted average effective interest rate at June  30, 2016 of 4.3% and has various maturity dates that run through May 1, 2039. 

Covenant Compliance and Debt Maturities

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



Company Capital



Common Shares



On December 14, 2015, the Board authorized a 2016 share repurchase program (“2016 Plan”) for up to 0.6 million shares and on December 31, 2015, the Company adopted a Rule 10b5-1 Plan implementing the Board’s authorization.  During the second quarter of 2016, the Company repurchased 0.3 million shares at an average price of $16.67.  Between July 1, 2016 and August 3, 2016, we repurchased 19,000 shares at an average price of $18.33.    As of August 3, 2016, the Company had repurchased 0.4 million shares at an average of $16.17 since the 2016 Plan’s inception.  The maximum price at which management is authorized to purchase shares is $19.62 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 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.  Refer to “Income Taxes” for more information regarding our NOLs. 



As of June  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.

---

 

Bond Portfolio



Portfolio Summary



Table 19 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 TRSs that the Company accounts for as derivatives as of June  30, 2016 (such bonds and TRSs 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 TRSs are reported in the Company’s financial statements.



Table 19:  Bond Portfolio - Summary



The performance of our Bond Portfolio continued to show improvement in the second quarter of 2016.  The fair value of the Bond Portfolio as a percentage of its UPB improved from 101.2% as of March 31, 2016 to 102.4% as of June 30, 2016.  Similarly, the weighted average debt service coverage ratio improved from 1.04x as of March 31, 2016 to 1.07x as of June 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.

In Table 20, 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 June 30, 2016 and December 31, 2015.  In estimating such impacts, we also assumed that expected future cash flows associated with the Bond Portfolio remained constant relative to projections that were consumed in fair value measurements used to report carrying values in our Consolidated Balance Sheets at June 30, 2016 and December 31, 2015. 

---

 

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



Table 20:  Exposure of the Bond Portfolio to Increases in Market Yields and Capitalization Rates









LIHTC

Contractual Interests in 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 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.  In this regard, and as of June 30, 2016, the Company is contractually due $2.2 million for services rendered through such date.  However, such amount has not yet been recognized in the Company’s financial statements.  The Company’s analysis of when such amount may be recognized considers various factors that are determinative to whether payment is reasonably assured of collection and include, but are not limited to, the length of time within which the Company expects to receive payment and the priority of payment of such fees relative to other interests in TC Fund I.  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.  The Company assesses whether asset management fees that are legally due are reasonably assured of collection each reporting period.

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 such guarantee, the Company is contractually entitled to an upfront guarantee fee from TC Fund I of $4.2 million.  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, compounded annually, and will be paid solely from cash flows received by TC Fund I from its portfolio of limited partnership investments.   

As of June 30, 2016, the Company had a $5.3 million loan receivable from TC Fund I that was recognized in the Company’s financial statements on December 31, 2015.  This loan legally accrues interest at 9.5% per annum compounded 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 June 30, 2016, this loan is on non-accrual status, which is re-assessed by the Company each reporting period.

Direct Real Estate Investments

As of June 30, 2016, the Company owns five real estate investments that it acquired on December 31, 2015 in connection with the formation of TC Fund I.  These investments, which consisted of one wholly owned limited partnership and four 99% limited partnership interests, had a carrying value of $14.6 million at June 30, 2016.

As of June 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 recognition of the affordable multifamily property, which had a carrying value of $14.7 million at June 30, 2016, due to the financial statement consolidation of the partnership.

Seller Financing

The Company has a subordinated loan receivable from a tax credit asset manager to whom it provided financing in connection with the sale of a portion of our LIHTC business.  The unpaid principal balance of this loan was $13.0 million as of June 30, 2016.

This loan has performed pursuant to its contractual terms and, since the loan was originated, the tax credit asset manager has made

---

 

principal and interest payments to the Company of $6.0 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 said conveyance could not be treated as a sale for financial reporting purposes. 

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.



Energy Capital and Other Investments

Renewable Energy Project Lending

As of June 30, 2016, the Company had contributed $50.0 million in capital to the Solar Joint Venture.  This investment, which represents a 50% ownership interest in the Solar Joint Venture, had a carrying value of $51.2 million as of June 30, 2016 and we received $3.1 million in related cash distributions during the first six months of 2016.    

As of June 30, 2016, the UPB of loans reflected on the balance sheet of the Solar Joint Venture was $109.8 million, while the UPB of loans reflected on the Consolidated Balance Sheets of the Company was $26.4 million.

As of June 30, 2016, outstanding loans that have been originated by MEC, whose average tenor ranges from one to ten months and whose weighted average coupon is 9.9%, are performing pursuant to their contractual terms.

Other Investments 

At June 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 that had an affordable multifamily property partnership.  We also owned four legacy solar installations.  The carrying value of these investments was $27.4 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.



Critical Accounting Policies and Estimates

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 “MD&A—Critical Accounting Policies and Estimates” in our 2015 Form 10-K for a discussion of these critical accounting policies and estimates.



Impact of Future Adoption of New Accounting Guidance

We identify and discuss the expected impact on our condensed consolidated financial statements of recently issued accounting guidance in Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies.”