Description

MMA Capital Management

MMAC was originally written up when it was known as MuniMae and traded over the counter.  We thank Mpk391 for pointing it out then and since he closed it out we thought we’d post it as a new idea with updates on what’s transpired since and why it is a compelling idea today.  See that writeup for background, as we will focus on what we’ve learned since.

MMA Capital is a grab bag of mismarked assets and overstated liabilities.  Current shareholder’s equity as of the last quarter was $105m or $15.55/sh.  Subsequent events put it at $113m or ~$16.75/sh.  It has grown nicely over the years but as a GAAP figure BV understates economic BV/sh.  As time goes on, the economic BV will become more obvious and work its way into the GAAP book value and the shares should react accordingly.  Large repurchases are accretive when done below GAAP BV/sh and wildly accretive to economic BV/sh.  

MMA also recently got involved with the asset sales at GE Capital, effectively facilitating the sale of GE’s Low Income Housing Tax Credit business to Bank of America and collecting a fee for managing the assets and earning the right to 70% of the incentive fees earned on the back end.  They also got a few properties and interests that they will work to unwind over the next 24 months.

Over the last 2 years, both the company and management have been buying shares in the open market aggressively.  Management for the 1st half of 2015 was spending over 100% of their annual after tax income buying shares every week.  The company is out there in the market purchasing 10% of the float every year at prices below the most recent quarter’s BV/sh.  10% is the most they can do without jeopardizing their sizeable NOL.  On an economic basis, we think they’re buying a dollar for a fraction of a dollar.  

MMA, at its core, is an asset management business.  They manage a portfolio of munis, a solar lending business, a South African Housing business, and some other projects.  While we don't love some of the businesses, like solar lending, they should help generate operating earnings at some point. As they scale up the asset management businesses, we think they’ll generate operating profits that deserve some multiple, but it is really the mismarked balance sheet we find intriguing.

How is the balance sheet mismarked?

First, the assets are understated.  

MMA has a $400m+ NOL with a full valuation allowance that don’t expire until 2027, for reasons we will explain, we think they can make a real dent in them.   There is a NOL protection plan in place.

It also has an unrealized gain of $15.7m from the “sale” of its Low Income Housing Tax Credit business t because of a contingent liability that is highly unlikely to be paid.  They sold the business to Morrison Grove Management (MGM) and they retained an option to buy it back for $12m in 2019.  MGM had a business about the same size as MMA, their option is to buy the whole thing, the total funds represent roughly $2b in assets.  The option has tremendous value as 2019 is about the time they can start unwinding these funds by selling properties, earning potentially large incentive fees.  These can be offset with the NOLs.  Neither the sale, nor the option appear on the BS.

There is also some real estate they acquired mid crisis, most notably ⅓ of the Savannah River Landing, which is carried at $6m.  Pre-crisis, the SRL was going to be an $800m mixed use development.  Recently, there have been rumblings out of the local politicians about a new development breaking ground.  

http://wsav.com/2015/07/07/city-seeking-contract-to-expand-and-repair-east-river-street-expecting-large-development-to-begin/

MMA recently had their annual board meeting in Savannah to tour the site.  It is hard to say what this is worth, or what their involvement with it will ultimately be, but it is worth a lot more to MMA if a $1b development project is close to getting started.  There are a few others they still own but this is the most material in our view.

The value of the South African Housing business isn’t reflected anywhere on the balance sheet other than the co-investment in the funds, but MMA owns 100% of it.  They didn’t always, when they took their ownership up 13% from 83 to 96% they paid $1.6m, implying the whole business may be worth nearly $12m, netting out $1.6m they spent gets us to $10.4m in potential value.  They also started a property management venture related to this business which should presumably increase performance of the properties and generate fees.

There is also MMA Energy, which is a solar lending business that they just started. It's goal is to provide construction lending. They have an equity partner in Global Advisors, each is kicking in $50m to start this portfolio. MMA should get a proportionate share of interest income and origination fees. This is more of an option at this stage, but they anticipate holding a little leverage and getting to a low teens ROE. Like we said, we don't love this business, but it should help them generate income from operations.

There was a preferred being carried for $5m less than par, but it was redeemed in the yet to be reported fourth quarter.

Management also alluded to the fact their bond portfolio is continuing to experience improved credit and may have positive marks upward.

How are liabilities overstated?

The liabilities are overstated in two main areas.  

First, the deferred revenue associated with the LIHTC fund business they sold is still carried, this is about $11m.  

Second, they have some very low cost debt that is very long term where they disclose, but do not mark it, at estimated fair value.  The debt is 20 yrs, and at Libor plus 2%, with some amortization 0.50%/qtr.  This represents a significant funding advantage.  Using various, more market like for MMA, discount rates means the economic value of the liability is overstated, between $70 (@ 15%) & $86m (@20%) or so, just for the sub debt.  

We don't mind them foregoing the fair value election.  Part of the reason they haven't made a fair value election, in our opinion, is so people don't realize what cheap funding they have and MMA can continue to acquire shares attractive prices.

Third, in the 4thQ they were able to get $3m of debt extinguished in an estate settlement.

GE LIHTC portfolio a big coup

Though the stock is up 10% or so since the announcement, the GE deal is a bigger deal for MMA than most people following it realize.  

GEs portfolio is 2x as large as the MGM portfolio, but it gives them immediate scale.  Bank of America invested $211m and MMA gets a management fee of 2% of BACs investment.  They also get 70% of the residuals (incentive fees) as the portfolio is unwound.  The GE portfolio is rather mature, and they should start to realize incentive fees over the year or two.  

To give context, BAC paid $211m for the $150m or so in remaining tax credits, which means they paid $61m for the 30% incentive fee and some passive losses they get along the way.  In theory they should be applying a high discount rate to the cash flows, meaning nominal cash flows should be much higher, MMA owns 70% of those.  This also helps put some context to the MGM fees, which MMA should own entirely.  MGM is a $2b portfolio, GE is a little over 2x the size in terms of units (650 vs ~300).  

The GE portfolio not only helps them get back to scale in LIHTC, but it allows them a credible path toward eating into a chunk of that NOL.

Adding it up

Q3 2015 shareholders equity is about $105m, since the end of the Q there has been $8m added due to subsequent events to go to $113m.  Additionally, we have $15m in understated assets, $11m of overstated liabilities from the MGM transaction.  That gets us to $139m.  There is also the SA fund venture at ~$10m to go to $149m.  On 6.7m shares that's north of $22/sh book value.  The economic value of the debt is probably $70m lower than stated, or over $10/sh.  On top of that there is also the option of SRL development, the $420m NOL carried at $0, and all the potential future incentive fees.

The buyback

Since the accounting and the businesses are both confusing, this has allowed MMA to aggressively repurchase shares at a discount GAAP BV.  While accretive on a GAAP basis, we think this has resulted in a buyback that is highly accretive to economic BV, taking into account the balance sheet and NOL shielded incentive fees they could earn.  They have been buying back about 10% of the float.  Shares outstanding have gone from over 8.7m to 6.7m over the last 3 years, while management's stake has grown to north of 10%. It is important to note they've been out of the market since the last plan was used in its entirety and they just announced a new plan for another 600k shares to start in 2016.  By the time they exercise the MGM option at the end of 2019, it is entirely possible they have less than 4.5m shares just as it becomes clearer how much they could make from the incentive fees.  

Risks

The Muni & Solar lending businesses could suffer losses

The LIHTC business may not generate incentive fees

SRL may never get going

NOL may never get utilized

Catalyst

Continued buybacks

Values become more apparent over time

LIHTC monetization