MMA Capital Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 10 Aug 2017

[Operator:]

Good morning ladies and gentlemen and welcome to the MMA Capital Management LLC Second Quarter of 2017 Financial Results and Business Update Conference Call. My name is Kate and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of this conference call. Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital Management LLC, which are based on current expectations. These comments are subject to significant risks and uncertainties, which include those identified in the company’s filings with the Securities and Exchange Commission that could cause actual results to differ materially from those expressed in these forward-looking statements. The company undertakes no obligation to update any of the information contained in the forward-looking statements. Please note this event is being recorded. I would now like to turn the call over to Mr. Michael Falcone CEO, of MMA Capital Management LLC.

[Michael Falcone:]

Thank you, Kate. Good morning everyone and welcome. With me on the call today are Dave Bjarnason, our Chief Financial Officer; and Executive Vice President, Gary Mentesana. Dave and I will deliver our prepared remarks, after which we will be available to take questions. Purpose of our call today is to review our second quarter 2017 results and to provide an overall business update, including some insights into how we see our business moving forward. With respect to our second quarter results, which Dave will review in detail later, we ended the quarter with $127.5 million of common equity, which represents an increase of $7.2 million or 6% during the quarter. Diluted common shareholders' equity per share or book value came in at $21.69 an increase of $1.37 per share of 6.7% during the which reflects the impact of both performance and our buyback plan on the book value per share. The increase in book value is driven by $7.4 million of net income $800,000 of comprehensive income and was offset by $1 million of other reductions to common shareholders' equity primarily driven by share buybacks. Overall, the income that we represent in the second quarter reflects positive returns and the continued growth in our investment in lending platforms and an initial recognition of management fee income from the TC Fund 1and a gain from the extinguishment of debt. We also saw a reduction in operating expenses and net fair value losses in the second quarter, as operating income in the second quarter operate at first quarter loss, we have in the first six months in the year recognized $2.2 million increase in common shareholders' equity of adding $0.94 per share at book value. During the quarter, we purchased approximately 42,000 shares with our 2017 buyback authorization at an average price of $22.29 per share which close to $1 million reduction in common shareholders' equity. As previously discussed, this program is proven to be an important lever in our efforts to increase shareholder value with the filing with our second quarter Form 10-Q the buyback price from increases for the coming quarter to $24.94. Across our U.S. operations more broadly, we saw positive returns from our bond portfolio experienced continued growth in our energy lending platform and so our long-term housing business line continued to perform as expected. Positive store lines have gotten us back on track for the year. Within our leverage bonds business line, our bond portfolio continues to performance at a high level as they were no new defaults while the average statutory coverage rate and fair value of our holdings further increased in the second quarter. As we've discussed in the past, weakness in two infrastructure bonds is related to Spanish Fort, continue to be an area of concern going forward because in the softening in the retail market as such investments will performance consistent with contractual terms in the first half of the year. Our LIHTC business continue to meet or exceed our expectations in a number of capital transactions associated with TC Fund 1 investments closed in the second quarter. And therefore, we were able to recognize $3.9 million of asset management fees in this reporting period. in this regard, our underwriting of the GE Transaction continues to be validated. In addition, capital transactions early close in the third quarter paid for more income recognition in the second half of the year. We continue to expect that our returns in the TC Fund 1 will need or exceed our initial expectations over the long-term. Although, because capital transactions are generally beyond our control the timing of revenue recognition in the future will likely be lumpy. It also bears mention that 10.1 million of loans that we acquired as part of the GE transaction are redeemed in full since March 31st and we also generated 2.6 million of liquidity along with $174,000 gain in the second quarter to the sale of one of the two remaining direct real estate investments that we acquired as part of the GE transaction. Within our renewable energy finance business, we funded 28 million of UPB in the second quarter all through our Solar Ventures. At the end of the second quarter, the UPB of loans that were funded through the Solar Ventures was 158 million while the carrying value of our equity investments in such entity was 79 million, up from 77.1 million at the end of the first quarter resulted from a recognition of our shares income from the ventures that will be distributed in the third quarter. With respect to international operations, the South African economy remains a headwind that relatively stable in Q1 with continued strengthening of rand relative to the U.S. dollar. Our capital raising for Fund 2 is continued with the number of possible investors in the final stages of their review including one closing our revenue in the third quarter for approximately US$12 million. Our management fee revenue for the quarter was 2.2 million and its dependent on part on how much of show capital is closed in Fund 2 as the year progresses. Operationally within HIS, we’ve been busy in the fund investment fund and with our property management businesses in South Africa. Our property management business continues to grow and help improve operations across the investments made by the funds that we managed. Initial fund also known as South African Workforce Housing Fund, we are getting closer maturity and Fund 2 continues to deploy in capital chose investment opportunities in South Africa. As discussed on prior calls, we continue to monitor the South Africa public market, as a potential exit path for certain South African Workforce Housing Fund assets. Including the trends in that we recently manage in the [indiscernible] traded in the OpEx of the Johannesburg Stock Exchange. Lastly, from a corporate operations perspective, we executed a discounting purchase of approximately 20 million in subordinated debt, which resulted in 3.8 million extinguishment gain and we will continue to seek out opportunity to repurchase outstanding debt at favorable terms. With that, it is time to turn the call over to Dave for the financial highlights. Dave?

[Dave Bjarnason:]

Thank you, Mike and good morning, everyone. As I provide an overview of our results, I will refer to various tables and item 2 of our Form 10-Q. As Mike mentioned, common shareholders' equity increased $7.2 million in the second quarter to $127.5 million while book value per share increased to $21.69 per share, up $1.37 per share since March 31st. Table 3 of our filing, which is located on page 11, breakdown achieved as a common shareholders' equity. On that table, you can see that as Mike also mentioned, the $7.2 million increase in common equity was driven by $7.4 million in net income, $800,000 of other comprehensive income and $1 million of other reductions in common equity. Comprehensive mid-term that is recognized in the second quarter was some reported net income and other comprehensive income increased by $11.3 million compared to what we reported in the first quarter. As I'll discuss in more detail, there were four key drivers for this increase. First, fee based returns from our LIHTC business line improved $3.9 million as we recognized asset management fees TC Fund 1 for the first time since the management's inception. Secondly, net fair value loss is decreased by $2.1 million as the defaulted non-asset backed corporate loans as we discussed last quarter which were down to zero in that reporting period, thereby eliminating any further recognition. Thirdly, we've realized the $3.8 million related to experience from [indiscernible] subordinated debt Mike mentioned earlier. While operating expenses declined by $2.5 million as the company's share price decreased in the second quarter which reduced stock compensation expense while reduction in professional fees was also a contributing factor. Otherwise reported [indiscernible] in the fair value of our leverage bond [indiscernible] equity in the second quarter net interest income growth was relatively unchanged in the quarter-over-quarter basis. And we continue to see positive returns from our solar ventures and reported $1 million increase in our share of this business. But I think more detail the key performance drivers as a result of such for each of our primary business and financing activities starting to look at our bond portfolio. Excluding equity business for adjustments, we reported approximately $100,000 of net fair value losses in the second quarter related to bond that are recognized at our balance sheet the total returns [indiscernible] for is derivatives. By comparison we've recognized $1.7 million of net fair value gains related to dispositions in the first quarter. This increase was primarily attributable to several bond investments from market capitalizations to discount rate assumptions and were used to measure fair value decrease in our projected cash flows from underlying property operations decrease. From a yield perspective, we recognized $2.4 million in interest income in the second quarter related to bond investments recognized in our balance sheet, which represented approximately $100,000 decrease compared to what we look for in first quarter. This decrease was driven primarily by decline in prepayments in our bond investments which caused for a decrease the amount of bond caring value adjustments that were amortized in the interest income in the second quarter. In this regard, as of June 30, the UPB of our bonds recognized on our balance sheet was $150 million which approximated the UPB assumptions [indiscernible] at end of March 31. With respect to other investments with low risk bond, business line we owned or were a partner in three direct investments of real estate that consisted of two land parcels and multi-use account under development. This incremental tax revenues to fill our infrastructure bond investments. On June 30, these investments had a carrying value of $27.1 million or a rate of return that we've recognized in the second quarter we think will slow. With respect to interest rate hedges, we've recognized $1.4 million of fair value losses in the second quarter while the net income effect of these positions has led us to the numbers in this quarter. The yield curve flat in the second quarter, its drove the recognition of these fair value losses. However, decreases in the fair value positions to hedge our bond portfolio was generally offset by changes in the fair value of performing multi-family taxes and other bond investments including certain total return swaps. And while changes in the fair value positions were hedged floating rate GAAP were not offset earnings as hedged exposures did not bought to market for accounting reporting purposes, that will give you straight derivatives provided protection against interest rate risk associated with hedged debt. With respect to cash, line and other short term investments of the company, distributable assets generally include short term receivables and other cash balances at a carrying value of $78 million at June 30 which declined by approximately $7 million since March 31st, primarily as a result of our purchase of a portion of our subordinate debt with regard was recognized approximately $300,000 of interest income in the second quarter specially with these assets which represented about $100,000 decrease compared to what we reported in the first quarter, that large part was driven or was a result of [indiscernible] non-asset backed corporate loan which we discussed last quarter. With respect to Energy Capital business, we continue to see favorable returns in the second quarter from Solar Ventures that we managed. These ventures had a UVB of $159 million as of June 30th up from $131 million at March 31st. For investment in these Solar Ventures including renewable energy ventures which is a venture through which we conduct most of our energy lending business at a carrying value of $79 million as of June 30th. In the second quarter, we recognized $2.9 million of equity income from our Solar Ventures, a decrease by $1 million on a quarter-over-quarter basis primarily as a result of an increase in the second quarter origination fees on five solar construction lending or SCL. We also recognized approximately $500,000 in the second quarter in asset management and reimbursement fees from the Solar Ventures which represents reimbursement for our direct costs associated with management related activities. With respect to returns from our LIHTC business line, further discuss with our filings at great interest and obligation for [indiscernible] business line in connection with our interest and obligation such as TC Fund 1 and as Mike mentioned we recognized $3.9 million of asset management fees in the second quarter on the basis of our share purchases with capital transactions that was settled in the second quarter while [indiscernible] our capital transactions that are settled since July 1st we expect to recognize an additional $3.2 million of asset management fees in the third quarter. We also recognized in the second quarter approximately $100,000 of income due to the amortization of deferred guarantees [indiscernible] an amount which is comparable what we recognized in the first quarter. With respect to our interest and obligation associated with [indiscernible] growth management or MGM, we collected about $400,000 of base interest in the second quarter associated with $13 million subordinated loan that we made at MGM. However, because this loan is not recognized for financial statement purposes, interest that we collect is deferred on a balance sheet and therefore is not recognized as earnings. Net income that we reported in the second quarter for direct real estate investments in the LIHTC business line is negligible. Additionally, as detailed on table 14, which is located on page 17 of our filing amounts that we reported as an allocated loss and consolidated entities which include guaranteed LIHTC funds, [indiscernible] of property partnerships which we are general partner relatively unchanged on a quarter-over-quarter basis. These allocations which led to a net loss in the second quarter of approximately $400,000 primarily related to guarantee fees, equity and losses from lower tier profit partnerships and interest income with those investments that are eliminated for reporting purposes. With respect to funds that we managed to International Housing Solutions or IHS, we recognized $220 million of fee and other income in the second quarter which represents a $1.7 million decrease compared to what we reported in the first quarter. This decrease was primarily attributable to $36 million of additional investor capital that was close to the first quarter IHS Fund 2SA and IHS Fund 2SSA with comparable recognition of $1.1 million of catch up management fees during that reporting period. In this regard, no additional investor capital was closed in either of these funds in the second quarter and as result overall fee revenues from our international operations declined relative to what we reported in the first quarter. In connection with our equity co-investments and funds managed by HIS, which we accounted for using the equity assets the book value of these investments was $4 million at June 30th. Both equity and income that we recognized in the second quarter which reflected modest increases in valuation of some Fund 2SA holdings was negligible and did not consequentially change compared to what we reported in the first quarter. In terms of interest and other operating expenses that we recognized in the second quarter, let me first briefly touch on our cost of funding. We continue from our filing that our financing arrangements are divided into two groups based on their purpose. Debt obligation that finance bond and other interest-bearing assets which we refer to as asset related debt and debt obligation to finance other assets and other activities to companies which we refer to as public debt. With respect to asset related debt total UPB debt was $84.2 million at June 30th and only modest amortization occurred in the second quarter. We recognized approximately $400,000 of interest expense associated with asset debt in the second quarter which represents the nature of the increase compared to what we recognized in the first quarter. For a full cost funding associated with other debt of $1.2 million in the second quarter was relatively comparable to the amounts that we reported in the first quarter. However, as already mentioned the company executed discounted purchase of a portion of its subordinated debt for approximately $20 million of UPB and recognized the $3.8 million gain fee net income from the expenses of interest obligations. Lastly, with respect to our core operating expenses which includes salaries and benefits, general and administrative expenses, professional fees and other expenses, we recognized $5.7 million of interest expense in the second quarter compared to $8.1 million in the first quarter, a decrease in the second quarter reflects of our common shares produced a fair value of the issued common stock options thereby resulting in $1.5 million decrease in the amount of stock compensation expenses that we recognized in the second quarter as compared to what we reported in the first quarter. Decline in professional fees is also a contributing factor to report a decline in operating expenses as audit related cost incurred in the first quarter were higher to the balance occurred in the second quarter due to the timing of our year-end financial statement concerned before audit. Before I turn the call back over to Mike, I wanted to briefly touch on our efforts to remediate material weaknesses in our internal control of our financial reporting. While our remediation efforts were going, we executed several important steps in the second quarter, you can actually put advancing the design, it is an invitation of both general information, technology controls, internal controls over spreadsheets. Specific steps that we took in the first six months of the year were described in our filing, although all were subject to continued evaluation by management and tested by the company's registered public accounts. Nonetheless we believe that we are making good progress in executing our remediation plan. And I will provide another update at our next investor call. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks Dave. Sorry I sneezed in the middle of your presentation. Consistent with prior calls, I want to spend a few minutes talking about our view of the business in the quarters ahead. In broad strokes, we continue to focus on maximizing the value in our LIHTC management business and growing our renewable energy business while focusing on disciplined cash management given the current uncertainty in the investment environment. Overall the performance of our core activity during the quarter was encouraging and provides the path forward to equal or maybe even exceed our internal growth plan for the year even after the slow start in Q1. In more detailed terms, our return from our interest in affordable housing business are heavily based on the ability to monetize the underlying portfolio of real estate overtime. A continuous process that provided significant income recognition in the second quarter and we helped with those investments will deliver additional value for years to come. Additionally, we continue to review the robust pipeline of opportunities in the solar energy lending business and a position to put significant capital to work across multiple lending platforms at attractive rates of return. A final item of note is the ongoing plan with respect to share buybacks. As it stands the company is currently in the middle of the 580,000-share buyback authorization for 2017. Even at our current market price which remains above the book value the board and management feels that the good use of capital by the company. Within the fiscal and policy uncertainty created by the new administration, we continue to approach 2017 with more caution than we have in the previous couple of years. Our plan is to maintain higher cash balances than in previous years in order to even react opportunistically, the challenging market conditions or to protect our position should be seen at these go-to-market conditions. We certainly hope that opportunities will present themselves to allow us to deploy additional capital quickly, while still meeting our underwriting standards. Before we take questions from our callers, I just wanted to reiterate that we remain focused on improving the per share value of the company through a combination of the growth of our fee based platforms, share buybacks and strategic asset investments. We believe that the current business landscape is more uncertain than it has been in some time. But that uncertainty does not change our commitment to work hard every day to create value in our business and for our shareholders. We are excited about the future, we remain committed to our shareholders and we thank you for your support. Now I'll now open the call to questions. Operator?

[Operator:]

We will now begin the Question-and-Answer Session. [Operator Instructions]. The first question is from Gary Ribe of MACRO Consulting. Please go ahead.

[Gary Ribe:]

I appreciate you're taking few questions. I just had a couple. I was kind of curious on the debt buyback. That's kind of a new strategy from you guys, and it was a significant repurchase I think would you spend $16 million little bit more than that?

[Michael Falcone:]

About that, yes.

[Gary Ribe:]

Okay. And you brought back the 8% debt, right. So that $16 million of maybe 1.6?

[Michael Falcone:]

Correct. We brought some of the 8% debt. We have about $6 million of that left outstanding held by different holders than the ones that we brought back. And our internal analysis is that's about a 12% risk in return.

[Gary Ribe:]

Yeah that's makes a ton of sense. Now you mentioned doing incrementally more buybacks on the debt front. Would that be the first place you would look to purchase, or because I would think it's not some of what is the really low rate LIBOR plus 200 basis points amortizing whatever it is -- probably pretty hard to replicate.

[Michael Falcone:]

I would say we're in no rush to buy back the LIBOR plus 200 or 250. It's 250 with 200 basis points a year of amortization for 20 years now. We're in no rush to buy that back.

[Gary Ribe:]

Got it. I wouldn’t think so. I just wanted to clarify.

[Michael Falcone:]

I mean, if the price were right we'd certainly buy it that, but I think the sort of bid that's spread there likely to be pretty wired but I think the odds are well that we'll buy any that debt.

[Gary Ribe:]

Yeah, I think you could drive a truck through it, right. So, I guess just on the buyback front, I mean are you guys -- is it a little slower than I would have -- than we have seen in the past. If you guys thought about just may be doing a tender at $115 and focusing who gives you what?

[Michael Falcone:]

Your observation is correct, we really did buy fewer shares in the quarter not because we attempted to buy fewer, our 10b5 plan was up and upgrading every day. I think I haven't looked at the math, but the volume seems to felt lower in the course of the quarter. We're always looking at ways to create value for shareholders and a more aggressive buyback plan is certainly a possibility in the form of a tender or otherwise whether and when that comes to be I really can't say.

[Gary Ribe:]

Got you. I wouldn't expect you to say, just curious that’s something you're actively considering. I guess just a couple of questions on the solar stuff, you guys described the pipeline as pretty full, I noticed you guys started a new solar venture within that I don't know if that's part of the DPQ thing or not, was it solar development lending or something like that? I don't know how that’s different than what you're currently doing and if it's part of that venture or not?

[Michael Falcone:]

Sure. We have basically three entities that are partnerships with two institutional partners, actually I guess it's four technically when you include parents to the subs. So SCL is Solar Construction Lending, think that's pretty obvious what that is, SPL is Solar Perm Lending, their parent is REL, can't remember what the RE stands for, Renewable Energy Lending, and then SCL is the brother, sister to REL is how I think about it and the reason for that is there are some optionality for investors to come into SCL where there really isn’t optionality relative to REL and SPL and SCL. And then in terms of the kinds of loans that we're doing in SCL they are a little different in that they include loans that may be or are sort of just short of some of the milestones to qualify as a construction loan in SCL. So, maybe [indiscernible] before there are other activities to them. But lending [indiscernible] people to buy panels before the project is actually ready to go and move at a higher rate of interest for that. They can lease payment and get higher interest for that our utility deposit. So, it’s very related, alone in SCL almost always leads to a loan in SCL or SPL we're the same style of loan and one might fit in SCL. But it’s a little more aggressive lending, a little higher rate and sort of investors have the option as to whether or not and we’ll get what ratios kind of fund deals in SCL. It seems to be a little more flexible, the other two are pretty rigid in terms of how they work.

[Gary Ribe:]

I see. So, you mentioned investors, would that be TSSP or somebody else?

[Michael Falcone:]

It’s TSSP and fundamental are the sort of investors who have the option to go into SPL.

[Gary Ribe:]

Alright, and are you guys co-investing alongside that?

[Michael Falcone:]

Yeah.

[Gary Ribe:]

Okay. And just you mentioned the pipeline looked pretty good for those ventures, do you have a sense of like where you could be with that by the end of the year at this point or is it still a little to see the moving parts?

[Michael Falcone:]

I think we have a sense of where that’s going. I think we’ve described it as robust but I don’t think we’ll disclose that number publicly. So, I think we’d rather not point to a specific number but we feel pretty good about the opportunities that are in front of us in that space. Remember that basically up 75 plus or minus million that we have deployed in REL which then invested in SPL and FCL really won’t change much overtime. What changes is sort of essentially the profit split overtime. To the extent we put capital into SDL, that’s sort of elective and that will change overtime and we’re looking at that, we look at that opportunistically in terms of what’s available to us both in terms of opportunities within SCL, other places in our business and are sort of cushions that we want to keep in light of this operating environment. So, it’s all that gets put into the mix. I would expect that we will deploy some capital into SCL in the quarters ahead. I would expect that, that would be between sort of 10 and 20 million like that. SDL, I would expect that we would put between 10 and 20 million to work in future quarters.

[Gary Ribe:]

Got it, okay. And then I got to ask so are you guys, is everything kind of on track there? I know you guys have somebody with the purchase option?

[Michael Falcone:]

We have somebody with a purchase option, we believe it’s on track but at this point we’re sort of continuing to advance the sort of contracts milestones and we certainly hope that that resolves themselves before year end. I'd say we would expect that we would tell that before year end.

[Gary Ribe:]

Got it. Hope you have some money coming in that might be good tender might be worth the bond purchase rate. Okay, I think that's it for me. And I appreciate all the color and thank guys.

[Michael Falcone:]

Thanks Gary.

[Operator:]

[Operator Instructions]. And the next question is from Stan Trilling [ph] of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Congratulations on continuing to do the great job and saving this company and making it into a viable investment. But on that point, my concern is as you continue to shrink the flow, do you become less interesting to institutional investors because of the lack of liquidity you're creating?

[Michael Falcone:]

I think that is certainly an issue, but I would say it's an issue we had for quite a while. We have essentially no institutional investors and have not had any since the financial crisis. So yes, by continuing to shrink, we become I think less interesting to institutional investors as we shrink the flow. Obviously, we try to grow the market cap and shrink the flow at the same time, because that always work quarter-to-quarter but it's generally is work. And that is something that we pay attention to. I mean the sort of trading in the stock can be pretty thin, I don't know and I'm sure some people noticed that we had $18 trade last week or this week. And that really had to do with the fact that there was sort of a whole lot of illiquidity in the market. It was an old limit order to buy at 18 and somebody put in a market order to sell, and those two got matched up oddly. And that's the price of the sort of the liquidity of the small stock. We tried to be -- our shared program in such -- our share buyback program is such that we are in the market almost every day if we can be to try to solve that circumstance for our individual investors. But yeah, that's something we think about and are certainly well aware of.

[Unidentified Analyst:]

My second question is in order to create liquidity, is there ever going to be a time in this relatively near future that you would consider doing a secondary? And under what conditions?

[Michael Falcone:]

Yeah, I mean we would do in the secondary offering under two circumstances and with lot of constraint. The circumstances would be at such time that we thought the stock was fairly valued. And I think the fact that we're buying shares still today for the shareholders that the company is buying shares would indicate that we think the stock is still undervalued. We would want to make sure we had investment opportunities on the other side right, attractive use for the capital. And then lastly, we have to do that in the context of managing the NOLs of the company. We don't want to -- if you do a share offering its sort of counts as if you sold to one shareholder odd enough under the rules. And so, the size of the offering would be limited by specifically would be taking to manage the risk of 50% turnover. So, the odds are that as we do offerings in the future if we get to the point where the first two of those conditions are met, would start off with relatively small offerings and sort of go from there. But, two or three years ago my answer to that question would have been, I don't foresee that anytime soon, I still don't see it anytime soon, but I see it as a possibility that’s starting to peek over that horizon, if we are able to continue to drive value in share price to where we think the sort of shares make sense.

[Unidentified Analyst:]

Thank you. And on that last point, what is the status of the NOL, how much is left in it and when does it started expiring?

[Michael Falcone:]

Roughly 400 million left and I think we have until 2027 is when the first of the NOLs start to roll off and then they last for three or five years after that.

[Unidentified Analyst:]

You have plenty of time. Okay, I think you…

[Michael Falcone:]

Well occasionally see that we pay some state taxes from time to time. I think we spent or expect to spend a $200,000 this year on state income taxes, but we have not -- we don't expect to pay Federal income tax anytime soon.

[Unidentified Analyst:]

Well, I hope it's a lot sooner than you have to. Okay. Thank you very much.

[Michael Falcone:]

Thank you.

[Operator:]

And the next question comes from Greg Zenith, a Private Investor. Please go ahead.

[Greg Zenith:]

So, if I heard you correctly, you expect the Savannah [ph] transaction is going to close prior to the end of this year, is that correct?

[Michael Falcone:]

That's our current expectation based on…

[Greg Zenith:]

Yes, are trying to model as far as the expected gain. I think in the last conference call you had thrown out kind of a nine-digit number or 10-digit number or whatever. What's the carrying value of Savannah for us as investors?

[Michael Falcone:]

Yeah, it's not a nine or 10-digit number. Our carrying value is around $6 million and we would expect the sale to be in the high seven digits, all right?

[Greg Zenith:]

So, your carrying value is 6 million and you may get somewhere about 9 million back, 8 to 9 million back. Is that correct?

[Michael Falcone:]

Directionally yes. Our share is worth 6 million and our share we would expect to be a seven digit, let me say that differently. Our share on our books is around 6 million and we would expect our share of the sale to be a seven-digit number. The overall property is at least six, seven eight digits value when two thirds of that goes to our economic partners.

[Greg Zenith:]

Okay. So, you may have a $2 million, $3 million gain on your [indiscernible] if I hear you correctly, the increase in our book value maybe increased by $2 to $3 million.

[Michael Falcone:]

It’s certainly sort of right neighborhood.

[Greg Zenith:]

Okay.

[Michael Falcone:]

And with the caveat that it's essentially still an option contract that somebody could walk away from and like most real estate contracts it was some money but not a ton and then we’ll be starting all over again.

[Greg Zenith:]

Is Spanish Fort now considered an impaired asset that, that should be downward or?

[Michael Falcone:]

No, the bond is Spanish Fort or mark-to-market and I don’t think that mark changed all that much quarter-over-quarter. And that couple of hundred grand that was driven by interest rates more than anything else. The equity is accounted for as an equity investment and basically changes as we put capital in and so we’ve not taken an impairment against users of assets. You know it's hard to know what will happen in the future. We are cautioning people because we see the retail market as being a different market than the multi-family market and we all read about what’s going on in retail. So, we feel there is less certainty in that than there is in the multi-family and we just want people not lose track of that. But we got, we think its fair value today.

[Dave Bjarnason:]

Yeah, we assessed every quarter whether or not impairment should be recognized I mean the bonds that Mike made reference to, they are actually not realized holding any position. So, unless you know it voted, we think we’ll check that.

[Greg Zenith:]

How much security do you have on that bond? I mean you’re in senior position on the property, is that correct?

[Michael Falcone:]

The bonds are sales tax revenue bonds. So, the property exists as more relatively small mortgage on at bank and we own an equity slides in the property. The retail on the property then pays -- there is essentially a sales tax surcharge that is used to pay the principal and interest on the bond and so there are kind of two different pieces of collateral if you will, one is good old fashion real estate collateral, and one is sale tax revenue.

[Greg Zenith:]

And the sales tax revenue that's being generated right now is covering the interest and principle on the bond?

[Michael Falcone:]

Right now, the sales tax revenue plus essentially develop payments to cut funds unbilled retail is covering the bond, yes.

[Greg Zenith:]

Are we considered one of the developers, or is that another party?

[Michael Falcone:]

That payment comes from the owner and we are a limited partner beyond that.

[Greg Zenith:]

Okay. And then the third party is just the raw law that's like in Winchester Virginia, is that correct for residential housing or something?

[Michael Falcone:]

It's another mixed used development. So, mixture of multi-family and commercial and office, its 150 acres and the demand roughly around 50.

[Greg Zenith:]

Is there anything going on out there or is that?

[Michael Falcone:]

Yeah. We are -- when did we go back to, late last year I guess. Is it late last year, I'm looking to book smartly and deal with it? Late last year we ended up having to -- we had the property under contract, that contract fell through in order to preserve some state road funding we had to start the development of the project. So, we are in the process of engineering to build roads and as those roads get built, we'll look to sort to sell parcels of land, I suspect if next year rolls around, we'll be putting capital into that to build out the roads. We're still looking to sell it, if we could sell it, we could do it we probably would, but in the meantime, we got to create value and so which is now our tax side and our land development expert. So, we kind of banging our head and getting that done.

[Greg Zenith:]

How much is tied up in that right now?

[Michael Falcone:]

$3.5 million is our investment in that field today.

[Greg Zenith:]

And the additional capital that you're putting into it over the next year is for land development?

[Michael Falcone:]

It will probably be $5 million or $6 million over the two or three years.

[Greg Zenith:]

And is part of that tied into the state bond, this infrastructure bond or is this our capital?

[Michael Falcone:]

So, in this circumstance this is also an infrastructure deal sort of like Spanish Fort. It was going to be paid from property taxes and as the difference being that this deal blew up, [indiscernible] blew up in financial crisis. This blew up much earlier in its development history so there was very little money committed, all the money that have been committed was really to buy the land. So, we ended up, the infrastructure was not built so, we decided to kind of the infrastructure bonds complicated the story at this particular property. So, we basically kept our same collateral which was the land, but eliminated the infrastructure bonds such that we own the land outright, there is no infrastructure fund in place anymore and we're putting our investment in place there and investment in land or investment and improvement, so I guess would be technically correct.

[Greg Zenith:]

Okay. If I can make a suggestion on the solar business you mentioned basically like three different entities and there is the -- I guess the construction funding of solar and that sounds like there is a permanent fund for solar if I am not mistaken, you use different letters for?

[Michael Falcone:]

Yes.

[Greg Zenith:]

Is there anyway possibly that you could do like a PowerPoint or a slide or something that would explain kind of a flowchart or how this kind of works and where you are in the pecking order of you know -- our money and investor's money and he is in senior position and if you actually -- do you put aside money for possible loan losses like a bank would? I mean are all loans performing now?

[Michael Falcone:]

We do not put aside a loan loss reserve, I don't think we're allowed to actually. We have one loan which is technically non-performing it's on our watch list I guess it's paying us but it's late interest payments just because the property hasn't sold yet.

[Dave Bjarnason:]

Yeah things are such that the registers [ph] are not setting aside a loan loss or establishing allowance for that and that's because our interest is the ventures or the form of equity investments. So, in allowance if you will would only sort of present itself [indiscernible] that we assess that our investment was impaired and we're a company that we evaluate on a quarterly basis and you kind of look at our earnings release, we can assess that we are impaired so, therefore no impairment, no allowance, et cetera.

[Michael Falcone:]

We'll look at our investor presentation and see if we can work a slide in there that might help get at what you're doing. We've tried to keep on our website, we've tried to keep the investor presentation more up to date than we have historically, so we adjusted every quarter and in fact now the sort of numbers are all fully integrated between our filings and our investor update. We usually get the investor update out and is updated a week or two after the filings. We'll see if we can kind of add a slide in that circumstance kind of help explain the inner relationships there.

[Greg Zenith:]

And Mike in the three ventures that you talk about that’s solar related, am I correct? You're basically the equity investor or the subordinated investor and that's where you get the higher rate of return but your outside investors are in a senior position or first to get paid out. Is that right?

[Michael Falcone:]

Its s true in REL which is the parent of SCL and SPL. It’s not necessarily true at SDL, SDL tends to be a place where we do the stroke deals. So, every deal is a little different in SDL. But in REL, we’ve put in half of the -- we’ve put in 75 million of capital plus or minus. TPG will put in the rest of the capital until we get to a ratio of 85

[Greg Zenith:]

Okay. And these are all basically shorter-term loans, correct, except now it sounds like you have a permanent one. Is that right?

[Michael Falcone:]

SPL does some term lending which for us is sort of really mini-term it’s kind of five years. We haven’t seen a ton of that business. The bit where we have seen this robust growth is in SCL and for us it's in the SDL buckets. And those are six to nine months construction loans.

[Greg Zenith:]

Are you experiencing more competition in this area or is this still market that is kind of untapped or are you finding more-and-more, people are wanting to finance, get into those kinds of finance.

[Michael Falcone:]

That’s an interesting question. I would say there is probably more capital than when we started 18 months ago, make that 24 months. But we wouldn’t say that there is sort of too much supply in this market yet.

[Greg Zenith:]

Okay. And this business basically has a finite light to it under -- if it’s driven by tax credits for solar, right?

[Michael Falcone:]

Yes, the tax credit program over the last four -- in two more years. So yes, much remains to be seen in terms of what happens with tax credits, local policy, national policy and prices but we see a multi-year window ahead of us still for this business.

[Greg Zenith:]

I guess one concern I have is general prices are dropping just like any technology. And when you make a loan and then the panel prices are dropping, the collateral for the loan is an asset that’s dropping in value, right. Is that correct the way to look at it?

[Michael Falcone:]

The real collateral isn't the panels, the real collateral is the contract to sell the power. We're not making our investments based on what the panels are -- we're making our investments, our loans using based on what through the economics returns to those panels are. And I think it is fair to say those closed, as panel prices have fallen, called the power purchase agreement pricing has fallen as well. But typically, the power purchase gets locked up for at least 5 if not 25 years. And we don't, we generally aren’t lending unless there is a construction lending business and that’s where is a term loan take out in place, so we know what the takeout is. On the medium-term business that we do, we have underwritten the power contracts or we look at power contracts and only done deals where the tail of the path that's left starting in year five through the end of the power purchase agreement is worth more than the moment we would have outstanding at the end of the five years. So, there is a possibility that some of these power company would walk away from these contract, but they don't have any legal ability to do that making a lawsuit and all that stuff yes. Think of it as a lease, think of it as a triple net lease in terms of.

[Greg Zenith:]

Triple net lease was a AA credit that is the power purchase agreement with the utility company.

[Michael Falcone:]

Yeah, the credit would vary with the utility was the ultimate off taker. But yes, it's a triple net lease within off taker and we underwrite the terms of the lease and the credit in the off taker who we doing a term loan. When you look at those things certainly when we do a construction loan, but the most important element of the construction loan is whether our sources have retained that in six or nine months and that’s usually is the term loan in the place and the tax credit equity sale in place. And our pricing varies a little bit depending on how in place those things are.

[Operator:]

[Operator Instructions]. There are no additional questions at this time. This concludes our Question-and-Answer Session. I would like to turn the conference back over to Mike Falcone for closing remarks.

[Michael Falcone:]

Hey thanks Kate. Well I'd like to thank everybody for their continued support. I see the list of people who are on the call and its folks who've listened to this call for many years. And we appreciate the fact that you are our long-term shareholders and have stuck with us through thick and thin and we certainly regret our bumps in the first quarter, but certainly we're back on track here and are feeling pretty good about the rest of the year. So, keep our fingers crossed, it's very much depending on the macro environment, but the wind continues to be at our back in terms of where interest rates are going with sort of only modest increases and in particular where cap rates are which multi-family space cap rates continue to stay low and that's really important for us as we monetize our various investments. So, again thank you for your support. We have our fingers crossed and feeling good about the rest of the year and look forward to talking to you shortly. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.