MMA Capital Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 10 Nov 2017

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Management LLC Third Quarter of 2017 Financial Results and Business Update Conference Call. My name is Rocco and I will be your coordinator 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, 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. As a reminder, today’s conference call will be recorded. I would now like to turn the call over to Mr. Michael Falcone CEO of MMA Capital Management LLC.

[Michael Falcone:]

Thank you, Rocco. 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. The purpose of our call today is to review our third 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 third quarter results, which Dave will review in detail later, we ended the quarter with $135.7 million of common equity, which represents an increase of $8.2 million or 6.4% during the quarter. Diluted common shareholders' equity per share or book value per share came in at $22.26, an increase of $1.57 or 7.2% during the quarter, which reflects the impact of both performance and our buyback plan on the book value per share. The net increase in our book value is driven by $10 million of comprehensive income which was partially offset by $1.8 million of other reductions to common shareholders' equity, that were primarily driven by share buybacks. Overall, the income that we recognized in the third quarter reflects positive returns from additional realization events and our low income housing tax credit business lines from real estate investments and from investor capital raising efforts in South Africa. As a result, we saw quarter-over-quarter increases in fee and other income, equity and income from unconsolidated funds and ventures and net gains on assets, derivatives and debt extinguishment. In the first nine months of this year, we recognized a $10.4 million increase in common shareholders equity, while adding $2.51 to book value per share. During the quarter, we purchased approximately 49,000 shares towards our 2017 buyback authorization at an average price of $23.73 per share, which caused a $1.2 million reduction in common shareholders' equity. With the filing of our third quarter Form 10-Q, the buyback price limit increases for the coming quarter to $26.75. Across our U.S. operations more broadly, we saw positive returns from our bond portfolio, experienced continued growth in our energy lending platform and saw our LIHTC business line continue to perform as expected. As a result as we entered the final two months of the year, we are in a great position to exceed the full year performance objectives that we set for ourselves. Within our leveraged bonds business line, our bond portfolio continues to perform at a high level, but there were no new defaults while the weighted average debt service coverage inflection rate of our holdings further increased in the third quarter. The principal balance of our leveraged bond portfolio declined $7.9 million in the third quarter due in large part to the full redemption of three bond investments that were collateralized by a pool of tax exempt municipal bonds that financed various non-profit projects. Additionally, as we have discussed in the past, two infrastructure bonds that relate to Spanish Fort continued to be [Indiscernible] concern going forward given the softening of the retail market. While such investments have performed consistently with their contractual terms, we recognized a $2.4 million decrease in the fair value of these two bond investments in the third quarter in light of increased uncertainty associated with sales tax revenues to support debt service payments on these investments. Nonetheless, we reported a net fair value gain of $400,000 in the third quarter and marking the leveraged bond portfolio market as a whole. In this case, the fair value loss that we recognized on our Spanish Fort bonds are more than offset by $2.9 million of net fair value gains that we’ve recognized in the third quarter on our multi-family tax exempt bond positions given higher than budgeted net operating income from affordable properties that supports certain bond investments combined with favorable discount rates at quarter end. Our LIHTC business continued to meet or exceed our expectations. Additional capital transactions associated with TC Fund I investments closed in the third quarter and as a result we recognized $4 million of asset management fee revenue. In this regard, our underwriting of the GE transaction continues to be validated and we also believe that our returns on TC Fund I will meet or exceed our initial expectations over the long-term. However, because capital transactions are generally beyond our control, the timing of revenue recognition in the future will likely continue to be lumpy. Within our Energy Capital business, the UPB loans that were funded through the solar ventures was $286.1 million while the carrying value of our equity investments in such entities was $89.4 million at September 30, up from $79 million at June 30. This net increase was driven in large part by $10.7 million – by $10.7 million capital contribution that we made in the third quarter through Solar Development Lending LLC or SDL. The last point worth noting related to U.S. operations is that in the third quarter, the Savannah River Landing development was sold and as a result we recognized $3.8 million of equity and income from the partnership that held such real estate. With respect to International operations, the South African economy remains a headwind, but was relatively stable in the third quarter while the Rand weakened relative to U.S. dollar. Our operations in South Africa performed well in the quarter mainly from our continued capital-raising efforts for Fund 2. In this regard, we closed $11.9 million of additional investor capital into the SA [Indiscernible] Fund II in the third quarter while other potential investors are in the final stages of their internal review. Additionally, IHS purchased from another investor in Fund I an 11.85% ownership interest in that Fund for approximately $11.8 million. As part of this transaction the investor committed to invest the proceeds of the receipts into IHS Fund II [Indiscernible] to the same conditions that govern the third-party’s original investment in Fund I and that includes but are not limited to a commitment by IHS to purchase the third-party’s ownership in IHS Fund II ten years from the initial close date of such fund. Operationally, within IHS, we’ve been busy on the fund investment front with our property management business in South Africa, a property management business which manages the substantial portion of IHS managed funds continues to grow with nearly 6900 units under management. As discussed on prior calls, the internalization in the property management function has improved operations across the investments made by the funds that we manage with significant occupancy improvements [Indiscernible] properties in our fund investments. The initial fund is getting closer to maturity and Fund II continues deploying capital towards investment opportunities in South Africa. As discussed on prior calls, we continue to monitor the South African public market as the potential exit caps for certain Fund I assets including to Transcend, a REIT that we manage and that is traded on the AltX of the Johannesburg Stock Exchange. Lastly, from a corporate operations perspective, we executed a discounted purchase of approximately $6.5 million subordinated debt which resulted in a $1 million extinguishment gain. At September 30, we had $92 million of relative expenses - subordinated debt still outstanding. With that, it’s time to turn the call over to Dave for the financial highlights. Dave?

[David Bjarnason:]

Thank you, Mike and good morning everyone. As I provide an overview of our results, I’ll refer to various tables in item 2 of our Form 10-Q. As Mike mentioned, the common shareholders’ equity increased $8.2 million in the third quarter to $135.7 million while book value per share increased to $23.26 per share, up $1.57 per share since June 30. Table 3 of our filing which is located on Page 11 provides an attribution of changes in common shareholders’ equity. From that table you can see that the $8.2 million increase in common shareholders’ equity was driven by $9.9 million of net income and approximately $100,000 of other comprehensive income, which were partially offset by $1.8 million of other reductions in common shareholders’ equity. Comprehensive income that we recognized in the third quarter or the sum of reported net income and other comprehensive income increased by $1.8 million compared to what we reported in the second quarter. As I’ll discuss in more detail, there were three key drivers behind this net increase in comprehensive income. Fee and other income improved by $1.6 million, primarily due to closing additional investor capital into the S.A. suite of IHS Fund II, which profits and recognition of catch-up asset management fees, secondly, net gains increased $2.4 million in the third quarter as net fair value losses that we’ve recognized on our interest rate hedge positions decreased on a quarter-over-quarter basis while gains that we recognized in the third quarter from the sale of certain real estate investments increased compared to amounts that we recognized in the second quarter. Lastly, equity and income from investees in which the company maintains equity investments increased $3.7 million primarily as a result of the sale of land that was owned by a partnership which we had a 33% equity interest, which prompted a recognition of $3.8 million of income in the third quarter. However, a $5.6 million increase in operating expenses which was tied to increases in salaries and benefits, professional fees and other expenses softened these impacts. Otherwise, in the third quarter, we reported a modest increase in the fair value of our leveraged bond portfolio. Net interest income is relatively unchanged compared to what we reported in the second quarter and we continued to see positive returns from our solar ventures having reported $2.2 million of equity and income from these ventures. I’ll speak now in more detail the key performance drivers and the results associated with each of our primary business and financing activities starting with a look at our bond portfolio. Excluding equity neutral adjustments, we reported approximately $400,000 of net fair value gains in the third quarter related to both bond investments that are recognized at our balance sheet, the total return swaps that we account for as derivatives. In this regard, we reported $2.9 million of net fair value gains when marking to market our multi-family tax exempt bond positions, which was partially offset by a $2.4 million decline in fair value of our infrastructure bond investments as Mike mentioned earlier. In comparison, we recognized $100,000 of net fair value losses associated with our leveraged bond portfolio in the second quarter. From a yield perspective, we recognized $2.2 million in interest income in the third quarter related to bond investments recognized in our balance sheet, which represented approximately $200,000 decrease compared to what we reported in the second quarter. The decrease was driven primarily by a decline in interest payments received on subordinated cash flow, multi-family tax exempt bond investments which are annual paying – or mid-payments during the second quarter of each year subject to available cash flow. I should also mention that the UPB of our bonds recognized on our balance sheet decreased by $7.7 million in the third quarter to $142.7 million due to principal pay downs on such investments. With respect to other investments in the leveraged bond business line, we directly own one parcel of land and/or an equity partner in the Spanish Fort venture whose incremental tax revenues secure infrastructure bond investments. As Mike mentioned, during the third quarter, the Savannah River Landing Development was sold and as a result we recognized $3.8 million of equity and income from that partnership while the overall carrying value of this group of investment declined by $5.9 million to $21.2 million. In comparison, the returns from this group of investments was negligible in the second quarter. With respect to interest rate hedge positions, we recognized $300,000 of net fair value losses in the third quarter compared to $1.4 million of net fair value losses in the second quarter. Mark-to-market adjustments that we recognized on these instruments in the third quarter were offset by changes in the fair value performing multi-family taxes and other bond investments including certain total return swaps. With respect to cash, loans and other short-term investments, the company, distributable assets which had a carrying value of $64 million at September 30, declined by approximately $13 million since June 30. Related to these investments, we recognized approximately $200,000 of interest income in the third quarter which represents about a $100,000 decrease compared to what we reported in the second quarter and that large part was the result of principal pay downs on the sub-portfolio. With respect to our Energy Capital business, we continue to see positive returns in the third quarter from Solar Ventures that we manage. These ventures held investments for the UPB of $286 million at September 30th up from $159 million at June 30. Our investment in the Solar Ventures had a carrying value of $89.5 million at September 30. In the third quarter we recognized $2.2 million of equity income from these ventures, which represented a $700,000 decrease compared to amounts that we recognized in the second quarter which in large part was driven by a decrease in origination fees earned by solar construction lending. We also recognized approximately $500,000 of income in the third quarter associated with reimbursements from the ventures for our direct cost associated with management-related activities. With respect to returns from our LIHTC business, we further discussed in our filing the various interests in and obligations that pertain to this business line. In connection with our interests in and obligations associated with TC Fund I and as Mike mentioned, we recognized $4 million of asset management fees in the third quarter on the basis of our allocatable share proceeds for set of capital transactions. We also recognized in the third quarter approximately $700,000 of other guarantee-related income through the amortization of deferred guarantee fees and the repayment of a mandatory loan that we make at TC Fund I in connection with our guarantees. The amount that we recognized in this case represented increase of about $600,000 compared to LIHTC related other income that we recognized in the second quarter. With respect to our interest and obligations associated with Morrison Growth Management or MGM, we collected about $400,000 of base interest in the third quarter associated with a $13 million subordinated loan that we made to MGM. However, because this loan is not recognized for financial statement purposes, interest that we collect is deferred on our balance sheet. Therefore it’s not recognized in earnings. In the third quarter, we reported $1.5 million of income from direct real estate investments of the LIHTC business line, which is primarily attributable to a gain that we recognized in connection with the sale of our last direct real estate investment from the GE transaction. Additionally, as the tab on Table 14, which is located on Page 17 of our filing, amounts that we reported as allocated loss from consolidated entities which includes guaranteed LIHTC bonds and four lower-tier property partnerships in which we are the general partner, but relatively unchanged on a quarter-over-quarter basis. These allocations which netted to a net loss in the third quarter of approximately $200,000 primarily relate to guarantee fees, equity and losses from lower tier profit partnerships, and interest income on bond investments that are eliminated for reporting purposes. With respect to funds that we manage through International Housing Solutions or IHS, we recognized $3 million in fee and other income in the third quarter, which represents an $800,000 increase compared to what we reported in the second quarter. This increase was primarily attributable to $12 million of additional investor capital that was closed in the third quarter into IHS Bond 2SA which profit is a recognition of $900,000 of catch-up asset management fees in the third quarter. In connection with our equity co-investments and funds that are managed by IHS, which we account for using the equity method, the book value of these investments was $15.8 million at September 30, while equity and income that we recognized in the third quarter increased approximately $480,000 on a quarter-over-quarter basis primarily as a result of having increased size of our equity co-investment in Fund I by $11.8 million in the third quarter which Mike discussed earlier. In terms of interest and other operating expenses that we recognized in the third quarter, let me briefly touch on our cost of funding. You can see 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 obligations that finance other assets and activities of the company, which we refer to as other debt. With respect to asset-related debt, the UPB, as this debt was $84 million at September 30 but while modest amortization occurred in the third quarter. We recognized approximately $470,000 of interest expense associated with asset-related debt in the third quarter which represents a negligible increase compared to what we recognize in the second quarter. Our reported cost of funding essentially with other debt is $1 million in the third quarter, which is $200,000 less than what we reported in the second quarter. This decrease was primarily attributable to the decrease in UPB of our subordinated debt. In the third quarter, the company executed a discounted purchase of $6.5 million of UPB and subordinated debt resulting in a $1 million gain in net income with the extinguishment of such 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 $11.2 million in such expense in the third quarter compared to $5.7 million in the second quarter. The net increase in these expenses was tied to several factors, salaries and benefits increased impart due to an increase in the price of our common shares, which caused the amount of stock compensation expense to increase, as well as increase due to an incremental accrual related to incentive compensation. Professional fees increased by $1.2 million as a result of various legal, valuation and advisory services that were rendered with the company in the third quarter, while other expenses also increased by $1.6 million in part due to foreign exchange losses that we recognized as the Rand weakened against the dollar, as well as because we recognized another temporary impairment charge in one of our infrastructure bond investments. Before turning the call back over to Mike, I wanted to briefly touch on our efforts to remediate material weakness in our [Indiscernible] In the third quarter, we executed several important steps in connection with advancing the design and implementation of additional improvements to columns in the spreadsheets including related to the validation of data and assumptions that are used in our spreadsheets, as well as related to the implementation of standard to be followed by the company personnel to clearly evidence change controls over information in our spreadsheets. Specific steps that we took in the first nine months of the year, are further described in Item 4 of our filing. Although all implemented enhancements are subject to continued evaluation by management and testing by the company’s fellow accountants. Nonetheless, we believe significant progress has been made in executing our remediation plan and I will provide another update at our next investors call. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. 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 growing our renewable energy business while focusing on disciplined cash management given the current uncertainty in this investment environment. Overall, the performance of our core activity during the quarter has continued to repeat into the second quarter and year-to-date including additional recognition of fee income in multiple business lines, additional investment in the renewable energy lending space and the retirement of the more expensive obligations in our capital stack at a discount. As a result, we now expect to exceed our internal growth plan for the year. In more detailed terms, our returns from our interest in the affordable housing business are heavily based on the ability to monetize the underlying consolidated real estate over time. Continuous process that provided significant income recognition in both the second and third quarter help to realize additional value from those investments going forward. Additionally, we continue to review the robust pipeline of opportunities in the solar energy lending business and position to put significant capital to work across multiple lending platforms at attractive rates of return. Final item of note is the ongoing plan with respect to share buybacks. As it stands the company is currently in the middle of a 580,000 share buyback authorization for 2017 and even at our current market price which remains above book value the Board of Management feels this as a good use of capital by the company. Given fiscal and policy uncertainty that exist today, we continue to approach the periods ahead with more caution than we have in the previous couple of years. In that vein, the ongoing tax legislation debate could impact our business in a number of ways from changes to the tax rate scheduled for the use of private equity bonds to LIHTC financing. As it remains early in this process, we are not in a position to comment on how any individual elements of the legislation would impact our business. This is simply additional uncertainty that reinforces our plan to maintain higher cash balances than in previous years. The cash retention we have to remain agile and as opportunistically with changing market conditions or to protect our position should they seen at risk due 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, strategic asset investments and other strategic opportunities. 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, remain committed to our shareholders and we thank you for your support. We will now open the call for questions. Operator?

[Operator:]

We will now begin the Question-and-Answer Session. [Operator Instructions] And today’s first question comes from Gary Ribe of MACRO Consulting. Please go ahead.

[Gary Ribe:]

Hi, Mike. Hi, David.

[Michael Falcone:]

Hi, Gary. How are you?

[Gary Ribe:]

Good, how are you guys doing?

[Michael Falcone:]

Fine, thank you.

[Gary Ribe:]

Good, good. I had a couple different questions. I guess it looks like things are going pretty well on various aspects of the business. I guess I’ll start with the solar stuff. It looks like there was a real uptick in activity in the quarter which you had mentioned. If I am kind of looking at this, I guess, two different questions that I have. For the TPG joint venture for REL, I guess, you guys have $286 million in loans that are kind of like in that class of loans for that venture. I think some of it is from a former partner outside of it, maybe that’s $50 million or so.

[Michael Falcone:]

Yes.

[Gary Ribe:]

Okay.

[Michael Falcone:]

And so, the total exposure is $286 million, Gary.

[David Bjarnason:]

Of which we have approximately $75 million worth of equity invested and then we also have money that’s invested in DL outside of that venture and that increased by about $10 million because of co-investments that made that closed into that venture this quarter.

[Gary Ribe:]

I see. Yes, so, and then, if I go to the asset page, where you guys give a breakdown, you have 386, I guess, is that SDL that you guess there was a $100 million contribution and you guys put in 10 and that’s kind of where that is?

[Michael Falcone:]

Correct.

[Gary Ribe:]

Okay. Can I ask a question just, when you initially form that venture, it was supposed to be 50-50 you and I think it’s TPG, but maybe it’s somebody else. The change from putting up $0.10 on a $1.50, is that reflective of an increased appetite on your other investors’ part for this type of – to make these types of loans?

[David Bjarnason:]

I try to give you the big picture and we can kind of dial into the details as we like. Originally, the venture that we put together to do solar [Indiscernible] done 50-50 between us and Fundamental Advisors. And then, subsequently, we brought in about a year ago, TPG into that. So that Fundamental had 50% of the capital in renewable energy – in SDL and SPL and then, MMA and TPG had the other 50%. Initially, we were a $75 million investor in our half with TPG and TPG was only a nominal investor. They are due to safely put in all additional capital as needed into that venture. The increase in volume in SDL in the third quarter was a result of a pool of asset we did within SDL. Typically, we would have gone at 50-50 investors with Fundamental has been the case up until that long time. But in the third quarter, we did it as 90-10 relationship.

[Gary Ribe:]

Okay.

[Michael Falcone:]

And that was largely driven by two factors. One, Fundamental is willing us to put up 90% and two, the size of the opportunity, we thought put too much stress upon our cash balances, if we put up the full 50%. So, the 90-10 is sort of where it felt comfortable for us. It could been a 20. I think what it demonstrates is that, there is a certain flexibility in those arrangements that we’ll likely continue over time.

[Gary Ribe:]

Okay. Got it. So you guys have $77 million in REL and there is, I think $286 million, $50 million of that is Fundamental, if I recall, so, am I right in saying that TPG went to like 160 or so in the quarter?

[David Bjarnason:]

Fundamental has 50% of the $286 million.

[Gary Ribe:]

Okay.

[David Bjarnason:]

And then, we and TPG have the balance and TPG has about $40 million invested in venture today.

[Gary Ribe:]

Okay. So much of the increase is from Fundamental then?

[Michael Falcone:]

Correct.

[David Bjarnason:]

So, Gary, not all of the $286 million has been drawn so far.

[Gary Ribe:]

Okay.

[David Bjarnason:]

Right now, our number is kind of fixed if you will, and the TPG number is ramping up.

[Gary Ribe:]

I see. So, TPG, especially when they have a number of different BDCs and things that they have IPOed is that kind of like an end-game for this entity here assuming you have [Indiscernible]?

[Michael Falcone:]

We are at the beginning of the game in that entity, not [Indiscernible] at the end of the game in that entity. So, I don’t know that we thought through really whether they will – what the active plan is there. Certainly what you described is a possible exit. Whether we will need an exit, whether we will need additional capital, whether we are better off getting that capital in public markets or private markets is all kind of [Indiscernible], right. I think, right now, we still are in the process of sort of ramping up and ultimately the question become what’s the cheapest long-term source of capital for that business and we’ll have to figure out at that time what the answer is. But as we sit here today, we are much more focused on ramping that up and we are figuring out a capital exit; our partnership plenty of appetite what we think is a fair price for the capital, [Indiscernible] really much time thinking about a capital exit there.

[David Bjarnason:]

And I think, to add, this asset class is a little different than maybe the exit that we may be contemplating in IHS for bond [Indiscernible] to transact, right, longer dated assets. The exit here if you will could be as simple as having the reasonably short-term assets mature. It’s not as if we need a take out, these are largely short-term less than a year loans. And the take out is anticipated to be perm loans and tax credit equity. So, not as if I just want to make sure it’s clear to you, it’s not that we need to take out for the existing capital stack invested in these reasonably short-term loans.

[Gary Ribe:]

Okay. I understand, but the ramp was what – it was a pretty strong ramp. So, I thought it was and seeing to be mostly other people’s money so that was pleasantly surprising. I will say, I would expect more of it – you mentioned the tax plan [Indiscernible] the tax exempt stuff, but I think they kicked out Solar another five years or so as part of at least to house plans. So, if that’s hanging around, you’ll probably have even more appetite still.

[Michael Falcone:]

Yes, I think, at this point, we kind of have no idea what’s happening down the road in Washington and I don’t event to want to try to speculate.

[Gary Ribe:]

Yes, I just got in there. I don’t think they know either for what it’s worth. Okay. So, I did have a couple other questions. On the South African stuff, you brought in the other 40% of the property manager that you guys established.

[Michael Falcone:]

Yes. [Indiscernible]?

[Gary Ribe:]

Just curious what you guys paid to that?

[Michael Falcone:]

Let’s see, on Page 8 of our filing, you’ll note that we completed that transaction in the third quarter and we paid…

[David Bjarnason:]

700.

[Michael Falcone:]

600 and change. It’s on yes, on Page 12 what we talk about other changes in equity, you can see on Page 12, [Indiscernible] looks like we paid in about seven and a quarter.

[Gary Ribe:]

Okay. That’s fine, but ballpark is great. I don’t think that…

[Michael Falcone:]

Yes.

[Gary Ribe:]

I am not going to hold you to the nearest thousand of dollar or whatever it is. I guess, what you are doing there with these funds is kind of interesting. So if I am, you are unwinding these funds by dropping them into a REIT and then externally managing them and also property managing from kind of summarizing that activity. Is that a fair way to think about it?

[Michael Falcone:]

It is a fair way to think about it.

[Gary Ribe:]

Is that potentially something that you guys could do? Is that a template for how you could potentially handle the LIHTC properties as they come off over the next kind of 3 to 8 years or whatever it is?

[Michael Falcone:]

I thought about it. Now the term is margin. I think part of the issue might be that, is to whether we’ll give you a scale in the context of the U.S. capital markets to make that an interesting proposition for capital partners. It’s certainly an idea that we ought to explore a little bit. We are not in direct control of what happens with the assets in the LIHTC business if you are in the South African business. So that’s kind of one of the issues. But, I think our strategy today has been in the – what we view is exceedingly U.S. cap rate environment will be there will be seller than buyers. Whether this low cap rate environment, I think of a certain aberration, that’s been an aberration now for ten years. So at some point, it’s not an aberration any more. And maybe that does reflect some the exit. It’s not one you are sort of contemplating currently.

[Gary Ribe:]

Got it. Got it. And, like the private activity bonds that that would mostly, disseminated away with that that would mostly affect your ability to credit these up again and kind of refinance the existing bonds that way?

[Michael Falcone:]

Correct.

[Gary Ribe:]

Okay.

[Michael Falcone:]

It would put limits on the new issue and depending on definitions of new issuance as currently written, it would restrict a lot of refundings. So…

[Gary Ribe:]

And then just push you take these properties and make them more market rate?

[Michael Falcone:]

It might - it depends on the sort of the covenants around what the land on those properties. Typically, it would take it to like we have a Fannie Freddie taxable take out.

[Gary Ribe:]

Got it. That’s interesting. Okay. I have one more that’s kind of escapes me for the time being. No, I think, that’s it for me right now. I’ll jump back and let somebody else ask questions. Thanks guys.

[Michael Falcone:]

Thanks, Gary.

[Operator:]

[Operator Instructions] Showing no further questions I would like to turn – I do apologize, we’ve got someone just jumped in. Our next question comes from Stanley [Indiscernible] of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Good morning gentlemen. I have one basic question, [Indiscernible] all of the different products [Indiscernible] the different various entities you are. How do you do long-term planning under these circumstances?

[Michael Falcone:]

You broke up there. And so I am going to repeat what I think the question is. I think the question was, given the complexity of the entities that we manage and the complexity of the direct and indirect ownership, how do we do long-term planning? The answer to that is, that we – let’s do it by business line, I think that’s sort of the easiest way to think about it. In the sort of bond business, that is sort of the simplest place for us to do our planning and that we sort of presume we hold the bonds until basically the first reasonable call date, that’s typically the first call date, when can be refinanced out. But sometimes if we don’t think the borrower will be able to refinance this out, in that circumstance, we may project longer ownership. On the LIHTC side, we are dependent on real estate sales, most of which we don’t have direct control over, but we can generally predict based on when the various credit periods end. And we can sort of dialogue with the general partners who we are talking to all the time. We generally have a sense of sort of what their interests are and are able to sort of manage toward this understanding on what the sort of sales schedule might be on underlying properties there. What we can’t manage it, such that it’s going to be in the third quarter of next year, we might know that in the next 12 months that kind of the sale and have started the sale process, something like that. From time-to-time, we take the bull by the horns and buy them out and then turnaround and do the actual process ourselves picking that based on our sort of national relationships we can do a little better. But more typically, we are just working very closely with the sort of developer partners in the LIHTC business. So, we know, we have a model that models out the value of just about every – if not every underlying property in which we have an interest and we know when those things are eligible to be sold and so we track it that way and which partners we are talking to is largely about sales, it’s largely a function of that underlying model. So we have a sense of what the pile of underlying real estate is, as we sit here today, but part of the problem there is, some of these things can’t be sold until 2022, pick a number and you are trying to project out five years of income and what cap rate is going to do in 2022. That’s way more art and science. So better or worse, we’ve been at this for a pretty long time and have a sense of the sort of art that’s involved but it is significantly more art than science. On the solar side, we are, as Gary said, we are in the short-term construction lending business. So those loans could go away as markets change, and as capital flows change. I think in some ways, we’d like to be doing more permanent loans. We just think the capital flows into permanent loans are such that the certain rates aren’t attractive to us in that market. So we traded long-term stability for sort of short-term profitability and that is something that could literally – it’s a business that could burn off over 18 months if market conditions change. In South Africa, the sort of long-term planning has kind of two elements. It’s in the context of an existing fund, you really know what your fee stream is going to be for that fund. So it’s relatively easy to predict what that is in terms of incentive fees and those kinds of fees we basically predict that we are not going to see any of those fees. So that, when they show up they are sort of positive upside, they are not something we would account on. And then, the base variable there is, sort of capital raising sort of new funds and where we think capital raising is going to be or the funds that we are ramping up right now which we will really ramp up by year end or maybe rolling over into January on a closing or two. And then, the question is sort of what’s next behind and that’s a particularly interesting question and as it relates to the growth of the public REIT, how quickly can we grow that. Can we grow it accretive, all those sorts of question? Our operating expenses don’t change all that much. We’ve got relatively lean organization and when you look at sort of our long-term debt costs, we’ve got 20-ish years left on our sub-debt that’s LIBOR plus 200. So we model out looking at various LIBOR terms over the period to project what our costs are long-term model. But we do – various ways of doing it, we are generally looking most closely into next five years and then kind of – we had modeled which we’ve sort of inform the next five years after that. We have a detailed budget obviously and annual goals for 2017 and we are just starting that process of annual business planning for 2018.

[Unidentified Analyst:]

Thank you very much for the detail. Can you just go [Indiscernible] trouble evaluating the company long-term and making a big bet, how well you will manage in advance due to the bets? So you could soon may help figure it out. I’ll wait for you guys to do it. Thank you.

[Michael Falcone:]

Well, I would say that, we do spend a good bit of time strategically thinking about simplification and we find ourselves in attention sometimes between getting simpler and making more money. And for better or worse, we have defaulted to making more money. But we understand that part of making more money for the shareholders is making the business simpler and easier to understand and we are constantly looking at ways to try to make that happen.

[Operator:]

And our next question today comes from Ted Lou of Valley Financial Group. Please go ahead.

[Ted Lou:]

Good morning everyone. Could you comment on the…

[Michael Falcone:]

Good morning, Ted.

[Ted Lou:]

Good morning. Could you comment on the current level of the NOL?

[Michael Falcone:]

It’s $440 million is – plus or minus is the total amount of the NOL. It’s all fully reserved and the sort of bar for unreserving that is quite high. We’d expect to use some of that NOL this year. But probably, it will continue to remain reserved. That we’ll use some of it this year. Obviously, depending on what happens is the tax that – we could end up with all sorts of different answers around the NOL. A cut in corporate taxes will make NOL less valuable. But there is at least one reading on the language which has it not expire, in which case, that could have positive impacts on our balance sheet. So, we just – I don’t think that as – that can have a positive impact but it would have a – it might impact our view of the reserve as we go forward.

[Ted Lou:]

Thank you.

[Michael Falcone:]

That’s to be determined there.

[Operator:]

And our next question today comes from Greg Zenith of Morgan Stanley. Please go ahead.

[Greg Zenith:]

Good morning, Mike.

[Michael Falcone:]

Good morning, Greg. How are you?

[Greg Zenith:]

Good. So, in your commentary about dividing the businesses up and you are talking about the LIHTC business and about the partnerships, and the end of life of the credit, you said, you’ve got that modeled out. I guess, the first question is, as you are – recent experienced in that when the credit period – tax credit periods are with that the general partner has decided to actually sell the assets?

[Michael Falcone:]

Generally speaking, I would say that way, Gary or Megan, do you know how many partnerships we’ve exited in the last twelve months?

[Megan Targarona Sophocles:]

Either directly or through TP Fund I, probably about a 50, lower-tier property partnership openings.

[Michael Falcone:]

Yes, so it happens all at a time. So we’ve probably gotten out of – Megan’s guess is about and she would know, because she runs that part of the business, it’s about 50 partnerships we’ve exited. Of those, probably there has been meaningful proceeds in ten, something like that. And so, it is happening all the time, much or most of the time, it’s a meaningless economic event. But for a significant portion, yes, it seems like the numbers hung out around 20% of the projects for a while now. We, sort of had some chance to make some money on those exits.

[Greg Zenith:]

So, I guess, looking forward to 2018, you say, 2017 is a necessity, 2018 you must have a marker of how many are eligible to be in – like you said, you usually start a conversation about whether they are going to sell or not. So, whether the general partner do sell or not, because you don’t have control over that. Is there any way you can share – I think analysis before about it seems to me, there is a number of properties over the next several years that are going to where business is going to be made. Whether you make money or not, but at least, from a shareholder point of view, if we could know, if you think about a maturity – a bond schedule maturity, knowing when these things are eligible. I mean, the total number of partnerships you are involved and it’s how many?

[Michael Falcone:]

600-ish is I think the number.

[Greg Zenith:]

So, 50 happened this year and out of the 50, 20% were – you got some money for the shareholders, the rest are more break – I mean, you receive nothing.

[Michael Falcone:]

Correct

[Greg Zenith:]

Yes, so, there is another 550 partnerships out there that, sometime over the next – whether it’s five years or ten years or and is there – it would be nice to know it for, if there is more – or it seems that there is more opportunity as year goes by for there to be a monetization of that, while that you are going to have received something from that?

[Michael Falcone:]

I think in the – in sort of the broadest math, that is true, just to say, as we broom through from zero to call it, 600 and that number is a bit of a guess, because we just don’t have any problem this year. As we go from zero to 600, you would think, okay, well there is certainly going to be more opportunity over time. I will tell you that sort of counterargument to that is, we prioritize trying to be able to deal where we think there is the most residual opportunity. So we’ve been looking at those deals and sort of saying that, so, okay, how do we – in the normal course, that is a 2020 deal unlike we turn into a 2017 deal, just because we take this cap rate environment as so attractive. So, I certainly understand the – sort of the instinct and the desire for the information. We did kind of being able to figure out how that’s sort of create information that passes the sort of SOX standard to put out into the public markets, right, because so much of it is about – so much of that information is about predicting the future and GAAP doesn’t like you to predict the future in that context, just it’s hard for us to do that.

[Greg Zenith:]

One another question, you said, you have a 2020 deal, is it eligible to be sold in 2020 and you are kind of move it up to 2017. Is that – did I hear that right, because…?

[Michael Falcone:]

The kind of thing we do in asset management, yes.

[Greg Zenith:]

How do you get the general partner to do that or the investors that don’t – aren’t they obligated to stay in until the end of the credit period?

[Michael Falcone:]

So, as at the end of the credit period, there is like a five year recapture burn-off period. And there are various things we can do in that period that maybe make the transactions more attractive to – and it could be in the LPs get out because the GPs stays in, because when the GP wants to retire and so he will sell us reducing the interest and go place off and then we’ll go buy the LP interest in any number of variants there. But a lot of the LPs, once the credits are gone, don’t have a ton of interest just hanging out to get losses.

[Greg Zenith:]

Okay. All right. Thank you very much.

[Operator:]

[Operator Instructions] Showing no further questions, I would like to turn the conference back over to the management team for any final remarks.

[Michael Falcone:]

Okay. Thanks Rocco. Again, just want to thank all of our shareholders for their support. We are more obviously pleased with the performance this quarter. But I think it’s important that we all remember that a good bit of this performance is driven by the macroeconomic environment and we’ve had – certainly had the wind at our backs for – on a while now. We’ve been working hard to take advantage of that. But we are also trying to position ourselves, so that if the winds change, we are protected. So, we appreciate your support. We are excited about the future and with the upcoming holiday season and we wish everybody a happy end of the year and we’ll be talking to again really, I guess, up until March, I guess, into the next call. So, thank you all very much and we are happy to answer any questions anybody might have through our Investor Relations line. Thank you.

[Operator:]

And thank you sir. This concludes today’s conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.