MMA Capital Holdings, Inc.
Q2 2013 Earnings Call Transcript

Published: 21 Aug 2013

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Municipal Mortgage & Equity second quarter earnings and investor update. My name is Amy and I'll be your coordinator for today. At this time, all participants are in 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 MuniMae, which are based on current expectations. These comments are subject to significant risks, which include those identified in filings with the Securities and Exchange Commission and uncertainties 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. I would now like to turn the call over to Mr. Michael Falcone, CEO of Municipal Mortgage & Equity.

[Michael Falcone:]

Thank you, Amy. Good afternoon, everyone, and welcome. With me on the call today is Lisa Roberts, our Chief Financial Officer; Executive Vice President, Gary Mentesana and Earl Cole, who normally participates on these calls, are both traveling today, and unable to join us. Lisa and I together will deliver our prepared remarks, then we will close and take questions. The primary purpose of our call today is to review our second quarter results and to review a pro forma adjusted balance sheet, which [show] our balance sheet look like immediately after the sale of our common shares in TEB of July 3, 2013. We discussed in our call last month biggest rate risk taking MuniMae prior to the sale of our common shares in TE Bond Sub or TEB as I walk or refer to, was rising interest rates. Earlier this year we began a Board level strategic review to determine how best to manage that risk. When we started this strategic review our performing fixed rate portfolio was valued at its all-time high at just over 103% of par. I clearly would like to have achieved that valuation based again to move adversely in May and more significantly in June before we could complete the transaction for the final closing price ended up at 101% of par. Effectively we exchanged our common shares in TE Bonds Sub valued at approximately $225 million on June 30, with $78.5 million in cash and approximately $147 million in TE Bonds. Ultimately we concluded the sale was in the best of the company and its shareholders and we were satisfied to achieve this pricing on the bond portfolio to eliminate approximately $800 million of debt from preferred equity obligations and the interest rate risk associated with that portfolio and its financing. We have repositioned the bond portfolio away from leveraged interest rate risk and towards property performance risk. We believe that we are much better able to manage this risk in the economic environment ahead of us. As a result of the sale we have generated a significant amount of cash. And as such, we are now evaluating various ways to deploy this cash. While redeployment is important, we do not feel it is urgent. We will not rush into spending this capital. As we announced last week we have amended our share buyback program and plan to use some cash to repurchase common stock. If the opportunity presents itself, we would buy subordinated debt in an appropriate discount. Also reinvesting in our existing U.S. and international businesses, repayment of senior debt, redevelopment of new business opportunities are all possible uses of the cash we have generated. As we discussed last month as a result of the TE Bond Sub transaction we need to reduce our operating overhead. We started that effort, but it’s still very premature to estimate our stabilized operating cost. Finally an important element of the TE Bond Sub sale is that it helped to position us to convert to corporation for tax purposes, thereby eliminating the pass-through of income to our shareholders, including the phantom gain and allocation that has been experienced by low base of shareholders since 2008. Although we will now be a tax payer at the corporate level, we are able to preserve our net operating loss or NOL carryforwards which should enable us to show much of our tax exposure for the foreseeable future. I will now turn the call over to Lisa to review the company’s second quarter results and the pro forma adjusted balance sheet. Lisa?

[Lisa Roberts:]

Thank you, Mike. We reported common shareholders’ equity of $64.6 million on June 30, 2013, as compared to $44.9 million at December 31, 2012. We also reported total comprehensive income to common shareholders which includes net income and other comprehensive income of $90 million for the first six months of 2013 which included a loss of $31.2 million for the second quarter of 2013 and income of $50.2 million for the first quarter of 2013. The primary driver of the loss reported for second quarter was $22.4 million of unrealized losses recognized on the bond portfolio, most of which related to the fixed rate performing bond portfolio at market yields rose during the quarter. We also recognized the $7.8 million of additional interest expense related to unamortized debt issuance cost and issuance discounts on debt for securitization debt and mandatorily redeemable preferred shares that are accounted for as debt that was transferred in the third quarter 2013 as the part of the sale of TEB. Included in our press release issued last Thursday announcing our second quarter results we provided investors with an adjusted income statement and an adjusted balance sheet as of and for the period ended June 30, 2013. These reports are non-GAAP metrics because they removed the impact of consolidated funds and ventures. However, we had not adjusted our bottom line GAAP net income nor have we altered our bottom line GAAP common shareholders’ equity. We also provided a pro forma adjusted balance sheet in order to show what our June 30, 2013 balance sheet look like after the sale of our common shares in TEB. Lastly, we provided a reconciliation of these non-GAAP metrics to GAAP. The remainder of my comments today will follow the form of these reports. Turning to the adjusted income statement, I'm going to review the first six months of 2013 as compared to the first six months of 2012. Line 15, on Exhibit B, total comprehensive income was $19 million for the first six months of 2013, as compared to $20.5 million for the first six months of 2012. Bond interest income reported on Line 1 of $33.1 million for the first six months of ’13, down $2.6 million from the same period last year, primarily due to declines in the size of the bond portfolio. Line 2, income on our preferred stock was $2.6 million, down about $500,000 from the same period last year, due to $5 million of par redemptions in July 2012. Asset management fees on Line 3 were $2.1 million for the first six months in 2013, down $900,000 from the same period last year, mainly due to expected declines from our South African Workforce Housing Fund. Interest expense on line five, which includes interest on all of our debt plus the distributions on preferred shares and interest payments on plots was $32 million for the first six months of 2013 and includes $7.8 million of accelerated interest expense as a result of the sale of TEB in the third quarter. Basically, we had $7.8 million of unamortized debt issuance cost and issuance discount that were being amortized as additional interest expense on an effective yield basis over the life of the related debt. However, when it was clear that this debt will be transferred as part of a TEB sale, we expect the unamortized balance all in the second quarter of 2013. Operating expenses were $16.9 million for the six months of 2013, which were $4.1 million higher than the same period last year to $1.5 million of professional fees, mainly legal fees incurred related to the TEB sale. We also recognized additional compensation expense of $1.6 million related to existing employee stock awards, accounted for as a liability rather than equity and therefore marked to fair value at each quarter end. Line seven through 11 reflects other mark-to-market adjustment as well as gains and losses on capital transactions, the most significant of which were the gains of $37.9 million recognized in the first quarter of this year related to the subordinate debt repurchase that fully result in debt holding with one particular counterparty that allowed us to recognize the entire discounted purchase including prior discounts. Finally on line 14, we reported $19.8 million of other comprehensive losses for the first six months of 2013 as compared to $14.3 million of other comprehensive income for the same period last year. The primary activity reported to this line is the mark-to-market adjustments on the bond portfolio. Therefore, the losses reported for the first six months of 2013 are primarily due to bond losses recognized in the second quarter as rates were rising, as compared to falling rates in 2012. Turning now to the pro forma adjusted balance sheet reported on Exhibit A. Before we review the balances, I want to point out that for these balance sheets we have [removed] certain funds and ventures that are consolidated on our GAAP balance sheet even though we have little to no equity interest. As mentioned earlier, we have not modified our GAAP common equity, so even though for example for this balance sheet, we removed certain real estate partnerships that we were required under GAAP to consolidate and replace that real estate with our actual bond investments. We have not included the incremental fair value changes related to those bonds occurring since consolidation. In addition to [removing] these funds and ventures, we have also provided a pro forma adjusted balance sheet of June 30, adjusted to give asset to the sale of TEB on July 3, on lines one and two we broken our cash held by TEB on line two as compared to cash held by MuniMae on line one. We generated $78.5 million cash of which $16.3 million was pledged to the purchaser and is recorded through line three as restricted cash. Subsequent to the sale of TEB, the carrying basis in our bonds were $281 million. However included in item two of our second quarter filing, we provided a management view of our bond portfolio that reflects a total bond portfolio of $294 million higher by $13 million as a result of the fair value improvement on bonds that were eliminated in consolidation where we have followed real estate accounting and have not been permitted to increase the value of the real estate. As reflected in our filings, 73% of the remaining bond portfolio is comprised of multifamily tax exempt bond with an average pay rate of 3.9% compared to an average contractual coupon of just over 7% and a debt service coverage of 0.64 times. In addition to the multifamily bond, 19% of our remaining bond portfolio is comprised of community development district bonds with an average pay rate of 5.8%. The final 8% of the remaining portfolio consist of two senior certificate investments in a trust, collateralized by a pool of tax exempt municipal bonds with an average pay rate of 4.3%. Approximately half of the remaining bond portfolio is unleveraged. Included in the debt balance reported a $367.6 million on line 10 with $53.3 million of total return swap borrowings against certain bonds in our remaining portfolio as well as $94.6 million of debt as a result of bond or interest in bonds that has been legally sold but the sale proceeds received treatment as a secured borrowings either because we provided the buyer a performance guarantee or because we sold senior interest in the bond and we retained the corresponding subordinating interest. Turning back to the asset section of the pro forma adjusted balance sheet. On line five we have reported an investment in our South African Workforce Housing Fund of $3.4 million but it is eliminated in consolidation. This represents the equity we have provided to the fund as well as our shares of income allocations. As a reminder, we have several ways to generate revenue as it relates to our international operations. Through our subsidiary we call International Housing Solutions or IHS, we are the general partner in the South African Workforce Housing Fund and through the general partner interest, we provide asset management services for a fee. And as a managing member we are also entitled to special distribution based on returns generated by the fund. Separate from these two components we have a 2.7% limited partner interest in the fund which is represented by the $3.4 million investments on our adjusted balance sheet. Turning to line six, $18 million is the real estate that we hold including three main investments and one multifamily property. Line seven, $31.4 million is the carrying amount of preferred stock in a private national mortgage vendor and services and its paying distribution of 14.4% on a par now to $36.6 million. Line eight; other assets of $25 million include a $6.3 million equity investment in real estate, $5.8 million of [solar] facilities as well as other miscellaneous assets. On line 10, we reported debt of $367.6 million. As I mentioned earlier, approximately a $150 million is related to our bond portfolio. Also included in this debt balance is a $141.4 million of subordinated debt, of which a $111.6 million had pay rate concessions. We have a total return swap of $36.6 million on our preferred stock investment and in the remaining balance of $39.2 million is primarily senior debt most of which is guaranteed by the company. On line 13, we reported $16.4 million of deferred revenue of which $14.1 million related to guarantee fees collected from our tax credit equity funds that are eliminated in consolidation but are being amortized into income over the life of the funds. The additional $2.3 million relates to bonds that were transferred as part of a TEB sale, but because the bonds were not on our GAAP balance sheet the gain has been deferred and recognized overtime. Finally, I wanted to note that the reported common equity of $64.6 million, is $3 million lower after providing for the effects of TEB sale due to the fact that we transferred the perpetual preferred shares issued by TEB at a par amount of a $121 million. However, we carry these shares at a discounted amount of a $118 million as reflected on line 16 justify to the (inaudible) sale. With that, I'll turn the call back over to Mike. Mike?

[Michael Falcone:]

Thanks, Lisa. Before opening the call for questions, I did want to reiterate that we believe the company has attractive opportunities to create additional shareholder value moving forward. With the capital we've generated, we can buy back shares, pay down debt and make new investments based on where and when we see opportunity. The focus on creating value likely means we're entering a period where our earnings maybe irregular as we seek to deploy our capital and improve our common equity per share. Thank you very much for your support. I can assure you of our continued commitment to creating value for our shareholders as we move in to this next stage of our company’s develop. We'll now open up the call to questions. Operator?

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Michael Leconey of Bishop, Rosen.

[Michael Falcone:]

Hey, Mike how are you?

[Michael Leconey:]

Good to talk to you. But a lot has been going on with this company when I drill, trying to get through these -- your filings. I mean we're working hard out here at Bishop, Rosen I can assure you. The first question I had Mike, was in terms of [FFO], thank you, your excellent questions or comments about creating some value, making money going forward, one point I didn’t understand and the reason I bring it up, for two reasons. One is, it seem to me a business that made you, at centerline, which was acquired not so long ago and sort of resembles MMAB and as the LIHTC funds, which I mean I don’t know it seems to me a lot of money there, I mean it's still like almost $900 million invested in these things. And you're are the general partner of these housing projects? Is this I mean I can’t figure out frankly from reading your documents, whether there is a substantial income or. I mean there was $8 million, I, for some reason didn’t catch what the $8 million was which was from in the quarter some tax exempt, it sounded like it got something to do with these funds, if they're on the right track, I mean is this a relevant question or…?

[Michael Falcone:]

Yeah. Let me briefly describe the way that business work.

[Michael Leconey:]

Great, great.

[Michael Falcone:]

Works and work. So at one point we had a group of people whose job it was to raise capital from institutional investors and turnaround and find redeploy that money in investments in multi-family housing that was eligible for tax credit, it would be eligible for those tax credits because of basically an agreement to rent with restrictions.

[Michael Leconey:]

Right.

[Michael Falcone:]

We actually sold that business in general, four years ago plus or minus.

[Michael Leconey:]

Is this the -- okay, look I -

[Michael Falcone:]

Probably be the same. Now, we sold that business without taking back any filling up (Inaudible).

[Michael Leconey:]

Okay.

[Michael Falcone:]

It is the million dollars of financing [equipment] and so the way that business works today is we have $864 million I think is the number of funds that we raised that is still that we held on to and help on to these particular funds largely because they were funds where we guaranteed the return to investors and when we went to sell the business in the height of the financial crisis we could find anyone to take on the guarantee risk. We have since seen all those properties gets built, we have these properties get rented up we have in fact modified the terms of the guarantee such that our current view is we don’t see any loss associated with these funds. We do collect fees from them annually which more than cover the expense but not much more, the expense of running them and we have what we think is sort of the significant residual opportunity in these funds, but that opportunity is probably five to eight years away, five to ten years away depending on the fund and the underlying properties. So it’s much like real estate investment management business in general where you get a fee and a promote it kind of covers your overhead and the promote is your interest for staying in the fund and you getting paid long-term.

[Michael Leconey:]

That's where you make some real money.

[Michael Falcone:]

There's a similar structure to these funds and we believe that there may be opportunities to sort of mine value out of these funds between now and they're ultimate wrapping up. But frankly, we're just in the last couple of months have been putting more life on these funds and what we might be able to accomplish with them. Previously we spent most of our asset management focus on the bonds which were paying cash money every month.

[Michael Leconey:]

I see, so I just I know I've spent too much time on this, but you mentioned the number like you sold a bunch of them and there was like [$665 million] that you had to keep, so what's the relevant of the $852 million number just sorry to -- it does mention any of your -- it's Lisa isn't it?

[Lisa Roberts:]

Yeah, in terms of our remaining bonds portfolio?

[Michael Leconey:]

No, it says, honestly I'm looking at item to management's discussion or I think it must be the -- darn, I'm going to murder the -- there's so many papers here, I'm losing it. It might be the (Inaudible) events, say (Inaudible). I think you sort of answered it and it's a relatively - at this point it's a relatively modest business. I guess in a larger sense, (inaudible) secondly was in your we're going through the assets, I didn’t find that category where the - where is those properties in Savannah and then one in Phoenix where is that on your balance sheet?

[Lisa Roberts:]

Yeah, the $3 million deals I don’t think that's Savannah

[Michael Falcone:]

Savannah is in other asset.

[Lisa Roberts:]

Savannah is in our adjusted other assets like

[Michael Leconey:]

Okay.

[Lisa Roberts:]

It's about $6 million of that $24 million (Inaudible).

[Michael Falcone:]

And that's because we own a third interest in a partnership which owns the land there with the - as a now we have a managing partner in that partnership.

[Michael Leconey:]

I got it.

[Michael Falcone:]

The rest, we actually own directly the title.

[Lisa Roberts:]

And that's in line 6 (Inaudible).

[Michael Leconey:]

6, yeah adjusted. Okay and all right. Super, all right and so I know where that it. That's where the Phoenix property is. All right. And next, Mike I guess $64 question, that we're all asking ourselves, at Bishop, Rosen is, how you're going to make money? And I guess another one of your colleagues that he said we really have a property manager business and everybody around here said well what the heck is that? Can you help us on that one, help me frankly explain it to people?

[Michael Falcone:]

I don't know, who you would have had that conversation with, but we're really in currently we're in the asset management business, is that I would say.

[Michael Leconey:]

Okay.

[Michael Falcone:]

Which is the business of harvesting value from the various real estate assets and funds that we manage.

[Michael Leconey:]

Okay.

[Michael Falcone:]

And then we're looking to redeploy the capital that we have either by buying our subordinate debt at a discount or making new investments in real estate or real estate funds that would enable us to generate significant returns on our equity going forward. Or we pay off some senior debt, if we don't see that those opportunities in front of us. But and we see a variety of ways to generate shareholder value. As I said, we're not rushing in to investing the capital, we think it would be a mistake to behave like this, if this was burning a hole on our pocket and as a result of that, we're going to see some irregularity in our earnings call forward. But we are very much focused on maximizing value, the assets that we own and looking at opportunities to invest in other assets where we can create value or pay down the senior or subordinate debt and lastly we did announce significant share buyback and we are [quoting] to move that as a way to returns in capital to investors who want to get out of new investment at this point.

[Michael Leconey:]

Okay, and I guess a very high priority remains a sub-debt?

[Michael Falcone:]

Very high priority remains to sub-debt.

[Michael Leconey:]

Okay, I guess no point developing that any way further. Thank you very much.

[Operator:]

(Operator Instructions) The next question comes from Patrick [McAvoy], Private Investor.

[Unidentified Analyst:]

Could you elaborate a little bit more on these real estate properties; I know in the last conference call, there was a lot of talk about a $79 million a year that you guys were hoping on your balance sheet of assets interested it could be the George asset, the Phoenix assets and then LA asset. I believe LA and Phoenix are land, and it was asked of you, what was the original price paid and you said, 5 to 10 times of that. Could you just elaborate on that a little bit more?

[Michael Falcone:]

Yeah. I don’t remember the $80 million number, but what we got is basically if you look at the real estate held for [lease] line into lease line what?

[Lisa Roberts:]

Line [6].

[Michael Falcone:]

line 6, the $18 million [17996], it's got four things in it it's got a multi-family property, it's about $10 million. That is a deal we took back in middle of its renovation, we are completing the renovation and as soon as that’s done we got to sort of sell that property frankly and then there are three land parcels, some of which is in southern California to call it LA is a little generous I think. I think its technically in Lancaster, California Inc., without (inaudible) here, I hesitate to say that. But it's in far suburban Los Angeles. Red River is a deal in Phoenix, and Russell 150 is a deal in Northern Virginia. Together those three make up the other 8 million in real estate held for sale. And then in other assets, we have a deal in Savannah to as I said earlier it’s in other assets because we own a third of a partnership as opposed to owning the real estate directly and that’s on our books for 6 million plus or minus. And so those are the sort land assets that we got, and we are looking at ways to Pat, increase value on those properties.

[Unidentified Analyst:]

Okay, and can you give us some update as to timing on realizing some value for shareholders with these real estate assets held for sale?

[Michael Falcone:]

I bet they are far enough out because it’s sort of hard to predict, it’s sort of hard. It is nothing eminent in these deals and as I said [Belmar] we want to complete the construction and redevelop that. The rest was really in many ways waiting on the reemergence of the single-family markets in these particular locals. And in the case of Red River and Russell, I think we feel like things are headed in our direction, but I still think we are ways away. (inaudible) which is the deal in Southern California, we sort of included that it’s far enough away that its highest and best use may not be as housing, and so we are looking at other alternative ways to get some value out that property.

[Unidentified Analyst:]

Okay, fair enough. And when you do make a sale of one of this properties, and if you realize the key to that is offset by the net operating loss carry forwards?

[Michael Falcone:]

Yeah.

[Unidentified Analyst:]

It will be, we know that.

[Michael Falcone:]

It would happen within the [C Corp.] and for that matter any gain that we now get whether it’s from selling a bond or from selling a real estate will happen within the [C Corp.] and there will be no phantom gains passed on the shareholders.

[Unidentified Analyst:]

Right, that would be corporation (inaudible) and at corporate level?

[Michael Falcone:]

You broke up there at the end, but the corporation hence significant near operating losses that would shield the kind of income that we are talking about here and would also likely shield the cancellation of debt income that we might have if we bought the sub-debt at a discount. I think we use the word foreseeable future, when we described it in the filings, but we have enough NOLs for quite a well.

[Operator:]

Our next question comes from [Greg Bennette], Private Investor.

[Unidentified Analyst:]

Lisa, first question, going forward is the value of the bond portfolio going up either based on of a bond becoming performing or based on interest rate movement. Is that going to flow through on your quarterly earnings statement like it has in the past?

[Lisa Roberts:]

Yeah, right now the composition of the portfolio we still do have a few bonds that will be driven by interest rates, but a lot of them will be driven by the underlying credit quality of the real estate itself. Either way gains and losses on the remaining bond portfolio will continue to be reported as it has historical meaning, gains will flow through what we refer to as other comprehensive income and losses will reflected through the income statement.

[Unidentified Analyst:]

Okay. So in interest rate movement each quarter and that changes the valuation of bonds. If one of your properties becomes a performing or one of the bonds becomes performing do your expertise running or assisting in running property. Is that an annual thing that the accountants look out and say now you can adjust that up order downward at a quarterly event?

[Michael Falcone:]

We are still marking the bonds to market quarterly and we have two methodologies for marking bond. One methodology, we call the performing bond model; that's pretty mechanical looking at interest rates and duration of the bonds and credit spreads that we get from market makers. That used to be the way the vast majority of the bonds were mark-to-market. We sold the vast majority of those bonds that were marked choosing the performing bond model. So what we're left with today is bonds that are largely mark-to-market using the non-performing model, which is essentially looking at the performance of the underlying real estate during a 10 year DCF on real estate. Interest rates affect real estate value obviously, and in that calculation affects value in at least two ways mathematically and that is by using the discount rates that we use and the terminal cap rates that we use in the 10-year DCF, but the way the models work, everything adjust quarterly. So there is not a sort of cliff that happens and recovery suddenly pops up. Every quarter bond value is going up and down based on what we're seeing with interest rates and what we're seeing with property performance.

[Unidentified Analyst:]

That going forward could be a major driver of each quarter -- what you mentioned that quarter going forward could be kind of lumpy or unpredictable that maybe one of the factors.

[Michael Falcone:]

Yes.

[Unidentified Analyst:]

All right, it seems like that will be a big factor actually. You went on a great length talking about the first question about the tax credit partnerships that were sold, explaining that you are getting a management fee which is the breakeven and you also have the potential for some kind of value diversity once the partnerships round up and that’s a 5 to 10-year period. (inaudible) what do they get?

[Michael Falcone:]

These are sold largely to banks and what they get was a flow of tax credits, which is sort of -- essentially was guaranteed to them. So for example, they would get tax credit such and they would get maybe a 5% return on their investment. But significantly for the bank investors they also got CRA credit, Community Reinvestment Act credit, which for banks to be in good standing, they have to reinvest in their communities. So much of the investment in this market is driven by bank searching for community reinvestment assets. And arguably that search has driven yield low enough both historically and from what I understand in the market today, but sort of other investors don’t really find the tax credit investments attractive at current and historic yields. So it really is a financial institution market primarily driven by banks. Fannie and Freddie were significant players back when they paid taxes.

[Unidentified Analyst:]

So you are the managing or you are the general partner, is that correct?

[Michael Falcone:]

So we are the general partner in the funds, the funds are then limited partner investors in property partnerships and a developer is the general partner at the property level, but we have essentially protected rights that allow us to determine when a property gets sold, those sorts of things.

[Unidentified Analyst:]

So am I correct that you could decide later this year or next year whatever that a particular property is to put it on the market, I think it’s limited partners to banks and the other had received all the credit, tax credits are growing, yeah, is that correct?

[Michael Falcone:]

No, in general, these tax credits run for 10 years after the properties were built and ran it up. So when I pointed to likely, rather it’s for 10 years the tax credits are awarded and then another five year required whole. So when I pointed to 2020 and later, that’s really when the window kind of opens for eligible sale of most of these properties. You can’t sell them beforehand but it’s very completed and generally speaking they don’t trade. And you wouldn’t expect to see these properties sale much before 17 years after we funded, two years to build and ran them up five years to ten years of tax credit awards and another five years compliant, so it’s not eminent.

[Unidentified Analyst:]

So there is nothing close to [say both].

[Michael Falcone:]

You broke up a little there Greg, can you try that?

[Unidentified Analyst:]

The first, I mean there must be these anniversary dates that you have that are very defined when something becomes eligible to where you have the 10 year and the five year and you met all?

[Michael Falcone:]

Yes.

[Unidentified Analyst:]

And your indication is that at least another five years out?

[Michael Falcone:]

There are 100 and some properties and each property has its own date, but generally speaking those are sort of five years out or so.

[Unidentified Analyst:]

Could you sell your interest, your general partnership interest, I mean all the guarantees have been that you stated and somebody who wants that cash flow out in the future is that they would pay you at discounted amount for that today?

[Michael Falcone:]

It is certainly possible to do that, whether another party would use the guarantees is not likely to be realized and what discount rate they would pay would be a factor to whether or not we would sell the properties with the funds really, but that’s the calculus. And when we look at these three years ago, we thought the discount that was being demanded -- three or four years levels whenever we sold the rest of the business, we thought the discount that was being demanded in the market was way too high relative to the value of the properties.

[Unidentified Analyst:]

You mentioned that, when that time period comes, when these properties will trade and you will get out of being a general partner for each of the 100 properties that there is a residual value and it could be significant. Is there any way of defining or giving the range or what that might or how is that determined?

[Michael Falcone:]

We have pro formas for 100 properties, 110 whatever it is, organized by fund where we look at sort of projected cash flows over the next 10 years. We then look at projected residual values then one the residual value and the cash flows through various waterfalls based on the legal documentation to figure out how much of that money is coming to us and how much of it would go to third-parties and but, frankly, I am not comfortable speaking publically about 10-year pro formas on a 110 real estate properties. When we got into a three or four year pro formas that may make more sense but that at this point we do believe the number would be significant it’s subject to all sorts of variability as we move forward. So we just can’t disclose that at this point.

[Unidentified Analyst:]

Okay, so for the next several years we are going to have this messed up balanced sheet and income statement eventually if you and I are talking seven years from now and may be able to put a number on it that would, I think it would never show up in the income statement or the balance sheet, you actually recognize a property get sold. Is that correct?

[Michael Falcone:]

You are saying the residual value that we ---

[Unidentified Analyst:]

Correct.

[Michael Falcone:]

I think that’s correct though, we haven’t really thought too hard about that sort of end of the fund accounting at this point. But I mean there are lots of, I mean, unfortunately there are lots of assets on our book that are no longer mark-to-market such that the GAAP value and the underlying economic value have diverged and we really [love] the market leave everything to market but desirably that’s not what GAAP allows.

[Lisa Roberts:]

Our general stance on this has been, our look out for a two-year ring bell in terms of what we're referring to is contingent asset management fees and if we can reliably estimate looking out two years, there is a view that we could actually record those as an asset on the balance sheet but as Michael said, we're not, we can’t reliably estimate or project those at this point. So they’ve gotten no recognition on the financial statements.

[Unidentified Analyst:]

Okay. You mentioned waterfall and I've seen some of these investments where as you go through time, there is different returns or tranches and as you succeed in achieving those for the limited partners, that been, there is a potential for cash flow to start flowing through the general partners, particularly as these things (inaudible) as they mature. Is there a potential for that to occur without a sale where (inaudible) it would be through contingent management fee or if it's just something as your figure of 2.5% investor where once you achieve a rate of return with the limited partners that you get something?

[Michael Falcone:]

The mechanism by which it happens is a little different than what you described, but it is the case where those properties perform and generate cash flow. Some of that cash flow could come to us as increased contingent asset management fees.

[Unidentified Analyst:]

Okay, so there is potential for that figure to grow and the future without the property being so it’s just achieving cash flow, okay well that’s good to hear.

[Michael Falcone:]

Yeah. I mean at this point for us, all of these portfolios have bit of a free option in that we’ve got our cost covered by the basis and we have an opportunity to harvest value from these properties and these funds in a whole variety of ways whether its buying out [GPs], developer partners, buying our investors limited partners, we believe that there will be opportunities over the next five to 10 years to create some value by working this portfolio by mining at that we’ve just that I couldn’t tell you whether asset dollar or pay more than a dollar, because we are just starting to look at those kinds of opportunities now, but they clearly exist.

[Unidentified Analyst:]

Those partnerships, people that are partners in this as limited partner may seek liquidity, there is [inefficient] or there is no market for where you may get familiar already with the property you may provide a bid for them if they want to sell up a piece their interest.

[Michael Falcone:]

Those kinds of things that would enable us to perhaps make some money in this portfolio overtime.

[Unidentified Analyst:]

Is there, am I correct in these portfolios, there is no financing risk or refinance, that’s called interest rate risk, would that be correct?

[Michael Falcone:]

As the limited partners we have no exposure. I guess the worst case scenario is that properties would go away and they would be foreclosed upon we lose the properties. In some instances if that happens before the end of compliance period that could be problematic but our current view as I said our view of our guarantee exposure year out, the implication of that is we don’t expected any losses that might be generated if the portfolio would be material.

[Unidentified Analyst:]

One might say all of these properties are performing would be I guess the best way to explain it.

[Michael Falcone:]

I wouldn’t say that they are all performing. I would say that all of that but the funds are currently performing at a level where we think our guarantee exposure is euro. So we don’t expect the [rep] to write a check relative to the entire funds’ performance and we do benefit from cross collateralization within a fund. So if there are 10 properties in a fund and one isn’t quite ready we would like it to be from a tax credit perspective, but we already guaranteed it was tax returns not economic returns. So if a property is in a fund and one is over performing, one is under they tend to offset. But from a fund perspective, when we look at all the funds we don’t see any exposure to our guarantee.

[Unidentified Analyst:]

Tax credit return or guarantee was only that it met the community's where pre-investment act is that correct?

[Michael Falcone:]

Well, the guarantee was that the sum total of the tax credits that would be delivered over a period of time would yield to the investor a certain IRR on their original investment. And that calculation was generally a single digit return and the tax credits was generally speaking fixed with the time the properties construction was completed. So as long as the properties performs over the - and doesn’t isn't foreclosed upon over the next 15 years, generally speaking we will meet the [requirements].

[Unidentified Analyst:]

Okay, if I can switch gears going into, we talked about this today some of the real estate the one multifamily property I think you -- they refer to as Belmont, the $10 million property that's under [rent].

[Michael Falcone:]

It has three or four different names, Belmont is one by that should go, yes, to that aspect.

[Unidentified Analyst:]

Where is that property located?

[Michael Falcone:]

New Orleans.

[Unidentified Analyst:]

New Orleans?

[Michael Falcone:]

Suburban New Orleans. It's I forget which town it is, it's --

[Unidentified Analyst:]

That is fine, so the property empty now and you are doing before renovation, or it's just you're renovating one, you've got people in there or?

[Michael Falcone:]

No, it may have gotten completely empty at one point but currently its occupied but there's still ongoing renovation.

[Unidentified Analyst:]

Okay, so you're renovating apartments or condominiums or living units as you have presence in the, there's a plan for how you're doing it? Do you expect that to be done this calendar year?

[Michael Falcone:]

It's really a question, Earl would be best suited to answer. But I do think we expect that the renovation to be done within the next 12 months, if not within the next six. And we are, well (Inaudible) lease up period after that and that certainly would then look to monetize our investment. That means like many properties that you end up taking back that the story gets to be convoluted and in this particular case, there was a fire during the course of the renovation and we just settled with the insurance company, even though we've renovated some of the fire damage units already, we've just settled with the insurance company on the insurance claim within the last month there's still ongoing activity there we would expect to continue.

[Unidentified Analyst:]

Okay am I correct, Lisa stated that, of the $18 million adjusted real estate held for use, the Belmont property is about $10 million of that?

[Michael Falcone:]

Correct.

[Unidentified Analyst:]

Okay. That means $8 million is spread among [Deltzer], Red River and Russell 150?

[Michael Falcone:]

Correct.

[Unidentified Analyst:]

Russell 150, Northern Virginia, I live in -- in my backyard, where is Russell 150 and what is it?

[Michael Falcone:]

It's in Winchester Virginia. And it's again this is sort of conversation for Earl but I don't -- it's about a 150 acres that’s being developed. We originally owned two development zones and has taken back underlying real estate.

[Unidentified Analyst:]

These are like entitled lots that may have road and sewer waiting for a developer to come build homes?

[Michael Falcone:]

Come build properties, whether they're homes, or offices or hotels or retail. I thinks one of the combination of all of the above.

[Unidentified Analyst:]

Okay, and then the next one is I guess is Phoenix at Red River. Is that correct?

[Michael Falcone:]

Correct.

[Unidentified Analyst:]

Well, that's raw land for housing?

[Michael Falcone:]

Correct.

[Unidentified Analyst:]

Is it raw or are there entitlements?

[Michael Falcone:]

You're at a level of detail I'd like to refer Earl for, and he's not here. I would there's zoning I don't think there's any infrastructure in place.

[Unidentified Analyst:]

What is it, it stands of residential units. How many units?

[Michael Falcone:]

I don’t have the number. I know it's a lot.

[Unidentified Analyst:]

Okay. I mean everything I read in the paper, everything I’ve been reading as Phoenix coming back.

[Michael Falcone:]

And we're reading the same things. It's they call politics or local, all real estate is local. Earl could describe you in pretty good detail how, which section of Phoenix is a pretty hot market right now and which is not where we are but we expect kind of next place within we're starting to perk up so we think we're starting to see some change but it's still off in the future.

[Unidentified Analyst:]

Would you spend money to get the zoning permitted for, or maybe it's already in there, we have a certain number of houses that have been permitted. And would you invest money in infrastructure with or would you is that not in your area of expertise?

[Michael Falcone:]

I think our job is to maximize the value of the assets that we own and to look for other assets that we can invest and to make money, I don’t think I would feel comfortable based on my knowledge and our knowledge within the company of investing in this, in the infrastructure at this particular project, without a lot more learning and we're in the process of trying to get smarter about this. In the end, our job is to make investments worth more, so I could put in a nickel and get back a dime and we would probably do that if we had a high degree of confidence in that investment thesis. So it's going to be very specific to each asset as we work to develop value of these assets in the future.

[Operator:]

Our next question comes from [Patrick McAvoy] Private Investor.

[Unidentified Analyst:]

Hi Mike sorry got off there before, but just one more quick thing, as far as the buyback goes and it’s a great sum of money and it’s exciting for investors, but why a buyback rather than issuing some sort of cash dividend to actually return that money to investors and lower their cost basis?

[Michael Falcone:]

In general a dividend is a longer-term commitment than a buyback and we have a fixed amount of money that we are prepared to commit and share buyback seem to us a better way to do it than a one-off dividend where we go don’t simply get any long-term credit through that. So it was certainly discussion of the various alternatives and we concluded that the Board’s well over it, share buyback is the place to start.

[Unidentified Analyst:]

Okay and then one more thing is, as you the – the way that’s bond portfolio has been sold, indeed this is the question for Lisa but with 800 million in less in assets under management now it’s got to be on your mind to try reduce overhead and in what way are you guys trying to do that, how quickly can you do it and is there a dollar value you can put on the savings in that sort of reduction?

[Michael Falcone:]

I covered this in my remarks, we are actively reducing our overhead and we reduced staffing already and will continue to do so over the course of the year, as we complete the thing. It’s premature to sort of put a number on it, but the overall overhead reductions between space with the [cost] we expect to go down and people will be significant. There are also thing in overheads like legal fees associated with the assets management on the $800 million approval.

[Unidentified Analyst:]

Where LCC taxed offshore.

[Michael Falcone:]

Yeah, we are not doing it all on a few bonds -. Unidentified Analyst All right.

[Michael Falcone:]

$400,000 there. So the premis of our sales, the Board was very focused on the required cost cutting and we are working through that (inaudible) Board. Unidentified Analyst Right, I mean just on paper you have a company that has been reduced in size by 60% to 70% assets under management, so commencement, commensurate with that you would expect everything from employee account to compensation for employees to decrease to some level, correct?

[Michael Falcone:]

Well, it will go down substantially, but there are still cost associated with running a public company which is essentially fixed cost, if you will. So those will go down some, but to the cost of insurance for example, that will change dramatically as the assets go down and certainly overhead associated with salaries will go down dramatically.

[Operator:]

Our next question comes from [Ted Lou], Valley Finance Group.

[Unidentified Analyst:]

Hi Michael I just wondered if you had a pro form equity per share figure.

[Michael Falcone:]

Pro forma equity, I don't know exactly what you mean by pro forma. We have given equity per share by that we mean we have a common share, we have a GAAP equity per share number, which is a $1.53 right Lisa?

[Lisa Roberts:]

Correct

[Unidentified Analyst:]

Right.

[Michael Falcone:]

Yeah. We have the $1.53, but

[Unidentified Analyst:]

And that’s before the July transaction right?

[Lisa Roberts:]

Right, we didn't do, we purposely from Exhibit A did not translate and provide a common equity per common share after the TEB sale for the 3 million reduction, and one could do the math if they wanted to. But because the quarter, really the book value should be re-measured again when we get to the end of September, which will include more than the effects of the TEB sale on July 3.

[Unidentified Analyst:]

I understand. Thank you very much

[Michael Falcone:]

At this time, I think we are going to call this conference call ended. We’ve certainly run past our allotted hour. So we’d like to thank you all very much. We greatly appreciate your interest in the company and as I said we can answer any questions you've got, we’d certainly look forward to be doing that. Thanks for your support and we look forward to talking again soon.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.