NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
—
Summary of Significant Accounting Policies
Organization
MMA Capital Management, LLC was organized
in 1996 as a Delaware limited liability company. Unless the context otherwise requires, and when used in these Notes, the
“
Company
,” “
MMA
,” “
we
,” “
our
” or “
us
”
refers to MMA Capital Management, LLC and its subsidiaries.
The Company invests in debt associated
with renewable energy infrastructure and real estate. We focus on investments with attractive risk-adjusted returns that generate
positive environmental or social impacts. Our investments, other assets and liabilities are organized into three portfolios:
|
·
|
Energy Capital – This portfolio includes investments that we have made directly or through
joint ventures with an institutional capital partner in loans that finance renewable energy projects;
|
|
·
|
Leveraged Bonds – This portfolio primarily includes tax-exempt mortgage revenue bonds that
are leveraged; and
|
|
·
|
Other Assets and Liabilities – This portfolio includes certain loan receivables, cash, real
estate-related investments, subordinated debt and the balance of the Company’s assets and liabilities.
|
Commencing on January 8, 2018, we became
externally managed by Hunt Investment Management, LLC, an investment adviser registered with the SEC (our “
External Manager
”).
In conjunction with this change, and as further discussed in the 2017 Annual Report, we completed the sale of the following businesses
and assets to Hunt (Hunt Companies, Inc. and/or its affiliates are herein referred to as “
Hunt
” and this sale
transaction is hereinafter referred to as the “
Disposition
”):
|
·
|
our Low Income Housing Tax Credit (“
LIHTC
”) business;
|
|
·
|
our international asset and investment management business;
|
|
·
|
the loan origination, servicing and management components of our Energy Capital business (including
certain management, expense reimbursement and other contractual rights that were held by the Company with respect to this business
line);
|
|
·
|
our bond servicing platform; and
|
|
·
|
certain miscellaneous investments.
|
Given these changes to our business model
and effective the first quarter of 2018, we operate as a single reporting segment. As a result, we no longer operate, or present
the results of our operations, through three reportable segments that, as of December 31, 2017, included United States (“
U.S.
”)
Operations, International Operations and Corporate Operations.
Proposed Conversion to a Corporation
On August 7, 2018, the Board of Directors
(“
Board
”) approved the conversion of our legal form of organization from a limited liability company to a corporation.
Since its inception, the Company has followed a corporate form of governance and, in July 2013, elected to be taxed as a corporation.
The proposed conversion would conform our legal form of organization to that of our tax and governance attributes.
If the conversion is approved by our shareholders,
our common shares will be converted on a one-for-one basis from common shares of a limited liability company to common shares of
a corporation and our current governance framework, including Board of Directors, will remain in place. Similarly, the measurement
of our assets, liabilities and other tax, financial and accounting attributes for financial reporting purposes will be unchanged.
However, upon conversion, we will be governed by the Delaware General Corporation Law (the “
DGCL
”) and a new
certificate of incorporation instead of by the Delaware Limited Liability Company Act (the “
LLC Act
”) and our
current limited liability company operating agreement.
The proposed conversion of the Company’s
legal form to that of a corporation is subject to the approval of our shareholders. Accordingly, the Company will hold a special
shareholders’ meeting on November 20, 2018 at which shareholders will be provided an opportunity to vote on the Company’s
proposed conversion. The Company filed a proxy statement with the SEC on September 28, 2018 that provides more information about
the Company’s proposed conversion including the differences between the DGCL and our proposed corporate documents as compared
with the LLC Act and our current limited liability company operating agreement.
Basis of Presentation
The accompanying consolidated financial
statements have been prepared in accordance with generally accepted accounting principles (“
GAAP
”) in the U.S.
The unaudited interim consolidated financial
statements as of, and for the three months and nine months ended September 30, 2018, should be read in conjunction with our audited
consolidated financial statements and related notes included in our 2017 Annual Report.
The Company evaluates subsequent events
through the date of filing with the Securities and Exchange Commission (“
SEC
”).
Changes in Presentation
We have revised the presentation of our
Consolidated Balance Sheets and Consolidated Statements of Operations for all reporting periods presented as a result of certain
discontinued operations occurring in the first quarter of 2018 as a result of the Disposition. We have also made certain reclassifications
to the prior year’s financial statements to enhance comparability with the current year’s financial statements.
Use of Estimates
The preparation of the Company’s
financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
commitments and contingencies, and revenues and expenses. Management has made estimates in certain areas, including the determination
of fair values for bonds, derivative instruments, guarantee obligations, and in prior periods certain assets and liabilities of
CFVs. Management has also made estimates in the determination of impairment on bonds and real estate investments. Actual results
could differ materially from these estimates.
Principles of Consolidation
The consolidated financial statements include
the accounts of the Company and of entities that are considered to be variable interest entities in which the Company is the primary
beneficiary, as well as those entities in which the Company has a controlling financial interest, including wholly owned subsidiaries
of the Company. All intercompany transactions and balances have been eliminated in consolidation. Equity investments in unconsolidated
entities where the Company has the ability to exercise significant influence over the operations of the entity, but is not considered
the primary beneficiary, are accounted for using the equity method of accounting.
New Accounting Guidance
Adoption of New Accounting Standards
Accounting for Revenue from Contracts
with Customers
In May 2014, the Financial Accounting Standards
Board (“
FASB
”) issued Accounting Standards Update (“
ASU
”) No. 2014-09, “
Revenue
from Contracts with Customers (Topic 606)
” as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12
and 2016-20 (collectively “
Topic 606
”). Topic 606 superseded existing revenue recognition standards with a single
model unless those contracts are within the scope of other accounting standards. The revenue recognition principle in Topic 606
is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services.
On January 1, 2018, we adopted Topic 606
using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Only our asset
management fee revenue is subject to Topic 606, which represents an insignificant portion of the Company’s total revenue.
The adoption of Topic 606 did not have a material impact on the Company’s Consolidated Balance Sheets, Consolidated Statements
of Operations, Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date or for the three
or nine months ended September 30, 2018.
Accounting for Derecognition of Nonfinancial
Assets
In February 2017, ASU No. 2017-05, “
Other
Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20): Clarifying the Scope of Asset Derecognition
Guidance and Accounting for Partial Sales of Nonfinancial Assets
” was issued. This guidance clarifies that the derecognition
of all businesses should be accounted for in accordance with the derecognition and deconsolidation guidance of Topic 810-10 –
Consolidations
. In addition, this guidance eliminates the scope exception in authoritative literature that governs transfers
of financial assets related to transfers of investments (including equity method investments) in real estate entities and supersedes
guidance related to the exchange of a nonfinancial asset for a noncontrolling ownership interest as set forth in Topic 845 –
Nonmonetary Transactions
. The effective date of ASU 2017-05 is aligned with Topic 606. We adopted ASU No. 2017-05 in conjunction
with our adoption of Topic 606 as of January 1, 2018 and we recognized a cumulative effect adjustment of $9.2 million to retained
earnings on January 1, 2018.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230)
. The objective of this update was to provide additional guidance and reduce diversity
in practice when classifying certain transactions within the statement of cash flows. In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. This new standard requires that the statement of cash flows explain
the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. The Company adopted these new accounting standards on their effective date of January 1, 2018 utilizing the retrospective
transition method. These new standards resulted in presentation changes of restricted cash within our Consolidated Statements of
Cash Flows and in certain tables within our “Liquidity and Capital Resources” discussion in Item 2 – “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Accounting for Business Combinations
In January 2017, ASU No. 2017-01,
“Business
Combinations (Topic 805): Clarifying the Definition of a Business”
was issued. This guidance clarifies the definition
of a business and provides guidance to assist reporting entities in the evaluation as to whether a transaction should be accounted
for as an asset acquisition or business combination. We adopted this new guidance on its effective date of January 1, 2018. The
adoption of this guidance did not impact the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations,
Consolidated Statements of Equity or Consolidated Statements of Cash Flows as of the adoption date or for the nine months ended
September 30, 2018.
Accounting for Stock Compensation
In May 2017, ASU No. 2017-09,
“Compensation
– Stock Compensation (Topic 718): Scope of Modification Accounting”
was issued. This guidance amends the scope
of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms
or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718,
“
Compensation – Stock Compensation
.” Specifically, an entity would not apply modification accounting if
the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification.
We adopted this new guidance on its effective date of January 1, 2018. The adoption of Topic 718 did not have an impact on the
Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity or Consolidated
Statements of Cash Flows as of the adoption date or for the nine months ended September 30, 2018.
Accounting for Financial Instruments
In February 2018, the FASB issued ASU No.
2018-03,
“Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities.”
This guidance makes technical corrections to certain
aspects of ASU 2016-01. We adopted this new guidance on its effective date of June 30, 2018. The adoption of this guidance did
not impact the Company’s Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Equity
or Consolidated Statements of Cash Flows as of the adoption date.
Issued Accounting Standards Not Yet
Adopted
Accounting for Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13,
“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Improvements.”
This guidance is intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities
use to account for debt instruments. This guidance establishes an impairment methodology that reflects lifetime expected credit
losses rather than incurred losses. This guidance requires consideration of a broader range of reasonable and supportable information
to inform credit loss estimates. This new guidance is effective for us on January 1, 2020, with early adoption permitted. We are
currently evaluating the potential impact of the new guidance on our consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for
Fair Value Measurement.”
This guidance eliminates certain disclosure requirements for fair value measurements, requires
public entities to disclose certain new information and modifies some disclosure requirements. This new guidance is effective for
us on January 1, 2020, with early adoption permitted. We are currently evaluating the potential impact of the new guidance on our
consolidated financial statements
Accounting for Income Taxes
In February 2018, the FASB issued ASU No.
2018-02,
“Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive Income.”
This new guidance permits companies to reclassify stranded tax effects
caused by the Tax Cuts and Jobs Act of 2017 (the “
Act
”) from AOCI to retained earnings. This new guidance, which
also requires new disclosures, is effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating
the potential impact of the new guidance on our consolidated financial statements.
Accounting for Stock Compensation
In June 2018, the FASB issued ASU 2018-07,
“Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.”
This guidance expands the scope of Accounting Standards Codification (“
ASC
”) Topic 718 to include all share-based
payment arrangements related to the acquisition of goods and services from both nonemployees and employees. This new guidance is
effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating the potential impact of the new
guidance on our consolidated financial statements.
Note 2—Investments in Debt Securities
The Company’s investments in debt
securities primarily consist of multifamily tax-exempt bonds and other real estate-related bond investments. These investments
are classified as available for sale for reporting purposes and are measured on a fair value basis in our Consolidated Balance
Sheets.
Multifamily tax-exempt bonds are issued
by state and local governments or their agencies or authorities to finance affordable multifamily rental housing. Generally, the
only source of security on these bonds is either a first mortgage or a subordinate mortgage on the underlying properties.
The Company’s investments in other
real estate-related bonds consists of municipal bonds that finance the development of infrastructure for a mixed-use town center
development and are secured by incremental tax revenues generated from the development.
The weighted-average pay rate on the Company’s
bond portfolio was 6.4% and 6.2% at September 30, 2018 and December 31, 2017, respectively. Weighted-average pay rate represents
the cash interest payments collected on the bonds (excluding subordinated cash flow bonds) as a percentage of the bonds’
average unpaid principal balance (“
UPB
”) for the preceding 12 months for the population of bonds at September
30, 2018 and December 31, 2017.
The following tables provide information
about the UPB, amortized cost, gross unrealized gains, gross unrealized losses and fair value (“
FV
”) associated
with the Company’s investments in bonds that are classified as available-for-sale:
|
|
At
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
FV as a %
|
|
(in thousands)
|
|
UPB
|
|
|
Cost
(1)
|
|
|
Gains
|
|
|
Losses
(2)
|
|
|
FV
|
|
|
of UPB
|
|
Multifamily tax-exempt bonds
|
|
$
|
116,870
|
|
|
$
|
75,976
|
|
|
$
|
50,256
|
|
|
$
|
─
|
|
|
$
|
126,232
|
|
|
|
108
|
%
|
Other real estate-related bond
investments
|
|
|
26,825
|
|
|
|
20,889
|
|
|
|
750
|
|
|
|
(63
|
)
|
|
|
21,576
|
|
|
|
80
|
%
|
Total
|
|
$
|
143,695
|
|
|
$
|
96,865
|
|
|
$
|
51,006
|
|
|
$
|
(63
|
)
|
|
$
|
147,808
|
|
|
|
103
|
%
|
|
|
At
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
FV as a %
|
|
(in thousands)
|
|
UPB
|
|
|
Cost
(1)
|
|
|
Gains
|
|
|
Losses
(2)
|
|
|
FV
|
|
|
of UPB
|
|
Multifamily tax-exempt bonds
|
|
$
|
105,472
|
|
|
$
|
67,982
|
|
|
$
|
43,587
|
|
|
$
|
─
|
|
|
$
|
111,569
|
|
|
|
106
|
%
|
Other real estate-related bond
investments
|
|
|
37,050
|
|
|
|
31,163
|
|
|
|
1,203
|
|
|
|
(331
|
)
|
|
|
32,035
|
|
|
|
86
|
%
|
Total
|
|
$
|
142,522
|
|
|
$
|
99,145
|
|
|
$
|
44,790
|
|
|
$
|
(331
|
)
|
|
$
|
143,604
|
|
|
|
101
|
%
|
|
(1)
|
Amortized
cost consists of the UPB, unamortized premiums, discounts and other cost basis adjustments,
as well as net OTTI recognized in “Impairments” in our Consolidated Statements
of Operations.
|
|
(2)
|
Includes
one bond that was in a gross unrealized loss position for more than 12 consecutive months
and that had a fair value of $15.0 million at September 30, 2018 and December 31, 2017.
|
See Note 8, “Fair Value,” which
describes factors that contributed to the $4.2 million increase in the reported fair value of the Company’s bond portfolio
for the nine months ended September 30, 2018.
Maturity
Principal payments on the Company’s
investments in bonds are based on contractual terms that are set forth in the contractual documents governing such investments.
If principal payments are not required to be made prior to the contractual maturity of a bond, its UPB is required to be paid in
a lump sum payment at contractual maturity or at such earlier time as may be provided under the governing documents. At September
30, 2018, the majority of the Company’s bond investments amortize on a scheduled basis and have stated maturity dates between
March 2032 and March 2049. The Company also had four non-amortizing bonds with principal due in full between November 2044 and
August 2048 (the total cost basis and fair value of these bonds were $3.1 million and $17.0 million, respectively, at September
30, 2018).
Investments in Debt Securities with
Prepayment Features
The contractual terms of all of the Company’s
investments in bonds include provisions that permit such instruments to be prepaid at par after a specified date that is prior
to their stated maturity date. The following table provides information about the UPB, amortized cost and fair value of the
Company’s investments in bonds that were prepayable at par at September 30, 2018 and stratifies such information for the
remainder of the Company’s investments based upon the periods in which such instruments become prepayable at par:
(in thousands)
|
|
UPB
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
September 30, 2018
|
|
$
|
26,825
|
|
|
$
|
20,889
|
|
|
$
|
21,576
|
|
October 1 through December 31, 2018
|
|
|
1,855
|
|
|
|
262
|
|
|
|
2,113
|
|
2019
|
|
|
5,170
|
|
|
|
4,080
|
|
|
|
5,222
|
|
2020
|
|
|
12,045
|
|
|
|
8,485
|
|
|
|
12,496
|
|
2021
|
|
|
46,001
|
|
|
|
27,140
|
|
|
|
49,715
|
|
2022
|
|
|
51,799
|
|
|
|
36,009
|
|
|
|
56,686
|
|
Thereafter
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Bonds that may not be prepaid
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Total
|
|
$
|
143,695
|
|
|
$
|
96,865
|
|
|
$
|
147,808
|
|
The weighted-average expected maturity
of the Company’s investments in bonds that were not currently prepayable at par at September 30, 2018 was 3.0 years.
Bond Aging Analysis
The following table provides information about the fair value
of the Company’s investments in bonds that are classified as available-for-sale and that were current with respect to principal
and interest payments, as well as information about the fair value of bonds that were past due with respect to principal or interest
payments:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total current
(1)
|
|
$
|
134,842
|
|
|
$
|
135,571
|
|
30-59 days past due
|
|
|
─
|
|
|
|
─
|
|
60-89 days past due
|
|
|
─
|
|
|
|
─
|
|
90 days or greater
|
|
|
12,966
|
|
|
|
8,033
|
|
Total
|
|
$
|
147,808
|
|
|
$
|
143,604
|
|
|
(1)
|
Includes
one bond that was placed on non-accrual during the second quarter of 2018, as collection
of principal and interest was not reasonably assured, that had a fair value of $6.6 million
at September 30, 2018.
|
Troubled Debt Restructurings
The Company may periodically agree to modify
the contractual terms of its investments in debt securities in the interest of attempting to obtain more cash or other value from
a debtor than it otherwise would, or to increase the probability of receipt, by granting a concession to a borrower. If the Company
makes an economic concession to a borrower who is experiencing financial difficulty, the Company will typically assess a modification
or other form of concession to represent a troubled debt restructuring (“
TDR
”) for financial reporting purposes.
On August 27, 2018, the Company agreed
to extend the scheduled payment date associated with one of its infrastructure bonds, which had a UPB of $10.7 million at September
30, 2018, from September 1, 2018 to November 1, 2018. This extension provided the debtor and the Company more time to negotiate
a comprehensive restructuring of both of the Company’s infrastructure bond investments, which was completed on October 30,
2018. Refer to Note 17, “Subsequent Events,” for additional information.
There were no TDRs completed during the
year ended December 31, 2017.
Non-Accrual Bonds
The fair value of the Company’s investments
in bonds that were on non-accrual status was $19.5 million and $8.0 million at September 30, 2018 and December 31, 2017, respectively.
The Company recognized interest income on a cash basis of $0.1 million for the three months ended September 30, 2018 and September
30, 2017, and $0.3 million and $0.2 million for the nine months ended September 30, 2018 and September 30, 2017, respectively.
Interest income not recognized on bonds that were on non-accrual status was $0.3 million and $0.2 million for the three months
ended September 30, 2018 and September 30, 2017, respectively, and $0.8 million and $0.5 million for the nine months ended September
30, 2018 and September 30, 2017, respectively.
Bond Sales and Redemptions
The Company recognized cash proceeds in
connection with sales or full redemptions of its investments in bonds of $0.5 million for the three months and nine months ended
September 30, 2018 and $7.4 million for the three months and nine months ended September 30, 2017.
The following table provides information about gains or losses
that were recognized in the Consolidated Statements of Operations in connection with the Company’s investments in bonds:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
OTTI losses recognized on bonds held at each period-end
|
|
$
|
─
|
|
|
$
|
(880
|
)
|
|
$
|
(6
|
)
|
|
$
|
(880
|
)
|
Gains recognized at time of sale or redemption
|
|
|
5,080
|
|
|
|
620
|
|
|
|
5,080
|
|
|
|
620
|
|
Total net gains (losses) on bonds
|
|
$
|
5,080
|
|
|
$
|
(260
|
)
|
|
$
|
5,074
|
|
|
$
|
(260
|
)
|
Note 3—Investments in Partnerships
The following table provides information
about the carrying value of the Company’s investments in partnerships and ventures:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Investments in U.S. real estate partnerships (includes $928 and $1,046 related to variable interest entities ("
VIEs
"))
(1)
|
|
$
|
19,878
|
|
|
$
|
19,114
|
|
Investment in SAWHF
|
|
|
10,703
|
|
|
|
12,695
|
|
Investment in Solar Ventures
|
|
|
115,523
|
|
|
|
97,011
|
|
Investments in Lower Tier Property Partnerships ("
LTPPs
") related to CFVs
(2)
|
|
|
─
|
|
|
|
99,142
|
|
Total investments in partnerships
|
|
$
|
146,104
|
|
|
$
|
227,962
|
|
|
(1)
|
We
do not consolidate any of the investees that were assessed to meet the definition of
a VIE because the Company was deemed not to be the primary beneficiary.
|
|
(2)
|
See
Note 15, “Consolidated Funds and Ventures,” for more information.
|
Investments in U.S. Real Estate Partnerships
At September 30, 2018, $18.9 million of
the reported carrying value of investments in U.S. real estate partnerships relates to an equity investment made by the Company
in a real estate venture to develop a mixed-use town center development. The Company made an initial capital contribution of $8.8
million, which represented 80% of the real estate venture’s initial capital. The Company has the right to a preferred return
on its capital contribution, as well as the right to share in excess cash flows of the real estate venture. As of September 30,
2018, the Company held a 71.2% economic interest based upon the partnership’s distribution waterfall. This entity was determined
not to be a VIE and because decision-making rights are shared equally among its members, the Company accounts for this investment
using the equity method of accounting.
During the first quarter of 2018, the Company
acquired three limited partner interests in three affordable housing partnerships in which our ownership interest ranged from 74.25%
to 74.92% for $3.3 million. While these entities were deemed to be VIEs, the Company was not deemed to be their primary beneficiary.
Therefore, the Company did not consolidate these entities and accounts for these investments using the equity method of accounting.
At September 30, 2018, the carrying value of these investments was $0.9 million.
At September 30, 2018, four of the U.S.
real estate partnerships in which we have investments were determined to be VIEs while, at December 31, 2017, two of the U.S. real
estate partnerships in which we had investments were determined to be VIEs. The carrying value of the equity investments in these
partnerships was $0.9 million and $1.0 million at September 30, 2018 and December 31, 2017, respectively. For one of the Company’s
VIEs, because the underlying real estate was sold during the fourth quarter of 2017, the Company does not expect to make additional
contributions to that investment. Our maximum exposure to loss due to our involvement with these VIEs was $0.9 million and $1.0
million at September 30, 2018 and December 31, 2017, respectively. Because we are unable to quantify the maximum amount of additional
capital contributions that we may be required to fund in the future associated with our proportionate share of one of the VIEs,
we measure our maximum exposure to loss based upon the carrying value of these investments.
The following table provides information about the total assets,
debt and other liabilities of the U.S. real estate partnerships in which the Company held an equity investment:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total assets
|
|
$
|
56,883
|
|
|
$
|
57,712
|
|
Debt
|
|
|
5,863
|
|
|
|
7,037
|
|
Other liabilities
|
|
|
32,538
|
|
|
|
22,030
|
|
The following table provides information
about the gross revenue, operating expenses and net (loss) income of U.S. real estate partnerships in which the Company had an
equity investment:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross revenue
|
|
$
|
543
|
|
|
$
|
12,017
|
|
|
$
|
1,722
|
|
|
$
|
13,469
|
|
Operating expenses
|
|
|
487
|
|
|
|
317
|
|
|
|
1,377
|
|
|
|
1,425
|
|
Net (loss) income and net (loss) income attributable to the entity
|
|
|
(582
|
)
|
|
|
11,028
|
|
|
|
(1,300
|
)
|
|
|
10,150
|
|
Investment in SAWHF
At September 30, 2018, the carrying value
of the Company’s 11.85% equity investment in SAWHF was $10.7 million. As SAWHF was determined not to be a VIE, the Company
accounts for this investment using the equity method of accounting.
The following table provides information about the carrying
value of total assets, debt and other liabilities of SAWHF:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total assets
|
|
$
|
90,621
|
|
|
$
|
123,187
|
|
Debt
|
|
|
─
|
|
|
|
15,712
|
|
Other liabilities
|
|
|
69
|
|
|
|
100
|
|
The following table provides information about the gross revenue,
operating expenses and net (loss) income of SAWHF:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross revenue
|
|
$
|
1,693
|
|
|
$
|
(2,238
|
)
|
|
$
|
3,998
|
|
|
$
|
4,626
|
|
Operating expenses
|
|
|
376
|
|
|
|
(1,591
|
)
|
|
|
1,927
|
|
|
|
6,412
|
|
Net (loss) income and net (loss) income attributable to the entity
|
|
|
(4,463
|
)
|
|
|
2,021
|
|
|
|
(2,896
|
)
|
|
|
5,092
|
|
Investment in Solar Ventures
The carrying value of the Company’s
equity investments in Solar Construction Lending, LLC (“
SCL
”), Solar Permanent Lending, LLC (“
SPL
”)
and Solar Development Lending, LLC (“
SDL
”) was $101.1 million, $2.9 million and $11.5 million, respectively,
at September 30, 2018. None of these investees were assessed to constitute VIEs and the Company accounts for all of these investments
using the equity method of accounting. At December 31, 2017, the Company accounted for its equity investment in Renewable Energy
Lending (“
REL
”) pursuant to the equity method of accounting. However, by acquiring its investment partner’s
ownership interest in REL and becoming the sole owner of such investee on June 1, 2018, the Company began to consolidate REL for
reporting purposes in the second quarter of 2018.
The following table provides information
about the carrying amount of total assets, other liabilities and noncontrolling interests of all investees for which the Company
had an equity method investment:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total assets
|
|
$
|
226,416
|
|
|
$
|
399,758
|
|
Other liabilities
|
|
|
3,546
|
|
|
|
5,111
|
|
Noncontrolling interests
|
|
|
─
|
|
|
|
87,699
|
|
The following table provides information
about the gross revenue, operating expenses and net income of all investees for which the Company had an equity method investment:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross revenue
|
|
$
|
6,118
|
|
|
$
|
8,493
|
|
|
$
|
18,639
|
|
|
$
|
19,257
|
|
Operating expenses
|
|
|
1,290
|
|
|
|
1,194
|
|
|
|
4,107
|
|
|
|
4,022
|
|
Net income
|
|
|
4,755
|
|
|
|
7,208
|
|
|
|
14,974
|
|
|
|
15,604
|
|
Net income attributable to the entity
|
|
|
4,755
|
|
|
|
5,404
|
|
|
|
14,974
|
|
|
|
10,253
|
|
Note 4—Loans Held for Investment
(“HFI”) and Loans Held for Sale (“HFS”)
The following table provides information
about the carrying value of the Company’s loans:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Loans HFI
|
|
$
|
58,299
|
|
|
$
|
736
|
|
Loans HFS
|
|
|
9,000
|
|
|
|
─
|
|
Total loans
|
|
$
|
67,299
|
|
|
$
|
736
|
|
Loans HFI
We report the carrying value of HFI loans
at their UPB, net of unamortized premiums, discounts and other cost basis adjustments and related allowance for loan losses. However,
such loans are reported at fair value to the extent the Company has elected the fair value option (“
FVO
”) for
such instruments and, as a result, such assets are subsequently measured on a fair value basis in our Consolidated Statement of
Operations as a component of “Net gains (losses) on loans.”
The following table provides information
about the UPB and cost basis adjustments that were recognized in the Company’s Consolidated Balance Sheets related to loans
that it classified as HFI:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
UPB
|
|
$
|
59,140
|
|
|
$
|
1,487
|
|
Cost basis adjustments, net
|
|
|
(841
|
)
|
|
|
(751
|
)
|
Loans HFI, net
|
|
$
|
58,299
|
|
|
$
|
736
|
|
The following table provides information
about the UPB and amortized cost of loans that are current with respect to principal and interest payments, as well as information
about the UPB of loans that are past due with respect to principal or interest payments:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
(in thousands)
|
|
UPB
|
|
|
Carrying value
|
|
|
UPB
|
|
|
Carrying value
|
|
Total current
|
|
$
|
58,090
|
|
|
$
|
58,000
|
|
|
$
|
437
|
|
|
$
|
437
|
|
30-59 days past due
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
60-89 days past due
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
90 days or greater
|
|
|
1,050
|
|
|
|
299
|
|
|
|
1,050
|
|
|
|
299
|
|
Total
|
|
$
|
59,140
|
|
|
$
|
58,299
|
|
|
$
|
1,487
|
|
|
$
|
736
|
|
At September 30, 2018 and December 31,
2017, the Company did not have any loans for which it elected the FVO.
At September 30, 2018 and December 31,
2017, the UPB of HFI loans that were placed on non-accrual status was $1.1 million while the carrying value of these loans was
$0.3 million as of such reporting dates.
At September 30, 2018 and December 31,
2017, no HFI loans that were 90 days or more past due in scheduled principal or interest payments were still accruing interest.
Loans HFS
We report the carrying value of HFS loans
at the lower of cost or fair value. In this regard, if a loan’s amortized cost exceeds its fair value at a reporting date,
the Company will establish a valuation allowance and recognize a related provision for loan loss in our Consolidated Statement
of Operations as a component of “Net gains (losses) on loans.” Subsequent increases in the fair value of an HFS loan
for which a valuation allowance was established will be recognized in the Consolidated Statements of Operations as a reduction
of “Net gains (losses) on loans” up to the amount of previously recognized losses.
The cost basis for HFS loans was $15.0
million and $6.0 million at September 30, 2018 and December 31, 2017, respectively, with $9.0 million and zero carrying value at
September 30, 2018 and December 31, 2017, respectively.
During the three months and nine months
ended September 30, 2018 and September 30, 2017, the Company did not recognize any lower of cost or market adjustments associated
with any HFS loans that were recognized in the Consolidated Balance Sheets.
Refer to Note 17, “Subsequent Events,”
for additional information.
Unfunded Loan Commitments
There were no unfunded loan commitments
at September 30, 2018 and December 31, 2017.
Note 5—Other Assets
The following table provides information
related to the carrying value of the Company’s other assets:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
$
|
9,653
|
|
|
$
|
6,865
|
|
Real estate owned
|
|
|
3,719
|
|
|
|
3,447
|
|
Accrued interest receivable
|
|
|
1,928
|
|
|
|
1,558
|
|
Other assets
|
|
|
887
|
|
|
|
860
|
|
Other assets held by CFVs
(1)
|
|
|
─
|
|
|
|
5,175
|
|
Total other assets
|
|
$
|
16,187
|
|
|
$
|
17,905
|
|
|
(1)
|
See
Note 15, “Consolidated Funds and Ventures,” for more information.
|
Derivative Assets
At September 30, 2018 and December 31,
2017, the Company had $9.7 million and $6.9 million, respectively, of derivative assets. See Note 7, “Derivative Instruments,”
for more information.
Real Estate Owned (“REO”)
The following table provides information
about the carrying value of the Company’s REO held for use, net:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Building, furniture, fixtures and land improvement
|
|
$
|
1,100
|
|
|
$
|
828
|
|
Land
|
|
|
2,619
|
|
|
|
2,619
|
|
Total
|
|
$
|
3,719
|
|
|
$
|
3,447
|
|
Buildings are depreciated over a period
of 40 years. Furniture and fixtures are depreciated over a period of six to seven years and land improvements are depreciated over
a period of 15 years. The Company’s Other Assets and Other Liabilities portfolio includes the Company’s REO that represents
a parcel of land that is currently in the process of being developed. As a result, no depreciation expense was recognized in connection
with this land investment for the three months and nine months ended September 30, 2018 and September 30, 2017. Additionally, the
Company did not recognize any impairment losses for such reporting periods.
Note
6—Debt
The table below provides information about
the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding:
|
|
At
|
|
|
At
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Carrying
|
|
|
Effective Interest
|
|
|
Carrying
|
|
|
Effective Interest
|
|
(dollars in thousands)
|
|
Value
|
|
|
Rate
|
|
|
Value
|
|
|
Rate
|
|
Asset Related Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other debt – bond related
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
35,022
|
|
|
|
2.9
|
%
|
|
$
|
41,767
|
|
|
|
3.2
|
%
|
Due after one year
|
|
|
46,392
|
|
|
|
3.0
|
|
|
|
42,071
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset related debt
|
|
|
81,414
|
|
|
|
3.0
|
|
|
|
83,838
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
2,244
|
|
|
|
3.5
|
|
|
|
2,297
|
|
|
|
2.6
|
|
Due after one year
|
|
|
96,041
|
|
|
|
3.5
|
|
|
|
97,700
|
|
|
|
2.6
|
|
Notes payable and other debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
─
|
|
|
|
─
|
|
|
|
14,733
|
|
|
|
2.8
|
|
Due after one year
|
|
|
7,473
|
|
|
|
14.7
|
|
|
|
10,859
|
|
|
|
12.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other debt
|
|
|
105,758
|
|
|
|
4.3
|
|
|
|
125,589
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset related debt and other debt
|
|
|
187,172
|
|
|
|
3.7
|
|
|
|
209,427
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt related to CFVs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
─
|
|
|
|
─
|
|
|
|
6,712
|
|
|
|
6.5
|
|
Total debt related to CFVs
|
|
|
─
|
|
|
|
─
|
|
|
|
6,712
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
187,172
|
|
|
|
3.7
|
|
|
$
|
216,139
|
|
|
|
3.4
|
|
|
(1)
|
Included
in notes payable and other debt – bond related were unamortized debt issuance costs.
The balance at September 30, 2018 and December 31, 2017 was de minimis.
|
|
(2)
|
The
subordinated debt balances include net cost basis adjustments of $8.0 million and $8.3
million at September 30, 2018 and December 31, 2017, respectively, that pertain to premiums
and debt issuance costs.
|
Covenant Compliance and Debt Maturities
The following table provides information about scheduled principal
payments associated with the Company’s debt agreements that were outstanding at September 30, 2018:
|
|
Asset Related Debt
|
|
(in thousands)
|
|
and Other Debt
|
|
2018
|
|
$
|
35,185
|
|
2019
|
|
|
2,194
|
|
2020
|
|
|
36,720
|
|
2021
|
|
|
20,804
|
|
2022
|
|
|
1,679
|
|
Thereafter
|
|
|
82,906
|
|
Net premium and debt issue costs
|
|
|
7,684
|
|
Total debt
|
|
$
|
187,172
|
|
At September 30, 2018, the Company was
in compliance with all covenants under its debt obligations.
Asset Related Debt
Asset related debt is debt that finances
interest-bearing assets. The interest expense associated with this debt is included within “Net interest income” on
the Consolidated Statements of Operations.
Notes Payable and Other Debt –
Bond Related
These debt obligations pertain to bonds
that are classified as available-for-sale and that were financed by the Company through total return swap (“
TRS
”)
agreements. In such transactions, the Company conveys its interest in bonds to a counterparty in exchange for cash consideration
while simultaneously executing TRS agreements with the same counterparty for purposes of retaining the economic risks and returns
of such investments. The conveyance of the Company’s interest in bonds was treated for reporting purposes as a secured borrowing
while TRS agreements that were executed simultaneously with such conveyance did not receive financial statement recognition since
such derivative instruments caused the conveyance of the Company’s interest in these bonds not to qualify for sale accounting
treatment.
At September 30, 2018, under the terms
of these TRS agreements, the counterparty is required to pay the Company an amount equal to the interest payments received on the
underlying bonds (UPB of $76.2 million with a weighted-average pay rate of 6.6% at September 30, 2018). For the majority of the
TRS agreements, the Company is required to pay the counterparty a rate that is based upon the Securities Industry and Financial
Markets Association seven-day municipal swap rate (“
SIFMA
”) plus a spread (notional amount of $74.2 million
with a weighted-average pay rate of 2.9% at September 30, 2018) and for the remaining TRS agreements, the Company is required to
pay the counterparty a rate of 1-month London Interbank Offered Rate (“
LIBOR
”) plus a spread (notional amount
of $7.2 million with a weighted-average pay rate of 3.7% at September 30, 2018). The Company uses the pay rate on executed TRS
agreements to accrue interest on its secured borrowing obligations to its counterparty.
Other Debt
Other debt is debt that finances non-interest-bearing
assets and other business activities of the Company. The interest expense associated with this debt is included within “Interest
expense” under “Operating and other expenses” on the Consolidated Statements of Operations.
Subordinated Debt
The table below provides information about
the key terms of the subordinated debt that was issued by the Company’s wholly owned subsidiary MMA Financial Holdings, Inc.
(“
MFH
”) and that was outstanding at September 30, 2018:
|
|
Net Premium
|
|
|
|
|
|
Interim
|
|
|
|
|
(dollars in thousands)
|
|
and Debt
|
|
|
Carrying
|
|
|
Principal
|
|
|
|
|
Issuer
|
|
Principal
|
|
|
Issuance Costs
|
|
|
Value
|
|
|
Payments
|
|
Maturity Date
|
|
Coupon
|
MFH
|
|
$
|
26,659
|
|
|
$
|
2,437
|
|
|
$
|
29,096
|
|
|
Amortizing
|
|
March 30, 2035
|
|
3-month LIBOR plus 2.0%
|
MFH
|
|
|
24,241
|
|
|
|
2,227
|
|
|
|
26,468
|
|
|
Amortizing
|
|
April 30, 2035
|
|
3-month LIBOR plus 2.0%
|
MFH
|
|
|
13,973
|
|
|
|
1,186
|
|
|
|
15,159
|
|
|
Amortizing
|
|
July 30, 2035
|
|
3-month LIBOR plus 2.0%
|
MFH
|
|
|
25,407
|
|
|
|
2,155
|
|
|
|
27,562
|
|
|
Amortizing
|
|
July 30, 2035
|
|
3-month LIBOR plus 2.0%
|
Total
|
|
$
|
90,280
|
|
|
$
|
8,005
|
|
|
$
|
98,285
|
|
|
|
|
|
|
|
Notes Payable and Other Debt
At September 30, 2018, the UPB and carrying
value was $7.8 million and $7.5 million, respectively, of notes payable and other debt used to finance the Company’s 11.85%
ownership interest in SAWHF. Such debt, which is denominated in South African rand, has a contractual maturity date of September
8, 2020 and requires the Company to pay its counterparty a rate that is based upon the Johannesburg Interbank Agreed Rate (“
JIBAR
”)
plus a fixed spread of 5.15%. At September 30, 2018, the JIBAR base rate was 7.03%.
Letters of Credit
The Company had no letters of credit outstanding
at September 30, 2018 and December 31, 2017.
Note 7—Derivative Instruments
The Company uses derivative instruments
for various purposes. Pay-fixed interest rate swaps, interest rate basis swaps and interest rate caps are used to manage interest
rate risk. TRS agreements are used by the Company to obtain, or retain, the economic risks and rewards associated with tax exempt
municipal bonds. Foreign currency forward exchange agreements are used to manage currency risk associated with the financing of
our SAWHF equity investment.
Derivative instruments that are recognized
in the Consolidated Balance Sheets are measured on a fair value basis. Because the Company does not designate any of its derivative
instruments as fair value or cash flow hedges, changes in fair value of such instruments are recognized in the Consolidated Statements
of Operations as a component of “Net gains on derivatives.” Derivative assets are presented in the Consolidated Balance
Sheets as a component of “Other assets” and derivative liabilities are presented in the Consolidated Balance Sheets
as a component of “Other liabilities.”
The following table provides information
about the carrying value of the Company’s derivative instruments:
|
|
Fair Value
|
|
|
|
At
|
|
|
At
|
|
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
(in thousands)
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Total return swaps
|
|
$
|
2,589
|
|
|
$
|
70
|
|
|
$
|
2,347
|
|
|
$
|
46
|
|
Basis swaps
|
|
|
1,112
|
|
|
|
15
|
|
|
|
439
|
|
|
|
26
|
|
Interest rate caps
|
|
|
1,400
|
|
|
|
─
|
|
|
|
788
|
|
|
|
─
|
|
Interest rate swaps
|
|
|
4,376
|
|
|
|
─
|
|
|
|
3,291
|
|
|
|
─
|
|
Foreign currency forward exchange
|
|
|
176
|
|
|
|
─
|
|
|
|
─
|
|
|
|
247
|
|
Total derivative instruments
|
|
$
|
9,653
|
|
|
$
|
85
|
|
|
$
|
6,865
|
|
|
$
|
319
|
|
The following table provides information
about the notional amounts of the Company’s derivative instruments:
|
|
Notional Amounts
|
|
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total return swaps
|
|
$
|
71,616
|
|
|
$
|
72,290
|
|
Basis swaps
|
|
|
84,500
|
|
|
|
100,500
|
|
Interest rate caps
|
|
|
80,000
|
|
|
|
80,000
|
|
Interest rate swaps
|
|
|
130,000
|
|
|
|
140,000
|
|
Foreign currency forward exchange
|
|
|
4,399
|
|
|
|
4,363
|
|
Total dollar-based derivative instruments
|
|
$
|
370,515
|
|
|
$
|
397,153
|
|
The following table provides information about the net gains
that were recognized by the Company in connection with its derivative instruments:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Total return swaps
(1)
|
|
$
|
422
|
|
|
$
|
1,522
|
|
|
$
|
2,060
|
|
|
$
|
4,100
|
|
Basis swaps
(2)
|
|
|
208
|
|
|
|
14
|
|
|
|
715
|
|
|
|
5
|
|
Interest rate caps
|
|
|
137
|
|
|
|
(116
|
)
|
|
|
612
|
|
|
|
(598
|
)
|
Interest rate swaps
(3)
|
|
|
327
|
|
|
|
(162
|
)
|
|
|
1,722
|
|
|
|
(1,178
|
)
|
Foreign currency forward exchange
|
|
|
8
|
|
|
|
172
|
|
|
|
355
|
|
|
|
172
|
|
Total derivative gains
|
|
$
|
1,102
|
|
|
$
|
1,430
|
|
|
$
|
5,464
|
|
|
$
|
2,501
|
|
|
(1)
|
The
accrual of net interest payments that are made in connection with TRS agreements are
reported as derivative instruments and is classified as “Net gains on derivatives”
on the Consolidated Statements of Operations. Net cash received was $0.7 million for
the three months ended September 30, 2018 and September 30, 2017. Net cash received was
$1.9 million and $2.3 million for the nine months ended September 30, 2018 and September
30, 2017, respectively.
|
|
(2)
|
The
accrual of net interest payments that are made in connection with basis swaps is classified
as “Net gains on derivatives” on the Consolidated Statements of Operations.
The net cash paid was de minimis for the three months ended September 30, 2018 and September
30, 2017, and for the nine months ended September 30, 2018. The net cash paid for the
nine months ended September 30, 2017 was $0.1 million.
|
|
(3)
|
The
accrual of net interest payments that are made in connection with interest rate swaps
is classified as “Net gains on derivatives” on the Consolidated Statements
of Operations. Net cash received was $0.1 million and $0.3 million for the three months
and nine months ended September 30, 2018, respectively. During the three months and nine
months ended September 30, 2018, the Company also received $0.3 million to amend two
interest rate swaps and recorded $0.3 million through “Other assets” on the
Consolidated Balance Sheets. The amount recorded to “Net gains on derivatives”
on the Consolidated Statements of Operations was de minimis. Net cash paid was $0.1 million
and $0.3 million for the three months and nine months ended September 30, 2017, respectively.
|
Note 8—Fair Value
We use fair value measurements to record
fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded
at fair value on a recurring basis are presented in the first table below in this Note. From time to time, we may be required to
measure at fair value other assets on a nonrecurring basis such as certain loans held for investment or investments in partnerships.
These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of
individual assets.
Fair Value Hierarchy
The Company measures the fair value of
its assets and liabilities based upon their contractual terms and using relevant market information. A description of the methods
used by the Company to measure fair value is provided below. Fair value measurements are subjective in nature, involve uncertainties
and often require the Company to make significant judgments. Changes in assumptions could significantly affect the Company’s
measurement of fair value.
GAAP establishes a three-level hierarchy
that prioritizes inputs into the valuation techniques used to measure fair value. Fair value measurements associated with assets
and liabilities are categorized into one of the following levels of the hierarchy based upon how observable the valuation inputs
are that are used in such measurements.
|
·
|
Level 1: Valuation is based upon quoted prices in active markets for identical instruments.
|
|
·
|
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs
or significant value drivers are observable in active markets.
|
|
·
|
Level 3: Valuation is generated from techniques that use significant assumptions that are not observable
in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the
asset or liability.
|
Recurring Changes in Fair Value
The following tables present the carrying
amounts of assets and liabilities that are measured at fair value on a recurring basis by instrument type and based upon the level
of the fair value hierarchy within which fair value measurements of such assets and liabilities are categorized:
|
|
At
September 30,
|
|
|
Fair Value Measurements
|
|
(in thousands)
|
|
2018
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
$
|
147,808
|
|
|
$
|
─
|
|
|
$
|
─
|
|
|
$
|
147,808
|
|
Derivative instruments
|
|
|
9,653
|
|
|
|
─
|
|
|
|
7,064
|
|
|
|
2,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
85
|
|
|
$
|
─
|
|
|
$
|
15
|
|
|
$
|
70
|
|
|
|
At
December 31,
|
|
|
Fair Value Measurements
|
|
(in thousands)
|
|
2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities
|
|
$
|
143,604
|
|
|
$
|
─
|
|
|
$
|
─
|
|
|
$
|
143,604
|
|
Derivative instruments
|
|
|
6,865
|
|
|
|
─
|
|
|
|
4,518
|
|
|
|
2,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
$
|
319
|
|
|
$
|
─
|
|
|
$
|
273
|
|
|
$
|
46
|
|
Changes in Fair Value Levels
We monitor the availability of observable
market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between
Level 1, Level 2, and Level 3 accordingly. Observable market data includes, but is not limited to, quoted prices and market transactions.
Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes
in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause
of transfers between Level 1, Level 2 and Level 3.
For the three months ended September 30,
2018 and September 30, 2017, there were no individually significant transfers between Levels 1 and 2, or between Levels 2 and 3.
Changes in the fair value of assets and
liabilities that are measured at fair value on a recurring basis and that are categorized as Level 3 within the fair value hierarchy
are attributed in the following table to identified activities that occurred during the three months ended September 30, 2018:
(in thousands)
|
|
Investments in
Debt Securities
|
|
|
Derivative
Assets
|
|
|
Derivative
Liabilities
|
|
Balance, July 1, 2018
|
|
$
|
162,261
|
|
|
$
|
2,747
|
|
|
$
|
(44
|
)
|
Net losses included in earnings
|
|
|
─
|
|
|
|
(158
|
)
|
|
|
(26
|
)
|
Net change in AOCI
(1)
|
|
|
(3,914
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from sales/redemptions
|
|
|
(10,364
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from settlements
(2)
|
|
|
(175
|
)
|
|
|
─
|
|
|
|
─
|
|
Balance, September 30, 2018
|
|
$
|
147,808
|
|
|
$
|
2,589
|
|
|
$
|
(70
|
)
|
|
(1)
|
This
amount includes the reclassification into the Consolidated Statements of Operations of
$5.1 million of realized bond gains related to bonds that were sold or redeemed. This
decline was partially offset by $1.0 million of net unrealized holding gains recognized
during this reporting period, as well as by $0.1 million of realized losses that were
reclassified out of AOCI and into the Consolidated Statements of Operations in connection
with one of the Company’s bond investments that was assessed as OTTI.
|
|
(2)
|
This
impact considers the effect of principal payments received and amortization of cost basis
adjustments.
|
The following table provides information
about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of
Operations for the three months ended September 30, 2018 related to activity presented in the preceding table:
(in thousands)
|
|
Net gains on
bonds
(1)
|
|
|
Net gains on
derivatives
(2)
|
|
Net change in unrealized losses related to assets and liabilities still held at
September 30, 2018
|
|
$
|
─
|
|
|
$
|
(184
|
)
|
Additional realized gains recognized
|
|
|
5,080
|
|
|
|
605
|
|
Total gains reported in earnings
|
|
$
|
5,080
|
|
|
$
|
421
|
|
|
(1)
|
Amounts
are classified as “Impairments” and “Net gains on bonds” in the
Company’s Consolidated Statements of Operations.
|
|
(2)
|
Amounts
are classified as “Net gains on derivatives” in the Company’s Consolidated
Statements of Operations.
|
Changes in the fair value of assets and
liabilities that are measured at fair value on a recurring basis and that are categorized as Level 3 within the fair value hierarchy
are attributed in the following table to identified activities that occurred during the three months ended September 30, 2017:
(in thousands)
|
|
Investments
in Debt
Securities
|
|
|
Loans Held
for Investment
|
|
|
Derivative
Assets
|
|
|
Derivative
Liabilities
|
|
Balance, July 1, 2017
|
|
$
|
151,662
|
|
|
$
|
3,899
|
|
|
$
|
3,405
|
|
|
$
|
(399
|
)
|
Net (losses) gains included in earnings
|
|
|
(1,777
|
)
|
|
|
─
|
|
|
|
413
|
|
|
|
399
|
|
Net change in AOCI
(1)
|
|
|
42
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Impact from sales/redemptions
|
|
|
(6,784
|
)
|
|
|
(3,899
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from settlements
(2)
|
|
|
(192
|
)
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Balance, September 30, 2017
|
|
$
|
142,951
|
|
|
$
|
─
|
|
|
$
|
3,818
|
|
|
$
|
─
|
|
|
(1)
|
This
amount includes $0.6 million of net unrealized holding gains recognized during this reporting
period, an increase of which was mostly offset by the reclassification into the Consolidated
Statements of Operations of $0.6 million of realized gains related to bonds that were
sold or redeemed during such reporting period.
|
|
(2)
|
This
impact considers the effect of principal payments received and amortization of cost basis
adjustments.
|
The following table provides information
about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of
Operations for the three months ended September 30, 2017 related to activity presented in the preceding table:
(in thousands)
|
|
Net losses on
bonds
(1)
|
|
|
Equity in
Losses from
LTPPs
|
|
|
Net gains on
loans
(2)
|
|
|
Net gains on
derivatives
(3)
|
|
Change in unrealized (losses) gains
related to assets and liabilities still held at September 30, 2017
|
|
$
|
(880
|
)
|
|
$
|
(897
|
)
|
|
$
|
─
|
|
|
$
|
812
|
|
Additional realized gains recognized
|
|
|
620
|
|
|
|
─
|
|
|
|
805
|
|
|
|
710
|
|
Total (losses) gains reported in earnings
|
|
$
|
(260
|
)
|
|
$
|
(897
|
)
|
|
$
|
805
|
|
|
$
|
1,522
|
|
|
(1)
|
Amounts
are classified as “Impairments” and “Net gains on bonds” in the
Company’s Consolidated Statements of Operations.
|
|
(2)
|
Amounts
are classified as “Net gains (losses) on loans” in the Company’s Consolidated
Statements of Operations.
|
|
(3)
|
Amounts
are classified as “Net gains on derivatives” in the Company’s Consolidated
Statements of Operations.
|
Changes in the fair value of assets and
liabilities that are measured at fair value on a recurring basis and that are categorized as Level 3 within the fair value hierarchy
are attributed in the following table to identified activities that occurred during the nine months ended September 30, 2018:
(in thousands)
|
|
Investments in
Debt Securities
|
|
|
Derivative
Assets
|
|
|
Derivative
Liabilities
|
|
Balance, January 1, 2018
|
|
$
|
143,604
|
|
|
$
|
2,347
|
|
|
$
|
(46
|
)
|
Net (losses) gains included in earnings
|
|
|
(6
|
)
|
|
|
242
|
|
|
|
(24
|
)
|
Net change in AOCI
(1)
|
|
|
(2,931
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from deconsolidation
|
|
|
17,997
|
|
|
|
─
|
|
|
|
─
|
|
Impact from sales/redemptions
|
|
|
(10,364
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from settlements
(2)
|
|
|
(492
|
)
|
|
|
─
|
|
|
|
─
|
|
Balance, September 30, 2018
|
|
$
|
147,808
|
|
|
$
|
2,589
|
|
|
$
|
(70
|
)
|
|
(1)
|
This
amount includes the reclassification into the Consolidated Statements of Operations of
$5.1 million of net realized gains related to bonds that were sold or redeemed during
this reporting period. This decline was partially offset by $2.1 million of net unrealized
gains recognized during this reporting period.
|
|
(2)
|
This
impact considers the effect of principal payments received and amortization of cost basis
adjustments.
|
The following table provides information
about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of
Operations for the nine months ended September 30, 2018 related to activity presented in the preceding table:
(in thousands)
|
|
Net gains on
bonds
(1)
|
|
|
Net gains on
derivatives
(2)
|
|
Change in unrealized (losses) gains
related to assets and liabilities still held at September 30, 2018
|
|
$
|
(6
|
)
|
|
$
|
218
|
|
Additional realized gains recognized
|
|
|
5,080
|
|
|
|
1,842
|
|
Total gains reported in earnings
|
|
$
|
5,074
|
|
|
$
|
2,060
|
|
|
(1)
|
Amounts
are classified as “Impairments” and “Net gains on bonds” in the
Company’s Consolidated Statements of Operations.
|
|
(2)
|
Amounts
are classified as “Net gains on derivatives” in the Company’s Consolidated
Statements of Operations.
|
Changes in the fair value of assets and
liabilities that are measured at fair value on a recurring basis and that are categorized as Level 3 within the fair value hierarchy
are attributed in the following table to identified activities that occurred during the nine months ended September 30, 2017:
(in thousands)
|
|
Investments
in Debt
Securities
|
|
|
Loans Held
for Investment
|
|
|
Derivative
Assets
|
|
|
Derivative
Liabilities
|
|
Balance, January 1, 2017
|
|
$
|
155,981
|
|
|
$
|
3,835
|
|
|
$
|
2,327
|
|
|
$
|
(372
|
)
|
Net (losses) gains included in earnings
|
|
|
(3,984
|
)
|
|
|
(5,335
|
)
|
|
|
1,491
|
|
|
|
372
|
|
Net change in AOCI
(1)
|
|
|
1,388
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Impact from purchases
|
|
|
─
|
|
|
|
14,028
|
|
|
|
─
|
|
|
|
─
|
|
Impact from loan originations
|
|
|
─
|
|
|
|
1,500
|
|
|
|
─
|
|
|
|
─
|
|
Impact from sales/redemptions
|
|
|
(6,784
|
)
|
|
|
(14,028
|
)
|
|
|
─
|
|
|
|
─
|
|
Impact from settlements
(2)
|
|
|
(3,650
|
)
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Balance, September 30, 2017
|
|
$
|
142,951
|
|
|
$
|
─
|
|
|
$
|
3,818
|
|
|
$
|
─
|
|
|
(1)
|
This
amount represents $2.0 million of net unrealized holding gains recognized during the
period, an amount of which was partially offset by the reclassification into the Consolidated
Statements of Operations of $0.6 million of realized gains related to bonds that were
sold or redeemed during this reporting period.
|
|
(2)
|
This
impact considers the effect of principal payments received and amortization of cost basis
adjustments.
|
The following table provides information
about the amount of realized and unrealized (losses) gains that were reported in the Company’s Consolidated Statements of
Operations for the nine months ended September 30, 2017 related to activity presented in the preceding table:
(in thousands)
|
|
Net gains on
bonds
(1)
|
|
|
Equity in
losses from
LTPPs
|
|
|
Net losses on
loans
(2)
|
|
|
Net gains on
derivatives
(3)
|
|
Change in unrealized (losses) gains
related to assets and liabilities still held at September 30, 2017
|
|
$
|
(880
|
)
|
|
$
|
(3,104
|
)
|
|
$
|
─
|
|
|
$
|
1,863
|
|
Change in unrealized losses related to assets and liabilities held at January 1, 2017, but
settled during 2017
|
|
|
─
|
|
|
|
─
|
|
|
|
(5,335
|
)
|
|
|
─
|
|
Additional realized gains recognized
|
|
|
620
|
|
|
|
─
|
|
|
|
805
|
|
|
|
2,237
|
|
Total (losses) gains reported in earnings
|
|
$
|
(260
|
)
|
|
$
|
(3,104
|
)
|
|
$
|
(4,530
|
)
|
|
$
|
4,100
|
|
|
(1)
|
Amounts
are classified as “Impairments” and “Net gains on bonds” in the
Company’s Consolidated Statements of Operations.
|
|
(2)
|
Amounts
are classified as “Net gains (losses) on loans” in the Company’s Consolidated
Statements of Operations.
|
|
(3)
|
Amounts
are classified as “Net gains on derivatives” in the Company’s Consolidated
Statements of Operations.
|
Fair Value Measurements of Instruments
That Are Classified as Level 3
The tables that follow provide quantitative
information about the valuation techniques and the range and weighted-average of significant unobservable inputs used in the valuation
of substantially all of our Level 3 assets and liabilities measured at fair value on a recurring basis for which we use an internal
model to measure fair value. The significant unobservable inputs for Level 3 assets and liabilities that are valued using dealer
pricing are not included in the table, as the specific inputs applied are not provided by the dealer.
|
|
Fair Value Measurement at September 30, 2018
|
|
|
|
|
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Weighted
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Techniques
|
|
Inputs
(1)
|
|
Range
(1)
|
|
|
Average
(2)
|
|
Recurring Fair Value Measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily tax-exempt bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
102,593
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
4.3 - 6.7
|
%
|
|
|
4.8
|
%
|
Non-performing
|
|
|
12,965
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
8.1
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Capitalization rate
|
|
|
6.9
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Net operating
income ("
NOI
") annual growth rate
|
|
|
0.1
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Property bids
|
|
$
|
13,162
- 13,557
|
|
|
$
|
13,404
|
|
|
|
|
|
|
|
|
|
Valuation technique weighting factors
|
|
|
10 - 90
|
%
|
|
|
N/A
|
%
|
Subordinated cash flow
|
|
|
10,674
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
7.4
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Capitalization rate
|
|
|
6.2 - 6.3
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
NOI annual growth rate
|
|
|
0.4 - 0.5
|
|
|
|
0.5
|
|
Infrastructure bonds
|
|
|
21,576
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
7.3 - 9.9
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
Cash flow probability - future incremental tax revenue growth
|
|
|
75
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Cash flow probability - no future incremental tax revenue growth
|
|
|
25
|
|
|
|
N/A
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
|
2,519
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
4.6 - 5.4
|
|
|
|
4.8
|
|
|
(1)
|
Unobservable
inputs reflect information that is not based upon independent sources that are readily
available. These inputs are based upon assumptions and internally generated data
made by the Company, which may include significant judgment that has been developed based
upon available information from third party sources or dealers about what a market participant
would use in valuing the asset.
|
|
(2)
|
Weighted-averages
are calculated using outstanding UPB for cash instruments, such as loans and securities,
and notional amounts for derivative instruments.
|
|
|
Fair Value Measurement at December 31, 2017
|
|
|
|
|
|
|
Significant
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Weighted
|
|
(dollars in thousands)
|
|
Fair Value
|
|
|
Techniques
|
|
Inputs
(1)
|
|
Range
(1)
|
|
|
Average
(2)
|
|
Recurring Fair Value Measurements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily tax-exempt bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
90,963
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
4.3 - 6.7
|
%
|
|
|
5.0
|
%
|
Non-performing
|
|
|
8,033
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
7.5
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
Capitalization rate
|
|
|
6.4
|
|
|
|
6.4
|
|
|
|
|
|
|
|
|
|
NOI annual growth rate
|
|
|
(1.2)
|
|
|
|
(1.2
|
)
|
Subordinated cash flow
|
|
|
12,573
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
6.7 - 7.0
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
Capitalization rate
|
|
|
5.8 - 6.1
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
NOI annual growth rate
|
|
|
0.6 - 0.9
|
|
|
|
0.8
|
|
Infrastructure bonds
|
|
|
21,824
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
7.1 - 9.2
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
Cash flow probability - future incremental tax revenue growth
|
|
|
80
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
Cash flow probability - no future incremental tax revenue growth
|
|
|
20
|
|
|
|
20
|
|
Other bonds
|
|
|
10,211
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
4.2
|
|
|
|
4.2
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return swaps
|
|
|
2,301
|
|
|
Discounted cash flow
|
|
Market yield
|
|
|
4.1 - 5.3
|
|
|
|
5.0
|
|
|
(1)
|
Unobservable
inputs reflect information that is not based upon independent sources that are readily
available. These inputs are based upon assumptions and internally generated data
made by the Company, which may include significant judgment that has been developed based
upon available information from third party sources or dealers about what a market participant
would use in valuing the asset.
|
|
(2)
|
Weighted-averages
are calculated using outstanding UPB for cash instruments, such as loans and securities,
and notional amounts for derivative instruments.
|
We use valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs.
For our Level 3 assets and liabilities,
we generally use a discounted cash flow valuation technique to measure fair value. This type of valuation technique involves developing
a projection of expected future cash flows of an instrument and then discounting such cash flows using discount factors that consider
the relative risk of the cash flows and the time value of money. In applying this technique, the rate of return, or discount rate,
that is utilized for such purposes reflects specific characteristics of an instrument including, but not limited to the expected
term of the instrument, its debt service coverage ratio or credit quality, geographic location, investment size and other attributes:
|
·
|
For performing multifamily bonds and certain TRS derivatives, the Company’s projection of
expected future cash flows reflects cash flows that are contractually due over the life of an instrument. Such projected cash flows
are discounted based upon the market yield of such instruments. For such instruments, the Company determines market yield by generally
utilizing the AAA Municipal Market Data tax-exempt rate (“
MMD
”) for each instrument’s specific term and
applies a market rate risk premium spread that reflects that instrument’s specific credit characteristics, such as size,
debt service coverage, state or bond type.
|
|
·
|
For infrastructure bonds, the Company’s projection of expected future cash flows reflects
a probability-weighted assessment of the expected future incremental tax revenues that would be generated through existing and
future development of raw land and the mixed-use town center that support the debt service payments on the Company’s bonds.
Such projected cash flows are discounted based upon the market yield of such instruments. For such instruments, the Company determines
market yield by generally utilizing the AAA MMD tax-exempt rate for each infrastructure bond’s specific term and applies
a market rate risk premium spread that reflects each instrument’s specific credit characteristics.
|
|
·
|
For non-performing bonds, subordinate cash flow bonds and certain TRS derivatives, the Company’s
projection of expected future cash flows reflects internally-generated projections over a 10-year investment period of future NOI
from the underlying properties that serve as collateral for our instruments. A terminal value, less estimated costs of sale, is
then added to the projected discounted projection to reflect the remaining value that is expected to be generated at the end of
the projection period. The Company utilizes geographic and sector specific discount rates that are published by an independent
real estate research organization. For purposes of projecting expected future cash flows associated with non-performing bonds,
the Company may also consider quotes received from third parties related to underlying properties that serve as collateral for
our instruments. In instances where the Company uses more than one valuation technique to measure the fair value of underlying
properties, the results (respective indications of fair value) are evaluated and weighted, as appropriate, considering the reasonableness
of the range indicated by those results.
|
Significant unobservable inputs presented
in the preceding tables are those we consider significant to the fair value of the Level 3 asset or liability. We consider unobservable
inputs to be significant if, by their exclusion, the fair value of the Level 3 asset or liability would be impacted by a predetermined
percentage change, or based on qualitative factors, such as nature of the instrument, type of valuation technique used and the
significance of the unobservable inputs relative to other inputs used within the valuation. Following is a description of the significant
unobservable inputs that are referenced in the table:
|
·
|
Market yield – is a market rate of return used to present value the future expected cash
flows to arrive at the fair value of an instrument. The market yield typically consists of a benchmark rate component and a risk
premium component. The benchmark rate component, for example, MMD or SIFMA, is generally observable within the market and is necessary
to appropriately reflect the time value of money. The risk premium component reflects the amount of compensation market participants
require due to the uncertainty inherent in the instrument’s cash flows resulting from risks such as credit and liquidity.
A significant decrease in this input in isolation would result in a significantly higher fair value measurement.
|
|
·
|
Capitalization rate – is calculated as the ratio between the NOI produced by a commercial
real estate property and the price for such asset. A significant decrease in this input in isolation would result in a significantly
higher fair value measurement.
|
|
·
|
NOI annual growth rate – is the amount of future growth in NOI that the Company projects
each property to generate on an annual basis over the 10-year projection period. These annual growth estimates take into account
the Company’s expectation about the future increases, or decreases, in rental rates, vacancy rates, bad debt expense, concessions
and operating expenses for each property. Generally, an increase in NOI will result in an increase to the fair value of the property.
|
|
·
|
Cash flow probabilities – represent factors that, in the aggregate, sum to 100% and that
are individually applied to two or more cash flow scenarios to arrive at a set of bond cash flows that represents the probability-weighted
average of all possible bond cash flows. Changes in probabilities that are assigned to underlying cash flow scenarios could potentially
have significant impacts on the fair value measurement of the Company’s investments in infrastructure bonds.
|
|
·
|
Valuation technique weighting factors – represent factors that, in the aggregate, sum to
100% and that are individually applied to two or more indications of fair value considering the reasonableness of the range indicated
by those results.
|
|
·
|
Property bids – represent the average of bids, net of closing costs, received from third
parties in connection with the pending sale of affordable housing properties that secure non-performing bond investments.
|
Non-Recurring Changes in Fair Value
During the nine months ended September
30, 2018, the Company recognized $0.4 million of impairment losses associated with certain equity investments based upon the fair
value of such instruments. Fair value measurements of these instruments, which were categorized as Level 3 in the fair value hierarchy,
were completed using a discounted cash flow methodology. There were no non-recurring fair value adjustments recorded for the nine
months ended September 30, 2017.
Additional Disclosures Related To
The Fair Value of Financial Instruments That Are Not Carried On The Consolidated Balance Sheets at Fair Value
The tables that follow provide information
about the carrying amounts and fair values of those financial instruments of the Company for which fair value is not measured on
a recurring basis and organizes such information based upon the level of the fair value hierarchy within which fair value measurements
are categorized. Assets and liabilities that do not represent financial instruments (
e.g.
, premises and equipment) are excluded
from these disclosures.
|
|
At
|
|
|
|
September 30, 2018
|
|
|
|
Carrying
|
|
|
Fair Value
|
|
(in thousands)
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,556
|
|
|
$
|
15,556
|
|
|
$
|
─
|
|
|
$
|
─
|
|
Restricted cash
|
|
|
10,944
|
|
|
|
10,944
|
|
|
|
─
|
|
|
|
─
|
|
Asset management fees and reimbursements receivable
|
|
|
288
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Loans held for investment
|
|
|
58,299
|
|
|
|
─
|
|
|
|
─
|
|
|
|
59,399
|
|
Loans held for sale
|
|
|
9,000
|
|
|
|
─
|
|
|
|
─
|
|
|
|
9,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other debt, bond related
|
|
|
81,414
|
|
|
|
─
|
|
|
|
─
|
|
|
|
81,452
|
|
Notes payable and other debt, non-bond related
|
|
|
7,473
|
|
|
|
─
|
|
|
|
─
|
|
|
|
7,755
|
|
Subordinated debt issued by MFH
|
|
|
98,285
|
|
|
|
─
|
|
|
|
─
|
|
|
|
52,088
|
|
|
|
At
|
|
|
|
December 31, 2017
|
|
|
|
Carrying
|
|
|
Fair Value
|
|
(in thousands)
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,693
|
|
|
$
|
35,693
|
|
|
$
|
─
|
|
|
$
|
─
|
|
Restricted cash
|
|
|
21,271
|
|
|
|
21,271
|
|
|
|
─
|
|
|
|
─
|
|
Restricted cash related to CFVs
|
|
|
23,495
|
|
|
|
23,495
|
|
|
|
─
|
|
|
|
─
|
|
Asset management fee receivable from TC Fund I
|
|
|
116
|
|
|
|
─
|
|
|
|
─
|
|
|
|
116
|
|
Loans held for investment
|
|
|
736
|
|
|
|
─
|
|
|
|
─
|
|
|
|
1,754
|
|
Loans held for investment related to CFVs
|
|
|
65
|
|
|
|
─
|
|
|
|
─
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other debt, bond related
|
|
|
83,838
|
|
|
|
─
|
|
|
|
─
|
|
|
|
83,879
|
|
Notes payable and other debt, non-bond related
|
|
|
25,592
|
|
|
|
─
|
|
|
|
─
|
|
|
|
26,014
|
|
Notes payable and other debt related to CFVs
|
|
|
6,712
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Subordinated debt issued by MFH
|
|
|
99,997
|
|
|
|
─
|
|
|
|
─
|
|
|
|
43,256
|
|
Valuation Techniques
Cash and cash equivalents and restricted
cash
– The carrying value of these assets approximate fair value due to the short-term nature and negligible credit risk
inherent in them.
Accrued interest and accounts receivable
– The carrying value of these assets approximate fair value due to the short-term nature and negligible credit risk inherent
in them.
Asset management fee receivable
– Fair value is measured using a discounted cash flow methodology pursuant to which contractual payments from actual or anticipated
residual events are discounted based upon a market yield.
Loans held for investment
–
Fair value is measured using a discounted cash flow methodology pursuant to which contractual payments are discounted based
upon market yields for similar credit risks.
Notes payable and other debt
–
Fair value is measured by discounting contractual cash flows using a market rate of interest or by estimating the fair value of
the collateral supporting the debt arrangement, taking into account credit risk.
Subordinated debt
– The Company
measures the fair value of the subordinated debt by discounting contractual cash flows based upon its estimated market yield, which
was 12.5% and 14.0% at September 30, 2018 and December 31, 2017, respectively. As outlined in the table above, at September 30,
2018, the aggregate fair value was measured at $52.1 million. At September 30, 2018, the measured fair value of this debt would
have been $62.0 million and $44.7 million using a market yield of 10.0% and 15.0%, respectively. The measured fair value of this
debt is inherently judgmental and based on management’s assumption of market yields. There can be no assurance that the Company
could repurchase the remaining subordinated debt at the measured fair values reflected in the table above or that the debt would
trade at that price.
Note 9—Guarantees and Collateral
Guarantees
At September 30, 2018, the Company had
one minimum yield guarantee associated with a nonconsolidated guaranteed LIHTC fund that expires on December 31, 2018. In this
case, the Company agreed to indemnify the purchaser of the general partner interest in that guaranteed LIHTC fund from investor
claims related to that guarantee. This arrangement requires the Company to stand ready to perform under such guarantee of investor
yield for losses that result from the recapture of tax credits due to foreclosure or from difficulties in maintaining occupancy
levels as mandated by LIHTC compliance regulation with respect to the LTPP in which the guaranteed LIHTC fund is invested. Prior
to December 31, 2017, the guaranteed LIHTC fund had delivered all tax credits to its investors resulting in no additional future
exposure to the Company as the tax credit recapture risk is not significant enough to reduce the guaranteed LIHTC fund yield below
its guaranteed yield for the remaining two LTPPs in which the guaranteed LIHTC fund is invested that are within their tax credit
compliance period. As a result, the Company has measured the maximum exposure and the carrying value of this guarantee to be zero
at September 30, 2018 and December 31, 2017.
The Company also has agreed to indemnify
specific investors in non-guaranteed LIHTC funds related to the performance on two LTPPs. If a third party fails to perform on
its financial obligation relating to the property’s performance, the Company would be required to indemnify impacted investors.
Such indemnities will expire on December 31, 2018 and December 31, 2022. At September 30, 2018 and December 31, 2017, the Company
had a maximum exposure of $0.1 million related to one of these LTPP indemnifications and the remaining LTPP indemnification had
no financial limit as the specific guarantee requires the guarantor to unconditionally fund any operating deficits of the LTPP.
However, the Company does not believe it will be required to perform under this indemnification or incur any losses based upon
the current operations of the LTPP.
Based upon the foregoing, the Company has
measured the maximum exposure to be $0.1 million and the carrying value of these indemnifications to be zero at September 30, 2018
and December 31, 2017.
Collateral and Restricted Assets
The following tables summarize assets that
are either pledged or restricted for the Company’s use at September 30, 2018 and December 31, 2017. For prior periods, these
tables also reflect certain assets held by CFVs in order to reconcile to the Company’s Consolidated Balance Sheets:
|
|
At
|
|
|
|
September 30, 2018
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
Total
|
|
|
|
Restricted
|
|
|
in Debt
|
|
|
Investments in
|
|
|
Assets
|
|
(in thousands)
|
|
Cash
|
|
|
Securities
|
|
|
Partnerships
|
|
|
Pledged
|
|
Debt and derivatives related to TRS agreements
|
|
$
|
4,263
|
|
|
$
|
122,811
|
|
|
$
|
─
|
|
|
$
|
127,074
|
|
Notes payable and other debt
(1)
|
|
|
6,673
|
|
|
|
─
|
|
|
|
10,703
|
|
|
|
17,376
|
|
Other
|
|
|
8
|
|
|
|
─
|
|
|
|
─
|
|
|
|
8
|
|
Total
|
|
$
|
10,944
|
|
|
$
|
122,811
|
|
|
$
|
10,703
|
|
|
$
|
144,458
|
|
|
(1)
|
The
majority of this balance represents collateral pledged by the Company in connection with
the debt that finances its 11.85% ownership interest in SAWHF.
|
|
|
At
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Restricted
|
|
|
in Debt
|
|
|
Investments in
|
|
|
Other
|
|
|
Assets
|
|
(in thousands)
|
|
Cash
|
|
|
Securities
|
|
|
Partnerships
|
|
|
Assets
|
|
|
Pledged
|
|
Debt and derivatives related to TRS agreements
|
|
$
|
9,160
|
|
|
$
|
128,902
|
|
|
$
|
─
|
|
|
$
|
─
|
|
|
$
|
138,062
|
|
Notes payable and other debt
(1)
|
|
|
5,991
|
|
|
|
─
|
|
|
|
12,695
|
|
|
|
─
|
|
|
|
18,686
|
|
Other
(2)
|
|
|
6,120
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
|
|
6,120
|
|
CFVs
|
|
|
23,495
|
|
|
|
─
|
|
|
|
99,142
|
|
|
|
5,175
|
|
|
|
127,812
|
|
Total
|
|
$
|
44,766
|
|
|
$
|
128,902
|
|
|
$
|
111,837
|
|
|
$
|
5,175
|
|
|
$
|
290,680
|
|
|
(1)
|
This
balance represents collateral pledged by the Company in connection with the debt that
finances its 11.85% ownership interest in SAWHF.
|
|
(2)
|
The
majority of this balance represents collateral pledged by the Company in connection with
the tax credit guarantee.
|
Note 10—Commitments and Contingencies
Operating Leases
During the first quarter of 2018, the Company
conveyed all its operating lease agreements to Hunt. As a result, the Company had no future rental commitments at September 30,
2018.
Litigation and Other Legal Matters
In the ordinary course of business, the Company and its subsidiaries
are named from time to time as defendants in various litigation matters or may have other claims made against them. Such legal
proceedings may include claims for substantial or indeterminate compensatory, consequential or punitive damages, or for injunctive
or declaratory relief.
The Company establishes reserves for litigation matters or other
loss contingencies when a loss is probable and can be reasonably estimated. Once established, reserves may be adjusted when new
information is obtained. At September 30, 2018, we had no significant litigation matters and we were not aware of any other claims
that we believe would have a material adverse impact on our financial condition or results of operations.
Note
11—Equity
Common Share Information
The following table provides information
about net income to common shareholders as well as provides information that pertains to weighted-average share counts that were
used in per share calculations as presented on the Consolidated Statements of Operations:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income from continuing operations
|
|
$
|
8,611
|
|
|
$
|
4,361
|
|
|
$
|
8,516
|
|
|
$
|
592
|
|
Net income from discontinued operations
|
|
|
13
|
|
|
|
5,560
|
|
|
|
21,210
|
|
|
|
13,302
|
|
Net income to common shareholders
|
|
$
|
8,624
|
|
|
$
|
9,921
|
|
|
$
|
29,726
|
|
|
$
|
13,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
(1)
|
|
|
5,804
|
|
|
|
5,871
|
|
|
|
5,717
|
|
|
|
5,890
|
|
Common stock equivalents
(2), (3)
|
|
|
283
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Diluted weighted-average shares
|
|
|
6,087
|
|
|
|
5,871
|
|
|
|
5,717
|
|
|
|
5,890
|
|
|
(1)
|
Includes
common shares issued and outstanding, as well as deferred shares of non-employee directors
that have vested but are not issued and outstanding.
|
|
(2)
|
The
weighted average potential dilutive shares outstanding, inclusive of the options exercised
during the year based on the exercise date, had a potential dilutive share impact of
282,597 and 348,403 for the three months and nine months ended September 30, 2018, respectively.
For the nine months ended September 30, 2018, the adjustment to net income for the awards
classified as liabilities caused the common stock equivalents to be anti-dilutive. At
September 30, 2018, 222,000 stock options were exercisable and in-the-money.
|
|
(3)
|
At
September 30, 2017, 410,000 stock options were exercisable and in-the-money and had a
potential dilutive share impact of 383,299 and 382,088 for the three months and nine
months ended September 30, 2017, respectively. For the three months and nine months ended
September 30, 2017, the adjustment to net income for the awards classified as liabilities
caused the common stock equivalents to be anti-dilutive.
|
Common Shares
On March 13, 2018, the Board authorized
a 2018 share repurchase program (“
2018 Plan
”) for up to 125,000 common shares, at a maximum price of $30.00
per share. The Company then adopted a Rule 10b5-1 plan implementing the Board’s authorization. On August 7, 2018, the Board
amended the 2018 Plan to increase (i) the total shares authorized for repurchase to 187,500 and (ii) the maximum authorized share
repurchase price per share to $31.50. Furthermore, on November 6, 2018, the Board authorized the amendment of the 2018 Plan to
increase (i) the total shares authorized for repurchase to 218,750 and (ii) the maximum authorized share repurchase price per share
to $32.96, which represents the Company’s diluted common shareholders’ equity per share at September 30, 2018.
In the third quarter of 2018, the Company
purchased 28,473 common shares at an average price of $27.11. Between October 1, 2018 and November 1, 2018, the Company repurchased
34,350 common shares at an average price of $26.26. After taking into consideration the number of shares purchased through November
1, 2018, the number of shares that remain available for purchase under the amended 2018 Plan is 34,900.
On March 9, 2018, the Company issued 125,000
common shares to Hunt for $4.1 million, representing a price per share of $33.00. On June 26, 2018, the Company issued an additional
125,000 shares to Hunt for $4.3 million, or $34.00 per share.
Effective May 5, 2015, the Company adopted
the Rights Plan to help preserve the Company’s net operating losses (“
NOLs
”). In connection with
adopting the Rights Plan, the Company declared a distribution of one right per common share to shareholders of record as of May
15, 2015. The rights do not trade apart from the current common shares until the distribution date, as defined in the Rights
Plan. Under the Rights Plan, the acquisition by an investor (or group of related investors) of greater than a 4.9% stake in the
Company, could result in all existing shareholders other than the new 4.9% holder having the right to acquire new shares for a
nominal cost, thereby significantly diluting the ownership interest of the acquiring person. The Rights Plan will remain in effect
the earlier of (i) a period of five years, (ii) or until the Board determines the plan is no longer required.
On January 3, 2018, the Board approved
a waiver of the 4.9% ownership limitation for Hunt, increasing such limitation to 9.9% of the Company’s issued and outstanding
shares in any rolling 12-month period.
At September 30, 2018, we had two shareholders
with a greater than a 4.9% stake in the Company. Additionally, as of September 30, 2018, two of the Company’s executive officers,
Michael L. Falcone and Gary A. Mentesana could each have a greater than 4.9% stake in the Company for purposes of the Rights Plan
following their prospective exercise of their vested option awards. In anticipation of these officers becoming greater than 4.9%
shareholders, the Board of Directors has named each of them as an exempted person in accordance with the Rights Plan and determined
that the exercise of the options and the required share award purchases will not, in and of themselves, constitute a triggering
event for purposes of our Rights Plan.
Noncontrolling Interests
The following table provides information
about the noncontrolling interests in CFVs:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Guaranteed LIHTC Funds
|
|
$
|
─
|
|
|
$
|
83,909
|
|
Consolidated Property Partnerships
|
|
|
─
|
|
|
|
5,620
|
|
Total
|
|
$
|
─
|
|
|
$
|
89,529
|
|
Guaranteed LIHTC Funds
At September 30, 2018, the Company did
not consolidate any guaranteed LIHTC funds for financial reporting purposes. As a result, noncontrolling interests in such funds
were not recognized in the Company’s financial statements as of such reporting date.
At December 31, 2017, noncontrolling interest
holders were comprised of limited and general partners in the 11 guaranteed LIHTC funds that were consolidated for reporting purposes.
See Note 15, “Consolidated Funds and Ventures,” for more information.
Consolidated Property Partnerships
At September 30, 2018, the Company did
not consolidate any property partnerships for financial reporting purposes. As a result, noncontrolling interests in such entities
were not recognized in the Company’s financial statements as of such reporting date.
At December 31, 2017, noncontrolling interest
holders were comprised of limited and general partners of these partnerships. See Note 15, “Consolidated Funds and Ventures,”
for more information.
Accumulated Other Comprehensive Income
Allocable to Common Shareholders
The following table provides information
related to the net change in AOCI that was allocable to common shareholders for the three months ended September 30, 2018:
|
|
Investments
|
|
|
Income
|
|
|
Foreign
|
|
|
|
|
|
|
in Debt
|
|
|
Tax
|
|
|
Currency
|
|
|
|
|
(in thousands)
|
|
Securities
|
|
|
Expense
|
|
|
Translation
|
|
|
AOCI
|
|
Balance, July 1, 2018
|
|
$
|
54,857
|
|
|
$
|
(14
|
)
|
|
$
|
(483
|
)
|
|
$
|
54,360
|
|
Net unrealized gains
|
|
|
1,025
|
|
|
|
─
|
|
|
|
525
|
|
|
|
1,550
|
|
Reclassification of realized gains on sold or redeemed
bonds into the Consolidated Statements of Operations
|
|
|
(5,080
|
)
|
|
|
─
|
|
|
|
─
|
|
|
|
(5,080
|
)
|
Reclassification of realized losses to the
Consolidated Statements of Operations related to bond investments assessed as OTTI
|
|
|
141
|
|
|
|
─
|
|
|
|
─
|
|
|
|
141
|
|
Income tax benefit
|
|
|
─
|
|
|
|
14
|
|
|
|
─
|
|
|
|
14
|
|
Net change in AOCI
|
|
|
(3,914
|
)
|
|
|
14
|
|
|
|
525
|
|
|
|
(3,375
|
)
|
Balance, September 30, 2018
|
|
$
|
50,943
|
|
|
$
|
─
|
|
|
$
|
42
|
|
|
$
|
50,985
|
|
The following table provides information
related to the net change in AOCI that was allocable to common shareholders for the three months ended September 30, 2017:
|
|
Investments
|
|
|
Foreign
|
|
|
|
|
|
|
in Debt
|
|
|
Currency
|
|
|
|
|
(in thousands)
|
|
Securities
|
|
|
Translation
|
|
|
AOCI
|
|
Balance, July 1, 2017
|
|
$
|
42,344
|
|
|
$
|
(3,406
|
)
|
|
$
|
38,938
|
|
Net unrealized gains
|
|
|
623
|
|
|
|
19
|
|
|
|
642
|
|
Reclassification of realized gains on sold or redeemed
bonds into the Consolidated Statements of Operations
|
|
|
(620
|
)
|
|
|
─
|
|
|
|
(620
|
)
|
Reclassification of realized
losses to the Consolidated Statements of Operations related to bond investments assessed as OTTI
|
|
|
39
|
|
|
|
─
|
|
|
|
39
|
|
Net change in AOCI
|
|
|
42
|
|
|
|
19
|
|
|
|
61
|
|
Balance, September 30, 2017
|
|
$
|
42,386
|
|
|
$
|
(3,387
|
)
|
|
$
|
38,999
|
|
The following table provides information
related to the net change in AOCI that was allocable to common shareholders for the nine months ended September 30, 2018:
|
|
Investments
|
|
|
Foreign
|
|
|
|
|
|
|
in Debt
|
|
|
Currency
|
|
|
|
|
(in thousands)
|
|
Securities
|
|
|
Translation
|
|
|
AOCI
|
|
Balance, January 1, 2018
|
|
$
|
44,459
|
|
|
$
|
(3,306
|
)
|
|
$
|
41,153
|
|
Net unrealized gains
|
|
|
2,143
|
|
|
|
3,348
|
|
|
|
4,851
|
|
Reclassification of realized gains on sold or redeemed bonds into the Consolidated Statements of Operations
|
|
|
(5,080
|
)
|
|
|
─
|
|
|
|
(5,080
|
)
|
Reclassification of realized losses to the Consolidated Statements of Operations related to bond investments assessed as OTTI
|
|
|
6
|
|
|
|
─
|
|
|
|
6
|
|
Recognition of unrealized holding gains on bond investments due to deconsolidation of LTPPs
|
|
|
9,415
|
|
|
|
─
|
|
|
|
9,415
|
|
Income tax expense
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Net change in AOCI
|
|
|
6,484
|
|
|
|
3,348
|
|
|
|
9,832
|
|
Balance, September 30, 2018
|
|
$
|
50,943
|
|
|
$
|
42
|
|
|
$
|
50,985
|
|
The following table provides information
related to the net change in AOCI that was allocable to common shareholders for the nine months ended September 30, 2017:
|
|
Investments
|
|
|
Foreign
|
|
|
|
|
|
|
in Debt
|
|
|
Currency
|
|
|
|
|
(in thousands)
|
|
Securities
|
|
|
Translation
|
|
|
AOCI
|
|
Balance, January 1, 2017
|
|
$
|
40,998
|
|
|
$
|
(3,180
|
)
|
|
$
|
37,818
|
|
Net unrealized gains (losses)
|
|
|
1,969
|
|
|
|
(207
|
)
|
|
|
1,762
|
|
Reclassification of realized gains on sold or redeemed
bonds into the Consolidated Statements of Operations
|
|
|
(620
|
)
|
|
|
─
|
|
|
|
(620
|
)
|
Reclassification of realized
losses to the Consolidated Statements of Operations related to bond investments assessed as OTTI
|
|
|
39
|
|
|
|
─
|
|
|
|
39
|
|
Net change in AOCI
|
|
|
1,388
|
|
|
|
(207
|
)
|
|
|
1,181
|
|
Balance, September 30, 2017
|
|
$
|
42,386
|
|
|
$
|
(3,387
|
)
|
|
$
|
38,999
|
|
Note 12—Stock-Based Compensation
On January 8, 2018, the Company engaged
Hunt through the execution of the Management Agreement to externally manage the Company’s operations. All employees of the
Company were hired by the External Manager. The Company has stock-based compensation plans (“
Plans
”) for Non-employee
Directors (“
Non-employee Directors’ Stock-Based Compensation Plans
”) and stock-based incentive compensation
plans for its former employees (“
Employees’ Stock-Based Compensation Plans
”).
The following table provides information
related to total compensation expense that was recorded for these Plans:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employees’ Stock-Based Compensation Plans
|
|
$
|
(34
|
)
|
|
$
|
902
|
|
|
$
|
930
|
|
|
$
|
2,481
|
|
Non-employee Directors’ Stock-Based Compensation Plans
|
|
|
163
|
|
|
|
164
|
|
|
|
491
|
|
|
|
341
|
|
Total
|
|
$
|
129
|
|
|
$
|
1,066
|
|
|
$
|
1,421
|
|
|
$
|
2,822
|
|
Employees’ Stock-Based Compensation
Plans
At September 30, 2018, there were 466,694
share awards available to be issued under Employees’ Stock-Based Compensation Plans. While each existing Employees’
Stock-Based Compensation Plan has been approved by the Company’s Board of Directors, not all of the Plans have been approved
by the Company’s shareholders. The Plans that have not been approved by the Company’s shareholders are currently restricted
to the issuance of only stock options. As a result, of the 466,694 shares available under the plans, 54,505 are available to be
issued in the form of either stock options or shares, while the remaining 412,189 shares available for issuance must be issued
in the form of stock options.
Employee Common Stock Options
The Company measures the fair value of
unvested options with time-based vesting and all vested options (both time-based and performance based) using a lattice model for
purposes of recognizing compensation expense. The Company believes the lattice model provides a better estimate of the fair
value of these options as, according to FASB’s Accounting Standards Codification Topic 718, “the design of a lattice
model more fully reflects the substantive characteristics of a particular employee share option.” Because options granted
with stock price targets contain a “market condition” under FASB’s Accounting Standards Codification Topic 718,
a Monte Carlo simulation is used to simulate future stock price movements for the Company. The Company believes a Monte Carlo
simulation provides a better estimate of the fair value for unvested options granted with specific stock price targets as the model’s
flexibility allows for the fair value to account for the vesting provisions as well as the different probabilities of stock price
outcomes. All options were vested as of September 30, 2018.
The following table provides information
related to option activity under the Employees’ Stock-Based Compensation Plans:
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Life per option
|
|
|
Intrinsic
|
|
|
Period End
|
|
(in thousands, except per option data)
|
|
Options
|
|
|
per Option
|
|
|
(in years)
|
|
|
Value
(1)
|
|
|
Liability
(2)
|
|
Outstanding at January 1, 2017
|
|
|
410
|
|
|
$
|
1.56
|
|
|
|
4.4
|
|
|
$
|
7,149
|
|
|
$
|
7,166
|
|
Forfeited/Expired in 2017
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
410
|
|
|
|
1.56
|
|
|
|
3.4
|
|
|
|
9,322
|
|
|
|
9,342
|
|
Exercised in 2018
(3)
|
|
|
(188
|
)
|
|
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired in 2018
|
|
|
─
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
222
|
|
|
|
1.80
|
|
|
|
3.5
|
|
|
|
5,413
|
|
|
|
5,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options that were exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
410
|
|
|
|
1.56
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
222
|
|
|
|
1.80
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Intrinsic
value is based on outstanding options.
|
|
(2)
|
Only
options that were amortized based on a vesting schedule have a liability balance. These
options were 222,000 at September 30, 2018 and 410,000 at both December 31, 2017 and
January 1, 2017.
|
|
(3)
|
When
exercised, stock options were net share settled. For the nine months ended September
30, 2018, 188,000 stock options were exercised, which resulted in a $4.8 million reduction
to Other liabilities at September 30, 2018. Of the 188,000 stock options that were exercised,
the Company issued 102,651 common shares for the nine months ended September 30, 2018,
and 85,349 stock options were tendered to the Company by their holders in connection
with the payment of related withholding taxes and exercise price.
|
Non-Employee Directors’ Stock-Based
Compensation Plans
The Non-employee Directors’ Stock-based
Compensation Plans authorize a total of 1,130,000 shares for issuance, of which 396,720 were available to be issued at September
30, 2018. The Non-employee Directors’ Stock-based Compensation Plans provide for grants of non-qualified common stock options,
common shares, restricted shares and deferred shares.
On August 3, 2017, the Board adopted an
amendment to the Non-employee Directors’ Stock-based Compensation Plans providing for directors to be paid $120,000 per year
for their services. In addition, the Chairman receives an additional $20,000 per year, the Audit Committee Chair receives an additional
$15,000 per year and the other committee chairs receive an additional $10,000 per year. Under this plan, 50% of such compensation
is paid in cash and the remaining sum through common share-based grants.
The table below summarizes non-employee
director compensation, including cash, vested options and common and deferred shares, for services rendered for the nine months
ended September 30, 2018 and September 30, 2017. The directors are fully vested in the deferred shares at the grant date.
|
|
|
|
|
Common
|
|
|
Deferred
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Grant Date
|
|
|
Options
|
|
|
Directors' Fees
|
|
|
|
Cash
|
|
|
Granted
|
|
|
Granted
|
|
|
Share Price
|
|
|
Vested
|
|
|
Expense
|
|
September 30, 2018
|
|
$
|
245,625
|
|
|
|
─
|
|
|
|
9,038
|
|
|
$
|
27.18
|
|
|
|
─
|
|
|
$
|
491,250
|
|
September 30, 2017
|
|
|
170,625
|
|
|
|
─
|
|
|
|
7,210
|
|
|
|
23.67
|
|
|
|
─
|
|
|
|
341,250
|
|
Note
13—Related Party Transactions and Transactions with Affiliates
Transactions
with Hunt
External Management Fees and Expenses
Reimbursement
Commencing on January 8, 2018, we became
externally managed pursuant to a management agreement between us and the External Manager (the “
Management Agreement
”).
At the time of the Disposition, all employees of the Company were hired by the External Manager. In consideration for
the external management services, the Company agreed to pay the External Manager (i) a base management fee, which is payable quarterly
in arrears and is calculated as a percentage of the Company’s GAAP common shareholders’ equity, with certain annual
true-ups, and (ii) an incentive fee equal to 20% of the total annual return of diluted common shareholders’ equity per share
in excess of 7%. For the first and second quarters of 2018, the base management fee is fixed at $1 million per quarter,
with the percentage of GAAP common shareholders’ equity calculation beginning with the third quarter of 2018. Additionally,
pursuant to the Management Agreement, the Company agreed to reimburse the External Manager for certain allocable overhead costs,
including certain salaries and benefits, subject to a cap. During the three months and nine months ended September 30, 2018, the
Company recognized $1.1 million and $5.8 million, respectively, of management fees and expense reimbursements in our Consolidated
Statements of Operations. At September 30, 2018, $1.1 million of management fees and expense reimbursements is payable to the External
Manager.
Loan
HFI
As consideration for the Disposition (refer
to Note 1, “Summary of Significant Accounting Policies” for more information), Hunt agreed to pay the Company $57.0
million and to assume certain liabilities of the Company. The Company provided seller financing through a $57.0 million note receivable
from Hunt that has a term of seven years, is prepayable at any time and bears interest at the rate of 5% per annum. The unpaid
principal balance on the note will amortize in 20 equal quarterly payments of $2.85 million beginning on March 31, 2020. During
the three months and nine months ended September 30, 2018, the Company recognized $0.7 million and $2.1 million, respectively,
of interest income associated with this note receivable in the Consolidated Statements of Operations. At September 30, 2018, $0.7
million of interest remains payable by Hunt.
Common Shares
In conjunction with the Disposition, the
Company agreed to issue, and Hunt agreed to acquire, 250,000 of the Company’s common shares in a private placement at an
average purchase price of $33.50 per share. On March 9, 2018, the Company issued 125,000 common shares to Hunt for $4.1 million,
representing a price per share of $33.00. On June 26, 2018, the Company issued the remaining 125,000 shares to Hunt for $4.3 million,
or $34.00 per share.
Note
14—Discontinued Operations
On January 8, 2018, the Company entered
into a series of material definitive agreements with affiliates of Hunt, in which the Company sold certain business lines and assets
to Hunt and converted to an externally managed business model by engaging Hunt to perform management services for the Company.
The Company sold the following to Hunt
as part of the Disposition: (i) its LIHTC business; (ii) its international asset and investment management business; (iii) the
loan origination, servicing and management components of its Energy Capital business; (iv) its bond servicing platform; and (v)
certain miscellaneous investments. This sale transaction also included certain management, expense reimbursement and other contractual
rights held by the Company with respect to its Energy Capital, LIHTC and International Operations. The 11 guaranteed LIHTC funds
that were deconsolidated in connection with the Disposition have been excluded from discontinued operations because such funds
were not conveyed to Hunt as part of the Disposition.
As a result of the Disposition, the Company’s
continuing operations consist primarily of its: (i) investments in debt securities; (ii) equity investments in renewable energy
lending ventures and SAWHF; (iii) the $57.0 million note receivable from Hunt; (iv) derivative financial instruments that are used
to hedge interest rate and foreign currency risk of the Company; and (v) other assets and liabilities, including certain real estate-related
investments and the Company’s subordinated debt.
The table below summarizes the Company’s
assets and liabilities related to discontinued operations reported in its Consolidated Balance Sheets:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
─
|
|
|
$
|
3,654
|
|
Restricted cash
|
|
|
─
|
|
|
|
16,073
|
|
Investments in debt securities
|
|
|
─
|
|
|
|
5,450
|
|
Investments in partnerships
|
|
|
─
|
|
|
|
4,456
|
|
Real estate, net
|
|
|
─
|
|
|
|
23,944
|
|
Other assets
|
|
|
─
|
|
|
|
7,643
|
|
Total assets of discontinued operations
|
|
$
|
─
|
|
|
$
|
61,220
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
─
|
|
|
$
|
8,308
|
|
Accounts payable and accrued expenses
|
|
|
─
|
|
|
|
3,454
|
|
Other liabilities
|
|
|
─
|
|
|
|
5,450
|
|
Total liabilities of discontinued operations
|
|
$
|
─
|
|
|
$
|
17,212
|
|
The table below provides information about income and expenses
related to the Company’s discontinued operations reported in its Consolidated Statements of Operations:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Interest on bonds
|
|
$
|
─
|
|
|
$
|
19
|
|
|
$
|
6
|
|
|
$
|
60
|
|
Interest on loans and short-term investments
|
|
|
─
|
|
|
|
110
|
|
|
|
6
|
|
|
|
276
|
|
Asset management fee and reimbursements
|
|
|
─
|
|
|
|
7,537
|
|
|
|
842
|
|
|
|
18,408
|
|
Other income
|
|
|
─
|
|
|
|
254
|
|
|
|
53
|
|
|
|
835
|
|
Interest expense
|
|
|
─
|
|
|
|
(31
|
)
|
|
|
─
|
|
|
|
(100
|
)
|
Salaries and benefits
|
|
|
─
|
|
|
|
(2,048
|
)
|
|
|
(53
|
)
|
|
|
(6,072
|
)
|
General and administrative
|
|
|
─
|
|
|
|
(279
|
)
|
|
|
(68
|
)
|
|
|
(875
|
)
|
Professional fees
|
|
|
(11
|
)
|
|
|
(336
|
)
|
|
|
(31
|
)
|
|
|
(982
|
)
|
Other expenses
|
|
|
─
|
|
|
|
(616
|
)
|
|
|
(29
|
)
|
|
|
(379
|
)
|
Gains on sales and operations of real estate, net
|
|
|
2
|
|
|
|
201
|
|
|
|
63
|
|
|
|
370
|
|
Equity in income from unconsolidated funds and ventures
|
|
|
─
|
|
|
|
33
|
|
|
|
1
|
|
|
|
(5
|
)
|
Income tax benefit
|
|
|
22
|
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
Net income from discontinued operations, net of tax
|
|
|
13
|
|
|
|
4,844
|
|
|
|
790
|
|
|
|
11,536
|
|
Disposal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on sale of business
|
|
|
─
|
|
|
|
251
|
|
|
|
─
|
|
|
|
251
|
|
Net gain on disposal of discontinued operations
|
|
|
─
|
|
|
|
─
|
|
|
|
20,420
|
|
|
|
─
|
|
Net income from discontinued operations
|
|
|
13
|
|
|
|
5,095
|
|
|
$
|
21,210
|
|
|
$
|
11,787
|
|
Loss from discontinued operations allocable to noncontrolling interests
|
|
|
─
|
|
|
|
465
|
|
|
|
─
|
|
|
|
1,515
|
|
Net income to common shareholders from discontinued operations
|
|
$
|
13
|
|
|
$
|
5,560
|
|
|
$
|
21,210
|
|
|
$
|
13,302
|
|
The table below provides information about operating and investing
cash flows related to the Company’s discontinued operations reported in its Consolidated Statements of Cash Flows:
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Depreciation and amortization
|
|
$
|
29
|
|
|
$
|
990
|
|
Capital expenditures
|
|
|
─
|
|
|
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
Net change in assets, liabilities and equity due to sale of business:
|
|
|
|
|
|
|
|
|
Decrease in investments in debt securities related to CFVs
|
|
|
(5,450
|
)
|
|
|
─
|
|
Decrease in loans
|
|
|
(231
|
)
|
|
|
─
|
|
Decrease in other assets ($24,140 related to CFVs)
|
|
|
(35,715
|
)
|
|
|
─
|
|
Decrease in debt ($6,144 related to CFVs)
|
|
|
8,308
|
|
|
|
─
|
|
Decrease in accounts payable and accrued expenses
|
|
|
7,201
|
|
|
|
─
|
|
Decrease in other liabilities ($480 related to CFVs)
|
|
|
5,333
|
|
|
|
─
|
|
Decrease in noncontrolling interests in CFVs
|
|
|
5,620
|
|
|
|
─
|
|
Increase in accumulated other comprehensive income
|
|
|
(3,404
|
)
|
|
|
─
|
|
Note 15—Consolidated Funds and
Ventures
In instances where the Company had a minimal
ownership interest in certain consolidated entities, the assets, liabilities, revenues, expenses, equity in losses from those entities’
unconsolidated LTPPs and the losses allocated to the noncontrolling interests of the consolidated entities have been separately
identified in our Consolidated Balance Sheets and Consolidated Statements of Operations. Third-party ownership in these CFVs is
recorded in equity as “Noncontrolling interests in CFVs.”
Guaranteed LIHTC Funds
At December 31, 2017, the Company consolidated
11 guaranteed LIHTC funds for reporting purposes. During the first quarter of 2018, the Company assigned to Hunt, and Hunt assumed,
the Company’s guarantee obligations associated with these 11 guaranteed LIHTC funds in connection with the Disposition. Consequently,
the Company deconsolidated these guaranteed LIHTC funds upon settlement of the Disposition.
The primary assets of the guaranteed LIHTC
funds were equity investments in LTPPs. These investments were accounted for by the guaranteed LIHTC funds using the equity method
of accounting.
Asset Summary:
The following table summarizes the assets
of the CFVs:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
─
|
|
|
$
|
23,495
|
|
Investments in LTPPs
|
|
|
─
|
|
|
|
99,142
|
|
Other assets
|
|
|
─
|
|
|
|
5,175
|
|
Total assets of CFVs
|
|
$
|
─
|
|
|
$
|
127,812
|
|
The assets of the CFVs were restricted
for use by the specific owner entity and were not available for the Company’s general use.
Investments in LTPPs
The guaranteed LIHTC funds’ limited partner investments
in LTPPs were accounted for using the equity method of accounting. The following table summarizes the total amount of assets, debt
and other liabilities of LTPPs:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Total assets of the LTPPs
(1)
|
|
$
|
─
|
|
|
$
|
1,085,998
|
|
Total debt of the LTPPs
|
|
|
─
|
|
|
|
771,027
|
|
Total other liabilities of the LTPPs
|
|
|
─
|
|
|
|
165,500
|
|
|
(1)
|
The
assets of the LTPPs are primarily real estate and the liabilities are predominantly mortgage
debt.
|
The following table provides information
about the gross revenue, operating expenses and net loss of LTPPs related to CFVs:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross revenue
|
|
$
|
─
|
|
|
$
|
37,682
|
|
|
$
|
─
|
|
|
$
|
113,047
|
|
Operating expenses
|
|
|
─
|
|
|
|
22,062
|
|
|
|
─
|
|
|
|
66,187
|
|
Net loss and net loss attributable to entity
|
|
|
─
|
|
|
|
(4,927
|
)
|
|
|
─
|
|
|
|
(18,163
|
)
|
Prior to the Disposition, the Company’s
exposure to loss related to the guaranteed LIHTC funds and the underlying LTPPs had two elements: (i) exposure to loss associated
with our financial guarantees as described above and (ii) exposure to loss related to the Company’s investments in bonds
that were dependent upon repayment by certain LTPPs within the guaranteed LIHTC funds.
Liability Summary:
The following table summarizes the liabilities
of the CFVs:
|
|
At
|
|
|
At
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Debt
(1)
|
|
$
|
─
|
|
|
$
|
6,712
|
|
Unfunded equity commitments to unconsolidated LTPPs
|
|
|
─
|
|
|
|
8,003
|
|
Asset management fee payable
|
|
|
─
|
|
|
|
31,840
|
|
Other liabilities
|
|
|
─
|
|
|
|
4,010
|
|
Total liabilities of CFVs
|
|
$
|
─
|
|
|
$
|
50,565
|
|
|
(1)
|
At
December 31, 2017, $6.7 million of this debt had a UPB equal to its carrying value, a
weighted-average effective interest rate of 6.5%, and was due on demand.
|
Income Statement Summary:
The following section provides more information
related to the income statement of the CFVs:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income related to CFVs
|
|
$
|
─
|
|
|
$
|
3
|
|
|
$
|
─
|
|
|
$
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
─
|
|
|
|
121
|
|
|
|
─
|
|
|
|
307
|
|
Professional fees
|
|
|
─
|
|
|
|
487
|
|
|
|
─
|
|
|
|
589
|
|
Asset management fee expense
|
|
|
─
|
|
|
|
1,016
|
|
|
|
─
|
|
|
|
3,206
|
|
Other expenses
|
|
|
─
|
|
|
|
459
|
|
|
|
─
|
|
|
|
1,370
|
|
Impairments
|
|
|
─
|
|
|
|
9,671
|
|
|
|
─
|
|
|
|
21,071
|
|
Total expenses related to CFVs
|
|
|
─
|
|
|
|
11,754
|
|
|
|
─
|
|
|
|
26,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses from LTPPs of CFVs
|
|
|
─
|
|
|
|
(1,863
|
)
|
|
|
─
|
|
|
|
(9,125
|
)
|
Net loss
|
|
|
─
|
|
|
|
(13,614
|
)
|
|
|
─
|
|
|
|
(35,421
|
)
|
Net losses allocable to
noncontrolling interests in CFVs from continuing operations
|
|
|
─
|
|
|
|
12,717
|
|
|
|
─
|
|
|
|
32,327
|
|
Net loss allocable to the common shareholders related to CFVs from continuing operations
|
|
$
|
─
|
|
|
$
|
(897
|
)
|
|
$
|
─
|
|
|
$
|
(3,094
|
)
|
The following table provides details of net loss allocable to the common shareholders related to CFVs:
|
|
For the three months ended
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Equity in losses from LTPPs
|
|
$
|
─
|
|
|
$
|
(897
|
)
|
|
$
|
─
|
|
|
$
|
(3,104
|
)
|
Equity in income from Consolidated Property Partnerships
|
|
|
─
|
|
|
|
─
|
|
|
|
─
|
|
|
|
10
|
|
Net loss allocable to the common shareholders related to CFVs from continuing operations
|
|
$
|
─
|
|
|
$
|
(897
|
)
|
|
$
|
─
|
|
|
$
|
(3,094
|
)
|
Note 16—Segment Information
At September 30, 2018, the Company primarily
invests in debt associated with real estate and infrastructure and operates as a single reporting segment. As discussed in Note
1, “Summary of Significant Accounting Policies,” as a result of the Disposition the Company no longer operates, or
present the results of its operations, through three reportable segments that, as of December 31, 2017, included U.S. Operations,
International Operations and Corporate Operations. Therefore, all required segment information can be found in the consolidated
financial statements.
Note 17—Subsequent Events
Assignment of Purchase Agreements
On October 4, 2018, Hunt exercised its
option as set forth in the Master Transaction Agreement dated January 8, 2018, between the Company and Hunt to take assignment
of the Company’s agreements to acquire (i) the LIHTC business of Morrison Grove Management, LLC (“
MGM
”)
and (ii) certain assets pertaining to a specific LIHTC property from affiliates of MGM (these agreements are collectively referred
hereinafter to as the “
MGM Agreements
”). As a result of the assignment of the MGM Agreements and Hunt’s
closing thereunder, the Company expects to recognize an increase in common shareholders’ equity of approximately $14.2 million
in the fourth quarter of 2018, or approximately $2.35 per share based upon diluted shares outstanding at September 30, 2018.
In connection with the closing of the MGM
Agreements, the Company executed a series of additional transactions completing the Company’s disposition of its MGM and
LIHTC related assets. Those additional transactions included the acquisition by Hunt of the Company’s $9.0 million HFS loan
for $9.4 million, that the Company had previously acquired from an affiliate of MGM, and the Company’s remaining general
partner interests in two nonconsolidated LIHTC funds. In addition, the Company acquired $10.0 million in Hunt notes from the MGM
principals for $5.0 million in cash and $5.0 million in a Company note. This purchase increased the aggregate principal balance
of the Company’s existing $57.0 million note from Hunt to $67.0 million. The Company’s $5.0 million note to the MGM
principals bears interest at 5.0%, is payable quarterly in arrears and has a varying amortization schedule that fully amortizes
the note by its maturity date of January 1, 2026.
Restructuring of Infrastructure Bond
Investments
On October 30, 2018, the Company agreed
to restructure two municipal bonds that financed the development of infrastructure for a mixed-use town center development and
that are secured by incremental tax revenues generated from the development. At September 30, 2018, these two bond investments
had a combined UPB, amortized cost and fair value of $26.8 million, $20.9 million and $21.6 million, respectively, bore interest
at a rate of 6.75% and had a weighted average maturity of 15.4 years. Under the terms of the restructured bond investment,
a single tax-exempt bond was issued, that has a UPB of $27.2 million, bears a coupon of 6.30% and has a contractual term of 30.1
years.
As part of this restructuring transaction,
the community development district (“
CDD
”) in which the mixed-use development is located will assess owners
of undeveloped land parcels an undeveloped land license fee that will supplement tax revenues that are generated from the mixed-use
town center development, thereby increasing the amount of funds available to the CDD to make principal and interest payments to
the Company on its infrastructure bond. At the time of restructuring, the real estate venture that develops the mixed-use
town center development and in which the Company has an 80% ownership interest was the owner of all undeveloped land parcels in
the CDD. Members of the venture will make capital contributions in order for the venture to satisfy its financial obligations associated
with undeveloped land license fees. However, through amendments to the real estate venture's operating agreement that effectively
reimburse the Company’s venture partner for its share of undeveloped land license fees, the Company bears 100% of the economic
burden of incremental license fees associated with land that is owned by the venture.
For financial reporting purposes, the restructuring
of the Company’s infrastructure bond investments was deemed to be a TDR. In this regard, the Company will carry forward
the amortized cost basis of its infrastructure bond investments as of the date of restructuring and will measure the fair value
of its restructured bond investment prospectively based upon its amended terms. Further, in accounting for its equity investment
in the real estate venture, the Company will continue to record its share of the development’s net operations as a component
of equity in income from unconsolidated funds and ventures, inclusive of 100% of the newly assessed undeveloped land license fees,
until such time that the land parcels are sold to third parties.