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Executives

Michael L. Falcone - CEO and President

Lisa Roberts - CFO

Gary A. Mentesana - EVP and CCO

Earl W. Cole - EVP

Brooks Martin - IR

Analysts

Jesse Greenfield - Greenfield Investment Services

Municipal Mortgage & Equity, LLC (OTCQB:MMAB) Q4 2012 Earnings Conference Call April 3, 2013 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen. Welcome to the Municipal Mortgage & Equity, LLC 2012 Year End Conference Call. My name is Amy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate a question-and-answer session at the end of this conference call. Please note this conference is being recorded.

Some comments today will include forward-looking statements regarding future events and projections of financial performance of MuniMae which are based on current expectations. These comments are subject to significant risks and uncertainties which include those identified in filings with the Securities and Exchange Commission, as well as actual results to differ materially from those expressed in these forward-looking statements. The company undertakes no obligation to update any of the information contained in the forward-looking statements.

I would now like to turn the call over to Mr. Michael Falcone, CEO of Municipal Mortgage & Equity, LLC.

Michael L. Falcone

Good afternoon, everyone, and welcome. With me on the call today are Lisa Roberts, our Chief Financial Officer; and Executive Vice President, Gary Mentesana and Earl W. Cole.

Our discussions today will follow our typical format. I will begin with an update on our more significant business initiatives and developments. Lisa will then review our 2012 financial results; Gary will provide an update on our bond business; and Earl will discuss the credit quality of our bond portfolio. I will then close and take questions.

Since our most recent conference call, there have been several notable and ultimately unrelated events that I would like to address today. These include the elimination of our independent auditors going concern within, improvement in common shareholder equity, recent developments with certain subordinate debtholders, the refinancing on a major bond-related securitization facility, the issuance remarketing and redemption of certain of our preferred shares and continued progress in the organization of a second African Workforce Housing Fund.

Turning to each of these in more detail. Since the onset of the global financial prices we have in our public disclosures expect substantial doubt about our ability to continue as a going concern. We've devoted considerable time and effort to improving our cash flow and liquidity to the point where we compare obligations as they come due, and we have now reached that point due in part to the transactions I will describe in a moment.

As a result, I'm truly pleased to report that based on our most current assessment at which our auditors agree, they're no longer reporting substantial doubt about our ability to continue as a going concern. This does not mean that our business is without risk of course and we urge you to bear in mind the risk factors laid out in our Annual Report, especially those risks associated with rising interest rates.

As to shareholders' equity, primarily driven by improvements in bond values, our network continued to grow in the fourth quarter and was 44.9 million at year-end 2012, reflecting an increase of 4.3 million since the end of September 2012 and an increase of 40.1 million since year-end 2011.

During the fourth quarter of 2012 and at the end of the first quarter of 2013, we entered into a series of transactions related to our subordinate debt. During the fourth quarter of 2012, we entered into an agreement with certain holders of our sub debt to repurchase 22.7 million of this debt for a cash payment of 6.8 million. And the holders of the debt agreed to extend the interest pay rate concession of 75 basis points on the remaining balance into early 2015.

As a result of the interest pay rate concessions foregone interest of $26.8 million was added to the subordinated debt outstanding, which when combined with the discounted purchases resulted in an increase of $4 million in certain of our subordinated debt outstanding, from $153.4 million at September 30, 2012 to $157.4 million at year end.

Then, last week we repurchased 45.5 million of subordinated debt or 17.4 million creating 37.1 million or $0.87 per share of additional common shareholder equity with substantial increase to our network reported at December 31, 2012, which Lisa will speak to later.

This repurchase was financed through the sale at par for 36.6 million of preferred stock we took back upon the 2009 sale of our delegated and underwriting and servicing business, our Fannie Mae business. Most of the remaining sale proceeds were used to replace an outstanding letter of credit serving as collateral against the guarantee obligation that we have.

Contemporaneously was the sale of the preferred stock we entered into agreements referred to as the total return swap with an affiliate of the buyer whereby that affiliate will pay us in the amount equal to the preferred stock distribution less a floating rate of interest. As Lisa will explain, the sale of our preferred stock investment and the total return swap will be accounted for as a secured borrowing for financial reporting purposes.

As we have previously reported, there were several significant transactions related to our bond business. First, with the replacement of 543 million in bond-related securitization debt followed by our bond subsidiary which we call TE Bond Sub or TEB; that had credit enhancement and liquidity facilities maturing on March 31, 2013. We successfully closed the replacement securitization debt facility in the fourth quarter of 2012.

Next, in February of 2013, TEB issued 74 million and remarketed 47 million of preferred shares which significantly reduced our annual cost of capital. Gary will cover the specifics in these transactions later. Finally, with respect to our international operations, as I've discussed on prior calls, we're the majority owner of International Housing Solutions, which invests in housing in South Africa and which manages approximately 230 million of funds for institutional investors.

Since our last call, we have made further advances in the organization of the second fund. Most importantly, we now have signed [conscription] agreements from investors indicating their commitment to providing funding for our second fund. These commitments were closed in escrow pending additional closings. We obviously cannot guarantee when or if we'll be able to break the escrow, but we continue to make progress. Once we have more tangible results, we will share that information with you.

Our primary source of net income continues to be the interest income earned from our bond portfolio less our interest expense including the distributions to the preferred shareholders in TEB. For the full year 2012, we've generated approximately 11 million out of operating cash flow. We depend almost exclusively on generating sufficient net income from our bond portfolio to cover our working capital needs and non-bond obligations. We collect the interest on these bonds, we asset manage the portfolio to maximize our returns.

Our bond portfolio is leveraged and the vast majority of our bonds are pledged as collateral. Cash flow is generated by the portfolio are subject to interest rate and debt rollover risk, as well as the risks associated with real estate underperformance. Likewise, nearly all of our non-bond assets are pledged.

One risk worth repeating is our interest rate risk. We borrow money on a short-term floating rate basis with financial bond pool which is primarily invested in long-term fixed rate bonds. The differential or spread is how we earn money. Because our liquidity is still constrained, we cannot hedge the risk of our rising short-term rates, which would squeeze spreads and therefore reduce our cash flow possibly significantly. A rise in longer term rates could also decrease the value of our bonds, thereby increasing the risks to collateral calls which could constrain our liquidity even further.

Before turning the call over to Lisa to review our 2012 financial results, I do want to take a minute to remind shareholders that because we are a pass-through entity for tax purposes, the disposition of bond investments to sales redemptions or securitizations at value in excess of an individual shareholder's tax basis and the underlying assets results in capital gains being allocated to such shareholder. Each individual shareholder's tax basis is a function of the price paid by the shareholder to acquire shares of the company.

The shareholder's most impacted by these capital gains with both that bought the company share subsequent to the decline in share price that began in 2008. Typically we refer to these as low-basis shareholders. And who also hold these shares in taxable accounts. Shareholders should keep in mind that the capital gains that are allocated to them will reverse and create capital losses upon the sale of their shares which may or may not be in the same tax year.

Shareholders are advised to consult their tax professionals for advice on these matters. Also shareholders should consult their tax advisors for advice on the appropriateness of holding shares in the company in a tax deferred account such as an IRA rather than in a taxable account.

I will now turn the call over to Lisa.

Lisa Roberts

Thank you, Mike. Before reviewing our 2012 results, I want to address the summary financial information provided in our March 27 press release and supported by our 2012 Annual Report as my financial review provided here today is based on that information. We distributed this additional view in hopes that it would provide a simpler and more distinct view of our financial results.

As you will see on the summary financial information in the press release, lines one through five reflect our core operating activity while lines six through nine reflect for the most part valuation-related activity including both unrealized and realized gains and losses.

You will see that our total GAAP net income was down 25 million year-over-year, however, that is almost exclusively due to the 28 million of unrealized that was transferred out of equity and into net income as a result of consolidation accounting and having no impact on overall equity. I will touch upon this again as I go through my review.

Our common shareholders' equity at December 31, 2012 was $44.9 million as compared to $4.8 million at December 31, 2011. The $40.1 million increase in common equity was mainly due comprehensive income for 2012, up 37.7 million which includes both net income and total other comprehensive income.

The primary driver for comprehensive income was net unrealized gains recorded to the company's bond portfolio during 2012 of 34.3 million which Gary will speak to later. Comprehensive income of 37.7 million for 2012 was comprised of net income of 3.1 million and total other comprehensive income of 34.6 million and was down 1.7 million from last year.

Our balances increased by 8.7 million during 2012 as we generated 84.6 million of cash flows from both operating and investing activities, which we used for financing-related activities including repayment of bond-related debt and discounted purchases of both subordinated debt and preferred shares issued by TEB.

Turning now to the components of comprehensive income and starting with net income. Net income for 2012 was 3.1 million, down from net income of 28 million for 2011, due primarily to the 28 million in unrealized gains that was transferred out of equity and into income during 2011.

The majority of our revenue is the interest income from our bond portfolio. We generated 72 million of interest income during 2012 which is down 11.9 million from interest income of 83.9 million for 2011. This decline was mainly due to a decline in the weighted average unpaid principal balance of the bond portfolio which decreased by 139.4 million to 1.2 billion during 2012 due to redemption activity and normal principal amortization.

The weighted average effective interest rate also declined year-over-year by 21 basis points to 6.1% for 2012. The income recognized from our preferred stock which Mike explained where we certainly sold was 5.7 million for 2012, which was down 500,000 from 2011 due to redemption activity in 2012.

Asset management fees that we collect from our South African fund as well as our tax credit equity fund was 6.3 million for 2012, which was down 2.1 million from fees recognized in 2011, mainly due to lower fees from our South African fund which declined pursuant to the terms of the operating agreement. This decline in core revenue was offset mainly by reduced interest expense.

During 2012, we recognized 58.9 million of interest expense which is down 13.3 million from 2011 and is adjusted from our GAAP figures to include distributions on our perpetual preferred shares and interest paid on our swaps. The decline year-over-year was mainly due to a decline in weighted average debt balances including our preferred shares which decreased approximately 150 million to 1.2 billion due to payoff activities.

The weighted average effective interest rate associated with this debt including our preferred shares also declined year-over-year by approximately 45 basis points to just under 5% for 2012.

We also recognized operating expenses of 28.7 million for 2012 which includes salaries and benefits, general and administrative expenses, professional fees and other expenses. Operating expenses were nearly flat year-over-year, however, other expenses were higher during 2012 as compared to 2011, largely due to fees incurred on our subordinate debt buybacks which were partially offset by lower professional fees.

Impairment on bonds were 7.2 million for 2012 as compared to 12.8 million for 2011. In 2011 we took impairments on several bonds that were performing, however, these bonds were considered at risk of default in light of declining property performance as well as concerns surrounding the continuation of developer support which is now proving to be true in some cases, as Earl will speak to later.

In 2012 we took impairments on several bonds, however, the majority of these losses were concentrated in two properties, one of which had a federal rent subsidies reduced and the other of which experienced a general decline in net operating income. We recorded 5.6 million of loan loss recoveries in 2012 as compared to loan losses of 900,000 in 2011. The recoveries in 2012 were mainly due to a reversal of a loan loss allowance associated with a loan paid off at par during 2012.

We recorded a gain on sale of bonds of 4.7 million during 2012 which is down for net gains of 13.5 million for 2011. In 2011, 19 bonds with 139 million of unpaid principal were either sold or redeemed and one of these bonds generated nearly 60% of the gains recognized. The gain on this bond represented the reversal of write-downs taken over the course of our investment.

In 2012, eight bonds were redeemed with 50 million of unpaid principal and again one of these bonds generated nearly 70% of the gains recognized. The gain on this bond was due to the receipt of contingent interest that Gary will speak to later. We record a gain on real estate consolidation and foreclosure of 5.4 million for 2012 compared to 28 million for 2011.

As discussed earlier, these are now primarily represents unrealized bond gains previously reflected in accumulated other comprehensive income, a component of common shareholders' equity that was transferred out of common shareholders' equity and into the income statement. As a result, much of this activity has no impact on total common shareholders' equity.

The trigger for these transfers relate to circumstances whereby either we or the MuniMae foundation and entity which we consolidate took control of the real estate serving as collateral for our bonds. In 2012, the foundation in which we do not have an ownership interest took control of seven properties on which we hold the bond with a then fair value of 98 million for which we transferred 28 million of unrealized gains out of equity and into the income statements.

In 2012, the foundation took control of four properties on which we hold the bonds with a then fair value of 36.7 million for which we transferred 4.3 million of unrealized gains out of common shareholders' equity and into the income statement. This transfer also explains why total other comprehensive income for 2012 is reported at 34.6 million as compared to only 11.4 million for 2011.

As stated earlier, the primary driver for total other comprehensive income is the net unrealized gains recorded in the bond portfolio each year which were relatively consistent year-over-year at approximately 34 million. However, during 2011, much of these gains were transferred out of common shareholders' equity and into the income statement thereby causing total other comprehensive income to decline and net income to increase.

Before turning the call over to Gary, I wanted to briefly cover the financial statement impacts for two of the recent business transactions. The most recent subordinate debt transaction whereby we purchased 45.5 million of subordinate debt for 17.4 million will result in a gain on extinguishment of debt of approximately 37.1 million thereby increasing equity accordingly.

After repurchasing the carrying value of this debt on our balance sheet was 56.2 million, which was higher than the legal amount due, because prior discounted purchases were being recognized over the life of the debt following the accounting for troubled debt restructuring. Because this most recent transaction resulted in the repurchase of all of the subordinated debt for this particular series [powered] by a single counterparty, we're now able to recognize the prior discounted purchases as well as the current discounted purchase.

Turning to the sale of our investment in preferred shares which was carried at 31.3 million at December 31, 2012 and sold at par at 36.6 million during the first quarter of 2013, this sale will be accounted for as the secured borrowing because from an accounting standpoint, we are deemed to maintain effective control over the shares as the total return swap agreement, which Mike described earlier, continues to provide us with both the risks and the rewards of ownership and the preferred shares.

I will now turn the call over to Gary to cover the bond portfolio. Gary?

Gary A. Mentesana

Thanks, Lisa. Substantially all of the companies operating cash flow continues to be generated by the company's bond business, which consists mainly of investments in tax exempt bonds secured by affordable multifamily housing properties. The four most significant recent events related to the bond business include the refinancing of the major bond-related securitization facility, the continued improvement in our bond portfolio valuation, the issuance remarketing and redemption of certain of our preferred shares, and two sizable bond redemptions.

In December 2012, TEB closed on a new bond securitization facility to replace all $543 million securitization debt that had credit enhancements of liquidity facilities expiring on March 31th of this year. The Class A certificate in that facility which are held by those parties bear an interest rate (inaudible) plus 200 basis points and are subject to remarketing on December 1, 2015. (Inaudible) reset last week at 12 basis points, but the facility does not benefit from credit enhancement or liquidity. However, it is subject to various covenants including a minimum collateral ratio of 144% of the outstanding Class A certificate.

During 2012, the bond portfolio gained $34.3 million in value and at December 31, 2012, the bonds on our balance sheet were valued at 98% of the unpaid principal value. The value improvements during 2012 were mainly driven by lower market yields on our performing bonds. Cumulative net unrealized losses on the bond portfolio were $2.3 million at December 31, 2012, which was comprised of 17.4 million of net unrealized losses related to bonds for which there are performance concerns, partially offset by 15.1 million of net unrealized gains related to our performing bonds.

In February of this year, TEB closed on both an offering and remarketing of its preferred shares with various existing and new institutional investors. TEB issued $74 million of Series A-5 shares generating $73.3 million in net proceeds. These shares have a distribution rate of 5% and a maturity date of 2028 as well as remarketing date on January 31, 2018. $70 million of these proceeds were used to repurchase and retire $70.2 million of shares then outstanding.

Also in February TEB completed the successful remarketing of a Series B shares which have an outstanding principal balance of $47 million. The impact to the overall distribution rate on all $253 million of TEB's preferred shares as a result of this offering and remarketing was to review TEB's weighted average distribution rate from 6.5% to 5.4%, thereby stating $2.7 million in end of distribution costs.

During the fourth quarter of 2012, our property owned by the MunieMae Foundation, a non-profit reconsolidated was sold to a third-party which generated net proceeds to TEB as bondholder of 21.3 million, including contingent interest of $6.8 million. In a similar transaction exposed last month, another property owned by the MunieMae Foundation was sold to a third-party which generated net proceeds to TEB as bondholder of 16.4 million, including contingent interest of 6.6 million.

Before I turn the call over to Earl, I want to emphasize that the company's bond portfolio is subject to interest rate risk, both from a valuation standpoint and from an earnings perspective. The company's bonds are predominantly fixed rate bonds and generally as long-term rates rise, our bond values decline and visa-versa.

Although TEB had $66.4 million of excess collateral pledged for its securitization debt at December 31, 2012 to the extent bond values decline in a material manner, we may be subject to collateral calls and other liquidity needs. If rates move materially, we might not be able to meet our collateral calls; essentially all of our assets are pledged or restricted in some manner, which limits our ability to raise cash.

In terms of earnings risk, substantially all of our bond-related debt is variable rate debt, with only a small portion of this debt hedged with pay fixed interest rate swaps. As a result, an increase in short-term rates generally increases our borrowing costs and reduces the net interest income generated by our bond portfolio. If the Federal Reserve keeps its pledge to maintain its benchmark interest rate levels at very low levels, at least through the end of 2014, we will likely benefit, but our liquidity and our valuations are likely to suffer if and when interest rates go up.

I will now turn it over to Earl, who will speak to the credit risk of our bond portfolio. Earl?

Earl W. Cole

Thanks, Gary. At December 31, 2012, 93% of the total unpaid principal balance of our bond portfolio, including bonds reflected on our balance sheet, as well as those we have recognized as the result of consolidation accounting, financed multifamily rental properties, which the vast majority are affordable rental properties, we refer to this population as our affordable bond portfolio.

Because some of these bonds do not have must pay interest obligations, we calculate the debt service coverage on 95.9% of our affordable bond portfolio. Based on our assessment of this population, the company has observed a modest improvement in the performance of the rental properties serving as collateral for our affordable bond portfolio since 2010 and through 2012, consistent with the general improvement in the U.S. rental apartment market. This is evidenced by gradually improving trends as it relates to debt service coverage and occupancy as well as stabilization and remember (inaudible) assets.

For example, the debt service coverage of the affordable bond portfolio at December 31, 2012 was 1.11, representing an improvement from the year-end 2011 level of 1.08 and the year-end 2010 level of 1.07. We are observing different trends and debt service coverage among the performing bonds versus the default of the bonds. Performing affordable bond portfolio had a debt service coverage ratio of 1.19 at December 31, 2012, which remained stable from the previous quarter, but represents an improvement in the year-end 2000 level of 1.15 and the year-end 2010 level of 1.14.

The defaulted affordable bond portfolio had a net service coverage ratio of 0.5 at December 31, 2012, which represents a deterioration from the year-end 2000 level of 0.59 and the year-end 2010 level of [0.62]. Even though we have seen an overall improvement in the performance of the rental properties serving as collateral bonds, near the end of 2012 we started to see an increase in the number of defaulted bonds due specifically to property developers or tax credit syndicators being unable or unwilling to fund operating deficits.

For example, based on unpaid principal balances at December 31, 2012, 11.9% of our affordable bond portfolio was in default, i.e. bonds that are 30 days and more past due which is up from the default percentage of 9.5% at September 30, 2012. This increase is due to two bonds with unpaid principal balances totaling 20 million, defaulting in the fourth quarter of 2012. These bonds were previously identified by management as being at risk to default in light of four property performance historically supported by the property developer and/or the tax credit syndicator.

Despite an improving economy, housing market and multifamily bond portfolio performance, there is risk of additional bond defaults among properties that operate significantly below breakeven. In our affordable bond portfolio at December 31, 2012, performing bonds with an unpaid principal balance of 109.8 million representing 12.2% of our performing portfolio were operating the debt service coverage less than 0.9 and being kept current by a combination of property developers or tax credit syndicators.

However, even if these bonds defaulted because the property developers or tax credit syndicators stopped supporting debt service, we would still expect to receive a substantial portion of the required debt service each month from property cash flows and we would have the right to exercise our default remedies, including foreclosure.

The company also tracks the geographic distribution of its affordable bond portfolio and at December 31, 2012, approximately 99.4% of the portfolio's unpaid principal balance was dispersed among 52 metropolitan statistical areas. Approximately 44.7% of the portfolio's unpaid principal balance is concentrated in six metropolitan regions, ranging from approximately 4.6% to 11.8% of the total portfolio. These six regions are Atlanta, Austin, Dallas/Fort Worth, Houston, Los Angeles, and San Antonio.

The highest concentration continues to be in the Atlanta MSA which is significant because Atlanta's apartment market has been weak. The overall performance of our affordable bond portfolio there has stabilized, but at low levels and the bonds that are 30 days or more past due in the Atlanta MSA make up a disproportionate share at almost 37% of our affordable housing bonds that are 30 days or more past due. The overall performance of our portfolios in four of the other five regions is either flat or improving. However, we did see a performance decline in our Houston portfolio this past quarter.

In addition to our affordable bond portfolio, the company has a small portfolio of bonds that finance infrastructure improvements for large residential and commercial development properties, commonly referred to as Community Development District, or CDD bonds.

At December 31, 2012, these CDD bonds made up 5.3% of all of our bonds. The collapse of the for sale housing market beginning in 2006 and the sharp decline in the commercial market shortly thereafter have put stress on our CDD bond portfolio, which in turn has contributed to an increase in the default percentage of all bonds in 2012.

The following default percentages are based on all bonds, affordable, CDD, and other, and include those that have been derecognized due to consolidation accounting. At December 31, 2012, we had 19 bonds financing 15 investments that were in default with an unpaid principal balance of $151.5 million and a fair value of $123.8 million. A percentage of defaulted bonds on an unpaid principal balance, so that 13.7% at December 31, 2012, which is up from 11.4% at September 30, 2012. This increase in the default rate in the fourth quarter of 2012 is due to the two new bond defaults in the affordable bond portfolio.

We have a number of reasons to expect performance will improve among all the defaulted bonds, including the company's ability to take over as general partner of the underlying realty partnership to facilitate the transfer of a general partner interest in a defaulted property partnership to a third party or to improve operating performance to intensive asset management.

I will now turn the call back over to Michael.

Michael L. Falcone

Thanks, Earl. As we've discussed here today, we continue to make significant progress across our most critical business objectives. As a result, we believe we were at a point where our primary focus has moved from maintaining the viability of the company to focusing on ways to increase shareholder value. Our efforts to create this value fall into three broad categories.

First, through competent asset management, we will continue to look for opportunities to improve credit quality and thereby bond in asset values. Next, while much of our debt restructuring is behind us, we will continue to pursue ways to reduce our financing costs. And finally, we are looking at new business opportunities and ways to grow shareholder value, particularly in IHS.

While we remain cautiously optimistic that these three activities will generate shareholder value, there can of course be no assurances given. We thank our investors for their continued patience as we move forward.

We'll now open up the call to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from (inaudible).

Unidentified Analyst

Yeah, I understand we had cash on the balance sheet and ended the year about 106 million, do we know approximately what it is at the current end of this current quarter?

Michael L. Falcone

I don't think we're prepared to discuss current quarter cash balances as we don't have those finished. I also think Lisa probably ought to clarify the cash balance statement a little bit. I think you probably…

Lisa Roberts

It includes cash in our consolidated funds and ventures. So if you look on our balance sheet, we have 50 million or cash and cash equivalents; 41 of that is in our consolidated subsidiaries. Restricted cash of 55 million, 53 of that relates to consolidated funds and ventures. So I think you've added restricted cash and cash together and a majority of that is in consolidated funds and ventures. Our cash in total in terms of MuniMae cash is 50 million as to 12/31/12.

Michael L. Falcone

The majority of that 50 million is in key bonds which we can't access through our company.

Gary A. Mentesana

It's approximately $42 million and it is in a separate subsidiary as Mike said.

Unidentified Analyst

So most of your cash is restricted then?

Michael L. Falcone

Most of our cash is not available to us; that's correct.

Unidentified Analyst

Okay. Thank you.

Lisa Roberts

That portion of related TEB reduce show that under our cash and cash equivalent. Yes, there are distribution restrictions per the operating agreement, but we reflect that as cash and cash equivalents on our balance sheet.

Unidentified Analyst

Thanks for clarifying that.

Operator

(Operator Instructions). Our next question comes from [Greg Bennett], private investor.

Unidentified Analyst

Hi. Lisa, unrelated business income tax for people who are old, their shares are not (inaudible) accountant, do you expect any level of that?

Michael L. Falcone

We have Brooks Martin here who's our VP and Tech and he is shaking his head no. So Brooks, do you want to speak to that?

Brooks Martin

We are sensitive to that particular issue and we are actively reviewing every transaction we do to make sure that we avoid that to any extent possible in the partnership entities. We do have corporate subsidiaries, specifically designed to house certain activities that would otherwise be even, but is excluded from the partnership activity that you see on your cable.

Unidentified Analyst

Fantastic. Second question, the African IAHF currently managed 230 million, I think Lisa had noted that the -- gone down by almost $2.1 million last year to lower fees and it sounds like this year you're -- 230 million in funds, it sounds like you stated that you plan to have a second fund possibly in 2013. Is that correct?

Gary A. Mentesana

We're working on it. Yeah, the fees went down in the first fund because we got to the end of the investment period. That fund is essentially fully invested. At the end of the investment period, the huge step down. We're hoping to put in place a new fund which would generate a new – to have a investment for asset management fees.

Unidentified Analyst

On the first fund, what do you anticipate would be -- I guess what I would call the evergreen management fee going forward? I mean you're showing 6.3 million for the entire year. That number will be lower if you don't have a second fund this year? Or is 6.3 kind of a run rate for evergreen management?

Michael L. Falcone

It's roughly speaking 1.5 on 230 million is a little lost in translation literally because of currency translations, but that's 3.7 something like that.

Unidentified Analyst

Okay. So we go down 3.7 this year…

Michael L. Falcone

3.7 is just the run rate. That business losses a little money. It's the only fee income is the fee income that's in place. It's got two sources with potential future revenues. One is (inaudible) from future funds and two is promote income from the current or future funds if that is to materialize.

Unidentified Analyst

Michael, you stated that -- I guess you said that the second fund that you signed agreements and how does it work? I mean there's money in escrow right now, so…

Michael L. Falcone

So investors sign what's called a subscription agreement which you would think of as like a term sheet -- it's a little more binding than a term sheet. And then from a subscription agreement, you'd go to a partnership agreement. The subscription agreements are signed. We expect the partnership agreements to be signed shortly, but those provisions have essentially a minimum fund size of at least 75 million and with the first two investors who closed, we don't get to that minimum fund size. So we got to close another 15 million-ish capital into our fund to actually takeoff the process of starting new investments and starting to get paid.

Unidentified Analyst

Once you reach 75 million -- if you reach 75 million, does the second fund additionally close or does it remain open for a period of time for other…?

Michael L. Falcone

Specifically a series of closing on funds like that, but we would expect really and certainly over the next two years really the fund will be opened for new investors, all of whom are institutional kinds of investors and we would expect to have two or three closings over that period of time beyond the first quarter.

Unidentified Analyst

So this fund ultimately maybe 200 million or more or don't know?

Michael L. Falcone

We really don't know. We're certainly hoping that it is the size when we last done or bigger, but whether that comes to be is just not something that we can predict at this point.

Unidentified Analyst

All right. Each funds have a life of -- they are a life of seven years or…?

Michael L. Falcone

Usually seven to 10 years.

Unidentified Analyst

All right. And then see when the fund is, I guess, liquidated?

Michael L. Falcone

You don't get a feed per se, you get a share of the profits upon liquidation.

Unidentified Analyst

All right.

Michael L. Falcone

That's why I referred to the [promote] income before, that's what I meant.

Unidentified Analyst

All right. And the asset type for the funds -- I mean find that there's a lot of people that are interested in or…?

Michael L. Falcone

There certainly has been interest in the fund. We certainly have a base of investors from our own fund who were working to closing the new fund. There are two investors who've already committed are new investors. And so -- yeah, it's not like the (inaudible) was backed up and we're getting buried under the money. But yes, there is interest in the fund.

Unidentified Analyst

All right. One final question. The nonprofit organization, it sounds like when you have a bond that is nonperforming or close on that bond, will that property get transferred to this nonprofit organization or it's still the property, is it both?

Michael L. Falcone

Most typically that is correct and that's really done in general for tax purposes. If there is a foreclosure, we have no control over where the property ends up. What mostly happens when you circumstance is you renegotiate a deed and newer foreclosure with the developer and in that circumstance in order to (inaudible) of the bonds, we generally find ourselves in a circumstance with the ownership of the property, it is taken over by the nonprofit, by [communing] a foundation which is a nonprofit.

Unidentified Analyst

Negotiate a deed and do a foreclosure, then is it ever aware that a call back to the developer perhaps other properties?

Michael L. Falcone

In the general structure of our bonds, developers guarantee construction completion and perhaps operating deficits over some period of time. In general though, we're kind of through that period to even mostly nonrecourse loans with the original developers. Many of them choose to support the deals that they're in above and beyond our legal obligations, but there is no requirement in the documents with them to support it above professional property operations. So these are nonrecourse loans.

Unidentified Analyst

All right. And you said one of the cures is that you can be a general partner. That doesn't necessarily mean that the property goes to a profit organization effect?

Michael L. Falcone

I'm sorry, say that again, you broke up.

Unidentified Analyst

I'm sorry. You said one of the cures to the nonperforming bond is that you can elect to change the general partner that I guess you would substitute the developer out for another general partner. Is that correct?

Michael L. Falcone

Correct.

Unidentified Analyst

That doesn't necessarily mean that it goes to the nonprofit organization, it could go to a REIT or somebody else you might want to buy that property or acquire it…?

Michael L. Falcone

That is correct. I apologize for the sirens in the background. That's not our building.

Unidentified Analyst

All right. And then I guess my final question is you mentioned three things to increasing value for this year; reducing the nonperforming bond portfolio, reducing I think your interest costs and the international housing. The nonperforming bond portfolio really it looks to me like -- there hasn't been any improvement in that area. You're expecting this year to be able to do that?

Michael L. Falcone

Every year there's sort of ups and downs in that portfolio, so it's a little hard to look at it in the aggregate year-after-year and say what has to change has not changed. We'll look at each asset and look at the change that we're able to create in each asset and that's how we think we create value at the asset term loan.

Unidentified Analyst

Okay. Thank you very much. I'll let somebody else ask a question.

Operator

Our next question comes from Jesse Greenfield of Greenfield Investment Services.

Jesse Greenfield - Greenfield Investment Services

Hi, Mike. How are you?

Michael L. Falcone

Great, Jesse. How are you today?

Jesse Greenfield - Greenfield Investment Services

Okay. First, I wanted to congratulate you. You guys are doing an incredibly good job of trying to get the ship back on the right path. Obviously the stocks reflects that, but I do have some questions today which is in your plan are we talking about a re-inflation of the business? Are we planning on possibly doing other deals like the South African deal in other areas?

Michael L. Falcone

So what we described in the three areas that sort of [Greg] outlined are we're working on our asset management of our bond portfolio, working on liability management and working on the South African Workforce Housing Fund. While there are sort of initiatives which in some respects have carried over from last year and carried over year-to-year, we earlier this year as part of our business plan goals set out of a goal to reexamine our strategic goals for the year in terms of our ability to create shareholder value and in ways that go beyond they've done in the past. We are just starting that process with the Board. I don't quite know what the answer is going to end up being in terms of are we going to do something that looks like IHS, are we going to do some more bond investing, are we going to something else? But we are starting to generate some cash flow that we can use to invest and grow the business. And we'll look at what the best use for that money is to create shareholder value. It could be that often -- we include in this environment that the best use is simply the pay down in debt, but we have breathing room financially and frankly we now have time for the first time in probably several years. So we'll look at some -- those three basic strategies and so we'll see what's next. So I can't answer that question for you because I don't know the answer, but I can tell you that it is something we have turn to -- really at the first Board meeting (inaudible) and probably continue throughout the course of this year as we try to deploy on that to grow shareholder value.

Jesse Greenfield - Greenfield Investment Services

Okay, well, that's great. Another question I have is according to your K, you have an NOL of $445 million and I'm trying to understand is that within a sub? How does that impact the operations of the company and serving money in the future?

Michael L. Falcone

It is within a C Corp subsidiary and one of the things we're trying to understand is how best to take care of -- make use of based on our analysis going forward.

Jesse Greenfield - Greenfield Investment Services

Okay. Does the company have any restrictions on stock buybacks at the moment? Are there any restrictions on that?

Michael L. Falcone

We put in place a 10b-5 program with the company to buy back shares. And when we put it in place, frankly our share price was significantly below our book value and the plan that's in place allows us to buy back shares I think of up to 60% or 65% of book value. We frankly have not been able to buy a lot of shares because shortly after we did that, the stock price shot up beyond the 65% level. So, one of the things that we'll look at with the Board at a future meeting is whether that 65% number should change. That number can only change during a period when the window is open, so it's a -- there are periods of time when insiders can't buy the stock because they get material information. The company falls under those same rules. So we would expect to look at that. Again, I don't expect to be buying above book value as a practical matter, but we will revisit that share buyback plan as we go forward. I think we put $1 million or made $1 million available and I don't think we've spent hardly any. I think we're pleased to tell some 35,000. So we really kind of missed that window, so we will look at that again.

Jesse Greenfield - Greenfield Investment Services

Okay. What about the potential of either relisting the stock or going from the bulletin board to NASDAQ?

Michael L. Falcone

That is also something that we're looking hard at as we go forward.

Jesse Greenfield - Greenfield Investment Services

Okay. I think you guys -- Mike, you usually know I don't compliment you but I'm complimenting you now. I think you guys are doing a great job. Hope you keep going.

Michael L. Falcone

Well, I was a little worried at first, Jesse, when you said the ship in the right direction. But I got it now.

Jesse Greenfield - Greenfield Investment Services

Okay. Thank you very much for you input. I appreciate it.

Michael L. Falcone

Thank you.

Operator

Our next question comes from [Ted Lieu of Ballot Financial Group].

Unidentified Analyst

Mike, I'm just wondering if you can estimate the percentage of the portfolio still left that has the potential for refinancing?

Michael L. Falcone

I'm not a 100% sure I understand the question, but we have -- let me try to answer it. We have a 1.1 billion of bonds that we own currently. We have financed essentially all of those bonds from our perspective when you look at the combination of the senior debt, preferred shares. Maybe there's 50 million to 100 million of additional debt that might be available to us. We're frankly are weaning ourselves in bit of a cushion. The other way to look at it is what percentage of the portfolio could be refinanced away from our developers, either we're at a premium or at par. And Gary and Earl, does either of you know -- there's a table in the 10-K which they're scrambling to find here which shows what the sort of availability of bonds we've obtained in this today. So sitting here today there's about $50 million worth of bonds. It could be refinanced to the developer and that number really grows, but maybe another $50 million in total over the next four or five years. But ultimately, all of these bonds can be prepaid. I think they were all originally 17-year deals with the developers. On average we probably did our deals in 2001 or '02, so we're probably -- our average on the portfolio kind of shows that.

Unidentified Analyst

And do we have -- one last question, do we have to wait until the end of the first quarter for announcements to figure a new book value?

Michael L. Falcone

We've done the math that we're allowed to do, which is we told you what the book value was at the end of the fourth quarter and we told you what the change in the book value would be as a result of the transaction that was completed, which is $0.87 a share of additional value. We haven't finished closing the books for the first quarter, but we can technically do more than that.

Unidentified Analyst

So, can you find a way to forecast what we could honestly ask for? But that answers my question very well.

Operator

Our next question comes from [Buck Sharon of Morgan Stanley].

Unidentified Analyst

Hi. I just have two quick questions. You talk about the size of the current portfolio, I guess I'd like to have you comment if you think that you have the ability to get back in the origination business and grow the portfolio, so that we're not just in run-off mode? And the other question I have was with respect to management incentives and ownership. I know the number of shares that's held by management is not insignificant, but the actual dollar value of those is less significant. And so I'd love to have some comment if I could either on options that you hold, that's publicly disclosable that kind of illustrates that the shareholders, your incentives for getting this thing back to a higher price security? Thank you.

Michael L. Falcone

Okay. I remember only the first question -- sorry, I remember the second question. As to origination, we do have some scare cash flow and some scare cash in TE bonds. Our view of where the market is today for better use of the money has been to deal with liabilities than it has been to go out and originate the debt. But we certainly have new assets. We certainly have the ability to go out and originate those new assets. We're paying attention to what's happening in that marketplace, but we're not aggressively going out and trying to originate new deals as we sit here today. That's very much a function of return on the capital and relative cost. In terms of the incentives that kind of information will be in the proxy in the next month or so. In general, I would say that over the last several years, Gary Mentesana who runs the bond business and I have been very heavily [incentivized] by options or shares as opposed to cash and the structure of some of those options and the shares is that they actually -- that strongly achieved various milestones. So with last year for example, we disclosed that we had some options that were matched at the price at the time which might have been $0.25 or something, but they wouldn't invest until the share price got to $1 for 30 days and some invested $1.50 for 30 days and some invested $2, et cetera. And so I think we are pretty heavily incentivized to get the share price up these days and it certainly encourages (inaudible) Chairman of the Compensation Committee that we think we should have more. I think we feel like we're pretty fairly compensated and the last several years have been – Gary has been taking (inaudible) to the incentive comp in shares.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). We have a follow-up question from Greg Bennett, private investor.

Unidentified Analyst

I've got two questions for you. In the marketplace today if you were to do a new financing, what would be the rate of return for lending money on affordable housing?

Michael L. Falcone

Well, what we would be able to do today would be to buy new tax exempt bond that are backed by affordable housing. We have capital in key bonds only by bonds. We are told by developers and others in the market that some new bonds are going off in the range of 5% to 5.5%, some maybe even less from them.

Unidentified Analyst

In your portfolio, is that fixed point view or something?

Michael L. Falcone

Something like that, yeah.

Unidentified Analyst

Okay. Second question is the subordinated debt that you retired, what is the current balance now? It was 157 million I think and now, today it would be down to roughly 100 million?

Michael L. Falcone

There are two elements with subordinated debt. Some of our debt, we have sort of -- what used to be subordinated debt is no longer subordinated debt. But our true subordinated debt…

Lisa Roberts

We currently after the three investments that just got completed, we have 30 million in subordinated debt that does not have any interest rate concessions on them. And we have 142 million of subordinated debt that continues to have interest rate concessions on them for a total of…

Unidentified Analyst

Okay. I think the 108 with pay rate concessions with the combined -- with the 30 is about…?

Lisa Roberts

(Inaudible) carrying value. 142 as total, right.

Michael L. Falcone

Right. 142 is total, 30 of which does not have pay rate concessions. That's a good way to describe it and 112 of which does have pay rate concessions on them.

Unidentified Analyst

The 30 million that have no pay rate concession, are you paying that?

Michael L. Falcone

We are.

Unidentified Analyst

Why?

Michael L. Falcone

That's because it's owed, but in terms of why that doesn't have a pay rate concession is that that particular one also had significant senior loans which they did (inaudible) extended period of time, so they were able to linked those two things.

Unidentified Analyst

Okay. So that's one other tranche, the one that you just took out was with one specific [on-door], correct?

Michael L. Falcone

Correct.

Unidentified Analyst

So the 30 million is also with the one specific bondholder I take?

Michael L. Falcone

No, one group of holders, yes.

Unidentified Analyst

Okay. And then the 108 that's left over is…?

Michael L. Falcone

Basically with two groups.

Unidentified Analyst

And those are groups that you've bought back in the past, some other bonds or discounts?

Michael L. Falcone

Correct.

Unidentified Analyst

Okay. What's the -- well, I guess maybe what's the likelihood of being – they have an appetite for wanting to sell back anymore?

Michael L. Falcone

We don't know the answer to that and frankly we sit here today, we don't have the cash to do it. It's always something that we will – when we talk about managing liabilities, that's the kind of thing we're always looking at.

Unidentified Analyst

Okay. Is there any guesstimate of what your free cash flow might be if you had to give a projection for this year?

Michael L. Falcone

Last year, it was 11 million. I think we've spoken in the past about an expectation that that was a number that we thought was achievable over an extended period, but we've not given specific guidance what we expect it to be in 2013 or 2014.

Unidentified Analyst

So that was the amount of money that you'd have either to buy back stock or to utilize to delever your 11 million?

Michael L. Falcone

Assuming no assets sales that will be (inaudible).

Unidentified Analyst

Besides the preferred issue that you just – the deal that you just did, is there any other assets that would you cable both selling the deal to pay down that debt?

Michael L. Falcone

There are some land assets that we've taken back over time. At some point, there might be the flexibility of taking some capital out of TE bond sales, but we're still restricted in doing that today. So, yeah, we are always looking to create those opportunities.

Unidentified Analyst

Okay. Thank you very much and thanks for the presentation by the way.

Michael L. Falcone

You're welcome. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Falcone for any closing remarks.

Michael L. Falcone

Great. Thanks operator. I just want to say thanks to everybody. A number of voices on the call today were very familiar and we understand that you all have sort of stuck with us to what has been a very difficult time for the company where we certainly can't make any guarantees of future success but sort of feel like we're turning the page and we're staring down the road a new page for the company and are excited about where we're headed. So thank you for your support and we look forward to being able to bring a new future. Thank you.

Operator

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

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