Municipal Mortgage & Equity's CEO discusses Business Updates Conference Call (Transcript)

| About: MMA Capital (MMAC)

Municipal Mortgage & Equity, LLC (MMAB.PK) Business Update Conference Call July 9, 2013 4:30 PM ET

Executives

Michael Falcone - President and Chief Executive Officer

Gary Mentesana - Executive Vice President and Chief Capital Officer

Lisa Roberts - Chief Financial Officer

Earl Cole - Executive Vice President

Analysts

Michael Leconey - Bishop, Rosen & Co., Inc.

Jesse Greenfield - Greenfield Investments

Eric Swergold – Firestorm Capital

Operator

Good afternoon, ladies and gentlemen and welcome to the Municipal Mortgage & Equity Recent Events and Business Update 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.

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

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

Michael Falcone

Thanks, operator. Good afternoon everyone and welcome. Joining me on the call this afternoon are Lisa Roberts, our Chief Financial Officer; and Executive Vice Presidents Gary Mentesana and Earl Cole. The purpose of today's call is to briefly review the transaction we announced last week, and to the extent possible answer questions regarding the transaction. This is not a call to review second quarter performance as we will not be in a position to do that until we file our Form 10-Q for the second quarter likely in the second week of August.

It's also important for folks to understand that we are still working through all of the GAAP implications of the transaction. So we can only speak to some of the GAAP consequences that we expect at this point. As a result we will primarily address the reasons for and most important details of the transaction but we will need to defer some questions and some specifics until we conclude our second quarter filing.

As we mentioned in our press release and as we have disclosed for some time, the biggest risk facing MuniMae prior to this transaction was rising interest rates. Were short-term rates to rises our cash flows would have declined and were long-term rates to rise our bond values would have been reduced.

As we have discussed on our investor calls in the past, on average for 2011 and 2012 we generated about a 11.5 million in net operating cash flows predominantly fueled by our bond portfolio's net interest income, based upon the fact that we had approximately 562 million of floating rate securitization debt as of March 31, 2013, a 200 basis point increase in floating rates would have caused our debt expense to increase by $11.2 million, therefore eliminating virtually all of our positive net operating cash flows.

A similar rise in long term rates could have caused our net worth of $95 million at March 31, 2013 to decline substantially and possibly entirely. And that impact of a rise in long term rates is much harder to calculate than the impact of rising short-term rates, as bond values are influenced by a combination of index rates, credit spread and the general shape of the yield curve. We have been focused on this problem for some time and earlier this year we began a Board level strategic review to decide how best to manage this risk. Ultimately we concluded that the transaction we announced last week would be in best interest of the company and its shareholders.

I will leave it to Gary to describe the details of the transaction. But essentially we have repositioned the bond portfolio away from leveraged interest rate risk and towards property performance risk. We believe that we are much better able to manage this risk in the economic environment ahead of us. We have also generated a significant amount of cash as a result of the transaction. We may use this cash to pay down senior and subordinate debt, to make new investments in our existing businesses in areas of expertise and/or to buyback common stock. We believe that as a result of this transaction, our operating overhead will be substantially reduced, but it’s too early to predict by how much.

Finally, an important element of this transaction is that it enables us to convert to a corporation for tax purposes, thereby eliminating the pass-through of income including the phantom capital gain allocation that has been experienced by low-basis shareholders since 2008 and that has been previously disclosed and discussed extensively on these calls. While holding the larger bonds, (inaudible) could not effectively convert to a corporation because of our potential material exposure of both state income taxes and the alternative minimum tax. As a result of the sale of performing fixed-rate bonds, we will be exposed to a much smaller risk of state and AMT taxes and should be able to show most of our anticipated income using our NOL carry-forward for the foreseeable future.

Although we anticipate some state and AMT exposure at various points in the future, we do not anticipate the liabilities to be significant at this time.

I will now turn it over to Gary and then to Lisa who each will provide additional details. Gary?

Gary Mentesana

Thanks, Mike. When we started this process, our performing fixed rate portfolio was valued at its all-time high at just over 103% at par. While we clearly would have liked to have achieve that valuation, rates began to move adversely in May and more significantly in June before we could complete the transaction, so the final closing price ended up at 101% at par. Effectively, we exchanged our common shares and TE bonds or TEB valued at $226 million at June 30th or $79 million in cash and $147 million of retained bonds. We were very satisfied to achieve this price while at the same time eliminating $799 million of debt and preferred equity obligations.

As Mike previously noted, the transaction that was consummated last week significantly reduced the interest rate risk that the company was exposed to. Specifically, the company eliminated the cash flow and collateral call risk that was associated with rising rates with respect to $562 million of bond securitization debt as of March 31, 2013. The company also eliminated the re-marketing risk associated with $242 million of preferred equity and [$17 million] (ph) of fixed rate debt.

While we had managed the interest rate risk related to TEB for quite some time, for a variety of reasons, we believe that the buyer is currently better able than we are to own and manage these assets in both a rising and in a volatile interest rate environment. We've retained $147 million of unleveraged participating and defaulted bonds along with the economic risks and rewards associated with the assets subject to two total return swap agreements, which we refer to as TRS because we believe that with these bonds, the benefits of our intensive asset management will more than offset the risks associated with the rising rates.

I will now turn the call over to Lisa. Lisa?

Lisa Roberts

Thank you, Gary. As we disclosed on July 3, 2013, the company sold for $79 million its common shares of TEB to an affiliate of Bank of America Merrill Lynch. The transaction resulted in the sale of TEB's fixed rate performing multifamily bonds and interest in such bonds and one Community Development District or CDD bond at an aggregate value of approximately 849 million or 101% at par. The transaction also relieved the company of approximately 799 million of TEB's contractual debt and preferred share obligations, which were 75% of the company's overall debt and preferred share obligations at March 31, 2013.

The company retained approximately 147 million of bonds and bond-related investments on an unleveraged basis comprised of TEB's bonds that are not fully performing that is bonds that are 30 days or greater past-due in either principal or interest, its participating multifamily bonds, and all but one of its CDD bonds.

Concurrently the company also entered into two TRS' with the purchaser using the value of two bond assets, approximately 31 million in the aggregate to set the notional amount for the TRS. Under the terms of the TRS the purchaser will pay the company an amount equal to the interest received on those two assets currently at weighted average rate of 6.9% and the company will pay the purchaser a rate of SIFMA which is a seven-day tax exempt rate plus a spread of a 150 basis points, currently a 155 basis points on the notional amount of the TRS.

We also pledged 16 million of additional collateral against the company's new and existing TRS borrowings with the purchaser. As Mike noted the financial statement consequences of the transaction have not been finalized but the company expects that the sale of TEB will result in the acceleration of some items that were being amortized over time as long as we own TEB. As a result we expect an expense recognition of approximately 8 million during the second quarter of 2013 related to the unamortized debt issuance cost and issuance discount associated with the debt that is being assumed at contractual amounts by the purchaser.

These costs would have otherwise been recognized at increased interest expense on an effective yield basis over the contractual life of the debt. Because the buyer is assuming that perpetual shares at par the company will also recognize at the time of sale and therefore during the third quarter of 2013 a 3 million reduction to common shareholders equity in order to write-off original issuance discount related to these shares.

Apart from this transaction because market yields increased during the second quarter of 2013, we expect to record a second quarter 2013 reduction in value of approximately 22 million on the fixed rate performing multifamily portfolio prior to the sale on July 1, 2013. Because the purchaser bought TEB based on the bond sale value at June 30, 2013 there will be no further impact to common equity for the third quarter as a result of the bond portfolio's sale.

The company also converted from a publicly traded partnership to a corporation for federal income tax purposes effective July 5, 2013. As a result of the conversion the company will be a direct tax payer, no longer passing through its income and loss to its shareholders for tax purposes and no longer issuing each shareholder an annual tax statement on Schedule K-1. This change will eliminate the ongoing cost of operating as a publicly traded partnership and the pass-through of tax items to shareholders and is consistent with change of the nature of the company's activity.

During March 2014, shareholders at the close of business on July 3, 2013 will receive a final schedule K-1 for the short year January 1, 2013 to July 4, 2013, including potential gains from the sale of the company's common shares in TEB. As a result of this transaction a final Schedule K-1 will likely report similar capital gains to certain low-basis shareholders as have been reported in prior tax years and will represent a final pass-through activity from the company. After the conversion date all activity of the company including any gains from capital transactions will be included on the company's corporate tax returns rather than subject to pass-through to shareholders.

I will now turn the call back over to Mike. Mike?

Michael Falcone

Before opening the call for questions I did want to speak briefly to the use of the proceeds and the business opportunities that lie ahead of us. We believe there are attractive opportunities to redeploy the capital we've generated such as buying back more of our outstanding debt, investing in our real estate asset management business or purchasing shares under an expanded share buyback plan. However it's not currently clear what our normalized cash flows per share will be once we fully redeploy the net offering proceeds.

This lack of visibility is due to a variety of factors including how much debt maybe retired, whether any debt will be available at a discount, the price at which common shares may be repurchased, the returns that we may be able to generate on new investments and how much overhead will be necessary going forward. I can however assure you that we will strive to achieve the greatest possible risk-adjusted returns per share.

We will now open up the call to questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Michael Leconey at Bishop, Rosen & Co.

Michael Leconey - Bishop, Rosen & Co., Inc.

Yes, hi. Thanks Mike.

Michael Falcone

Hey, Mike. How are you today?

Michael Leconey - Bishop, Rosen & Co., Inc.

Okay. It's hot up here, but we are happy with what you continue to do and your team, one hell of a job. I -- in preparation for this call, I have sort of sat down and scratched through a bunch of papers trying to figure out what does this all boil down to. Forgive me, but this is as close as I came. It seems like to me you've got two scenarios, one is you take 50 million of the cash and buy back a 100 million of the sub debt, and this is a scenario where if I have got the numbers correctly you end up with the company, with a buck a share in cash, maybe 180 million of assets and with very little, with very few encumbrances against it.

The other one is that you don't buy back the sub debt and you keep $2 a share of cash, and you've got assets that are 190 million of sub debt -- and against that 190 million of capital that's unencumbered now. I mean, and that's why the cash equals to share price or actually (inaudible). Also, you have considerable leverage potential to -- I mean in the business you are now, and someone said you are now in the asset management, you are now in the property management business. You used to be in sort of the, what I call, I know this is not accurate the mortgage REIT business.

In other words you own real properties, you develop them, and you do something with them. Am I correct that there is really not any substantive, let me put it this way, the remaining debt is relatively soft debt by guarantees and things like that to our [extent] (ph), do I make any sense?

Michael Falcone

I understand your question, I think, and it’s likely to lead to some frustrating answer, at least at this point, in that as we are -- have not yet reported the second quarter, we can’t sort of do for or put together for folks on this call a kind of balance sheet that they probably like in order to understand the company sitting here today moving forward. We are working on figuring out a good presentation of that for our August call, but the essence of your comment, I think is that we have several options going forward investing in our businesses, buying back subordinated or senior debt, and the third would be buying back common shares.

And we will -- we do have all of those opportunities, not all of them are within our control, and so we will explore all of them in the coming months and then we will pursue the path that we think produces the most value for our shareholders.

Michael Leconey - Bishop, Rosen & Co., Inc.

Well, all I can say like Mike is that it’s a terrific list of our alternatives compared to what some of your Board meetings have looked like. Congratulations.

Michael Falcone

Thank you.

Michael Leconey - Bishop, Rosen & Co., Inc.

You really got this thing ready to rock. Thanks, thanks to everyone in the team.

Michael Falcone

Thank you.

Operator

The next question comes from Gary Carlson, private investor.

Unidentified Analyst

Yes. I was curious as to what are the businesses as the company sees them in addition to, I guess, the affordable housing business in South Africa.

Michael Falcone

Hi Gary, how are you?

Unidentified Analyst

Pretty good, how are you?

Michael Falcone

Good. Well, we have a variety of businesses in front of us. I am not sure I would describe ourselves as being in the property management business as Mike previously did. I probably should have said that. We don’t expect that to be the case. If you look at our businesses right now, we have 150ish million of tax exempt bonds that we will be owning in asset managing. We have a tax credit business, almost $800 million or so of tax credit, funds that we asset manage in addition to the business in South Africa, and we have some land assets which are starting to turn around, and we are looking to get value out of those assets in the next couple years as well.

But, we view ourselves as having previously been in the business of real estate tax exempt bond, the asset management, and we view ourselves after the transaction as being in that same real estate tax exempt bond, the asset management business. We've simply repositioned the portfolio in a very significant way away from fixed rate risk in the property performance risk given the economic environment that we see in front of us.

Unidentified Analyst

Got it.

Operator

Our next question comes from Greg Bennett, a private investor.

Unidentified Analyst

Hi Mike.

Michael Falcone

Hey Greg, how are you?

Unidentified Analyst

Good. First question, at the end of March on your balance sheet, you had about $58 million in cash in the financial statement for March 31 quarter, and it looks like part of that was held, I guess, that was held in the consolidated subsidiary. How much of that cash do you (inaudible)?

Michael Falcone

I will let Lisa handle this one.

Lisa Roberts

Yeah, so of that number you just referenced $58 million, $48 million of that was held by TEB. And we also, within the restricted cash line, we had $70 million of restricted cash, a portion of that was the parent as well, almost $20 million. So, effectively from outside of TEB, MuniMae's cash at March 31 was $29 million. And so, of course TEB's cash balances changed in the second quarter and that cash was effectively sold to Merrill as part of the TEB common share purchase, so our parent cash of $29 million at the end of March and then our cash balances including restricted cash increased by this sale by $79 million.

Unidentified Analyst

Okay, so I can take $29 million and add $79 million, that's a ball park estimate.

Lisa Roberts

That's a ballpark, and that does not include the other tax activity during the second quarter. Effectively when we produce the financial statements and reports due at June 30, we will be much better equipped to effectively add that $79 million that was generated in the first week of July to that cash position at the end of June.

Unidentified Analyst

Okay, and of the 108 million on the TRS, there is -- of this 108 million restricted cash…?

Lisa Roberts

Right, of the $29 million starting in March, $19 million of that was restricted. And then, we added on $79 million and $16 million of that was restricted.

Unidentified Analyst

So how much is it -- of the 108, how much is it?

Lisa Roberts

$35 million.

Unidentified Analyst

$35 million is restricted. Second question, as a C corporation with that net loss carry-forward, [not given] (ph) an exact figure, but give a range what (inaudible)?

Michael Falcone

I am sorry, Greg, we didn't, couldn't hear the question.

Unidentified Analyst

You indicated that as a C corporation you can have a net loss carry-forward, but you don't know the exact numbers right now, but that the new core MuniMae as a C corporation will not pay taxes, it will have a net loss carry-forward. Do you have an estimate of what, a guestimate of a range of what that might be?

Lisa Roberts

Well, just I am starting to give you a few pieces here. When we filed our 2012 Form 10-K, we provided disclosures that reported an NOL, a pretax NOL balance of 446 million. Now, we have used some of that in the first six months, really in the first quarter with our sub debt buyback and the sale of our Oak Grove shares. But we still have a substantial amount of net operating losses as we move forward, and so those will be there to use.

Unidentified Analyst

So, you may have close to 400 million or somewhere between 300 and 400 million?

Lisa Roberts

Correct.

Unidentified Analyst

Okay and the expiration date for those NOLs is about, is it…

Michael Falcone

Until 2027 plus or minus.

Unidentified Analyst

Okay. Next question, the bond portfolio that was a non, the non-performing bond portfolio that you retained, shows you are paying the valuation of a 147 million, is that correct?

Lisa Roberts

Correct.

Unidentified Analyst

Okay, is that a written down value of the bond portfolio? You made adjustments so you are re-pricing your bond portfolio based on your estimate of what the bond…?

Michael Falcone

That's the mark-to-market value of the retained bond as of June 30.

Unidentified Analyst

So what was the par value of those bonds?

Michael Falcone

180.

Unidentified Analyst

180, so if you Michael can work magic and get back a 100 cents on the dollar through property manage -- or asset management, how you described that business that you are in, try to move 47 million.

Michael Falcone

We will try to move a 147 million up to a 180 plus there will be unpaid interest and that sort of thing. And it would be my colleagues who work in asset management who will work those miracles, it's not me. But yes, we have a team of people who are very focused on what we need to do and maximize the value of those retained assets.

Unidentified Analyst

So just about am I correct is it about 20 bonds like, I think.

Michael Falcone

It's 35 bonds, 30.

Unidentified Analyst

35 bonds.

Michael Falcone

35 bonds.

Unidentified Analyst

Yeah, I repeat mainly, although I guess…

Michael Falcone

Geography

Unidentified Analyst

The property that are…

Michael Falcone

Earl Cole who is our EVP for Asset Management will answer that question, Greg.

Earl Cole

About 70% of the bonds retained will be multifamily bonds, multifamily rental bonds the only significant concentration is among the multifamily bonds is in Atlanta that continue to be in Atlanta. About 29% of our multifamily bonds are in the Atlanta MSA.

Unidentified Analyst

The other 30% of the bond portfolio was that the assets bond held as collateral.

Earl Cole

21% is Community Development District or CDD bonds and infrastructure bonds. Then about another 10% of other principally tender option bonds.

Unidentified Analyst

And you said tender option bonds.

Michael Falcone

I am sorry, Greg let’s back up a second. You were asking about the $147 million and I think Earl was answering the question for the whole pool. Of the $147 million all about $3 million or $4 million are multifamily bonds and they probably have a slightly concentration in Atlanta than the number Earl was giving it.

Unidentified Analyst

So the other ones that are the CD, ECC or CDD bonds those are the $31 million, the TRS is that right?

Michael Falcone

Correct.

Unidentified Analyst

Okay and that’s the one that was make up of these other two classes CDD, Community Development bonds and those are called tender option bonds.

Lisa Roberts

Yeah, so let me go back because there is kind of three buckets here. The $147 million that we retained, Earl went through that.

Unidentified Analyst

The par value of that, the 180 correct?

Lisa Roberts

That’s the 180 the fair value is 147, it will be 180. And then we talked about two bonds that we legally sold. We entered into a financing deal at TRS that was $31 million, one of those is a community development district bond and the other is T bond, it's a certificate it’s not a CDD bond.

Unidentified Analyst

Okay.

Lisa Roberts

And then I think it’s about half and half and that EPB is about $32 million, a fair value of $31 million. And then where we were headed is outside of TEB, we held and we continue to hold at $60 million based upon March 31 fair values another 60 million and I set it about third of that are tender option bonds or what we refer as tax certificate that we previously had sold legally sold that we have entered into financing arrangement through a TRS on those.

Michael Falcone

And those essentially rated bonds which we have financed and owned, the difference the other ones are essentially multifamily or CDD bonds that we hold outside of T bonds.

Unidentified Analyst

Okay. So is there -- on the other the two buckets, are those, is there any upside in those bonds or is that mainly the spread between.

Michael Falcone

None to speak up. Those are -- I wouldn’t say they are exactly about 100 but they are close enough that there is no that’s an interest spread in that, that’s not a valued and we kept those bonds because they are rated and they are relatively short term. We didn’t see a lot of valuation change coming in those bonds that would wash out and they were paid off in a couple years. So we thought that the spread that we would earn there would continue to be valuable.

Unidentified Analyst

So on the second or third bucket on those bonds you are getting a spread between 6.9% and you are cost of funds was 1.55, I think. When those bonds pay off over that short term of time what was the cash generated that's up a bit, is it 1 million or 16?

Michael Falcone

The TRB portfolio is levered within three or four million, yes, sort of facing down. It's not between the -- and I think they are levered through a total return slot. So when those pay off there is a small cash bump, but mostly those are fully levered…

Unidentified Analyst

You said about $3 million or whatever, 4 million…

Michael Falcone

Correct.

Unidentified Analyst

Okay and 16 million of collaterals related to - cash collateral that you have first…

Michael Falcone

No, there's the -- 16 million, okay so there are, there is something called the TOB and then there's the TRS, okay this is going to get -- but the net result of those financings is we earned spread income that's not significant valuation cost on the debt paid off there and we will be better able to speak to those values when we have the June 30 numbers.

Unidentified Analyst

Okay, I don't want to, I don't know if you have other people waiting, but I have some, as usual I have some other questions.

Michael Falcone

I don't think we can help others waiting there, so keep going.

Unidentified Analyst

MuniMae real estate held for you at number four, the quarterly, last quarter of 77 million. Is that the real, you've mentioned that there is some interesting real estate that you have ownership in, other shareholder value in the future.

Michael Falcone

That real estate has been marked, written down, but not marked to market. I don't think we said publicly nor can we say publicly what we think it's worth today, but, and that represents, that 17 and change represents the low form of those yields being written down. But we do think there is recovery there, some of it.

Unidentified Analyst

Am I correct that there's like three properties at Phoenix, residential land property, Georgia property and other ones?

Michael Falcone

Correct, one in California.

Unidentified Analyst

The other one in California was like residential land…

Michael Falcone

Correct.

Unidentified Analyst

What, and I don't know whether you spoke, what was the original value before you marked it down?

Michael Falcone

The original values were dramatically higher than our current value, kind of a multiple of five to ten, higher than we got it on our books. But I don't want to suggest in any way that we think it's come back, back much, because it has not. In our minds it has come up from the 70 million.

Unidentified Analyst

Okay. Is that on all three of those parcels, or the three properties do you own a 100% of those or do you have partners.

Michael Falcone

In one of the deals we have a pension fund, that is our partner in the other two we own essentially a 100%.

Unidentified Analyst

I take it depends on the plan of the property in Georgia?

Michael Falcone

Correct.

Unidentified Analyst

And is there anything happening with that property or is sitting idle over time.

Michael Falcone

Right now there are various discussions underway. I will be able to answer that question better in our next call because I am going down there in two weeks to look at it myself. But for now essentially not much is happening other than the property is being positioned for future value creation to negotiations with to these other folks. But what the best timing is for that is not entirely clear to us at this point.

Unidentified Analyst

Okay. On an operating basis you said your operating expenses are going to decrease. I guess one expense that you probably know is what your annual expense during the K-1 were that you want to be doing after this year. My question is do you have a guesstimate of I would imagine doing K-1 for 10,000 shareholder of many has within expense of, do you have any guesstimate of what those…

Michael Falcone

All said and done, it was about $0.5 million that we expect save on an ongoing basis.

Unidentified Analyst

For the K-1?

Michael Falcone

Just related to K-1.

Unidentified Analyst

Okay. So there must be other areas where there is a lot of expenses, professional fee I mean when I look at your income statement, anyway you can’t let us -- there is no way of knowing…

Michael Falcone

We will need to sort of cut expenses across the board. And that will be both in professional fees for example there are amount of things in that numbers, there is a fair bit of money for asset management work, legal fees as we go on, expense that we don’t have any more. And so there is a -- there will need to be significant reductions in our overhead as we go forward and we understand that and are prepared to make those changes.

Unidentified Analyst

Okay. You mentioned Michael that you have a substantial business in the tax credit business, $800 million I think you referred to it was about $800 million tax credit business in that business.

Michael Falcone

Yeah, that’s in asset management business, yeah.

Unidentified Analyst

Correct. Is that business on an ongoing basis is that business, will that generate or does that generate today a positive cash flow or positive operating earning?

Michael Falcone

We are not currently doing new business, we not placing new funds, syndicating new funds. Rights now it’s just an asset management business and the asset management fees are plus or minus breakeven.

Unidentified Analyst

Yeah, so the big business it sounds like a big number but it’s basically a breakeven?

Michael Falcone

Correct.

Unidentified Analyst

So is that a business you will stay in or where the upside would be to be start up that business again and start originating new tax credit businesses?

Michael Falcone

There are a range of ways to make money in that business going forward we are not sure what we are going to do as we move forward.

Unidentified Analyst

That requires a commitment of capital or do you already have a -- is it basically…

Michael Falcone

Right now the asset management of that business is not required to make capital on an ongoing basis there is collateral committed and there is capital committed as collateral but there is no new collateral that’s required currently.

Unidentified Analyst

Okay. I think this will be the final question. Well just a commentary so it sounds like the upside is the real estate and the $147 million bond portfolio to drive value managing properties and getting value back up to par, better than par would that be correct?

Michael Falcone

And any ability we might have to buy senior debt would look at our common share at below book value.

Unidentified Analyst

So that will lead me to my final question.

Michael Falcone

But that was your final question.

Unidentified Analyst

Well.

Michael Falcone

Please go on.

Unidentified Analyst

All right. So you got and these guys are probably on the call so I don't maybe -- so what standing dues of these subordinated debt that's outstanding right now that you have been successful in the past purchasing back, but there are still blocks out there, that are, what standing -- did they move up or did they have a better standing now based on the transaction, are they still down on the subsidiary sub level or still in the same position?

Michael Falcone

There's subordinated debt and that's where they remain.

Unidentified Analyst

So as far as negotiating or thinking this brought in 69 -- or 79 million whatever number you might leave, they are still on the same line.

Michael Falcone

Correct, we have…

Unidentified Analyst

Except that you have some cash that either you can buy back stock or you can say, here's an offer we will buy back some of the bonds.

Michael Falcone

We can, it's a completely voluntary decision on the part of the sub debt holders, but we have cash that we can offer to buy in sub debt. We can use that to buy in senior debt, we can use it to invest in new business and we can use it to buy back shares. So we will continue to try to have negotiations and we will look at our investment opportunities and we will make our judgment as to what -- the best return to shareholders and we will put the cash there.

Unidentified Analyst

All right. It is managing -- the 147 million of problem bonds or underperforming bonds and your management team worked to improve the operating results. I would imagine that there is 100s of millions of other bonds that are out there, that are probably underperforming. Would that be correct?

Michael Falcone

I don't know what the size of that market is but there are certainly skills that we have in managing distressed bonds that we could apply to new business opportunities as well as to our existing portfolio.

Unidentified Analyst

Yeah, as long as you are going out and having another set of bonds or -- I don't know, I don't want to say it's easy to do but those bonds are held by institutions so that you don't know where they are.

Michael Falcone

Well the bonds that we would end up wanting to buy would largely probably be held by institutions. I don't think we would want to buy bonds on a one-off basis in small lots from new shareholders.

Unidentified Analyst

Okay, so that might be a potential for your use of cash if we could buy something at a discount, you are working on that?

Michael Falcone

Yes, any sort of investment like that in real estate related assets will probably make some return.

Unidentified Analyst

Got it, or you do a capital raise and you go out buy even more bonds. But the people know they are buying at a discount of face value out of those bonds…

Michael Falcone

For a public company a capital raise is always an alternative, it's not one that we are contemplating at this point.

Unidentified Analyst

Okay, right I will let somebody else, thank you for your patience.

Michael Falcone

Sure, thanks Greg.

Unidentified Analyst

Thanks for doing what you said you were going to do. It's unusual, I mean you've talked about trying to -- so congratulations.

Michael Falcone

Thank you.

Unidentified Analyst

You've done what you set out to do.

Michael Falcone

We are doing our best.

Operator

Our next question comes from Jesse Greenfield, Greenfield Investments.

Jesse Greenfield - Greenfield Investments

Hi Mike, how are you?

Michael Falcone

Well, Jesse, how are you guys?

Jesse Greenfield - Greenfield Investments

Hey, good. Could you make a more detailed argument as to going forward as opposed to potentially let's say distributing some of this money to existing stockholders that would benefit everybody, for you to keep going forward and re-inflating the business as opposed to distributing some of those funds to stockholders.

Michael Falcone

So we described a series of possible activities which would include a share buyback which is essentially a distribution to shareholders. And we certainly have among the tools that are available to us an ability to pay dividends and those decisions will be made by Board as we see the full range of opportunities that are in front of us.

Jesse Greenfield - Greenfield Investments

Okay. Am I sort of correct that it appears as though you had around $2 of share in cash at the moment, assuming this transaction is finalized?

Michael Falcone

Yes.

Unidentified Analyst

Okay. I haven't any other question other than Mike, and I have seen in the past that you have been a buyer of stock in the open market. Are there any restrictions on you at the moment from continuing that process? I am not asking if you are going to continue, just asking if you have any legal restrictions at the moment.

Michael Falcone

I do, I had a 10b5 plan that I put out at the beginning of the year that bought all the shares that I could under that plan. So if I were to buy new shares I'd have to file a new 10b5 plan and I can only file a 10b5 when the window is open for purchases by insiders and generally speaking for us that’s right at the period of time between our shareholder call where we report on activity for the quarter and the end of that quarter. So in this instance it would be from kind of mid-August through September that I could do another share plan.

Unidentified Analyst

Okay I appreciate that insight. Mike, still doing a nice job, thank you, I appreciate it.

Michael Falcone

Thank you.

Operator

The next question comes from [Stan Chiling], Credit Suisse.

Unidentified Analyst

Hi Michael. A quick question. I am little confused in your conversion to a C corp, the people who bought the low price stock who have had the tax burden for the last five years, does that change their position at all?

Michael Falcone

Going forward we will give people, at the end of this year we will give people a K-1 that would end on July 4. And then any transaction that we have in the future, so any sale of bonds in the future that gain would be absorbed within the C corp as opposed to passed on to low basis shareholders. So as of the July 4th K-1 that will be the last K-1 that passes on again on the capital gain to the low basis shareholders.

Unidentified Analyst

I am more concerned with the viability of the losses that we will have once we sell our positions, that’s what I am concerned about, do those once we close the transaction will we still have those losses versus the gains that we already took?

Michael Falcone

When the shares there is nothing about this transaction that would change your tax position and normally again I am getting the, we are not tax advisors look from the lawyers around the table but the normal circumstance is when you sell these low basis shares you would get the loss and there is nothing about this transaction that changed that, but your individual circumstances may vary and change and we have tax advisors that blah, blah, blah.

Unidentified Analyst

No, I understand it but will you be providing that data for when people sell the shares?

Michael Falcone

I am looking at Brooks Martin he is our SVP of Tax, as you just said it shows up on the final K-1 is that right? So somehow on this July 4th K-1 that information will show up and if you have more questions you could call our investor helpline and that Brooks answer that phone and he can answer the tax question.

Unidentified Analyst

Thank you very much for saving this company. It’s been a long, long painful journey but thank you.

Michael Falcone

Thank you and people have been thanking me, there are 30 folks sitting here in Baltimore who really deserve the thanks every bit as much as I do.

Unidentified Analyst

Thank all of them for me.

Michael Falcone

Right, I will do that.

Operator

Our next question will come from Eric Swergold at Firestorm Capital.

Eric Swergold - Firestorm Capital

Hi, good afternoon and thanks for holding this call after the July 4th holiday when we are all back at work, much appreciate it. First of all, usually I am much obsessed by die-hards on the conference call, so in this case Greg did a great job reeducating me on the story. I have been involved up until 2005 and I got out and recently got re-involved this quarter but Greg did a great job in getting up back to speed with all those questions, so thank you to Greg.

Two questions I have are one, with the sale it would seem like your marginal requirements or collateral, requirements for your positions are greatly reduced which frees up a tremendous amount of buying power is that correct?

Michael Falcone

Yes, our biggest concern about sort of the rising rate environment was not so much in the short term but really in the long term and how long term rising rates would both negatively impact our bond value and at the same time lead to collateral cost that we perhaps could not make. And that risk is essentially eliminated as it relates to fixed, well it is eliminated as it relates to fixed rate bond portfolio and there's just a, there's a little bit of collateral exposure on some of the bonds but we don’t view that as material right now.

Eric Swergold - Firestone Capital

Right. And then one thing I am completely out of date on since my prior involvement with the shares is with the respect to the tax advantages to new investors coming into the shares, as a C corp as opposed to K-1, given that historically you have been in the municipal tax advantage business, in the C corp format is there any tax advantage to us in the future say a couple of years down the road if you choose to start distributing dividends again? Are those dividends, assuming they are income dividends not capital gains dividends, would those be treated as municipal income rather than normal corporate income and have a preferential tax rate, do you have any idea on that?

Michael Falcone

The dividend going forward would be regular old dividend C corp dividends, the short story is when we stopped our dividend while we were a publicly traded partnership, people were getting phantom income, primarily phantom capital gains and that was problematic and part of the reason we did this transaction was to enable us to end that particular problem with the stock. Most people who bought the stock recently had bought it in their IRA, we believe from what we can tell, and for now people can more freely own the stock both in their IRA and general account and we think that will open up the shares to a broader base.

Eric Swergold - Firestone Capital

Okay, congratulations, both moves that you made moving away from the K-1 structure will attract new investors and I think getting rid of the interest rate risk will also help attract new investors. So my final question will be do you have a scheduled program for getting the word out, getting back on the road, getting out on the conference circuit and so on to re-educate people, reacquaint people with the story.

Michael Falcone

I wouldn't say that it is a scheduled program at this point. But one of my priorities for the remainder of the year is to do those kind of activities and we had said previously we were going to re-looking at relisting on an exchange and the C corp we think makes that a lot easier.

Eric Swergold - Firestone Capital

Very good. Thank you very much.

Operator

Our next question comes from Ted [Mill] at Riley Financial.

Unidentified Analyst

Hi, Mike. I just wondered if you have a ball park figure for any remaining debt for the corporation.

Michael Falcone

I -- we do have that number. This is one of the numbers that's an obvious one that we ought to be able to answer but in light of the fact that we haven't completed the second quarter yet, we can't quite answer it. Lisa you had a way of sort of frame that for folks, you want to be indirect answer and I will give the apology.

Lisa Roberts

Sure. So the debt remaining, there was about $280 million of debt at March 31 that was not impacted by this transaction. About half of that was the subordinated debt that we discussed and the other half of that $280 million was senior debt.

In addition to that debt that is effectively been unchanged to this transaction we do have the new TRS financing, the $31 million that we spoke of as well as some of these bonds that we legally sold will not get favored treatment and they will be treated as secured borrowings and that’s another approximate 64 million. But again as Mike said until we complete second and really third quarter, given this transaction happened in the third quarter it’s going to be little bit difficult to be completely clear with those. But what I just added up in those three buckets is around the 370 million.

Unidentified Analyst

Okay. Thank you very much.

Operator

The next question comes from Doug Shannon, Morgan Stanley.

Unidentified Analyst

Hi, I have just a quick follow on question as a comment regarding your listing. Can you, by the way there were lot of great questions asked ahead of me already, so thank you to everybody. But I would like to hear your probability assignment or assessment of putting a reverse split into place.

Michael Falcone

That's a decision that is made certainly by the Board; it's not one that we really talked about all that much other that in the context of whether or not it would be necessary in the context of getting a listing. And I would say at this point I really don’t know the answer to that being completely honest I mean if we were to do a reverse split it would be in the context of positioning the company for a listing. There is no other reason that we would want to do as we sit here today.

So I think we are not quite far enough down the road on a listing front to really know what would be required. It is within the realm of possibility, certainly, is it probable, I really can’t say. As we don’t know enough but it certainly will be something that we will have to consider in the context of the listing.

Unidentified Analyst

The reason I asked that question is historically reverse splits have a miserable return and I guess if we poll some of your very, very loyal followers that are on this line, and I encourage you to do so they would probably not be in favor of that and I would like to voice to that same view from my perspective as well, that I know that this clearly has no impact on value of your holdings but historically and statistically they usually don’t work out well.

Michael Falcone

I have certainly heard that from people I know to be on this call. So it is something that we have in mind but I think it’s also the case that it's to everybody's advantage for us be listed on the exchange again. So that’s the context in which we are looking at the question and certainly appreciate the view and we will pass that, make sure that, that view at the Board table when we discuss this question.

Unidentified Analyst

Thank you.

Operator

(Operator Instruction). At this time we show no further questions. If you would like to make any closing comments.

Michael Falcone

Yeah I just want to make one comment on something that addresses that issue of accounting of the debt. You referred to the fact that some of our -- some of the bonds that we sold we won't achieve accounting sales treatment and as a result, debt, about 64 million of debt will remain on our books. The flip side of that is the assets will remain on our books of about that size as well. And that's obviously, easily the kinds of numbers that we are still doing a lot of work on. So I'd ask that sort of we not be held to this particular part of our analysis here. But people do need to understand that, that's not just debt, it's debt and assets that will remain on the book, and the exact number that’s not clear yet.

Operator, that would be my concluding comments, other than the fact that I would like to thank all the investors on the call and lot of folks who stayed with us here through thick and thin and we very much appreciate your commitment to the company and we would have not gotten to this point without the dedication of a lot of good folks here in Baltimore and elsewhere around the country who really worked hard and did see us through the recovery so far. And we look forward to continuing to move the business forward to generate value where we can and to continue to drive the stock price hopefully in the right direction. So thank you all very much.

Operator

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

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