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Executives

Michael Falcone - Chief Executive Officer

Lisa Roberts - Chief Financial Officer

Analysts

Stan Trilling - Credit Suisse

Philip Mause - Pacific Economics Group

Municipal Mortgage & Equity, LLC (OTCQB:MMAB) Q3 2013 Earnings Conference Call November 20, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Municipal Mortgage & Equity, LLC Third Quarter Earnings and Business Update Conference Call. My name is Denise and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of this conference call.

Some comments today will include forward-looking statements regarding future events and projections of financial performance of 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 - Chief Executive Officer

Thank you, Denise. Good afternoon, everyone, and welcome. With me on the call today are Lisa Roberts, our Chief Financial Officer, and Executive Vice Presidents, Gary Mentesana and Earl Cole.

Lisa and I together will deliver our prepared remarks and then I will close and we will all take questions. The primary purpose of our call today is to review our third quarter results. As we discussed on our call in August as of June 30, 2013 MuniMae TE Bond Subsidiary, LLC otherwise known as TE Bond Sub was valued at $225.4 million and on July 3, 2013 we sold our common shares in TE Bond Sub for $78.7 million in cash while retaining $146.7 million on bonds previously held by TE Bond Sub.

As a result of this sale we were able to eliminate $816.7 million of debt and preferred equity obligations and importantly the interest rate risk associated with these obligations. We are now evaluating our options for the future including various ways to deploy the cash raised by our sale of TE Bond Sub. Some of our options include investing in our existing U.S. and international businesses, investing in new business opportunities, buying back our debt and or buying back our common shares. Over the long-term we will need to find and make new investments to generate sufficient returns to cover our operating expenses and grow shareholder value.

As previously announced we amended our common share buyback program and are using some of our cash to repurchase common stock. As of November 8, 2013 we repurchased 1.1 million common shares in average price of $1.34. Finally an important element of the TE Bond Sub sale was that it help position us to convert to a corporation for tax purposes, thereby eliminating the pass-through of income to our shareholders, including the phantom capital gain and allocation that has been experienced by low base of shareholders since 2008.

Although we will now be a tax payer at the corporate level, we were able to preserve our net operating loss or NOL carry-forwards which should enable us to offset much of our tax exposure for the foreseeable future. As disclosed in our third quarter filing we will issue one final K-1 during March of 2014 for the short year from January 1, 2013 through July 9, 2013 including potential capital gains from the sale of TE Bond Sub.

The final K-1s will likely report similar capital gains to certain low base o shareholders as it had been reported in prior years and will represent the final pass-through activity from the company. As of now we expect the gain to be approximately $2.50 per share for certain low base of shareholders and held their shares for the entire period. We generally low base of shareholders as investors that acquired chairs in January 2008 and later. The actual gain or loss to any individual shareholder also depends on the period you held your shares during the year due to the fact that each individual shareholder’s basis is unique based on the date they acquired their shares. We are not able to provide specific estimates for individual shareholder gain or loss.

I will now turn the call over to Lisa to review the company’s third quarter results. Lisa.

Lisa Roberts - Chief Financial Officer

Thank you, Mike. We reported common shareholders’ equity of $51.6 million at September 30, 2013, as compared to $44.9 million at December 31, 2012. We also reported total comprehensive income to common shareholders which includes net income and other comprehensive income of $9.3 million for the first nine months of 2013 which included a total comprehensive loss of $9.7 million for the third quarter of 2013. The third quarter comprehensive loss was primarily comprised of unrealized losses on the bond portfolio of $5.3 million and $4.1 million of net expenses.

Common shareholders’ equity declined by $13 million during the quarter as a result of the third quarter comprehensive loss as well as a $3 million equity reduction driven by the perpetual preferred shares transferred as part of our TEB sale and an equity reduction of $300,000 associated with our common shares repurchased during the third quarter.

Consistent with the prior quarter as part of that press release issued last Thursday announcing our third quarter results we provided investors with an adjusted income statement and an adjusted balance sheet. These reports are non-GAAP metrics because they removed the impact of consolidated funds and ventures. However we have not changed our bottom line GAAP net income nor have we altered our bottom line GAAP common shareholders’ equity.

Turning now to the adjusted income statement Exhibit B of our press release, I’m going to review our most recent third quarter results compared with third quarter results from last year. I’m not however going to review year-to-date results as I covered much of that during our last call. I can’t however take questions on these results as needed. On Exhibit B line 16 shows a total comprehensive loss of $9.7 million for the third quarter of 2013. The first item I want to cover is the $75.7 million of gains associated with the bonds sold as part of the TEB sale. They were transferred out of accumulated other comprehensive income or AOCI for short reflected as part of line 15 and into the income statement reflected on line 9 resulting in no change to common equity but causing net income to increase and AOCI to decrease by $75.7 million.

As a reminder as a result of the TEB sale we derecognized $679 million of bonds from our GAAP balance sheet. These bonds had an unpaid principal balance of $673.8 million and we sold them for an average price of approximately 101% for an economic gain of $5.2 million. However over time we had recognized losses on these bonds through our income statement and then recoveries of those losses were recorded through AOCI as required by the accounting rules. Nonetheless common equity on a cumulative basis reflected an overall net gain of $5.2 million on the bonds that received sale accounting when we sold TEB.

Turning to the components of the comprehensive loss for the third quarter, as I mentioned earlier core net expenses were $4.1 million and were comprised of total net income or total income of $7.7 million on line 5 of Exhibit B less total expenses of $11.8 million on line 8. Adjusted bond interest income for third quarter 2013 was $4.5 million and was down $13.4 million from the third quarter 2012 mainly due to the sale of TEB that resulted in the de-recognition of bonds with an unpaid principal balance of $747.7 million from our adjusted balance sheet with an average pay rate of 6.3%.

Income on our preferred stock investment for the third quarter 2013 was $1.3 million consistent with third quarter 2012. Adjusted asset management fees were $1.1 million for third quarter 2013 consistent with third quarter 2012. Adjusted other income includes interest income on loans, servicing income, syndication income and other miscellaneous income and was $800,000 for third quarter 2013 and approximately $300,000 million higher than third quarter 2012.

Adjusted interest expenses which includes interest expense on debt and perpetual preferred shares as well as net interest expense on derivatives was $6 million for the third quarter 2013 and was down $8.5 million from the third quarter 2012 mainly due to the sale of TEB that resulted in the de-recognition of $816.7 million of debt and preferred shares with an average pay rate of 3%, partially offset by the addition of $92.8 million of debt with an average pay rate of 4.8%. Adjusted operating expenses, which includes salaries and benefits, general and administrative expenses, professional fees and other expenses, were $5.8 million for third quarter 2013 and was nearly flat from operating expenses reported for the third quarter 2012.

Turning now to the adjusted balance sheet reported on Exhibit A. Exhibit A adjusts our balance sheet to remove certain funds and ventures that are consolidated on our GAAP balance sheet even though we have little to know actual equity interest. As mentioned earlier we have not modified our GAAP common equity so even though for example we removed certain real estate partnerships that we were required under GAAP to consolidate and replaced that real estate with our actual bond investment, we have not included the incremental fair value associated with those bonds occurring since consolidation.

At September 30, 2013, we had cash and cash equivalents for $45.6 million and restricted cash of $35 million. We had bonds with a book carrying value of $288.9 million comprised of multi-family tax exempt bonds and community development district bonds and as provided for in our disclosures we estimated the fair value of these bonds to be $321.4 million at September 30, 2013 which was $32.5 million higher than our book carrying value. This value has not yet been recognized for GAAP because in certain instances we account for the real estate serving as collateral to our bonds and under GAAP we cannot recognize the value appreciation until the real estate is sold.

As reflected in our filing 77% of the remaining bond portfolio is comprised of multi-family tax exempt bonds with an average pay rate of 4.9% compared to an average contractual coupon of 6.8% and a debt service coverage of 0.74 times. In addition to the multi-family bond 17% of our remaining portfolio is comprised of community development district bonds with an average pay rate of 5.9%. The final 6% of the remaining portfolio consists of two senior certificate investments and a trust collateralized by a pool of tax exempt municipal bonds with an average pay rate of 4.3%.

Included in the debt balance of $365 million on line 9 was $146.3 million related to the bond portfolio. This includes total return swap borrowings of $51.9 million and secured borrowings of $94.4 million because of bonds that were legally sold but held to receive sale accounting with a total annualized pay rate of about 5% as of September 30, 2013.

Turning back to the asset section of the adjusted balance sheet on line 4 we reported an investment in our South African Workforce Housing Fund of $3.6 million that is eliminated in consolidation. This represents the equity we provided to the fund as well as our share of income allocation. As a reminder we have several ways to generate revenue as it relates to our international operations. Through this subsidiary International Housing Solutions we are the general partner in the South African Workforce Housing Fund and through the general partner interest we provide asset management services (for a fee) and as the managing member we are also entitled to special distribution based on returns generated by the fund. Separate from these two components we have a 2.7% limited partner interest in the fund which is represented by the $3.6 million investment on our adjusted balance sheet.

Turning to line 5 $24.3 million is the real estate that we hold including three land investments one multi-family property and another land investment where we hold only 33% of the investment. On line 6 $314 million is the book carrying amount of preferred stock and a private national mortgage lender and servicer that is paying distribution of 14.4% on a par of now of $36.6 million. On line 7 other assets of $19 million primarily includes $5.6 million of solar facilities, $3.7 million of un-amortized debt issuance cost, $3.4 million of other receivables, and $2.4 million of loan investments.

On line 9 we reported debt of $365 million and as I mentioned earlier $146.3 million is related to our bond portfolio. Also included in this debt balance is $142.9 million of subordinated debt of which $113.2 million have pay rate concessions. We have a total return swap of $36.6 million on our preferred stock investment and then the remaining balance of $39.2 million is primarily senior debt most of which is guaranteed by the company. On line 12 we reported $19.3 million of deferred revenue of which $15.1 million is related to guarantee fees collected from our tax credit equity funds that are being amortized in the income over the life of the fund and $2.6 million relates to bonds that were transferred as part of the TEB sale however since these bonds were not on our GAAP balance sheet the gain is being deferred and recognized over time.

With that I’ll turn the call back over to Mike. Mike.

Michael Falcone - Chief Executive Officer

Thanks, Lisa. Before opening the call for questions I did want to state that we believe that we will be able to identify attractive opportunities to create additional shareholder value moving forward. With the capital we have generated, we can buyback shares, pay down debt to make new investments based on where and when we see opportunity. Our focus on creating value likely means we’re entering a period where our earnings maybe a regular as we seek to deploy our capital and improve our common equity per share. Thank you, for your support, all our future business is not yet determined, we remain committed to our shareholders as we move forward.

We’ll now open the call to questions. Operator?

Question-and-Answer Session

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question will come from Stan Trilling of Credit Suisse. Please go ahead.

Stan Trilling - Credit Suisse

Hi. I am a long suffering MuniMae’s client a customer and shareholder and dreamer. And the fact that you – the insiders have bought so much stock over the last 12, 18 months, you must have some vision for this company long term. I understand that it’s a balancing act between buying sub debt, buying back stock and other issues. Can you give us some vision of what you think this company might be when you grow up?

Michael Falcone

Sure. I should start by saying we are very much in the middle of certain strategic planning discussions at the Board level and ultimately the decisions about the future of the company will be made as a result of those conversations. But to sort of give you a sense of out of where opportunity where I think opportunity exist, first if you look back at the history of the company the most of what we have done has been in the multifamily space. And in particular multifamily rental space and we believe that, that is an area where we can mine our past relationships, mine our understanding of markets, our relationships with vendors. And that there will be opportunities for us there, I don’t mean to foreclose those kinds of real estate opportunities but I think if you look at sort of the multifamily business, there is opportunity there.

You pointed out I think correctly that we’ve got sort of assets and liabilities on our balance sheet. Those assets some of those are pieces of land that may create value through developments, some of them are multifamily properties which may create value through redevelopment, renovation and investment. And we have been able to buyback debt particularly our subordinated debt in the past there can be no assurance that we’ll be able to do that in the future, we disclosed I think what we have accomplished in that regard in the past. But, the sort of second area of opportunity that I would see is really around the existing assets and liabilities that are on our book.

We have a couple of businesses in the tax credit business and in IHS which are essentially asset management and co-investment businesses where we maybe able in the future to expand and grow those kinds of businesses. And we have been buying back shares at the company. I think until – on top of my head I’m not sure that any of the officers are still buying shares. I think we’ll had 10b-5 plans that have expired those that have been filled but the company has been buying shares, we bought over a million shares and we’ll continue to do that as we see opportunity to essentially to buy liquidity in the market where there right now is that probably much liquidity as many of us would like, so we have done that. So, it’s to exactly what the strategy is and exactly where the money goes among those mix of opportunities, it’s real hard to know and we’re sorting through those and getting ideas from other people about what other kinds of opportunities there might be out there. So, I think hopefully that gives you some picture of where we see future opportunity.

Stan Trilling - Credit Suisse

Thank you. And when – can you give us any sort of idea of when you will be able to talk to the street about once you get your plans in place, how far away do you think that might be?

Michael Falcone

I think it’s probably – we’ll take it through a series of Board Meetings in the next year - I also – in the early next year. I also suspect and it’s always hard to predict the future but I suspect that there will be opportunities that present themselves that when they do, we’ll take advantage of – there may not be a kind of one fell swoop, this is what we’re doing with the cash we’ve generated. It may instead be series of kind of opportunities that we see and try to take advantage of in order to build shareholder value. But presumably, as we get through a series of board meetings, we’d be able to speak with more clarity.

Stan Trilling - Credit Suisse

Thank you, very much. Appreciate it.

Michael Falcone

Sure.

Operator

Our next question will come from (Howard Edwards) of Capital Gains. Please go ahead.

Unidentified Analyst

Hi, for Ms. Roberts please. I know on her asset share part there is a $487 million of non controlling interest, is that an asset and what kind of asset is that please?

Lisa Roberts

That’s not an asset to MuniMae, that’s effectively we’ve consolidated tax credit equity funds and the South African fund that we really have very little equity and we talked about having 2.7% equity in the South African fund. And our tax credit equity funds we have approximately 1% through a general partner interest. However, we consolidate the assets of those funds on to our balance sheet and basically those that asset value benefits our third party a non controlling interest holder.

Unidentified Analyst

Okay. We’ve got under – go ahead sir.

Michael Falcone

You may have seen that refer to another places as minority interest, here it’s not a minority interest, this 99% of it is actually owned by someone else so it’s called the non-controlling interest because we have the controlling interest. But that is owned by other people, we are managing their money, it just flows through our balance sheet on a gross level that in net basis.

Unidentified Analyst

Okay. And one of the balance sheets I’ve seen about $90 million in restricted cash, what kind of cash is that?

Lisa Roberts

So, again part of that cash are $55 million almost $56 million of that cash is actually cash that is not MuniMae’s that is related to the consolidated funds and ventures, we had no rights to that cash. And so that – in the press release Exhibit A removes the $56 million of cash but is to benefit of someone else and only reflects the portion of restricted cash that is to our benefit of $35 million. And that cash is acting as security to total return plus borrowings for example and other exposures that we have with the counterparty.

Unidentified Analyst

Okay. That’s well explained. Thank you, both ways. Thank you much.

Michael Falcone

Sure.

Operator

(Operator Instructions) The next question will come from Philip Mause of Pacific Economics Group. Please go ahead.

Philip Mause - Pacific Economics Group

Yes. Focusing on the adjusted balance sheet, I believe you said that item number 3 you felt that the fair value is higher than the book value. I guess if you could go into a little more detail on that and then indicate whether there are any other items on the adjusted balance sheet where you think the fair value maybe higher or lower than the book value?

Michael Falcone

Phil, I’ll handle that. I mean what we – as Lisa said, the – on our GAAP balance sheet we have real estate. As the result of that, we have to depreciate the real estate we market-to-market when we take it back essentially, we never adjusted again and in fact we depreciated over time. What we actually own is bonds and we have to disclose in one of the footnotes what the think the bond fair values are. So, we believe the bond book values are about $30 million higher than this 288 number that you see on the Exhibit A. The reason we don’t show it there is because we want to tie out the gap – we want to tie out the common equity number on that page to the GAAP common equity so that’s why you don’t see that there.

In terms of sort of other places, we’re actually betting on this question before the call and talking about it amongst ourselves. There are some sort of ups and downs in other places throughout the balance sheet but I would say those numbers don’t add up to sort of the material difference, that the big change is the one we’ve disclosed related to the $30 million.

Philip Mause - Pacific Economics Group

Just a follow-up question, the – is there a fair value that could be associated with your interest in the consolidated funds and ventures, you get a management fee based on your role, is there a way of assigning a fair value to your interest in those ventures?

Michael Falcone

We don’t do that. Part of the reason we’re able to disclose the bond fair value difference is we actually in our disclosures include that fair value, so we go through a process which is controlled by Sarbanes-Oxley processes and reviewed by our auditors. We don’t do that on other pieces of the balance sheet and sort of our value of our consolidated funds and ventures, residual pieces is one of those things. I will tell you that those values should they be realized are 7 to 10 years away, 7 to 12 years away and something like that. So, they’re very hard at this point to get a handle on.

Philip Mause - Pacific Economics Group

Thank you.

Operator

(Operator Instructions) And I’m showing no additional questions in the queue. This will conclude our question-and-answer session. I would like to turn the conference back over to Michael Falcone for his closing remarks.

Michael Falcone - Chief Executive Officer

Great. Thank you again, Denise. Again, I just want to take the opportunity to thank all the shareholders. We’re excited about the future and the opportunities that may present themselves and appreciate everyone’s support so far. Thank you all and we probably won’t speak again until New Year. So have a happy and safe holiday season. Take care.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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