When I last wrote up MMA Capital Management (NASDAQ:MMAC) in March 2015, the equity story depended primarily on the management's ability to monetize some of the hidden value in its arcane balance sheet. The company has executed nicely on that front, and the shares are up substantially as stated book value has risen to $17.43 as of YE15 and the P/B discount has narrowed. Given the recent Bank of America (NYSE:BAC) JV and having gotten some more clarity on the Morrison Grove option, I think the investment thesis is as compelling today as it was a year ago - perhaps even more so.
While some of the old elements of the MMA value proposition remain - the stock still trades at a large discount to adjusted book value, which is closer to ~$22, and share repurchases continue to be done at highly accretive prices - management now needs to execute on a strategy that enables it to generate some return on equity. Unless the company is liquidated, even a double-digit discount to adjusted book doesn't make for a strong investment case if MMA is going to perpetually run at breakeven.
Michael Falcone and the board are well aware of this fact, and they've done a few things as of late that suggest MMA will be able to scale the business and monetize the $437 million of NOLs. At $16.50, I think MMAC remains substantially undervalued.
Paths to Sustained Profitability
(1) GE LIHTC Portfolio
Last December, MMA entered into a JV with Bank of America to acquire a portfolio of LIHTCs (low income housing tax credit) from General Electric (NYSE:GE), which as most of you probably know has been divesting the bulk of its finance operations.
The portfolio consists of 650 properties. BofA gets all of the tax credits and cash flows, in addition to 30% of the residual values related to the properties that comprise the portfolio. These residuals are expected to be realized over the next ten years, with the majority of them realized within the next six years.
MMA received a 2% annual asset management fee of BofA's $211 million investment ($4.2 million) in addition to a 70% share of the residuals. Of the 70% to which MMA is entitled, 20% of all realized proceeds will go to BofA. MMA is also guaranteeing the majority of the tax credits that BofA expects to receive.
BofA paid $211 million for 30% of the residual value and all of the tax credits and cash flows. So the key is figuring out what BofA paid for the residuals.
On page 23 of MMA's 10-K, it shows ~$110 million of maximum exposure for these tax credits, and it disclosed that this exposure represents 70% of the total expected tax credits. That implies about $157 million in total tax credits is what BofA expects.
Given the $211 purchase price, BofA paid about $54 million for the residuals, which makes MMA's 70% present share of the residuals presently worth $126 million.
For this deal to have made sense for BofA, it must have seen reason to model fairly strong IRRs for the variable residual component, since we know it's expecting $157 million in tax credits. If you start assuming even 5-10% annual IRRs on the total BofA investment, the value of the implied residuals component is pretty significant by 2026.*
*MMA said on the Q4 call that some of the properties become eligible for capital events (i.e. sale or refinancing) over the next couple of years, some more over 3-6 years, and the last bit in years 7-10.
Given the NOLs, whatever residuals MMA generates will be tax-sheltered. While MMA will have to pay 20% of realized residuals, there is material net income opportunity here. If the total value of residuals that MMA receives is $150 million over the next ten years, that's $15 million or ~$2.35/share in annual incremental EPS.
I appreciate that this is a crude exercise, but I think it gives a sense for some of the value here.
(2) Morrison Grove
As I noted last March, the transaction it entered into in Q4 '14 gave it an option to purchase Morrison Grove, a real estate asset manager, in 2019. As part of the deal, MMA sold its legacy LIHTC portfolio to Morrison Grove, which also manages a large portfolio of LIHTC properties. Importantly, MMA can also repurchase the sold LIHTC portfolio in 2019, when it will be in the process of unwinding and the residuals start materializing.
Management described the MG option in more color on the last call (Q4 '15). MG manages 24 or so funds that cover 350 properties. MG earns an asset management fee on these properties and is a GP in a small number of these properties as well. It is also entitled to a share of the LP economics for each individual property. There really isn't much publicly available information outside of that. Morrison Grove manages a portfolio of about $2.5 billion. If we assume a 2% management fee, that's about $50 million in revenue. The rest of the fees and expenses are anyone's guess.
By property count, Morrison Grove is a little more than half as large as the GE portfolio. So maybe MMA could purchase MG for $100-150 million and earn $10 million/year or so in tax-free net income if it is investing at a 10-15x P/E. These economics would be consistent with those of the GE deal, and MMA would be entitled to all of the income streams that MG throws off.
(3) Solar Lending
Management has $50 million of invested capital in a $100 million JV that makes loans for the development and construction of solar facilities. MMA believes it's underwriting double-digit returns on these loans, so that should be at least $5 million (~$3.5 in incremental) for 2016. It thinks it can lever up some in this business by doing more solar permanent loans, which look more like mortgages (20% equity) than do the short-term construction loans (~50% equity). Management also has plans to do another solar JV later this year.
If it does some more leveraged investments, in addition to the second JV, this could be a $10 million net income business. $10 million isn't an insignificant sum relative the current $105 million market cap.
Thoughts on Valuation
Reported book was $17.43 at YE15, and despite the last few years of asset sales, there are still plenty of favorable adjustments to be made:
- Deferred revenue associated with yield guarantees related to the legacy LIHTC portfolio sold to Morrison Grove in 2014; this liability amortizes and flows through net income each quarter: $10.4 million
- Deferred gains and value of the outstanding, off-balance sheet bridge loan related to the MG transaction: $18.2 million
- IHS - MMA owns 100% of IHS, which manages three South African real estate development funds from which it generated ~$6 million in asset management fees during 2016. MMA only carries the asset at $2.5 million, the value that it took to acquire the rest the minority ownership that existed when MMA first launched the business. It paid $1.6 million for a 13% stake, which makes the 100% ownership worth over $10 million more than carried value.
Overall, there's $38.6 million we can add to reported book of $116.2 million to get to $154.8 million. On 6.95 million diluted shares, we arrive at adjusted book of ~$22.27.
Management has once again re-upped on its share buyback program, which allows it to repurchase another 600,000 shares at prices up to stated book value. It brought down the share count ~500,000 shares in 2015 and should be able to do something close to that this year.
Looking out to YE2019, there should be ~5 million shares outstanding. At that point:
- MMA should be generating material income from its GE LIHTC residuals - figure $5-10 million.
- The solar business should be doing $8-10 million in net income.
- The MG business could be acquired, or MMA could repurchase the LIHTC and associated residuals for ~$12 million. If the former, that could add another $10 million.
The NOLs don't expire until 2027, and the company won't come close to exhausting them until beyond 2030 even using aggressive assumptions.
The business is currently ~$(4)-0 million on an operating basis, so the above figures should just about contribute directly to net profitability. On 5 million shares, MMA could be generating $20-30 million, or $5 per share at the mid-point. A 7-8x multiple gets the stock to close to $40, more than double where the shares are today. There's appreciable downside protection given the discount to book, and even if management misses a bit on these investments, shareholders should still do well. In the interim, the repurchases provide a steady tailwind to the share price; a buyback program of 500,000 shares for a stock that trades 12,000 shares per day means that probably >20% of any given day's float is attributable to MMA.
Insiders are nicely aligned with shareholders and have been buying at an increasingly rapid pace. Michael Falcone (CEO) has purchased over $120,000 worth of the stock during this month alone.
Disclosure: I am/we are long MMAC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.