[MMAC] - MMA Capital Management, LLC, Investor Q&A Session Thursday, March 16, 2017, 5:00 PM Eastern

Transcription

1 [MMAC] - MMA Capital Management, LLC, Investor Q&A Session Thursday, March 16, 2017, 5:00 PM Eastern Officers Michael Falcone; CEO, President Gary Mentesana; EVP Davidson Bjarnason; CFO Megan Targarona Sophocles; SVP Analysts Gary Ribe; MACRO Consulting Kyle Hynden; Stillwater Capital Questions and Answers Operator: Good afternoon, ladies and gentlemen, and welcome to the MMA Capital Management, LLC, 2016 full-year financial results and business update question-andanswer conference call. My name is Stephen, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital Management, which are based on current expectations. These comments are subject to significant risks and uncertainties, which includes those identified in the Company's filings with the Securities and Exchange Commission 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. At this time, the Company would like to open the call up for questions that call participants might have. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. Gary Ribe with MACRO Consulting. Gary Ribe: I appreciate you guys having this follow-up call. It's helpful. I guess I kind of want to start with kind of the solar business, not the loan that you disclosed, because, obviously, you can't say anything about that.

2 But I was kind of curious, kind of the TPG joint venture, where you guys were coming along with that? How much of it -- I think I saw there was $150 million invested. Are you guys a lot further into that now? You're almost done with the first quarter. So given the opportunities that you're seeing, how quickly do you think you'll get up to that first $225 million or so they've committed? I guess where are you and how quickly do you think you can get there? Michael Falcone: Let me sort of describe I think in general where things are headed there and maybe Gary or Megan, can answer more specifically. My general sense of that, of sort of where we are in the joint venture, is that we have a very robust pipeline, that we are seeing bigger deals than we thought we were going to see, and that we are closing a number of opportunities that we find to be very attractive. And so I feel actually quite good about where that business is headed. It's a little bit of a business where there are sort of draws going on and loans getting repaid all the time. I'm not sure I exactly know the balance in the fund right now. I would say it's a little hard to predict how we get to the or when we get to the $225 million breakpoint. But we certainly feel optimistic that we're headed in that direction and headed pretty aggressively in that direction. Gary Ribe: Got it. Gary Mentesana: It's Gary Mentesana. Two things on that point. One is, I think the breakpoint is $220 million, not $225 million, where we would get a larger share of the promote, if you will. And it is, as Mike said, something that's constantly subject to ebbs and flows. We have probably slightly less money outstanding in the JV today as a result of a greater amount of redemptions since year end, as compared to new originations and draws on both new and existing loans that were in place at yearend. But as Mike said, we have a pipeline that we kind of are constantly assessing and building, and it would [really help] the future of that business. Gary Ribe: Okay. That's good to hear. So you guys are relatively optimistic you'll get there sometime this year? Michael Falcone: That requires a real wild guess. Do I think it is this year or next? I'd feel pretty good about that. Do I think it's this year? I just don't know. I mean, I can certainly look at a pipeline and say, gee, if things went really well, we'd get there. But I can also look at that pipeline and say, gee, things happen, and it might take into next year.

3 But certainly, we're focused on good developers, transactions that make sense from an overall yield perspective and credit quality perspective, and then places where we can sort of get money out and attractive returns, both to us and to our partners. And then I think, in that regard, we feel pretty good about the business. It is really hard to predict balances in the pool, though. Gary Ribe: Got it. Okay. And now, if I'm looking at your results from the quarter, and I apologize if you covered this on the morning call or not. But if I'm looking at this, the loan you guys marked down was about 6.2, and then you had warrants associated with that loan of another 2.4, right? And then -- Dave Bjarnason: Gary, this is Dave. All-in between the warrant and the loan, the total mark-to-market adjustment was 6.2. Michael Falcone: So start at 10. Dave Bjarnason: Right, and you end at 3.8. Michael Falcone: You end at 3.8. Dave Bjarnason: Right. Gary Ribe: Okay. But you were carrying the warrants on the balance sheet at like 2.4, weren't you? Michael Falcone: Okay. And so this is a little bit of accounting inside baseball. But when we made the loan, we got a loan and warrants, and we spent $10 million. So we went through this very complicated analysis with a big four, not KPMG, but with a big four accounting firm that came back and said the warrants were worth a couple million bucks, $2.4 million. Dave Bjarnason: Yes. Michael Falcone: Therefore, by definition, the loan had to be worth $10 million minus $2.4 million, which we closed the loan on September 25th, or something, September 20th, and we valued it on September 30th. So that was sort of the accounting logic in the third quarter. And so when we made the subsequent -- We went through that same logic at yearend, hiring the same firm and doing that.

4 And then, when we did the subsequent event adjustment late in the process here, when it became clear that the borrower was going to file bankruptcy, we took the warrants to zero and we took the loan to our best estimate of recoverability, and that was the 3.8. Gary Ribe: Right. So the total amount of balance sheet effect is 8.6, would it not be then? Michael Falcone: No, because the loan, on September 30th, the loan plus the warrant passage was $10 million. Gary Ribe: Oh, I see. So you guys accounted for the loan as kind of like an OID? Michael Falcone: Sure. Exactly. We couldn't make the loan on -- if you had asked me in a sort of business logic, I would have come up with a notion that we had gotten a $10 million loan out and we had got some warrants that we had no idea how to value. Dave Bjarnason: Yes. Michael Falcone: We then went through a process based on GAAP where we did a valuation of the warrants, and that valuation came to a number of, call it 2.4, right? Dave Bjarnason: Yes. Michael Falcone: As a result, we had to kind of mark the loan down to 7.6, so that a week after having made the investment, we didn't have a $2.5 million gain. Gary Ribe: Got it. Michael Falcone: And so when we got to this quarter, we took the warrants to zero and we took the loan to what we thought recoverability on the loan was, and that's the 3.8 number. Gary Ribe: Got it. Okay. And then you guys spent like 2.2 on share repurchases, right? So if I've got -- I've got like eight-something coming out of shareholders' equity? Dave Bjarnason: Yes, about 2.3. Gary Ribe: Okay. So like you guys made a couple million bucks on the quarter before this solar loan kind of went by the wayside. I don't think there were any asset sales or dispositions or anything like that, and the markings on the bonds didn't look to have changed all that much. I actually think you might have marked them a little bit lower. Michael Falcone: Yes.

5 Gary Ribe: Is that just more indicative of your core profitability? Gary Bjarnason: Well, part of the positive return of the quarter was -- and I think Mike might have talked a little bit about this. If you look at the interest rate hedge positions that we've [put on] -- Gary Ribe: Oh, I see. Dave Bjarnason: -- there was roughly, call it a $4.5 million net fair value adjustment to those positions. So that was part of the driver for the positive return, exclusive of the effects of the loan. Michael Falcone: So they show up in derivative values, whereas, the bond changes show up in bond values. Gary Ribe: Right. But when you netted those kind of out, right, like the bond values took a little bit of a mark, and then you made money on the derivative? Dave Bjarnason: Yes. Michael Falcone: Yes. In this quarter because of credit improvements on the bonds, they probably didn't go down as much as we would have expected. Dave Bjarnason: Yes. Gary Ribe: Got it. Michael Falcone: So the net, if you net those two thanks, all things being equal, you would expect to have been down, but we ended up a little bit because we had some credit improvements, in spite of a credit setback on the Spanish Fort bond that I mentioned this morning, or they're [coupons], technically, we, in general, had some credit improvements which took bond values up. Gary Ribe: Yes. And you -- Michael Falcone: (Inaudible) -- Gary Ribe: -- have equity in Spanish Fort -- Michael Falcone: -- couple million dollars. Gary Ribe: Okay. And you have equity in Spanish Fort, too. Can you just remind me of what you guys have put in there?

6 Michael Falcone: We have two different ownership positions in Spanish Fort. In one instance, we own physical property in a joint venture. And that property includes land and retail space. And then the other piece of the Spanish Fort investment is we own the bonds, which are backed by sales taxes generated by the stores. We originally just owned the bonds backed by the sales tax. And, as part of the workout, we ended up with an interest in the stores, is the short story there. And the total exposure, I think of it as around 30-some million dollars, but that's my CEO number, not a CFO number. So looking for somebody -- give me a number, Megan. Megan Targarona Sophocles: Yes, that's about right. Michael Falcone: 16, something like that? Dave Bjarnason: I was just looking for the dollar -- Gary Mentesana: Yes, equity investment is about Michael Falcone: The equity investment is 16.5 and the bond investment -- Megan Targarona Sophocles: And then bonds is about the same. Michael Falcone: Net bonds are about the same. Gary Ribe: Interesting. And that's just slower in developing than you'd like to see? Is that what it is? Michael Falcone: It's slower in developing than we would like to see, exactly. Gary Ribe: Okay. Cool. Michael Falcone: And it's Internet sales taking people out of the Bass Pro Shops. Gary Ribe: Right. That makes sense. Now, on your bond portfolio, if I'm not mistaken, a fair number of the bonds are actually tied to [LIHTC] properties for funds that you originated, if I'm reading that properly and understanding it. Gary Mentesana: Yes, that's correct. Gary Ribe: Okay. There were a couple bonds that looked like they were removed in consolidation in the quarter. Michael Falcone: Yes.

7 Gary Ribe: And I don't know if I understand what's going on there, because you guys acquired -- [are you going to] acquire a GP interest back or what happened? How does that work? Gary Mentesana: Yes, that's right, Gary. This is where we'll do a take back of a GP interest. But for a reporting purposes, that results in us having to consolidate the issuer of the bond. And so as a result of that, at least for reporting purposes, the bond that we had a split second before the GP take back occurred, they get eliminated. Gary Ribe: And that's carried within the venture as like equity method investment at that point then? Gary Mentesana: I'm sorry? Gary Ribe: That's now carried within the [CFV] as like an equity method kind of net out? Gary Mentesana: Yes, because you're going to end up having real estate [come on] balance sheet as a result of that, because the bond gets eliminated. Gary Ribe: And the real estate comes on? Dave Bjarnason: Yes, the real estate comes on. Michael Falcone: So two things. One is, we buy GP interests where we're the LP for one of two reasons, generally speaking. One is, we think we can buy them at an attractive price, and the other is, we feel a need to buy them because we've got a GP who's in some way not performing. And so generally speaking, we think it's a good thing when we buy back when we get the GP interest. It gives us complete control. The sort of confusing element of that is that the sort of bond that we owned and we still own disappears. And what has happened over the last year, 18 months, or so, as we've bought a couple of these back, is, it used to be if you added up sort of consolidated funds and ventures, assets and liabilities, you got a number that was close to zero. Gary Ribe: Right. Michael Falcone: And now you do that, there's a positive number that would be essentially equity in consolidated funds and ventures, which is $10 million [a short sell] is my recollection of that number.

8 And so that gets a little bit hidden on our net debt value, kind of gets a little hidden on our balance sheet. It still comes through as common shareholder value when it's all said and done, but it's, frankly, a little less obvious. I mean, it's all there on the balance sheet and it comes through at the bottom line number, but it's just not as clear as when you can look and see a bond sitting on the balance sheet. Gary Ribe: Right. And so in situations where you guys originated a vehicle and you're now the GP, I guess the LP gets consolidated and you own the bonds, a lot of these when they're done, there's not a lot of equity left for the LP, right? So are you in a position then where you just own the property? Michael Falcone: So typically, the fund is the LP, right? Gary Ribe: Right. Michael Falcone: We become the GP and we own the bond. Let's say the property is then sold. The waterfall would generally be you pay the bond -- you pay your debt off so the bondholder gets paid. Gary Ribe: Yes. Dave Bjarnason: There's now a waterfall to the GP and to the LP. So when we buy a GP interest, we buy it based on what's the GP waterfall worth. And then once the cash goes into the LP, it rolls up into a fund, and that fund is split between us and the tax credit investor. Gary Ribe: Right. Michael Falcone: And generally speaking, the tax credit investors are getting less cash and we're getting more. So that's kind of another bite at that apple for us in terms of harvesting property value throughout that whole chain. And just to make it even that much more interesting, some of these bonds that we own aren't really bonds that we own, but they're bonds that have been sold to Merrill where we've taken back, essentially a derivative position through a total return swap. Gary Ribe: Yes. Michael Falcone: And all of this value comes from the property. And the sum of all of them never exceeds the value of the property, which is why we have to track what's going on at the property level very carefully. But, yes, it is -- Gary Ribe: That makes sense. But so these ones where you're buying the GP end, those are properties that you guys know -- you don't feel like the current GP was doing a very

9 good job, and you can kind of, by buying it and putting in some sweat equity, improve the waterfall for yourself and your in a position where, since you know the properties, you originated them, and what have you, you're kind of in a unique position to do that? Michael Falcone: I'd say correct, but for one thing. It is not always the case that the GP is not doing a good job. Gary Ribe: Got it. Michael Falcone: It may be that the GP wants to sell, and we don't think it's a good time to sell. It could be GP wants to retire. So some of these deals are 17 years old. Gary Ribe: Yes. Michael Falcone: There are people in this world who want to do other things than own affordable housing. I don't know why. But, so there are people who are looking to retire and maybe they could stick around for three more years and get a million bucks, but maybe they'd rather have $500,000 now. And I'm completely making up those numbers. But those are the kinds of opportunities we look for when we're buying GP interest. Gary Ribe: That's interesting. It seems like you did a fair amount of it relatively recently, like to consolidate some of those bonds. Michael Falcone: We probably have three or four over the -- three over the course of the last year. Gary Ribe: Yes. Michael Falcone: We had three -- the accountant who has to do all this reconciliation is sitting here. He knew exactly how many we did. There are three of them that we did last year. Gary Ribe: Get him a nice bottle of liquor for each one or something, that way at least (inaudible). So just so you can indulge me on this a little bit more than, the properties, what goes in the ground to build them 17 years ago, how well do they retain residual value versus like what went in the ground and what was originally mortgaged? I know it's all over the map. But like is there a sense of it? Is it $0.85, $0.90 on the dollar, or maybe some places there's higher and better uses so it's more.

10 But like is there -- I know each one is kind of its own thing. But like typically do they retain value versus what went in the ground, reasonably well? Michael Falcone: I think the short answer to that is yes. But let me give you a little bit of math, and I can point out that there are also places where this has gone wrong. So let's assume that the cost to build the property 17 years ago was a dollar. The odds are, $0.65 of that dollar was borrowed and 30% to 35% of that dollar was tax credit equity in some shape or another. Gary Ribe: Right. Michael Falcone: So with the vast majority of our bonds, the bonds are performing, and so we know that those deals have gone up in value relative to that $0.65 of debt that was on them. So you don't start at $1 that went in. With those, you start at $0.65. And if we got 120, 130, 140 debt service coverage, we know those deals have gone up in value. Gary Ribe: Right. Michael Falcone: The question then becomes how much of the $0.30 or $0.35 on the dollar do you recover that was the original tax credit investment, which, frankly, the original assumption was recovery on that was going to be zero, and a good percentage of the time, probably more often than not, that is still the right number. But there are certainly lots of instances where we think there is value in that tax credit equity and that we are trying to mine that value in some way, shape, or form. Now, I was just looking at a portfolio today, for example, where there were probably 20 properties. There were probably 20 properties, 4 or 5 of which have value in the sort of tax credit equity to the LP, and 15 or 16 didn't. That feels like a kind of number you see with some regularity repeating itself, something like 15% or 20% of these seem to get to the point where they've got some value and a lot of them, you know, 10% never get there. Gary Ribe: Well, that's the (inaudible) tax credit equity that it originally went in, right, is that what you're basing that on? Michael Falcone: That's the value after the debt has been paid. So what we just looked at today was a portfolio to look at sort of where does the residual value stand on a bunch of properties? And in looking at 20 properties, let's say, probably 15 or 16 of them, basically there is no value beyond the debt.

11 Gary Ribe: Right. Michael Falcone: So back to my dollar example, there were $0.65, $0.66, $0.68, and that's nothing noticeable. Another group is probably, relative to my old numbers, is probably worth $0.15 or $0.20 on the dollar, so that $0.35 of tax benefit is coming out as tax benefit, but maybe there's $0.15 or $0.20 of residual value. So that property is worth the $0.85 versus the original $1 that went in. And there's usually one or two relative to that original $1 went in, is worth $1.05, $1.10, something like that. And those are kind of the projects that it turned into [winners] for some reason or another. Gary Ribe: Okay. Well, that's very helpful color on kind of how those portfolios tend to play out. Now, the Morrison Grove option that you guys have that's for all of Morrison Grove, are they still originating funds and originating debt in their portfolio that you have the option to buy? Michael Falcone: They are not originating new deals, no. Gary Ribe: Okay. Do you know when they stopped? Michael Falcone: They stopped -- most of their funds are sort of coming to the end of their tax credit compliance period, and they probably stopped 12 to 15 years ago, something like that, 10, 12 years ago. Gary Ribe: Got it. Okay. I'm going to let somebody else ask some questions. But if nobody else does, I might have a few more. Michael Falcone: Great. Operator? Operator: (Operator Instructions) We will pause momentarily to assemble our roster. It appears we have no other questions at this time. Michael Falcone: Gary, you want to try again or are you done? Operator: Okay. We do have a question from Gary Ribe. Please go ahead. Gary Ribe: Thanks for letting me chime back in. Michael Falcone: Well, I think your questions are useful for everyone, which is -- and I have had people say that to me before, which is why I'm circling back.

12 Gary Ribe: Thank you. I appreciate that. I guess, so I guess as we get to some of these options here, and it says that you guys can accelerate the MGM purchase under certain circumstances, can you -- are you at liberty to say what those are? Michael Falcone: I'm at liberty. I don't remember. Gary, do you know under what circumstances we can accelerate the MGM option? Gary Mentesana: I'm not so -- I think by agreement we can accelerate. I don't think we have the right prior to October of But I (inaudible). Michael Falcone: Okay. We've got a couple of nods around the table. So that seems to be the case. Gary Ribe: Okay. That's fair enough. I guess the other thing I was kind of curious about as it relates to them, should we assume that you've got your portfolios and the CFV, where we can see some of the assets, we can see some of the liabilities, we can see kind of the deferred fees that you guys are owed and, I guess, some of the contingent guarantee fees and stuff like that. Does their portfolio look similar in that regard or is it accounted for completely differently because it's a -- I'm just trying to get my head around what's there versus what you guys have the right to. Michael Falcone: Yes. I mean, their portfolio, generally speaking, has smaller properties, but it has the same kind of economic characteristics that I just described, most properties probably not worth anything beyond the debt, and a smattering of properties to help create economic value. And economic value in the case of Morrison Grove would be beyond the option price. And I think we expect that it will be, but that's a little hard to know when we look out to Gary Ribe: Right. And the note that you guys have from them, that doesn't appear on the balance sheet because it didn't achieve sale, right? Gary Mentesana: Yes, that's correct. Michael Falcone: Correct. Gary Ribe: But the principal and interest that they've paid, that appears as a liability? Dave Bjarnason: Yes, that gets deferred on our balance sheet as a liability. Gary Ribe: Okay.

13 Dave Bjarnason: (Inaudible) Gary Ribe: So that and like the contingent guarantee fees and stuff get the first [swell] then, okay. Interesting. Where was I going with that? I guess we can kind of move on to the Bank of America/GE thing. Do you guys have a sense of like, if it's okay, do you guys have a sense of when you guys will finally start to recognize revenue out of that? Michael Falcone: So our original focus was to sort of sell some of the properties that we owned outright, and we have done that to the point where we've now gotten back our investment in the venture. We talked about that kind of last time. In terms of fee recognition, the reason that we sort of defer fee recognition, there are sort of two elements to the fee recognition, in layman's terms. One is, can you predict what you think the fee recognition is going to be? And the other is, can you predict the timing of it? We have economic models which tell us what we think the amount of the fees will be. Those economic models are only as good as our predictive powers. So they've got -- certainly have risk associated with them. But what we can't really predict as well is the timing on some of these. Since we're not the GP, we can't control when some of these transactions will happen. And while we can encourage people and incentivize them and use whatever characteristics we have, we can't actually know when the money's going to show up. Save you've actually asked the harder part of the question. But would I guess that we would start to see some of that in the next 12 months, I would say the answer to that would be yes. Gary Ribe: Yes. Michael Falcone: But it's a little bit hard to predict. Gary Ribe: Sounds like a back end of the year kind of thing if it happens. Michael Falcone: Well, and the other thing that happens is it's like my wife resting the steak before we eat dinner. The money rests in the partnership for a quarter before it comes up. So as the money starts to rest in the partnership, we'll have some advance warning. And that's probably when we'll be able to start to book the revenue when we can sort of see it in the partnership [downstairs]. So sometime this year, I would guess we'd start to see that.

14 Gary Mentesana: Yes. Just to add to that, I think one of the events that will prompt the realization when it becomes clear that that's going to happen, for example, that the underlying property is subject to a [further] sales (inaudible) is hard, even though the, quote, realization event hasn't happened, there's enough certainty to it ultimately transpiring, and, if it's in relatively close proximity, meaning it's not two years from now, but let's say it's inside of a year, that would certainly be certainly favorable to supporting -- taking some of the legally accrued asset management fees (inaudible) as well as how much we have legally [accrued], and recognizing that it's (inaudible) authority. As Mike says, there's some judgment there, whether it be time for the event to occur, et cetera. So that's (inaudible). Gary Ribe: Yes. And would you reverse the mark on the loan at that point or no? Because you guys have a loan in that venture that you guys have marked to zero. I was just curious if that would be the point where you -- Michael Falcone: Yes, if there's -- the -- I think it has to do with sort of where the loan sits in the waterfall of cash flows that come out of the partnership. And my recollection is the loan sits at the very bottom. So we're going to be recognizing income, I think, before we ever start to see an economic write-up on the loan. And I don't even know if, in fact, we can write it back up. Gary Mentesana: Yes. So think of the loan as like a deep discount or sort of like a zero coupon bond, because when we underwrote that, we had discounted it for recognition at a pretty high yield in the, call it the high 60s, which is sort of indicative -- and at that point, as far as recognizing income on it on day two, day three, which we haven't done, it all is a function of whether or not we can -- right now that loan is on non-accrual status. As Mike had mentioned, even where it sits in the waterfall, at this point in time its going to stay on non-accrual status and, therefore, there will be no income recognition, no movement in the book value of that asset until such time that we feel comfortable that there'll actually be (inaudible) that particular one (inaudible) cash flow. So at this point, we're of the view that it should stay on non-accrual. But obviously, that could certainly change down the road. Michael Falcone: And just to add, I think we can certainly see a whole bunch of scenarios where we would be very happy with the returns that we achieved from the overall transaction and that loan never gets taken back up to value. Gary Mentesana: Right. Michael Falcone: Because of the way the waterfall works, we could have taken out a lot of money before the loan and be quite happy with the results of the transaction and just not have gotten to the loan.

15 The loan is kind of a final sponge to sort of sop up residuals. And if we get there, we'll all be very happy. Gary Ribe: Got it. Me too, for sure. Michael Falcone: You were part of the we in that. Gary Ribe: Thank you. I appreciate that. Michael Falcone: We as shareholders would all be very happy. Gary Ribe: Yes. Did you guys up your own plans to reflect what the Company's doing in the market, as well? Michael Falcone: So Gary, Dave, and I have 10b-5 plans that have been in the market since the last time the window was open. We haven't bought in a while, because, frankly, the share -- at least Gary and I haven't bought in a while because the share price was above our cap. Just today the share price has gone back below my cap and Gary's cap, and we bought, I don't know -- I bought 750 shares today. I don't know what you got. Gary Mentesana: I think I bought 150 shares. Michael Falcone: 150 shares. So our 10b-5 plans worked today, and we bought some shares. We will, I think, all be re-upping our 10b-5 plans in the next week or 10 days before the window closes. I'm intending -- these things take a little bureaucratic time with your broker and they don't always get worked out as you expect them to. Gary Ribe: Right. Michael Falcone: But I'm hoping to get one done while this window is open. I know Gary and Dave are in the same boat. So we're off and running in that regard. Gary Ribe: Okay. I was just curious. As it relates to kind of like your guys' land properties, is there anything new going on in any of those? Michael Falcone: I think I've said in the past that we've got a contract on Savanna that's in kind of a due diligence phase. Three or four months have passed since we last talked about that, and I'd say, generally speaking, nothing bad has happened.

16 They're still moving forward, and we're hopeful that maybe by this summer that will sort of come to fruition. Russell 150 is a project in northern Virginia which we ended up stepping into as the actual developer. And we are moving ahead with road design and negotiating with some parties to buy a couple of parcels. So I'd say that's moving ahead pretty nicely. Again, it's a mix of multifamily and commercial and, frankly, I feel better about the multifamily than I do about the commercial, though, some of the commercial's like convenience store commercial. So I think that'll probably be fine. Spanish Fort, we talked about. It's not really progressing as quickly as we would like in terms of development efforts there. And we've kind refocused on what we might be able to do to kind of get some additional value there. That one is more heavily retail, which I think is part of the problem. So we're looking at the uses there to see if there's a different approach. Gary Ribe: Got it. Okay. That's cool. Last one for me, because you guys have a lot of different kind of moving parts and pieces. You guys are reasonably, I think -- when I do the math, I think you guys are probably operating profitably quarter to quarter. There's a lot of noise in it. And this quarter with the loan write down, that probably is more noise than you'd like or bad noise anyway. But are there any thoughts on when you guys might have to start to reverse some of that valuation allowance? Michael Falcone: We talked about that actually at the audit committee within the last week or two. The basic task is that -- and I think of it as -- and, Dave, you can correct me if I'm wrong here. I think of the sort of first hurdle is you have to have kind of three years of taxable income. And we're probably a couple of years into that. We might even have been three years into it, except in that earliest year, much of our income was tax exempt. By switching to the total return swaps, we actually create taxable income. So once you do that, you have to then -- as you start to approach that mark, you then have to sort of do a projection of future profitability and you then have to satisfy your accountants that that future profitability is, in fact, going to be there. And you have to create a process which can be sustained for Sarbanes-Oxley purposes. If you're Fannie Mae and Freddie Mac, and you own like a [million] dollars worth of mortgages and you know you're going to own them for 30 years, that process is not all

17 that hard at the end of the day. It's how big's my file of mortgages and what's my average interest rate and what's my overhead and what's my borrowing cost and am I going to make money? For a company like us, that process is going to be hard. I mean, we have 5- and 10-year models of the Company and we have what I would say the business level understanding of our future profitability. The struggle we will have is figuring out a Sarbanes-Oxley compliance projection of future cash flow, taxable income really, for the Company and getting that reviewed and approved by auditors. So we're actually just starting to think about that process. I think we're, I don't know, 12, 24, 36, 48 months away from the point at which we will start to see recognition in that regard. But we're at least starting to build the mechanics so that we can kind of do the analysis that is required to answer that question with rigor. Dave, is my CEO level understanding of that, CFO muster? Dave Bjarnason: Yes. I think the key is what you said, which is if you look at future projections and whether or not we think we have sufficient taxable income to support over an extended period of time the realization of those [protected] assets. At this time, we don't think we're positioned to make that case. But obviously, it's just -- and it's a dynamic analysis. We'll continue to look at it. And as Mike said, it is a high hurdle in order to substantiate a release of the allowance and coordinate the controls around the process, et cetera. So I think, again, that's something we'll continue to keep an eye on. I mean, another factor that we'll obviously be kind of keeping our eye on as well is tax reforms and where that goes and what effect, if any, that may have on the analysis, because there are some potential (inaudible) there I think could actually play into potentially releasing sooner than we'd otherwise like. But that's obviously just speculation at this point. But anyway, it's just another factor that we're keeping our eye on in addition to some of the things that Mike mentioned for [now]. Michael Falcone: I think specifically something we added as a risk factor this go-round is tax reform. Dave Bjarnason: Yes.

18 Gary Ribe: Well, it would just make it a little bit less valuable, right, if they cut the corporate rate to 20 or whatever it is, from 35, right? Michael Falcone: Well, you've got that as a negative, but you don't know how the sort of deeper rule, the more esoteric rules might change and could create value. I mean, we just don't know. Gary Ribe: Okay. That's interesting. I guess you'd mentioned in your prepared remarks earlier kind of some things that you were cautious about. Could you just -- you said macroeconomic, and that's kind of amorphous. Could you kind of pick off one or two of the specific things? I'm sure tax reform is one of them, because you've got tax credits and solar credits, too, I think help make that business more viable, right? Michael Falcone: Yes. I mean, I think the sort of big three would be interest rate policy, inflation and how that impacts the long bond rate, and taxes, whether those are -- and tax reform and how it might impact the relative value of real estate, those are all kinds of things that we're paying attention to and trying to watch. Gary Ribe: Got it. Okay. Well, that's it for me. I appreciate you guys doing the Q&A. It sounds like you guys have a lot going on. And I think kind of the one tough thing kind of jumped out at people, and you've got some good stuff going on beneath the surface, at least it seems to me. Michael Falcone: Great. Thanks, Gary. Operator, do we have other questions? Operator: Yes. Kyle Hynden with Stillwater Capital. Kyle Hynden: Sorry to jump back in the weeds. I think I noticed last quarter you disclosed sort of this upfront guarantee fees that you received. And I was just hoping you could maybe walk through how these guarantee fees are recognized sort of from an accounting standpoint and then sort of economically, if those two differ. Dave Bjarnason: I'm sorry. The guarantee fees that we -- related to our TC Fund I on the [BNA] transaction, is that what you're referring to? Kyle Hynden: These related to the guarantee funds. There's, you said, I think $28.9 million of upfront guarantee fees that were received, but maybe not recognized or eliminated in consolidation for some reason. Dave Bjarnason: Yes. Well, because those funds are consolidated for reporting purposes, the income -- well, first of all, effectively, the upfront guarantee fees, if you're

19 pre-consolidation, each of those funds we defer those fees and then they'll be amortized on a, what I'll call [a standard] reporting basis back over the life of the fund. And, effectively, those deferred fees which come through as amortization, come through as an allocation of income [to common], that's at a high level how it kind of looks. So if you kind of look at our key analysis -- I'm just sort of flipping through it. Michael Falcone: Sort of at 10,000 feet, the way I think about it is, Kyle, that was money we collected 10-plus years ago now, which we are amortizing into GAAP income over the 17 year life of the funds. And I can't remember if we did any more of that when we did the TC Fund I. But in general, the $28'ish million or so reflect money that we collected back in the late 1990s, early 2000s. And that number will sort of build down to zero by 2022, 2023, as the income is recognized. Kyle Hynden: Okay. That makes sense. Michael Falcone: That make some sense? So that doesn't really -- Kyle Hynden: Yes. Michael Falcone: So it's not really cash that's coming in the door any time soon or it's not reflective of anything like that. This is we got the money a long time ago and we're essentially getting GAAP income over the 17 your life. Kyle Hynden: Understand. Dave Bjarnason: Yes. As Mike said, those fees are initially deferred. We'll amortize them back and they effectively come through if it's an allocation to common over the life of those guarantees. It's a little bit more complicated because there's related funds that are consolidated for reporting purposes, but, as it relates to how they'll impact common equity, it is on a amortization basis, if you will. Kyle Hynden: Okay. That makes sense. And then on the TC Fund I side, could you just explain the loan performance obligation? Michael Falcone: It's a limited performance obligation. So generally speaking the way the transaction works is -- it'd be useful to think of three parties, even though it's just us and Bank of America legally. Think of kind of Merrill Lynch, Bank of America, and MMA. MMA and Bank of America entered into the investment and structured it in a way so that Bank of America gets the vast majority of the tax credits.

20 Merrill Lynch, the old Merrill Lynch, the sort of securities part of Bank of America -- well, back up. MMA has guaranteed to Bank of America a tax credit return. And we are able to do that because all these properties are up and running and we could add up all the future tax credits and see how many tax credits were going to come to Bank of America. Because of that guarantee, they accepted a much lower IRR than they would accept on an unguaranteed fund. But our credit isn't worth all that much to Bank of America, for obvious reasons. So we got Merrill Lynch to wrap our credit. So Merrill Lynch gets a fee, which is basically 20% of whatever we earn. And then Bank of America is our partner, and, as our partner, they basically get the tax credit, tax benefits of the transaction. That's highly simplified, but I think kind of explains what's going on there. So I think we've discovered maybe 100,000, couple hundred thousand in tax credits that we thought were going to show up didn't, but it's not a material number at this point. And we've got other tax credit, other tax benefits that are showing up. So at this point, we think that exposure is zero or pretty close to zero. Kyle Hynden: Okay. Thanks. That make sense. Just one more for me. It looks like you guys launched a REIT in South Africa in December. Could you just talk to that a little bit? Michael Falcone: Sure. What happened is, we took rental -- the first fund we did in South Africa is sort of wrapping up. And we took the rental properties out of that fund and listed it on what's called the AFEX, which would be the Johannesburg version of a kind of NASDAQ or AIM exchange. And we externally manage it, so that the REIT is actually owned by the Fund I investors. They will eventually get their liquidity by selling their REIT shares. And we're the external manager of that REIT. And depending on market conditions, we would like to [blow] that REIT. It was really a way to allow us to achieve [and access] at scale for our investors, while at the same time positioning us to have access to sort of local South African capital, as well as our international capital. Our sense is that sort of the international capital is going to be priced out of the market at some point in the future by sort of local REIT market in the multifamily side, and we wanted to be part of that multifamily REIT world, and now are the manager of a REIT called Transcend, which owns a hand -- I think it's like 13 properties that were originally in the Fund I. Kyle Hynden: Great. Thanks guys.

21 Operator: (Operator Instructions) And it appears we have no more questions at this time. So this concludes our question-and-answer session for today. I would now like to turn the conference back over to Michael Falcone for any closing remarks. Michael Falcone: Thanks, Operator. Again I'd like to thank everyone. I'm hopeful that we won't do two conference calls a day any time soon and appreciate your patience with us, as we wanted to make sure that we [remain] as transparent as we could be and apologize for taking up your time twice today, but hopefully you found it useful. Everybody have a good rest of the evening and a good weekend. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.