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Armando Perez: Asset Management of Debt and Equity Investments
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Armando Perez: Asset Management of Debt and Equity Investments

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  • You have heard a good deal about how equity investors approach asset management. MMA has a very large tax credit portfolio, but we also provide debt financing,. Our portfolio includes a diverse debt portfolio, so I was asked to give you a glimpse into the debt side, to share with you how we manage our debt portfolio.
  • MMA acquires LP interests in tax credit properties on behalf of corporate investors and makes debt investments for capital providers and its own account. We offer several kinds of tax credit investment funds -- Our debt products include – We have a “One Stop Shop” approach - our debt and equity teams are combined to facilitate a streamlined application, underwriting and closing process, and they often generate deals that have both tax credits and one or more of our debt products In terms of volume, on the tax credit side we expect to raise over $1.3 billion of equity in 2006, a little more than last year. – about 200 transactions per year. On the debt side we expect to do $725 million in bonds and construction loans – that’s about 35 bond transactions and 25 construction loans. On the Agency side we expect to close about 50 to 60 loans with Fannie, Freddie and HUD. About 70% of these debt transactions are combined with tax credit equity – so we add about 35 to 40 debt-only deals (without MMA tax credits) to the portfolio.
  • Asset Management oversees the entire portfolio -- the equity investments that our acquisitions group generate and the loans that our debt originators make. We currently have nearly 2,000 properties with tax credits and over 600 loans in our portfolio. And based on our current production volume, we add 230 to 240 new deals to the portfolio annually.
  • In some ways, debt and equity investments are very similar: -- just as the equity investor shells out a hefty sum for the tax credits, the lender steps in with debt capital to finance the property -- and they both invest in low income housing -- the equity investor and the debt provider are looking for a return on their investments -- usually, the debt capital is also tied into the deal for a long term (15 to 18 years), just like the tax credit equity -- poor property performance puts the debt and the equity investments at risk -- both debt and equity rely on the expertise and the financial strength of the project’s sponsor
  • But debt and equity investments are structured very differently: -- Equity investments are structured as an ownership interest in a pass through entity to ensure that tax credits and losses flow to the equity provider -- A lot of effort goes into structuring the equity investment to prevent tax issues that could result in a reduction or reallocation of tax credits -- The equity investor’s return is a steady stream of tax credits and losses – not cash. -- Debt investors do not have an ownership stake – they enter into a contractual agreement with the owner of the property (the partnership) -- These agreements seek assurances that the property will make cash flow available to service the debt and that the value of the asset is preserved -- The lender’s return is entirely dependent on cash flow and the repayment of the outstanding loan balance depends on property value
  • Asset Management oversees the entire portfolio -- the equity investments that our acquisitions group generate and the loans that our debt originators make. However, we are not organized around debt and equity investments. The same Asset Management staff that handles tax credit properties also handles our loans. Each property is assigned to one asset manager, regardless of whether it has MMA debt or how many MMA loans it has. Because the main focus is the real estate and the performance of the loan (or LP interest) as an investment, Explain the structure AM structure, which is organized around property lifecycle and geography Just as on the tax credit side, the properties on the debt portfolio are at various stages in their lifecycle – some are in construction or in the middle of their initial lease-up, others are in the initial operating phase, trying to convert to permanent financing, and many others are in their stabilized operational phase.
  • However, we are not organized around debt and equity investments. The same Asset Management staff that handles tax credit properties also handles our loans. Each property is assigned to one asset manager, regardless of whether it has MMA debt or how many MMA loans it has. Because the main focus is the real estate and the performance of the loan (or LP interest) as an investment, Explain the structure AM structure, which is organized around property lifecycle and geography Just as on the tax credit side, the properties on the debt portfolio are at various stages in their lifecycle – some are in construction or in the middle of their initial lease-up, others are in the initial operating phase, trying to convert to permanent financing, and many others are in their stabilized operational phase.
  • Routine asset management activities to monitor property performance and assess potential risk are very similar for both debt and equity. These activities are the foundation for risk management – they provide the information needed to spot problems early, evaluate potential risk, and to develop strategies to deal with the issues. However, there is complexity at the property lee, regulatory level, investor/capital provider and business levels – AM knowledge and decision making is supported by portfolio managers and strategies are
  • You have heard a good deal about how equity investors approach asset management. MMA has a very large tax credit portfolio, but we also provide debt financing,. Our portfolio includes a diverse debt portfolio, so I was asked to give you a glimpse into the debt side, to share with you how we manage our debt portfolio.

Transcript

  • 1. Asset Management of Debt and Equity Investments Presented by: Armando P é rez Principal, Director of Asset Management
  • 2. Headlines
    • More similarities than differences between debt and equity investments and how they are managed
    • The objectives and incentives of debt providers are determined by the structure of their investments
    • Understanding debt drivers is key to effective asset management and issue resolution – whether you are the asset manager or the developer.
  • 3. MMA Provides Equity and Debt …
    • LIHTC Corporate Tax Credit Funds
      • Multi-investor, Private, Guaranteed
    • Debt Products
      • Construction loans
      • Permanent financing
      • Tax exempt bonds
    • One-Stop Shop for Affordable Debt & Equity
      • Combined debt and equity teams
      • Unified application, underwriting & closing process
  • 4. … So We Manage Debt & Equity Products
    • MMA Equity Portfolio – 1,950 properties
      • Tax Credits
        • Low Income Housing
        • Historic Rehabilitation
    • MMA Debt Portfolio – 625 properties
      • Construction Loans
      • Bonds
      • Permanent Loans
        • Fannie Mae, Freddie Mac, HUD
  • 5. Debt and Equity Have Similarities …
    • Capital investments
    • In affordable multifamily property
    • Specified yield requirement
    • Long term
    • Impacted by asset performance
    • Dependent on developer strength
  • 6. … but Different Structures
    • LIHTC Investment
    • Ownership Interest
    • Pass-through entity
      • LP or LLC
      • Limited control & limited liability
    • Tax-advantaged return
      • Tax credits and losses
    • Debt Capital
    • Mortgage loan
    • Secured
      • First lien position
    • Cash return
      • Debt service
  • 7. … So Focus and Aims Are Not The Same
    • Equity
    • Yield
      • Credits and losses
    • Loss of ownership (recapture)
    • Long term viability
    • Property performance
    • Debt
    • Payment of debt service
    • Property performance
    • Liens
      • T & I escrows
    • Default losses
    • Value of collateral
  • 8. MMA Asset Management …
    • Oversees debt and equity investments under a single organizational structure
      • Teams are organized around property lifecycle and geography, not debt or equity products
      • Debt expertise is provided through specialization and processes
  • 9. Asset Management Structure Stabilized Portfolio Team Development Management Team Admin. and Technical Support Operations Team Analyst Pool Compliance Team Tax Team Northeast Central Southeast West Asset Management Team Capital Transactions Team
    • Workouts
    • Dispositions
    • Refinancings
    • Risk Management
    • Investment Performance
  • 10. MMA Asset Management …
      • Assigns one AM per property, regardless debt or equity product
        • Property monitoring activities are similar for debt and equity
          • Physical, management, financial reviews
        • Focus is on asset performance, which impacts both debt and equity
  • 11. MMA Asset Management …
      • Manages the portfolio from an investment perspective
        • AM’s understand debt and equity and can translate how a given issue affects each of these different investments
        • Debt portfolio managers support this investment perspective
  • 12. MMA’s Investment Perspective … Property Life-Cycle Phases
    • Development
    • Due diligence
    • Construction &
    • lease-up
    • Yield delivery
    • Loan conversion
    • Initial tax credit
    • compliance
    • Initial Operations
    • Capital and operating
    • escrow releases
    • Final tax credits (8609’s)
    • Permanent loan sizing & closing
    • Stabilization (DSC)
    • On-going monitoring
      • Stabilized Phase
      • Financial & budget review
      • Tax return review
      • Physical inspection
      • Management evaluation
      • Compliance monitoring
      • Partnership & loan agreement administration
    First 18 to 24 mos. Next 6 to 12 mos. Remaining holding period Risk Management Tax Credit and Debt Portfolio Managers
  • 13. … to Maximize Performance & Mitigate Risk RISK MANAGEMENT
    • Problem Deals
    • Deal Strategies
    • Issue Resolution
    PORTFOLIO MANAGER
    • Products
    • Capital
    • Relationships
    • Business Focus
      • Risk
      • Profitability
    ASSET MANAGER
    • Monitoring
    • Analysis
    • Performance
    • Tracking
    • GP/Borrower
    • Relationship
    Leverage expertise Investment perspective Effective strategies Investment performance Profitability
  • 14. Final Words – A Debt Perspective
    • Lenders make capital investments, but they are different than LP equity interests in a property
    • As capital providers, lenders have clear objectives and motivations
    • When there is a problem, understanding debt drivers is key to effective issue resolution – whether you are the asset manager or the developer
  • 15. Asset Management of Debt and Equity Investments Presented by: Armando P é rez Principal, Director of Asset Management