A low-tax secret MuniMae: Baltimore financial wizards have created one of the city's best-kept investment secrets. Its shares are up 40 percent since 1996.

March 01, 1998|By William Patalon III | William Patalon III,SUN STAFF

It's one of Baltimore's better-kept secrets: A locally based company with a high-yielding stock whose dividends are largely free from taxes, and whose shares have generated solid returns, thanks to shrewd, real estate-related investments.

The company is Municipal Mortgage & Equity LLC, nicknamed MuniMae. So far, the MuniMae formula seems to be working. Its shares are up about 40 percent since the stock was issued in August 1996. Its stated dividend yield is about 7 percent -- and roughly 85 percent of those dividends are free from taxes. What's more, the company is pushing for growth.

"We think what we have is a unique investment," said Mark K. Joseph, 59, MuniMae's chairman and chief executive officer. "We've combined our experience with municipal financing with real estate to produce growth -- and tax-exempt dividends. It's the intersection of public finance and the capital markets."

If you stood at that intersection expecting Joseph to be a smooth-talking wheeler-dealer, you'd be disappointed. Indeed, the gray-haired executive seems more like a college professor than capitalist: cerebral, friendly, and fond of discussing literature or social issues.

A graduate of Harvard Law School who jokes that he only "pretended" to practice law, Joseph spent about half his career in public service, including one stint as Baltimore City's deputy housing commissioner and another as president of its school board.

What he really wanted was to be a real estate developer.

Out of that desire sprouted the Shelter Group, a private company that's split into three parts: One that develops property, another that owns and manages property, and a foundation whose charge is creating housing for low-income families and the homeless. And out of the Shelter Group grew MuniMae, which debuted in 1986 as the SCA Tax-Exempt Fund, a closed-end partnership that held real estate bonds.

As a closed-end fund whose shares weren't listed, the SCA investment wasn't very liquid -- it wasn't easy for investors to buy and sell. In August 1996, the venture was transformed into a limited liability company (which has certain tax advantages) with its shares listed on the American Stock Exchange as Municipal Mortgage & Equity.

In January, MuniMae made its second foray into the capital markets. Legg Mason Wood Walker, Merrill Lynch & Co. and Wheat First Butcher Singer helped raise about $65 million

through a secondary stock offering. The money gave MuniMae a big war chest to start financing its growth plans.

While MuniMae's two-part strategy is outlined by its simple motto of "tax-exempt dividends and equity growth through real estate," the financial structure it employs to achieve that goal is anything but simple.

Insiders and outsiders alike say it's this complexity, combined with an outstanding management team, that makes MuniMae successful -- and makes it hard to clone.

"As with any public company, one of the first things you look for is a capable management team," said Keith Getter, a principal in Legg Mason's investment banking arm. "This management team has an expertise in both real estate and municipal finance, meaning they can go out and tap into markets in a way that few -- if any -- other companies can do. We think the opportunity for this company to grow over the next five to 10 years is pretty strong."

MuniMae buys, originates and services tax-free bonds that are secured by apartment housing. That makes the company a bit like a real estate investment trust, or "REIT" -- essentially a fund that, instead of stocks, creates a portfolio of real estate such as shopping centers, office buildings, apartments and senior-citizen housing.

But unlike a REIT, MuniMae is an indirect real estate investor, buying the municipal bonds that finance the property instead of the property itself. And since the bonds are tax-exempt securities, any income the company reaps from them is tax-free, too. For investors, that means any income that's "passed through" to them as dividends is free from personal income taxes.

When the secondary offering was completed in January, the stock had a stated dividend yield of 7.2 percent. Because of the tax-free feature, however, investors in the highest tax bracket would have to get an 11.1 percent return on taxable investments to end up with the same amount of money in their pocket.

And these days, with interest-rate yields on safe government bonds near record lows and stock prices at record highs (meaning dividend yields are at historic lows), investors can only get such hefty investment yields through junk bonds or other investments that carry numbing levels of risk.

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