MuniMae seeks profit in solving social problems

Company moves to finance housing in poorer nations, get into solar energy

June 15, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

Millions live in South African shanty towns with no running water or electricity, a vestige of apartheid that has frustrated government officials, housing advocates and aid workers.

But the solution to this social ill might come from an unlikely place: Baltimore's Inner Harbor.

There, in the sleek offices of real estate financier MuniMae, deal-makers are pooling millions of dollars from investors to finance the building of 400-square-foot apartments, each with a sink, toilet and small shower, for lower-income families in Johannesburg.

MuniMae isn't doing this for the sake of altruism. Executives think there's a profit to be made from affordable housing in poorer countries, and they are looking to expand their current business in U.S. real estate. The company also is branching into financing alternative energy projects, where executives see more profits - and a better world.

"It's clear to us that there are these assets, whether it's a solar panel or a home, that the world really needs and which somebody's got to figure out how to finance," Chief Executive Officer Michael L. Falcone said. "There's just not enough charity in the world to solve some of these issues."

MuniMae is embarking on new ventures in "financing sustainability" - itself a nascent area of investment - even as it strains to cope with the complexity of its established businesses. The company uncovered a string of accounting problems in recent months and hasn't filed public financial statements in almost a year.

The accounting issues triggered an inquiry by the Securities and Exchange Commission and prompted warnings from the New York Stock Exchange that it could take the company's shares off the exchange. The situation could jeopardize the company's relationship with creditors and hinder its ability to raise money in public markets.

But for the company to retrench until the accounting is corrected would be a "disservice" to shareholders, said Timothy J. Lordan, vice president of investor relations. "You don't just shut down when you're fixing your accounting," he said.

MuniMae, shorthand for Municipal Mortgage & Equity LLC, has grown into a $1 billion company by acting as the middleman between investors and real estate developers, principally in affordable housing but also in commercial real estate. The company arranges financing and makes money from a range of fees, including for coordinating the transaction.

In the four years through 2005, the last year for which MuniMae reported financial results, profit tripled to $87 million on revenue that increased to $223 million.

MuniMae is a spinoff from the Shelter Group, a Baltimore-based real estate development company begun by Mark K. Joseph, a former Baltimore City housing official who is still MuniMae's chairman. Its predecessor was formed in the mid-1980s when U.S. policy was shifting from public housing projects - often troubled by poor construction and crime - to public-private partnerships. Tax breaks were extended, and states began issuing federal tax credits for the construction of affordable rental housing. MuniMae is now one of the largest syndicators of those tax credits.

Common thread

In that way, MuniMae's old and new ventures have something in common. Not only would the company be the financier, but the projects would have government backing. The overseas housing developments are expected to receive government subsidies, and renewable energy projects benefit from tax credits.

Gary Ran, head of Telemus Investment Management, a MuniMae shareholder, acknowledged that there are risks to being a pioneer but thinks that time will prove the company right. Telemus increased its holdings recently and owns more than 60,000 shares.

"We'll see three years from now; it may be that those businesses weren't a good idea," Ran said. "They could be wrong, or they might be really right."

MuniMae shares are down almost 20 percent this year, and to some extent, the company has suffered from confusion over its obscure business model. In one day in February, for instance, the stock fell 9 percent.

Investors apparently mistook MuniMae for a subprime mortgage lender on a day when shares of those lenders tumbled. Subprime lenders, who make loans to people with poor credit, have been troubled by defaults in recent months.

MuniMae executives scrambled to get a statement out, clarifying that the company is not a subprime lender and does not extend mortgages on single-family homes. The stock bounced back in after-market trading that day but continued its downward drift over the next few months.

Seed money

To finance affordable housing overseas, an affiliate of MuniMae has garnered $100 million in seed money from the Overseas Private Investment Corp., the federal agency that offers American companies loans and insurance for projects in developing countries. MuniMae plans to help raise another $200 million from institutional investors such as pension funds.

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