MuniMae grows its way into the $2 billion club; Baltimore company nearly triples assets under management; Financial industry


Thanks to a year of solid growth, and an October acquisition that bulked up its business, Baltimore-based Municipal Mortgage & Equity LLC has been elevated into the $2 billion club, nearly tripling its assets under management in the course of a year.

Municipal Mortgage & Equity, better known as MuniMae, last week reported its final financial results for 1999, a year in which income rose 51 percent, profit 4 percent and dividends paid out 4 percent. For MuniMae, however, the story of 1999 wasnt just a tale of the numbers -- it was about growth into new markets and new lines of business.

Thanks to the acquisition, the year that passed was one in which the company transformed itself from a multimarket firm with a niche focus into a national player thats more of a one-stop shop for financing in the multifamily housing arena.

It was certainly a year to be proud of, said Mark K. Joseph, MuniMaes chairman and chief executive officer.

Before last years buyout of the Clearwater, Fla.-based Midland Cos., MuniMae focused almost solely on the market for tax-free real estate bonds. It originated, serviced and managed the tax-free bonds used to finance apartment projects -- with the apartments serving to back some of the bonds -- and could also participate financially when those apartments increased in value.

As a company, it was a financial hybrid, combining features of real estate investment trusts (REITs), limited partnerships and tax-free bond funds. The corporate structure is important: It means that more than 85 percent of the dividends paid out to stockholders are exempt from federal income taxes. Because of that tax-free feature, with a recent dividend yield of 8.7 percent, an investor in the 39.6 percent tax bracket would have to find a taxable bond yielding 13.4 percent to enjoy the same yield as the dividend payout on MuniMaes stock. Such hefty yields typically accompany only those investments that carry a high level of default risk -- not something most investors want to shoulder, even for a higher yield.

From a product-line perspective, with the Midland acquisition, MuniMae now brings more to the table. First, it became a bigger company, growing from about $700 million in assets under management to right around $2 billion, Joseph said. It also grew geographically, since Midland had offices in San Francisco, Dallas and Detroit, as well as Clearwater.

But its the ability to offer a broader line of financing and investment products that really has Joseph excited. For one thing, Midland is one of roughly two-dozen companies nationwide licensed to make loans on behalf of Fannie Mae, the finance giant that keeps the mortgage markets moving through its purchases and sales of mortgage debt. MuniMae had been in the market for a Fannie Mae license, which would give the company more ready access to capital, only to find that there were none to be had. But then it came across Midland and was able to make a deal, closing the purchase in late October.

Midland has a very good reputation as one of the smaller operations in this marketplace, said Rod Petrik, a real estate securities analyst with Legg Mason Inc. in Baltimore.

With Midland, MuniMae can play the equity side of the financing game in the multifamily housing market.

For instance, the combined enterprise is creating investment funds that will take ownership stakes in apartment projects, keeping a piece of the action for itself, but selling most of the space to pension funds that want to include real estate in their gigantic portfolios, Joseph said.

The newly merged company -- with its expertise in tax-free bonds, the access to loans made possible by the Fannie Mae license and the ability to raise equity money from pension funds -- is essentially now able to offer apartment-project developers the entire menu of financing tools.

Thats a very attractive proposition with developers around the country, Joseph said.

Even so, MuniMae has to execute on its plan to succeed. Although the merger has gone very well, there are still the problems that surface -- such as tying together different technology systems -- whenever two companies are being melded into one.

Another factor to watch is the rise in interest rates, which can throttle any building-related industry, since an increase in the price of money -- higher mortgage interest rates, for example -- usually leads to a decrease in construction-related activity.

Despite four interest-rate increases by the Federal Reserve since late June, which has pushed mortgage rates higher, Joseph said, the construction market for apartment housing remains very strong.

In fact, he said, rates in the tax-free market would probably have to eclipse 10 percent to completely throttle construction of new apartment buildings -- a scenario he doesnt believe will unfold.

Since investors associate MuniMae with other real estate stocks, or bond portfolios, the rise in interest rates has hurt the firms stock price, sending it into the $18 range from nearly $21 in early September.

At this price, however, Legg Masons Petrik thinks the stock is worth a look: Its book value -- the value of its assets on the books -- of roughly $19.50 is higher than its current stock price. And that book value doesnt factor in the value of such businesses as mortgage originations, for which it receives fees. The upshot: MuniMaes stock is undervalued, Petrik said.

We think its very important to keep track of its book value, he said.

In the face of those interest-rate fears, MuniMaes core tax-free bond related business keeps going well.

Cash available for distribution as dividends has continued to increase, meaning that the company has been able to keep raising its dividend: The increase in the fourth quarter was the 12th straight quarter MuniMae was able to boost its dividend. And if the business performs as well as planned during 2000, Joseph said, assets under management could reach $2.5 billion to $2.7 billion.

If you put all of what we do this year together, we would probably end the year with $2.7 billion in assets, Joseph said. Well certainly be over $2.5 billion. And maybe more.

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