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Edited Transcript of MMAC earnings conference call or presentation 15-Mar-19 12:30pm GMT

Q4 2018 MMA Capital Holdings Inc Earnings Call

BALTIMORE Mar 22, 2019 (Thomson StreetEvents) -- Edited Transcript of MMA Capital Holdings Inc earnings conference call or presentation Friday, March 15, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David C. Bjarnason

MMA Capital Holdings, Inc. - Executive VP & CFO

* Gary A. Mentesana

MMA Capital Holdings, Inc. - President & COO

* Michael L. Falcone

MMA Capital Holdings, Inc. - CEO & Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings, Inc. 2018 Fourth Quarter and Full Year Financial Results and Business Update Conference Call. My name is Nicole, and I will be your coordinator for today. (Operator Instructions)

Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital Holdings, which are based on current expectations.

These comments are subject to significant risks and uncertainties, which include 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.

Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of the information contained in the forward-looking statements. Please note, this event is being recorded.

I would now like to turn the call over to the Mr. Michael Falcone, CEO of MMA Capital Holdings, Inc. Please go ahead.

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Michael L. Falcone, MMA Capital Holdings, Inc. - CEO & Director [2]

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Thank you, Nicole. Good morning, everyone. This is Mike Falcone. With me on the call today are Gary Mentesana, President and Chief Operating Officer; and Dave Bjarnason, CFO.

Unfortunately, I've had a little bit of a travel snag this morning. And while I will be participating in the call, I haven't made it in front of the computer yet this morning. So I'm going to ask that Dave and Gary cover the bulk of the prepared remarks, and then we will all be available to speak to any questions folks might have. So Gary?

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Gary A. Mentesana, MMA Capital Holdings, Inc. - President & COO [3]

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Thanks, Mike. And I should also mention that Megan Sophocles, our Senior Vice President, is also on the call. And as Mike said, Dave and I will have prepared remarks, and we'll all then be able to take questions.

The purpose of our call today is to review MMA Capital Holdings' fourth quarter and full year 2018 financial results and to provide an overall business update.

Our annual report was filed with the SEC yesterday, and an updated investor presentation is now available on our website.

With respect to the financial results, which Dave will review in detail later, the company ended the year with $212.9 million of common shareholders' equity, which represents an increase of $19.4 million and $75.3 million for the 3 months and year ended December 31, 2018, respectively.

Diluted common shareholders' equity, or book value per share, came in at $36.20, an increase of $3.24 per share or 9.8% for the quarter, an $11.72 or approximately 47.9% for the year.

Increases in common shareholders' equity were primarily attributable to net income from the sale of certain business lines and assets to an affiliate of the Hunt Companies, Inc. and net fair value gains on our bond investments.

In addition to the Hunt transaction, which also simplified our financial reporting, the company completed a significant disposition of bond-related investments in December 2018 and January 2019 that facilitated 4 key elements of the company's business plan.

First, we exited a portion of our bond-related investments in an orderly manner and at fair value premiums that would otherwise decrease with passage of time.

Second, we made capital available to fund energy -- the Energy Capital portfolio, which we believe will generate higher returns. Third, we deleveraged the overall balance sheet, potentially creating an opportunity for better utilization of the corporate balance sheet. And fourth, we further simplified our balance sheet in an investment thesis.

When combined with other corporate initiatives, such as our conversion to a corporation, we are making steady progress towards our corporate goals.

Turning next to the company's portfolios. The company now has 2 portfolios, one of which is Energy Capital, and the second of which is other assets and liabilities, which now includes the company's bond-related investments.

In the Energy Capital portfolio, the company typically invests alongside an institutional capital partner in 3 Solar Ventures that primarily finance the development and construction of renewable energy projects.

In the fourth quarter and for the full year, the company -- the carrying value of our equity investments in the Solar Ventures increased by $10.8 million and $29.3 million, respectively, to $126.3 million at December 31. The annual increase in the carrying value of investments was driven by $55.9 million of capital contributions, $33.5 million of distributions received and $6.9 million of equity and income earned during 2018.

At December 31, project-based debt financing or loans in the Solar Ventures had an aggregate unpaid principal balance, or UPB, of $250.8 million, a weighted average remaining maturity of 7 months and a weighted average coupon of 9.2%.

These amounts at September 30 were $178.7 million, 5 months and the same weighted average coupon of 9.2%. The loans outstanding at year-end generated origination fees that ranged from 1% to 2% on committed capital and featured coupons that ranged from 7.0% to 13.8% on the UPB.

On their inception in 2015 through December 31, 2018, over $1.3 billion of loans have been originated for the Solar Ventures that will enable the completion of over 2.7 gigawatts of renewable energy. Approximately $930 million of these loans have been repaid without any loss of invested principal, generating a weighted average IRR of 15.8%, which was on average higher than originally underwritten.

The strength of the pipeline continues to represent an opportunity for the company to make additional investments in the Solar Ventures at attractive risk-adjusted returns, which is why the company raised additional capital for this portfolio through the disposition of a portion of our bond-related investments in December and January that I'll further discuss in a moment.

We believe that the efforts to increase investments in the Solar Ventures, combined with an orderly exit from other investments with lower returns, will increase the company's return on invested capital over time.

Turning to the other assets and liabilities portfolio. The UPB and fair value of our bond-related investments at December 31 was $110 million and $116.6 million, respectively.

The multifamily properties underlying our bond investments continued to perform well as there were no new defaults in the fourth quarter, while the weighted average debt service coverage and collection rate were 1.2x and 6.2% at December 31, 2018.

At year-end, the associated total return swap, or TRS, financing had a notional balance of $50 million and a pay rate that was SIFMA plus a spread of 1.35%. We hedged $30 million of this TRS interest rate exposure with a paid fixed interest rate swap that matures in 2023 and is tied to SIFMA.

As alluded to earlier, the company entered into a series of transactions in the fourth quarter that involved the termination of 15 TRS agreements that had a total notional amount of $102.6 million; the sale of 1 multifamily tax-exempt bond and 1 subordinate certificate interest in a multifamily tax-exempt bond, with an aggregate UPB of $10.8 million; the termination of a paid fixed interest rate swap agreement that had a notional amount of $65 million; and the termination of a basis interest rate swap agreement that had a total notional amount of $10.5 million.

Additionally, during the first week of January, the company entered into additional agreements to sell 1 multifamily tax-exempt bond and 1 subordinate certificate interest in a multifamily tax-exempt bond with an aggregate UPB and fair value at $8.5 million and $8.6 million, respectively.

These transactions made more capital available to fund renewable energy lending investments and modified premiums on our bond-related investments that are fully amortized.

As discussed on prior calls, sourcing new bond-related investments that meet our target investment returns is difficult in a low rate environment. Consequently, our bond-related investments are essentially in runoff, and we're reviewing individual investments to determine whether it remains suitable for investment purposes. As a result, we may continue to recycle some or all of the equity-invested and bond-related investments into additional Energy Capital investments to increase the company's return on invested capital.

With respect to the rest of the other assets and liabilities portfolio, we do not expect assets in this portfolio to contribute consistently to quarterly income, with the exception of the Hunt note, which ended the year with a UPB of $67 million and a pay rate of 5%. We continue to pursue opportunity to monetize these assets and realize what we believe to be their market value.

With that, I'll turn the call over to Dave, who will discuss the financial results in greater detail. Dave?

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David C. Bjarnason, MMA Capital Holdings, Inc. - Executive VP & CFO [4]

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Thanks, Gary, and good morning, everyone. As I provide an overview of our results, I will refer to various tables in Item 7 of our Form 10-K.

In the fourth quarter, as Gary mentioned, we recognized a net increase in common shareholders' equity of $19.4 million, while common shareholders' equity increased on a full year basis by $75.3 million to $212.9 million.

In this regard, book value per share increased to $36.20 per share, which represented a $3.24 per share increase in the fourth quarter and an $11.72 per share increase on a full year basis.

Increases in common shareholders' equity and book value per share were driven by $57.5 million of comprehensive income that we recognized in 2018, including $18 million in the fourth quarter.

In this regard, comprehensive income that we reported in 2018, which exceeded what we reported in 2017 by $34.8 million, included $61 million in net income to $3.5 million in other comprehensive loss. I'll discuss in more detail later the key drivers of comprehensive income that we reported in 2018.

In addition to reported comprehensive income, we recognized $17.8 million of other increases to common shareholders' equity in 2018, including $1.4 million in the fourth quarter.

Table 10 of our filing provides more information about this net increase. But at a high level, it was primarily driven by the issuance of shares to both the Hunt Companies, who acquired 250,000 shares in 2018; and to officers of the company, who exercised stock options.

The cumulative effect to common shareholders' equity of adopting new revenue recognition standards on January 1, 2018, was an increase of $9.2 million, which was also a key driver.

The impact of these drivers, however, were partially offset by the impact of share repurchases. We purchased approximately 219,000 shares through our share buyback program at an average price of $27.08 per share, which caused a $5.9 million reduction in common shareholders' equity.

In taking a closer look at drivers of comprehensive income, as I previously mentioned, we reported $61 million of net income allocable to common shareholders in 2018, including $31.3 million in the fourth quarter.

As you can see on Table 11 of our filing, we reported $41.6 million more of net income allocable to common shareholders in 2018 compared to 2017. There were 2 key drivers for this year-over-year increase. First, net gains increased by $24.5 million, primarily as a result of TRS terminations and bond sales discussed by Gary earlier, which resulted in approximately $21.9 million of unrealized holding gains being reclassified out of AOCI and into net income.

Secondly, income from discontinued operations increased $16.5 million, primarily as a result of $33.4 million of net gains recognized on the sale of certain businesses and assets to Hunt during 2018.

While these 2 items drove the largest changes in net income, there were several other drivers worth noting. Net interest income increased $2.2 million on a year-over-year basis, in large part due to the company's loan receivables from Hunt. The UPB increased by $10 million in the fourth quarter to $67 million in connection with the purchase by Hunt of Low-Income Housing Tax Credit assets from Morrison Grove Management, or MGM, as noted in our October press release.

The effect of this increase was partially offset by the increase in our cost of funding associated with bond-related debt, which stemmed from the reclassification of notes payable and other debt to bond-related debt upon the recognition of previously eliminated bond investments during the fourth quarter of 2018.

Separately, across both portfolios, equity and income from our unconsolidated funds and ventures was $7.7 million in 2018, $2 million of which was recognized in the fourth quarter.

[Amounts reported as buyouts] in 2018 decreased $6.3 million compared to 2017, nearly evenly across our equity investments in Solar Ventures, U.S. real estate partnerships and the South Africa Workforce Housing Fund.

Equity and income from Solar Ventures declined by $2.3 million in 2018, primarily as a result of a $1.1 million reduction in the amount of management fees earned by the company related to the Solar Ventures that were classified as equity and income from such entities, and was driven by the sale of our Energy Capital business to Hunt earlier in the year.

Other contributing factors would be a relative increase in the preferred return earned by the company's former investment partner in one of our Solar Ventures during the 5 months ended May 31, 2018, and amortization expense recognized in 2018 associated with the purchase premium paid by the company to buy out our former investment partner's interest.

Equity and income from U.S. real estate partnerships declined by $2 million in 2018, primarily as a result of a nonrecurring $3.8 million gain that was recognized in the third quarter of 2017 in connection with the sale of the underlying real estate by a partnership in which the company held a 33% interest, while equity and income from the South Africa Workforce Housing Fund declined $2 million compared to 2017 as a result of net unrealized losses on fund investments recognized in 2018.

Lastly, the company recognized $17.2 million of operating expenses in 2018, $2 million of which was recognized in the fourth quarter. Operating expenses decreased $4 million on a year-over-year basis, in large part due to a $10 million decrease in salaries and benefits expense, expense in the company's conversion to an externally managed business model, all the transaction with Hunt.

The impact of this reduction was partially offset by the incurrence of $6.9 million of external management fees and reimbursable expenses payable to our external manager in 2018.

While net interest income -- or net income, I beg your pardon, increased $41.6 million in 2018, the company recognized other comprehensive loss of $3.5 million in 2018, which compares unfavorably to a $3.3 million of other comprehensive income that we reported in 2017.

Table 9 of our filing disaggregates the components of other comprehensive income and loss recognized in 2017 and 2018. The 2018 loss that we reported was primarily driven by the reclassification of the $21.9 million of holding gains out of AOCI and into earnings as a result of the disposition of bond-related investments during the third and fourth quarters.

The impact of these reclassifications was partially offset by $15 million of bond-related gains that were recognized in 2018, $9.4 million of which was related to bond investments that were no longer eliminated for reporting purposes beginning in the first quarter of 2018.

The company's reversal of $3.4 million of cumulative translation adjustments, which was driven by the sale of our international asset management, the investment management business, in the first quarter of 2018 also softened the impact on our AOCI and related bond sales.

Lastly, with respect to the company's liquidity and capital resources, the company had $33.9 million of cash, cash equivalents and restricted cash at December 31, 2018, $28.2 million of which was unrestricted.

Table 21 of our filing breaks down the $66.3 million net decrease in the company's cash, cash equivalents and restricted cash during 2018. The impacts of deconsolidation of CFVs, the conveyance of cash as part of the Hunt transaction and other investing activities, including investments that we made in the Solar Ventures, accounted for nearly all of this entire decrease, while $9.1 million of cash flows provided by operating activities were largely offset by $8.5 million of cash flows used in financing activities.

With that, I will turn the call back over to Gary.

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Gary A. Mentesana, MMA Capital Holdings, Inc. - President & COO [5]

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Thanks, Dave. Before we get to the Q&A, I'll provide a brief update on the conclusion of the 2018 buyback plan and our approach to the 2019 business plan.

With respect to the buyback plan, the company concluded a successful execution of the 2018 buyback plan. As Dave noted, the company repurchased approximately 219,000 shares at a significant discount to book value. The board has not taken any action at this time to adopt the 2019 buyback plan.

From a business operations perspective, 2018 represented a significant transformation of the balance sheet: first, with the realization event in the tax credit and institutional businesses that simplified our financial statements; and second, with the recycling of equity out of runoff business lines into our growing Energy Capital portfolio, which also significantly reduced our leverage.

We continue to analyze the optimal risk-adjusted investment mix in the current business environment. And to that end, we plan to continue to cycle more equity into the Energy Capital portfolio as we begin the year.

As always, we continue to look at new initiatives in an effort to improve existing returns, and if we can identify additional investment opportunities, which we think will produce attractive risk-adjusted returns and generate positive social or environmental impacts, we retain the flexibility to invest accordingly.

In general, we continue to see 2 primary paths to increase shareholder value: first, growing the value of our business through increasing investment in higher-earning investment opportunities; and second, narrowing the gap between book value per share and trading price.

With time, we anticipate net income will be the key driver of long-term value for investors. In fact, that growth in net income will also inform our capital return policies as it impacts cash available for shareholders.

As previously mentioned, we have an actionable path to putting capital to work and growing our top and bottom line numbers, primarily through additional investment in the Energy Capital business.

With respect to the second path, we have historically used our buyback program as one lever and pursued other initiatives, exemplified by our conversion to a corporation in January to generate increased interest in the company's shares.

Although we still have additional opportunities in front of us on both paths, we've continued to see progress on both, given our investment growth and the recent increase in our share price.

Before we take questions, I wanted to mention that the company has set the date of the Annual Meeting of Shareholders for May 21. We anticipate the proxy will be sent around the second week of April, consistent with prior years.

In closing, we are excited about the future, remain committed to our shareholders, and we thank you for your support. We will now open the call to questions. Nicole?

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Questions and Answers

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Operator [1]

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(Operator Instructions) As we have no questions at this time, I would like to turn the conference back over to Mr. Falcone for any closing remarks.

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Michael L. Falcone, MMA Capital Holdings, Inc. - CEO & Director [2]

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Great. Thank you very much, Nicole. Again, I'd like to thank our shareholders for their patience. We're certainly excited about the year that we just finished, and we're equally excited about the year that is ahead of us.

I'd also like to thank the team that has been working pretty tirelessly together for many years here to continue to drive value for shareholders. We're excited together about our future and look forward to continuing to work with all of you as we move forward.

So thanks, again, to everyone, and have a great weekend. Bye.

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Operator [3]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.