U.S. Markets close in 50 mins

Edited Transcript of MMAC earnings conference call or presentation 13-May-19 12:30pm GMT

Q1 2019 MMA Capital Holdings Inc Earnings Call

BALTIMORE Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of MMA Capital Holdings Inc earnings conference call or presentation Monday, May 13, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings, Inc. 2019 First Quarter Financial Results and Business Update Conference Call. My name and Rocco, and I will be your coordinator today. (Operator Instructions) Please note today's event is being recorded.

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 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 information contained in the forward-looking statements.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Rocco. Good morning, everyone, and welcome. With me on the call today are Dave Bjarnason, our Chief Financial Officer; Gary Mentesana, our Chief Operating Officer; and Senior Vice President, Megan Sophocles. For our call this morning, Dave, Gary and I will deliver our prepared remarks, after which we will be available to take questions.

The purpose of our call today is to review MMA Capital Holdings' first quarter financial results and to provide an overall business update. Our quarterly report was filed with the SEC this past Friday and an updated investor presentation is now available on our website.

With respect to operations, we continue to see strong returns from our investments in the Solar Ventures during the first quarter as our equity in income from such ventures increased 29% on a quarter-over-quarter basis driven by strong origination volume in the first quarter. As Gary will further discuss, demand for capital to fund renewable energy infrastructure projects and what we believe are attractive risk-adjusted returns remains very strong.

Also during the first quarter, we continued to dispose of bond-related investments, a process which began in December 2018. As discussed on our March call with investors, dispositions of bond-related investments facilitated 4 key elements of the company's 2019 business plan in that we exited a portion of our bond-related investments in an orderly manner and at fair value premiums that would have otherwise decreased with the passage of time. We made capital available to fund the Energy Capital portfolio, which we believe will generate higher returns. We deleveraged the overall balance sheet, potentially creating an opportunity for better utilization of our corporate balance sheet. And finally, we've further simplified our balance sheet and investment thesis. The overall impacts of the comprehensive changes in our business structure are just now being reflected in the comparative financial statements and in our Energy Capital investments resulting in the noted significant increase in year-over-year equity in income from the Solar Ventures.

With respect to the financial results, which Dave will review in detail later, the company ended the quarter with $212.5 million of common shareholders' equity, which represents a decrease of $400,000 for the 3 months ended March 31, 2019. Diluted common shareholders' equity per share came in at $36.11, a decrease of $0.09 per share or 0.2% for the quarter. Decrease in common shareholders' equity was primarily attributable to net fair value losses on an interest rate hedge position. Due to our remaining interest rate hedges being mark-to-market in the company's financial statements and because they are primarily now hedging interest rate risk associated with company's subordinated debt which is not mark-to-market, we expect such hedging instruments to provide a continued source of earnings volatility in the future or where we believe this strategy remains effective in managing the company's exposure to rising interest rates.

Further, while compensation-related expense reimbursements are subject to an annual cap, the cap is not applied ratably throughout the year, which results in higher expense in earlier reporting periods and lower expense in later reporting periods for each fiscal year (inaudible).

Now for a further review of our portfolios, let me turn the call over to Gary. Gary?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Mike, and good morning, everyone. The company's assets and liabilities continue to be organized into 2 portfolios: Energy Capital and other assets and liabilities. In the Energy Capital portfolio, the company primarily invests alongside an institutional capital partner in 3 Solar Ventures that mainly finance the development and construction of renewable energy projects.

In the first quarter, the carrying value of our equity investments in the Solar Ventures increased by $4.1 million to $130.4 million at March 31. This quarterly increase was driven by $3.7 million of equity in income from the Solar Ventures, which was approximately $800,000 higher than what was earned in the fourth quarter and a net capital contribution of $400,000 to the ventures. At March 31, the loans held in the Solar Ventures, which are substantially project-based debt financing and had an aggregate unpaid principal balance, or UPB, of $232.1 million, had a weighted average remaining maturity of 9 months and a weighted average coupon of 10.7% compared to $250.8 million, 7 months and 9.2% at December 31. Although there was a decrease in outstanding loan UPB during the quarter, the Solar Ventures' unfunded loan commitments to borrowers increased from $89.1 million at December 31 to $156.1 million at March 31. The loans outstanding as of March 31, 2019, generated origination fees that ranged from 1% to 3% on committed capital and featured coupons that ranged from 7.0% to 18.0% on the outstanding UPB.

From their inception in 2015 through March 31, 2019, over $1.5 billion of loans have been originated for the Solar Ventures that will enable the completion of over 4.2 gigawatts of renewable energy. Approximately $1.1 billion of these loans have been repaid without any loss of invested principal, generating a weighted average IRR of 16.1%, which was on average higher than originally underwritten. We believe that the pipeline, which remains robust, continues to represent an opportunity for the company to make additional investments in the Solar Ventures at attractive risk-adjusted returns. Accordingly, the company continues to seek additional capital for this portfolio.

Turning to the other assets and liabilities portfolio. UPB and fair value of our bond-related investments at March 31 was $78.3 million and $83.6 million, respectively, down from $110 million of UPB and $116.6 million of fair value at year-end. These declines were driven by dispositions of bond-related investments that I'll touch on further in a moment. The performance of the multifamily properties to secure our bond investments was largely unchanged, as evidenced by the fact that the weighted average debt service coverage ratio and collection rate remained constant during the quarter at 1.2x and 6.2%, respectively. At March 31, the associated total return swap, or TRS, financing of our bond investments had a notional balance of $33.4 million, down from $50 million at year-end, and a pay rate that was SIFMA plus a spread of 1.35%. We have hedged $30 million of this TRS interest rate exposure with a pay fixed interest rate swap that matures in 2023 and is tied to SIFMA.

As discussed on prior calls, sourcing new bond-related investments that meet our investment target 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 they remain suitable for investment purposes. As a result, we may continue to recycle some or all of the equity invested in bond-related investments into Energy Capital investments to increase the company's return on invested capital as we did in April when a $13 million defaulted bond was redeemed.

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

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Gary. Good morning, everyone. As I provide an overview of our results, I will refer to various tables in item 2 of our Form 10-Q.

In the first quarter, as Mike mentioned, we recognized a decrease in common shareholders' equity of $400,000. In this regard, book value per share decreased to $36.11 per share, which represented a $0.09 per share decrease on a quarter-over-quarter basis. Decreases in common shareholders' equity and book value per share were primarily driven by a $200,000 comprehensive loss in the first quarter.

Comprehensive income, which included $2.9 million of net income and $3.1 million of other comprehensive loss, decreased $18.2 million compared to the fourth quarter. While I'll touch on performance drivers in more detail, comprehensive income softened in the first quarter primarily as a result of the material nonrecurring gain that the company recognized in the fourth quarter on the acquisition of Morrison Grove Management by a subsidiary of the Hunt Companies. Quarterly decline in the amount of net fair value gains recognized by the company on its bond-related investments was also a factor.

In addition to a $200,000 comprehensive loss, the company recognized $200,000 of other decreases to common shareholders' equity in the first quarter. Majority of such changes were driven by a transition adjustment that was made to the company's retained earnings in the first quarter to recognize the cumulative effect of adoption of a new accounting standard that accelerated the amortization into earnings of premium cost-based adjustments associated with our bond-related investments. This transition adjustment coupled with the absence of any consequential share issuances caused other changes in common shareholders' equity to decline by $1.6 million on a quarter-over-quarter basis.

In taking a closer look at the drivers of the comprehensive loss recognized by the company, as I previously mentioned, we reported $2.9 million of net income in the first quarter, which represented a $28.4 million decrease compared to net income that the company reported in the fourth quarter.

There are 2 key drivers for this quarter-over-quarter decrease. First, the amount of bond-related investments that were liquidated in the first quarter decreased compared to the fourth quarter. Consequently, the amount of net gains from bond investments that were reclassified out of accumulated other comprehensive income, or AOCI, and in the earnings in the first quarter decreased by $13.2 million compared to the fourth quarter. Secondly, income from discontinued operations decreased $13.4 million just primarily attributable to the recognition of $13 million of deferred revenue in the fourth quarter upon Hunt's settlement of its acquisition of Morrison Grove Management.

While these 2 items drove the largest changes in net income, there are several other drivers worth noting. Company reported $4 million in equity in income from unconsolidated funds and ventures in the first quarter, which represents a $2 million increase compared to the amounts reported in the fourth quarter. $2.7 million at the first quarter announced come from the company's equity in income from Solar Ventures, which represents an $800,000 increase compared to the amounts reported in the fourth quarter. This increase is primarily attributable to the company's equity investment in Solar Development Lending, or SDL. The company's share of SDL's net income increased $1.4 million in the first quarter as a result of an increase in commitment fees from loan originations and an increase in interest income on funded loans due to the quarter-over-quarter increase in the UPB of SDL's holdings. This quarterly increase was partially offset by a $600,000 decrease in the company's share of net income from Solar Construction Lending, or SCL. Capital distributions from SCL in the first quarter were redeployed into SDL, the funding with new commitments at such venture.

The balance of the quarterly increase in equity in income from investees was attributable to the company's equity investment in South Africa Workforce Housing Fund as net fair value of the fund's holdings improved on a quarter-over-quarter basis.

The company also recognized $1.7 million of net interest income in the first quarter, which represents a $600,000 decrease on a quarter-over-quarter basis that was primarily attributable to dispositions of bond-related investments in the fourth and first quarters.

Further, the company recognized $2.1 million of net gains from bond investments and derivatives. However, $3.6 million of this amount was equity-neutral and related to bond investment-related gains that were reclassified out of AOCI and into earnings. In this regard, as Mike referenced earlier, company recognized $1.4 million of net fair value losses associated with its interest rate hedge positions.

Lastly, the company recognized $2.7 million of operating expenses in the first quarter, which represents an $800,000 increase compared to amounts recognized in the fourth quarter. This net change was primarily driven by compensation-related expense reimbursements that are payable by the company to its external manager and for which the company did not recognize expense in the fourth quarter as the 2018 annual cap on such items was exceeded earlier that year.

While net income decreased in the first quarter, other comprehensive loss decreased in the first quarter by $10.1 million compared to the fourth quarter. The majority of this decrease was driven by a quarter-over-quarter decrease in the volume of bond investment dispositions. Consequently, the amount of net gains that were reclassified out of AOCI and into earnings in the first quarter decreased by $13.2 million compared to the fourth quarter. The impact of these reclassifications was partially offset by a $3.1 million decrease in the amount of net fair value gains that were recognized on bond-related investments in the first quarter.

Lastly, with respect to the company's liquidity and capital resource, the company had $34.4 million of cash, cash equivalents and restricted cash at the end of the first quarter, $28.8 million of which was unrestricted. Table 15 of our filing breaks down the $600,000 net increase in the company's cash, cash equivalents and restricted cash during the first quarter. Such increase was driven by $2.4 million of cash provided by investing activities, which was partially offset by approximately $1.8 million of cash that was used by the company in the operating and financing activities.

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

--------------------------------------------------------------------------------

Michael L. Falcone, MMA Capital Holdings, Inc. - CEO & Director [5]

--------------------------------------------------------------------------------

Great. Thanks, Gary. Thanks, Dave. Before we get to the Q&A, I'll provide a brief update on our approach to the 2019 business plan and the progress to date.

From a business operations perspective, 2018 represented a significant transformation in the balance sheet and focus on directing our investments into the Energy Capital portfolio and away from the other assets on our balance sheet, combined with significant deleveraging of our TRS borrowing. The first quarter of 2019 continued these themes with additional dispositions of bond-related investments and related deleveraging in order to continue to cycle more equity into the Energy Capital portfolio. We expect additional dispositions and cycling of capital into Energy Capital in the coming quarters. As always, we continue to look at new initiatives in an effort to improve existing returns. And if we can identify additional investment opportunities that we think will produce attractive risk-adjusted returns and generate positive social and environmental impact, we retain the flexibility to invest accordingly.

As discussed in prior calls, we anticipate growing the value of our business through increasing investment in higher-earning investment opportunities at the expense of declining returns from legacy portfolios that are winding down. With the planned additional investment in the Energy Capital business, we hope to begin the process of growing our top and bottom line numbers in the coming quarters. In turn, we hope those improving results combined with strategic capital management will translate into continued growth in our share price.

Before we take questions, I wanted to remind everyone that the date of the Annual Meeting of Shareholders is May 21, 2019, and all shareholders as of the record date are encouraged to vote.

In closing, we are excited about the future. We remain committed to our shareholders. We thank you for your ongoing support.

We'll now open the call to questions. Rocco?

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Falcone for any closing remarks.

--------------------------------------------------------------------------------

Michael L. Falcone, MMA Capital Holdings, Inc. - CEO & Director [7]

--------------------------------------------------------------------------------

Thank you, Rocco. Again, I'd like to thank all the shareholders. We are in a bit of a transition for the first half of this year as we continue to rotate our balance sheet into the Energy Capital business, but we are quite excited about the long-term prospects of that business, as we have discussed previously, and look forward to reporting the ongoing progress in that regard as we move forward. So thank you all very much, and have a great week.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Thank you, sir. This concludes today's conference call and thank all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.