MMA Capital Holdings, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings, Inc. 2020 First Quarter Financial Results and Business Update Conference Call. My name is Rocco, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of this conference call. Please also note this conference 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 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. I would now like to turn the call over to Mr. Michael Falcone, CEO of MMA Capital Holdings.

[Michael Falcone:]

Thank you, Rocco. Good afternoon, everyone, and welcome. With me on the call today are Dave Bjarnason, our Chief Financial Officer; Gary Mentesana, our President and Chief Operating Officer; and Megan Sophocles, Senior Vice President and Treasurer. The purpose of our call today is to review MMA Capital Holdings 2020 first quarter financial results and to provide an overall business update. Our first quarter report was filed with the SEC yesterday, and an updated investor presentation is available on our website. For our call today, I will begin my prepared remarks with a recap of the results for the quarter, including the impacts we saw in Q1 from COVID-19. Then I'll turn the call over to Gary and Dave for a more detailed review of our operations and financial performance. Finally, before we wrap up the prepared remarks and open the call for questions. I'll provide an update of the company's operating and capital plans for the near-term as we continue to navigate a period of great uncertainty for the U.S. and global economies. With respect to the financial results, we reported that the company ended the quarter with $277.7 million of common shareholders' equity or book value – or adjusted book value, which represents book value, excluding the carrying value of the company's deferred tax assets was $218.3 million. Book value decreased $3.5 million or $0.61 per share in the first quarter, while adjusted book value saw $5.1 million or $0.90 per share decrease for the same period. As Dave will further discuss, such decreases were primarily driven by $7.5 million of net fair value losses that were recognized in conjunction with bond investments, derivatives and certain loans originated in held by our Solar Ventures. As of quarter end, the net fair value losses were themselves, driven primarily by the impact of COVID-19 on interest rates, rather than credit quality, specifically an increase in market yields associated with many of our investments and a decrease in benchmark interest rates to which interest rate derivative positions are indexed. Although the results for the quarter are disappointing, all loans at the Solar Ventures were assessed to be adequately secured as of March 31, and we currently expect to be repaid in full. In this regard, we are cautiously optimistic about the status of the loan portfolio and are hopeful that market conditions may present attractive opportunities in coming months. We're particularly concerned about the impact of COVID-19 on our remaining real estate-related investments, continue to monitor and assess those investments. This said, the long-term impact of COVID-19 on our operational and financial performance ultimately depends on future developments, including the duration, spread and intensity of COVID-19, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, we're not able to estimate the long-term effects of these factors on our business. But at this time, we cannot rule out having a material impact on our business, results of operation, financial condition and cash flows. Now for a further review of our investments and funding, let me turn the call over to Gary. Gary?

[Gary Mentesana:]

Thanks, Mike, and good afternoon, everyone. The company's renewable energy investments, which represented 68% of the company's investments at quarter end are generally done through Solar Ventures, where the company invests alongside an institutional capital partner in loans that mainly finance the development and construction of renewable energy projects in the United States. During the quarter, the carrying value of the company's renewable energy investments increased by $56.2 million to $345.9 million at March 31, which represents 165% increase from the $130.4 million invested at this time a year ago. This increase was primarily due to the deployment of recycled equity, including proceeds from the repayment of the hunt note. And net draws on our revolving credit facility. As you will see in table 3 of our filing, during the quarter, the company recognized $4.6 million of income related to renewable energy investments. On an annualized trailing 12-month basis, we have realized an unlevered net return on these investments of 10.4% for the period ended March 31, 2020, versus 9.3% for the period ended March 31 last year. Equity and income from Solar Ventures was $800,000 or 22% higher compared to the first quarter last year. It was $1.9 million lower compared to the fourth quarter. The decrease compared to the fourth quarter was primarily driven by a $4 million decline in the fair value of our share of the Solar Ventures loan portfolio, which was marked at 98.8% of Unpaid Principal Balance or UPB at March 31, down from par at year-end. While the fair value losses largely related to loans that had longer remaining terms than average, and lack takeout financing commitments as of March 31. Given performance expectations and the short tenure of loans, we currently expect these unrealized losses to reverse over time upon the full repayment of such loans. Nonetheless, the measurement of fair value of the Solar loan – Solar Ventures loan portfolio and future reporting periods is expected to remain volatile until market conditions moderate. At March 31, 2020, loans funded by the Solar Ventures had an aggregate UPB of $745.8 million, fair value of $736.8 million. Weighted average remaining maturity of 8 months and weighted average coupon of 9.7% compared to $654.4 million of UPB and fair value, 10 months and 10.8% at December 31. As discussed on prior calls, we typically target loans to generate origination fees ranging from 1% to 3% on committed capital. And coupons on funded loan balances ranging from 7% to 14%. Through May 11, the construction and development of renewable energy projects that were financed through loans made by the Solar Ventures were generally on schedule, as the development and construction of such projects qualified as critical infrastructure for essential services. However, state and local responses to COVID-19 have resulted in some minor delays. Particularly in final utility commissioning for certain projects in Oregon, which we believe will be resolved next month. Given the prevailing macroeconomic conditions, uncertainty in the financial markets and our dependence on the functioning renewable energy finance market, we have fully drawn our $120 million revolving credit facility and have slowed our origination efforts as part of our investment and liquidity management program in the wake of COVID-19. While we continue to believe that there are opportunities to invest in renewable energy debt, with attractive risk-adjusted returns that also meet our environmental and social investment goals, we will continue to closely monitor loan performance and in addition to expected sources of repayment. We'll continue to explore ways to optimize the company's capitalization, including additional debt capital, where appropriate. Turning to other assets and liabilities. The UPB and fair value of our bond-related investments at March 31 was $30.9 million and $29.6 million, respectively. Increases in market yield in the first quarter drove a net $1.8 million decrease in the fair value of these investments. Although, both of these investments were in an unrealized gain position at March 31. Concerning the company's real estate-related investments, none of such investments were assessed to be other than temporarily impaired at March 31, 2020. However, with respect to the company's 80% ownership interest in the Spanish Fort joint venture, that owns a mixed-use town center development, which includes hotel and retail tenants and undeveloped land parcels and whose incremental tax revenues secure our infrastructure bond, the downturn in the economy from COVID-19 compare the underlying real estate value, consequently, we anticipate that we will continue to recognize equity and losses from our new investment in the Spanish Fort venture and that such losses may increase, possibly significantly. While the severity and duration of the expected losses cannot currently be quantified due to the current market uncertainty, we believe that it is reasonably possible that within the next 12 months, the loss that is material to the company's financial statements could be recognized, due to the residual economic effects of the measures taken to combat COVID-19. However, the exact timing and amount of loss recognition, if any, is based upon future circumstances, and therefore, cannot be predicted at this time. Separately, the book value of the company's debt obligations was $223.7 million at March 31, 2020, and increased $21.8 million in the first quarter, primarily, as a result of net advances from the company's revolving credit facility. As of May 11, 2020, the company was in compliance with all of its debt covenants. As stated in prior quarters, we do not expect the other assets and liabilities to contribute consistently to quarterly income, and we will continue to pursue opportunities to recycle capital from this part of the company's balance sheet at attractive levels. With that, I'll turn the call over to Dave, who will discuss our quarterly financial results in greater detail. Dave?

[Dave Bjarnason:]

Thanks, Gary, and good afternoon, everyone. As I provide an overview of our results, I will refer to various tables in Item 2 of our Form 10-Q. Book value decreased $3.5 million or $0.61 per share in the first quarter, while adjusted book value decreased $5.1 million or $0.90 per share during the same period. In comparison, book value increased $61.5 million or $11.14 per share in the fourth quarter, while adjusted book value increased by $3.8 million or $1.20 per share during the same period. The first quarter decrease in book value was primarily driven by a $3.5 million comprehensive loss, which included $3.1 million of net loss and $400,000 of other comprehensive loss. As Mike indicated, the first quarter decreased the company's book value was primarily driven by the recognition of $7.5 million of net fair value losses. The largest component of which was attributable to, as Gary discussed earlier, a $4 million decline in the fair value of the company's share of the loan portfolio of the Solar Ventures. Therefore, despite strong origination volumes and operating income at the Solar Ventures in the first quarter, company's share of the Solar Ventures net fair value losses significantly softened the amount of equity and income from the Solar Ventures that was recognized in the first quarter. Increases in market yields in the first quarter also drove a net $1.8 million decrease in the fair value of the company's bond investments. Although, as Gary mentioned, none of these investments were impaired as of March 31st. And changes in reference interest and foreign exchange rates in the first quarter resulted in a recognition of $1.7 million of net fair value losses related to the company's derivative instruments. Compared to the first quarter, however, company recognized $500,000 of net fair value gains in the fourth quarter. In this regard, net fair value adjustments can be volatile and significantly impact reported changes in adjusted book value. This said, while net fair value losses caused the largest impact on first quarter performance, the company also recognized $600,000 of equity and losses from our Spanish Fort venture. As Gary mentioned, we anticipate the company will continue to recognize equity and losses from this venture that such losses may increase possibly significantly. Additionally, the company recognized $5 million in operating expenses in the first quarter, which increased $2.9 million compared to the fourth quarter, primarily due to $1.1 million of foreign exchange losses stemming from the re-measurement of certain non-dollar-denominated assets and liabilities, although a majority of these losses were offset by a net fair value gain recognized in the first quarter related to the company's foreign currency hedge position. Increases in compensation-related expense reimbursements payable to the company's external manager, also contributed to the quarter-over-quarter increase in operating expenses. However, the company did not recognize any expenses related to such reimbursements in the fourth quarter, given that the annual cap on such items was met in the third quarter. For this reason, expense recognized by the company related to such reimbursements is typically higher in the first quarter compared to the fourth quarter. Otherwise, the company's overall cost of funding slightly increased in the first quarter given net draws from the revolving credit facility that closed in September. From a liquidity and capital resources perspective, the company had $30.2 million of cash, cash equivalents, and restricted cash at the end of the first quarter, $7 million of which was restricted. As reported in Table 8 of our filing, the total amount of the company's cash, cash equivalents, and restricted cash increased $17.4 million in the first quarter, which was primarily driven by $22.8 million of net cash flows provided by financing activities that generally related to net advances from the company's revolving credit facility. Additionally, the company generated $3.4 million of net cash flows from operating activities in the first quarter. Lastly, as discussed earlier, the long-term impacts of COVID-19 on the company's results of operations and financial condition are uncertain. Gary mentioned earlier, risks that are specific to the company's equity investment in the Spanish Fort venture. But I should note that as further discussed in the filing, we believe that related to the company's deferred tax assets, it is also reasonably possible that within the next 12 months, the company could recognize a reduction to the carrying value of such assets that is material to its financial statements. However, the exact timing and amount of plus recognition, if any, depends upon the future circumstances, and therefore, could not be predicted at this time. To this end, specific risks posed by COVID-19 are disclosed in Item 1a of Part 2 of the first quarter filing. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. Before we get to the Q&A, let me address the company's ongoing response to COVID-19 and the near-term capital allocation plans of the company. With respect to corporate operations and the performance of the external manager since the beginning of the office closures and state government responses to COVID-19, we can report that there were no disruptions to services provided by the external manager and other third parties in connection with the company's business operations. Employees of the external manager continue to work-from-home and while we certainly miss the day-to-day in person interaction with our colleagues, our remote work capabilities have been validated so far. And we have managed through our first quarter end reporting cycle successfully. In addition, the external manager continued to evaluate the portfolio and maintain relationships with our borrowers from their homes, carefully monitoring the performance of our existing loans and preparing for future investment opportunities. As an organization, the external manager has not set a formal target date to reopen any of our offices, however, any decisions related to the opening and operations within any office will be consistent with the local timing and operational guidelines set by the state, in which the office is located. With respect to our capital allocation plans for both the near and long-term, there remains a balance of near-term conservatism and long-term resolve. In the near-term, we are focused on maintaining adequate liquidity to fulfill our current obligations, including any funding requirements of the Solar Ventures, as well as remaining in position to take advantage of unique market opportunities that may result from the current disruptions. The end of Q1, this included drawing on our revolving line of credit for use in our investing activities and for the Solar Ventures to be very deliberate in the pace of underwriting by allowing loans with near-term maturities to repay of building a cash balance to help manage outstanding commitments without significant additional capital calls on the company. While there was a marginal drag on our Q1 investment returns, it provides a strong base from, which to operate during the balance of the year. We anticipate the pace of underwriting will pick up as we move into the summer as the near-term liquidity focus transitions back to a focus on capital deployment. Part of the focus on near-term liquidity, the Board has deferred any decision per 2020 capital return program until we have better visibility on the post COVID-19 recovery of the economy. This doesn't preclude implementation of a program later in the year, but this program will be based on capital planning and cash flows from operations and not on the availability of debt capital, which will be maintained solely for investment purposes. COVID-19 and the resulting economic conditions have us taking a cautious approach at this time, an approach that we may maintain for an extended period of time, while we carefully monitor any new and unforeseen risk to our investment model. That said, our belief in the long-term economic thesis favoring the transition to infrastructure-related investments, including renewable energy over fossil fuels remain very much intact. In addition, our belief in the intermediate term economic opportunities in renewable energy infrastructure investments, as well as our ability to capitalize on those opportunities remains unchanged. And as a company, our commitment to investments with positive environmental and social impact is not impacted by the current investment environment. If there are opportunities for high-return investments or to complete the recycling of capital from our nonrenewable assets, the infrastructure investments, including renewable energy, we are poised to take advantage of those opportunities. In closing, even in this uncertain moment in time, we remain excited about the future, committed to our shareholders. We thank you for your continued support. We'll now turn -- open the call to questions. Rocco?

[Operator:]

[Operator Instructions] And today's first question comes from Greg Venit [ph], a private investor. Please go ahead.

[Unidentified Analyst:]

Good afternoon. Was there any mention of the South African investment, I think that you're supposed to get back something like $7 million, sometime, the first part of this year.

[Michael Falcone:]

We did not mention it in the call. We have gotten some of that money back, maybe Megan or Dave, the exact number, but we're expecting additional returns from that investment as the year goes on. As in the U.S., things have slowed down a bit in South Africa as a result of the COVID-19.

[Unidentified Analyst:]

Okay. And under other assets, the other assets went from $17 million up to $26 million. Other assets are the Russell 150, the Spanish Ford in the South African investment, is that right? Or is there anything else in there?

[Dave Bjarnason:]

Greg, yes, that captures most of it. There are some other items, including -- if you look at the fair values that we report in connection with derivative assets, those also will make their way into that category. But I think that is what you mentioned, cover the lion's share.

[Unidentified Analyst:]

So in the quarter, other assets grew almost $9 million. And then that you committed capital into other assets, which, what did have to do with the Russell 150 that you put $9 million in there?

[Dave Bjarnason:]

Yes, that's right. There was about $5.9 million of land improvement costs that were capitalized in the first quarter in connection with Russell and those costs, due to their nature, are recognized as increase to other assets. So that was the primary driver for the change that you mentioned.

[Unidentified Analyst:]

What accounted for the other $3 million?

[Dave Bjarnason:]

In the first quarter, other assets were up about $6 million. So if you look at page 13 -- is that what you're asking?

[Unidentified Analyst:]

Yes. I thought at the end of December, maybe I read it wrong. I thought at the end of December it was $17,234,000.

[Dave Bjarnason:]

If you -- well, I don't think it's correct. If you look at table four in our filing, which is on page 13, at the end of December, other assets was $12.9 million, almost $13 million. And so, at the end of the first quarter, it was close to $19 million. So approximately a $6 million increase in the quarter.

[Unidentified Analyst:]

I'm looking at that. Look at the appendix, the table of your PowerPoint presentation.

[Michael Falcone:]

You're looking at the investor presentation?

[Unidentified Analyst:]

Yes, the investor presentation has a list of your assets under other assets, its $26 million. In December, it was $17,234,000.

[Dave Bjarnason:]

I'm just trying to scroll the presentation. Hold on a second.

[Unidentified Analyst:]

Yes, that's fine. So, I guess, on the Russell, are you done putting money into this road construction bridge? Is that the end of it, until you sell the property? Or is there more to come?

[Gary Mentesana:]

There is -- go ahead, Mike.

[Michael Falcone:]

Go ahead, Gary.

[Gary Mentesana:]

No, we do anticipate continuing to invest money into Russell 150, largely relative to our share of costs relating to the road and utility work.

[Unidentified Analyst:]

So, how much more -- I mean I think bridge and all was be done, what, later this year. How much more commitment of capital to try to hope that we get it out if you sell it?

[Gary Mentesana:]

I don't -- I think it's a couple of million dollars more, in the near term. But it's really a function of when we're going to be able to ultimately get out.

[Unidentified Analyst:]

Right. Except, it's not like you're just sitting on property and paying real estate tax on it. You're actually -- you're investing more to hope to get more out.

[Gary Mentesana:]

Correct.

[Michael Falcone:]

Yes. We're investing -- and I apologize, I've got a thunderstorm going on, on the background here. But we are investing money in Russell against contracts to sell parcels. So we clearly haven't sold the whole thing yet, but we have started a process to sell parcels there. And in order to do the sell of parcels, we have to have access into the various parcels. So that's what's driving the investment into Russell at this time.

[Unidentified Analyst:]

So you had a point where you have like a letter of intent or a contract that --

[Michael Falcone:]

We've got option contracts. So, we have deposits and we are moving through option periods for the most part.

[Unidentified Analyst:]

So, your expectation about recycling that capital, is that sometime later this year?

[Michael Falcone:]

I suspect it could be, I would say, our original expectation was later this year. But I would expect that, that's something that's likely to be delayed into next year, given the sort of overall economic conditions.

[Unidentified Analyst:]

Okay. Spanish Fort, what's -- in the call and I guess, in the 10-Q, you mentioned possibly a significant write-down for write-off. That's for the equity portion of your 80% ownership. What is your carrying value Spanish Fort?

[Michael Falcone:]

So, we own 80% this is -- we own 80% of Spanish Fort, roughly speaking. Again, I'm going to give you big picture numbers here. They won't be precise. But roughly speaking, there's $30 million in real estate value, $6 million of debt, $4 million attributable to the general partner, and just short of $20 million attributable to us. And we are looking at -- the way sort of equity -- GAAP equity works is you have to conclude that any loss in value is other than temporary before you make a write-down. We didn't -- neither we nor the general partner, remembering here, we're a limited partner, not the general partner we concluded that was not the case at quarter end. But the longer the sort of COVID-19 economic crisis goes on, I would say the more likely it is that we will conclude that as the year goes on. What that impairment will be? I don't think I know. But you can look around it at various real estate investments that are publicly traded and see that they've been discounted significantly and you can apply some of those discounts to the $30 million value and get some order of magnitude of what is out there in the world as a possibility. Again, the way this really gets measured, it will be looking at discounted cash flows and changes in values and appraisals and everything else. But we think that there is -- if this crisis continues, we think that there is reason to believe that we will be sometime in coming quarters, looking at a write-down there.

[Unidentified Analyst:]

So, $20 million is the investment that we have in Spanish Fort, that's our capital?

[Michael Falcone:]

That's the carrying value, yes.

[Dave Bjarnason:]

So Greg, just along those lines, so we have – at March 31, an equity investment at a book value of about $19.2 million. And then separate from that, the debt investment that we have had a fair value of about $23.5 million.

[Unidentified Analyst:]

Through the bonds?

[Dave Bjarnason:]

Yes.

[Michael Falcone:]

Through the bonds, which are secured by sales tax revenues and land taxes not by the property themselves.

[Unidentified Analyst:]

So if you're carrying – if it's $19.2 million and you have other investments and $26 million or whatever that number is, and that includes Russell and South Africa. The numbers don't add up.

[Dave Bjarnason:]

Yes. So Greg, maybe a couple of points of clarification. So if you look – if you're comparing the investor presentation in the appendix that you're referring to, all other assets, that number – or the way we are classifying certain assets in that table is a little bit different than you'll see in the face of our balance sheet or specifically on Table 4 in the filing. Number two, if you look at footnote number five in the filing, which is on Page 39, you can actually see a breakdown of the specific components of other assets. So specifically, within that, the lion's share of it relates to the Russell investment. So that's about – you can see on Page 39 of the filing, about – at a book value of about $14.3 million. You also have other items like debt issuance costs that get deferred on our balance sheet. So there was, like I said, about $19 million of other assets there. So just to clarify what's in there, now if you look back, not to over like I used this, but in the investor presentation in addition to the items that you'll see or that I just mentioned that are detailed in the footnote on Page 39. We have also, for presentation purposes, in the investor presentation included restricted cash. And so given the decline in fair value of our interest rate hedge positions in the first quarter, we had to post additional collateral in connection with those positions. So part of the incremental increase, as you see it in the investor presentation in all other assets, was in part tied to the additional collateral calls that we had to answer. So just wanted to clarify a little bit earlier what I had mentioned with respect to what was in other assets. Hopefully, that's helpful.

[Unidentified Analyst:]

So in that industrial presentation, where would Spanish Fort?

[Dave Bjarnason:]

The Spanish Fort? Yes. So yes, you'll find that in the third line of the investor presentation on the selected balance sheet data investments…

[Unidentified Analyst:]

Investment in the partnership?

[Dave Bjarnason:]

Yes. That's correct.

[Unidentified Analyst:]

So that's not just your investment within the Solar Venture bonds, there's other stuff in there?

[Dave Bjarnason:]

Yes, so investments in partnerships will have some of the things you mentioned. So our equity position in Spanish Fort is in there. Our equity in the South Africa fund is in there. And then, of course, the lion's share of that is attributable to our equity investments in the Solar Ventures.

[Unidentified Analyst:]

So the maximum that we could lose on Spanish Fort is $20 million. If it gets written down to zero. But if that happens, you have a problem with the bonds, too. Is that correct?

[Michael Falcone:]

Not necessarily. The bonds are paid off through sales tax revenues, which are -- and through land taxes, which is separate from the real estate value of the venture, which is largely based on a combination of land value and existing retail assets.

[Unidentified Analyst:]

How much of the revenue that goes to support those bonds comes from our investment in Spanish Fort? How much is from other part -- third parties that have nothing to do with us?

[Michael Falcone:]

Megan, correct me if I'm wrong, but roughly 60% or so of the bonds are paid by sales taxes from people like Bass Pro Shop?

[Megan Sophocles:]

Yes. Yes, that's correct.

[Unidentified Analyst:]

And Bass Pro Shops are tenants of yours, right?

[Michael Falcone:]

Correct.

[Unidentified Analyst:]

Okay. All right. So that sounds like the most -- would you say that's the biggest problem asset you have right now?

[Michael Falcone:]

I would say the equity in Spanish Fort is an area of concern as we move forward, yes.

[Unidentified Analyst:]

Okay. All right. Thank you. I’ll let somebody else get on the call. Thanks for answering. I appreciate it.

[Michael Falcone:]

Sure.

[Operator:]

[Operator Instructions] This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Falcone for any final remarks.

[Michael Falcone:]

Great. Thank you very much, Rocco. Thank you all for joining us this afternoon. I hope, looking at the call in list, I see a lot of long time shareholders. So I hope you all are doing well in this unusual time. And as we said in the call, while we are being conservative in the short-term, we are excited about our long-term future and appreciate your support of shareholders. Thank you all very much. Bye.

[Operator:]

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