MMA Capital Holdings, Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings Inc. 2020 Second Quarter Financial Results and Business Update Conference Call. My name is Elisa, 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. 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. Please go ahead.

[Michael Falcone:]

Thank you, Elisa. 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. As with many businesses during COVID, our offices remain closed and we're taking this call from remote locations. We apologize in advance for any connectivity issues or inconvenience that may cause, and remind my colleagues to make sure they are on mute. The purpose of our call today is to review MMA Capital Holdings 2020 second quarter financial results and providing overall business update. Our second quarter report was filed with the SEC on Monday, 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 ongoing COVID-19 impacts we saw in the corner. And 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 a general 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 second quarter with $274.5 million of common shareholders equity or book value. Our adjusted book value, which represents book value excluding the carrying value of the company's deferred tax assets was $217.2 million. Book value decreased by $3.2 million in the quarter or by $0.58 per share, while adjusted book value decreased by $1.1 million, or by $0.22 per share during the same period. As Dave will further discuss such decreases were primarily driven by a $9 million impairment, recognized against our investment in the Spanish Fort joint venture. As you will recall, Spanish Fort it is a long time holding in real estate joint venture. This write-down reduces the carrying value of our investment by just under 50%, in line with changes we have seen in the general real estate market outside of multifamily, and was based on an update of an independent appraisal to reflect the post-COVID world. Additionally, unrelated Spanish Fort bond, we recognize as a $1.9 million mark-to-market loss in the first quarter, primarily due to wider credit spreads on the bond. Credit spreads improved slightly in the second quarter, and therefore the value of the bond recovered $500,000 in the period, with year-to-date mark-to-market loss of $1.4 million. Second quarter results were also marked by strong results from our investments in the Solar ventures, which in large part reflected the recovery of net fair value losses, related to loan investments that were recognized in the first quarter, largely due to falling short-term interest rates and improved credit spreads on these investments. Additionally, our derivatives positions which are generally meant to protect against rising interest rates, further declined in value because of falling rates, but to a much lesser extent during the first quarter. Finally, when excluding the effects of the impairment loss I mentioned, operating expenses decreased 34% compared to the first quarter. Throughout the second quarter the company's renewable energy investments continue to perform substantially as underwritten, and to-date project schedules and loan payoffs has only been modestly impacted by the COVID-19 crisis. We also remain vigilant and continue to focus on managing liquidity, and utilizing a more conservative approach to portfolio management, as the economy continues its recovery. On this note, the company executed two financings to increase our overall liquidity, generating $22.5 million of net proceeds in the second quarter. As previously stated, 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. Consequently, we're not able to estimate the long-term effects of these factors on our business. To-date the impact on our investments has been relatively muted other than in the case of our Spanish Fort investment, which Gary will discuss. And at this time, we cannot rule out the possibility of an additional impact on our business, results of operations, financial condition and cash flow. 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 morning, everyone. The company's renewable energy investments, which represented 69% of the company's investments at quarter end, up from 68% at March 31, are generally made 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 second quarter, the carrying value of the company's renewable energy investments increased by $18.5 million to $364.4 million at June 30, an increase that was primarily due to equity and income recognized in the Solar ventures. As you will see in table three of our filing, during the quarter, the company recognized $13.8 million of income related to its renewable energy investments. On an annualized trailing 12 month basis, we have realized and unlevered net return on these investments of 11.8% for the period ended June 30, 2020, versus 10.4% for the period ended March 31, 2020. Equity and income from the Solar ventures was $9.2 million or 203% higher, compared to the second quarter of last year, as well as $9.2 million higher compared to the first quarter. This increase was primarily driven by the company's recognized share of fair value gains or $3.9 million, related to the Solar ventures loan portfolio, which was effectively marked at 100% of unpaid principal balance or UPB at June 30, up from 98.8% at March 31. Fair value gains recognized by the Solar ventures in the second quarter and the company's share of them, nearly reversed in full net fair value losses that were recognized in the first quarter. A reduction in the Solar ventures idle capital was also a factor in improved investment returns that were reported. As reflected in table one of the filing, at June 30, 2020, loans funded by Solar ventures have an aggregate UPB and fair value of $758.5 million, a weighted average remaining maturity of seven months, and a weighted average coupon of 9.5%, compared to $745.8 million of UBP and fair value of $736.8 million. Weighted average remaining maturity of eight months and a weighted average coupon of 9.7% at March 31. As discussed on prior calls, we typically target loans that generate origination fees ranging from 1% to 3% on committed capital, and coupons on funded loan balances ranging from 7% to 14%. Despite this pandemic, the construction and development of renewable energy projects that were financed through loans made by the Solar ventures have generally been on schedule, that the development and construction of such projects qualified as critical infrastructure or essential services. Given the prevailing macroeconomic conditions, uncertainty in the financial markets and our dependence on a functioning renewable energy market, we've remained focused on our investment and liquidity management programs. To that end, we ended the quarter with $24.6 million of unrestricted cash, and $10 million of capacity under our revolving credit facility. While we continue to believe that there are opportunities to invest in renewable energy and other infrastructure assets, 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 a payment, 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 were $30.7 million and $30.0 million, respectively. And that $300,000 increase in the fair value of these investments during the quarter, primarily due to changes in market yields. Concerning the company's real estate-related investments, the fair value of the company's 80% ownership in the Spanish Fort joint venture at June 30, was $10.1 million, which was 47% below its $19.2 million carrying value at March 31. This Spanish Fort development, which includes hotel and retail tenants, and undeveloped land parcels, and whose incremental tax revenues secure our infrastructure bond was adversely impacted by the economic decline, triggered by COVID-19. And based on the severity of the decline and its fair value and other factors, the company concluded that such decline was other than temporary, and that's a $9 million impairment is recognized in the quarter. We also anticipate that we will continue to recognize equity in losses of the Spanish Fort joint venture, a portion of which is attributable to appreciation and other non-cash expenses. Companies one direct investment in real estate which consists of a parcel of land is located outside of Winchester, Virginia, remains in the process of development. During the first six months of 2020, the company invested $6.1 million in additional land improvements, that were capitalized and at June 30, 2020, the carrying value of this investment is $14.5 million. So far, COVID-19 has had limited impact on this property which road construction and utility installation continuing without interruption over the past few months. With respect to the company's 11.85% ownership interest in South Africa Workforce Housing Fund, or SAWHF, which is a multi-investor fund whose term matured in April 2020. However, the fund does not anticipate fully exiting all its and remaining investments until December 31, 2021. During the second quarter, the company received the pro rata distribution from SAWHF, of 7.2 million common shares of a residential real estate investment trust, that is listed on the Johannesburg Stock Exchange. The carrying values of the company's equity investments in SAWHF and the REIT, were $2.0 million and $2.7 million, respectively at June 30, 2020. As long-term economic impact of COVID-19 remain uncertain, we continue to monitor the impact on the performance of our investments, and underlying real estate values. We remain prepared to make course corrections related to the portfolio, if warranted. Separately, the book value of the company's debt obligations was $245.5 million at June 30, an increase of $21.9 million in the second quarter, primarily as a result of two new debt transactions that closed in June. First, was a $10 million construction loan secured our investment in the Winchester, Virginia development. This debt has a fixed rate of interest of 4.85% per annum, payable quarterly, and it is expected to be repaid from future sales and parcels at the development. Second, financing transaction involves the execution of the total return swap or TRS of Spanish Fort bond. The notional amount of the TRS is $23.5 million and pays interest based upon SIFMA plus 2%, subject to a SIFMA floor of 50 basis points. The company pledged $10 million of cash received from our TRS counterparty as collateral, as required by the terms of the TRS. As of quarter end, 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 quarterly financial results in greater detail. Dave?

[Dave Bjarnason:]

Thanks Gary, and good morning, everyone. As I provide an overview of our results, I will refer to various tables and item two of our Form 10-Q. Book value decreased $3.2 million or $0.58 per share, in the second quarter, while adjusted book value decreased $1.1 million or $0.22 per share during the same period. In comparison, book value decreased $3.5 million or $0.61 per share, in the first quarter, while adjusted book value decreased by $5.1 million or $0.90 per share during the same period. The second quarter decrease in book value was primarily driven by a $3.3 million comprehensive loss, which included $3.5 million of net loss and $200,000 of other comprehensive income. The key performance driver in the second quarter was $5.4 million of net fair value losses related to certain investments in derivatives, the most significant component of which was the $9 million impairment loss mentioned earlier. However, this impairment loss was partially offset by the company share a fair value gains that were recognized by the Solar ventures. Well, unlike the first quarter that fair value losses on derivatives and bond investments were relatively insignificant. That said, we expect changes in the fair value of the company's bond investments, and derivatives to remain volatile until market conditions moderate. Besides net fair value losses, there are several other performance drivers worth noting. As Gary mentioned, equity and income of the Solar ventures increased $9.2 million in the second quarter, with the reversal of fair value losses on the loan portfolio, and a reduction in idle capital debentures, accounting for much of the reported improvement. Additionally, excluding the impact of the impairment loss we mentioned earlier, the company's operating expenses decreased $1.7 million, or by approximately 34% compared to the first quarter. This decrease was primarily driven by changes in foreign exchange rates, as the rand strengthened against the U.S. dollar in the second quarter, resulting in a $1.3 million decrease in losses that were recognized in connection with the re-measurement of non-dollar denominated assets into U.S. dollars for reporting purposes. Compensation related expense reimbursements to the company's external manager were also decreased in the second quarter, while G&A and professional fees were in the aggregate relatively comparable to the first quarter. Otherwise, the company's cost of funding slightly increased in the second quarter, given increases in both the average UPB of draws from the revolving credit facility, and the UPB of amounts barred due to two financing transactions that closed in the second quarter. From the liquidity and capital resources perspective, the company had $41.9 million of cash, cash equivalents and restricted cash at the end of the second quarter, $17.3 million, which was restricted. As reported in table eight of our filing, the total amount of the company's cash, cash equivalents and restricted cash increased $29 million for the first six months of the year, which was primarily driven by $44.6 million of net cash flows provided by financing activities, including from the financing transactions in the second quarter that involve the company's infrastructure bond investment, and direct investment in real estate. Additionally, the company generated net cash flows from operating activities of $3 million, and $6.4 million in the second quarter and first six months of the year, respectively. Lastly, as discussed earlier, the long-term impacts of COVID-19 on the company's results of operations and financial condition are uncertain, with specific risks posed by COVID-19 disclosed in item 1A in the part two of the company's second quarter filing. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. And as we did last quarter, before we get to the Q&A, I wanted to provide an update on our continuing response to COVID-19. With respect to corporate operations and the performance of the external managers since the beginning of the office closures, and state government responses to COVID-19, we continue to report no disruptions in connection with the company's business operations. Employees of the external manager continue to work from home, and the external manager still has not set a formal date to reopen any of our offices. However, we have determined that offices will remain closed and remote work will be employed through the balance of the calendar year. Any subsequent decisions related to the opening of any office will be consistent with the local timing and operational guidelines, set by the jurisdiction in which the office is located. With respect to our capital allocation plan, there remains a balanced near-term conservatism and long-term optimism. In the near-term, we believe our liquidity decisions since the beginning of the COVID-19 downturn, have provided adequate liquidity to fulfill our current obligations, including any funding requirements at the Solar ventures, without needing to further pursue capital market activities. That said, should the right opportunity become available at the right cost, we can always pivot back to the capital markets at that time. We will continue to be deliberate in the face of originating new investments by focusing on high-quality loan opportunities, while also continuing to manage outstanding commitments without significant additional capital calls on the company. As part of the focus on liquidity management and capital allocation in the current market environment, the Board continues to differ decision on any potential 2020 capital return program, until we have better visibility into the course of the economy in general and it's impact on our business in particular. We continue to remain vigilant in the wake of COVID-19 and the resulting economic conditions. And we continue to believe that the long-term economic thesis favoring the transition to infrastructure-related investments remains very much intact. As a company, our commitment to investments with positive environmental and social impact has not changed by the current investment environment. If there are opportunities for high return investments or to complete the recycling of capital from various legacy assets in the infrastructure investments, including renewable energy, we’re poised to take advantage of those opportunities. In closing, even in this uncertain moment and time, we remain excited about the future, committed to our shareholders, and we thank you for your continued support. We’ll now open the call to questions. Elisa?

[Operator:]

[Michael Falcone:]

Thank you very much, Elisa. I wanted to just take an opportunity to again thank our shareholders for their commitment during this sort of strange times, in which we live. Your commitment to our company is genuinely appreciated. The commitment that our employees have shown over the course of this crisis has been pretty remarkable. And I want to express my gratitude to those folks as well. So, thank you all very much, and everybody have a good rest of the summer. Bye.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.