MMA Capital Holdings, Inc.
Q4 2019 Earnings Call Transcript

Published: 18 Mar 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings, Inc. 2019 Annual Financial Results and Business Update Conference Call. My name is Andrew, 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. [Operator Instructions]. Please note this 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 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. Please go ahead.

[Michael Falcone:]

Thank you, operator. Good morning, 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. For our call today, Dave, Gary and I will deliver our prepared remarks, after which we will all be available to take questions.I should note because of the current coronavirus crisis, we are doing this call remotely, so I apologize for any technical issues that might develop as a result of that, but we’re on a handful of different cell phones bridged together.The purpose of our call today is to review MMA Capital Holdings 2019 annual financial results and to provide an overall business update. Our annual report was filed with the SEC this past Friday, and an updated investor presentation is available on our Web site.With respect to the financial results, which Dave will review in detail later, we are pleased to report that the company ended the year with $281.1 million of common shareholders' equity or book value, which represents an increase of $68.2 million for the year-ended December 2019 and $61.5 million for the fourth quarter.Book value per share finished the year at $48.43, an increase of $12.23 per share or 33.8% compared to the beginning of the year and up $11.14 or 29.9% for the fourth quarter. The increase in book value was primarily driven by the recognition of 57.7 million deferred tax asset in the fourth quarter along with strong returns from renewable energy investments for the year. As Dave will further discuss, the recognition of the deferred tax asset in the period greatly impacted our quarterly and annual results.The recognition of this asset was the result of years of work to reposition the portfolio and manage our liabilities and expenses to the point where the company foresees ongoing profitability from recurring operations moving forward, aided in particular by the company gaining access to the debt capital markets in the third and fourth quarters of 2019 by redeploying capital from the repayment of our note receivable from Hunt around year-end from the higher yielding investments.It's important to note though that assessing the likelihood of the deferred tax assets will be realized entails making estimates and assumptions that are inherently absurd, particularly concerning the company's future business structure and financial results, and therefore requires significant judgment. In this regard, the carrying value of net deferred tax assets could potentially change in subsequent reporting periods and cause earnings volatility. We have expanded the disclosures in our 10-K filing to reflect various risks of the company's projection of pre-tax book income.Additionally, because of the impact of deferred taxes created a significant non-cash recognition of our financial statements, you will also see that we expanded disclosures in the filing, press release and investor presentation to include certain non-GAAP measures including adjusted book value and adjusted book value per share, which excludes the impact of deferred tax assets and which we think are useful in assessing the company's underlying financial performance and business trends, because it eliminates the potential volatility in the value of our deferred tax assets.That said, the company's adjusted book value at year-end was 223.4 million, an increase of 10.5 million for the year or 4.9% versus 2018. On a per share basis, the company's adjusted book value per share at year end was $30.49, an increase of $2.29 or 6.3% for the year and $1.20 or 3.2% for the quarter.As discussed in prior quarters, part of our capital plan for the year involved obtaining reasonably priced capital in order to deploy additional capital into renewable energy investments, as well as to generate improved returns on such investments. During the third quarter, we successfully raised 70 million of debt capital in the form of a three-year revolving credit facility. A committed amount of that credit facility increased to 100 million in the fourth quarter and as of this call, now it’s been 120 million. Assessing this new source of capital in a significant effort to grow our portfolio and increase our return on equity.Another capital strategy for the year was to continue recycling capital out of investments with lower returns. This is the leverage bond investments in the Hunt note and redeployed it into higher yielding renewable energy investments. For the year, we liquidated a significant portion of our remaining bond investments including all related debt used to finance such conditions.In addition to bond liquidation, at year-end we received a prepayment of approximately 13 million on our note receivable from Hunt. And as we disclosed in the filing, the balances of Hunt note are approximately 54 million as we paid in full in early January. This created 67 million of additional capital available for investment, most of which has been deployed into additional renewable energy investments thus improving the overall return on equity for a significant part of our overall portfolio.We continue to see strong returns from our renewable energy investments during the fourth quarter and year-over-year. As Gary will further discuss, demand for capital to finance renewable energy projects in North America remained strong, and though the solar market is largely growing, financing alternatives remained segmented and developers underserved. The result we believe we are well positioned to further invest in this sector and can continue to generate attractive risk-adjusted returns which also generate positive environmental and social impacts due to our external manager's renewable energy loan origination platform.In the next few minutes of the call, we will focus on the operations of the company during the fourth quarter and for the year just ended. However, before opening the call for questions from investors, I will address current marking conditions due to the coronavirus outbreak and related market response.Now for a further review of our investments in funding, let me turn the call over to Gary. Gary?

[Gary Mentesana:]

Thanks, Mike, and good morning, everyone. Before touching on the company's investments in funding, I should note that effective with the fourth quarter we no longer organize the company's assets and liabilities into two portfolios. This change is the result of balance sheet simplification and reflecting an approach that is consistent with our management and financial reporting conventions.That said, related to the company's renewable energy investments, which represented 72% of the company's loan receivables, bonds and investments and partnerships at year-end, the company invests alongside an institutional capital partner in Solar Ventures that mainly finance the development and construction of renewable energy projects in North America.In the fourth quarter, the carrying value of the company's renewable energy investments increased by $75 million to 289.6 million at December 31. This increase was primarily due to the deployment of net draws on our revolving credit facility, recycled equity and income recognized for the period. Since the start of the year, the total carrying value of renewable energy investments increased $163.3 million or approximately 129%.As you will see in Table 3 of our filing, during the year the company recognized $23 million of income related to renewable energy investments which represents an unleveraged net return on investment of 11.4% for the year versus 6.6% in 2018. The $23 million of income recognized in these investments represented an increase of $16.1 million or 231% year-over-year.Further, income in the quarter was $7.5 million representing a $600,000 increase quarter-over-quarter or 9%. At December 31, loans funded by the Solar Ventures had an aggregate unpaid principal balance or UPB of $654.4 million, a weighted average remaining maturity of 10 months and a weighted average coupon of 10.8% compared to $362.7 million nine months and 10.8% at September 30.At December 31, 2018, the UPB was 250.8 million with a weighted average maturity and coupon of seven months and 9.2%, respectively. This represents 161% year-over-year growth in UPB of commitments originated by the Solar Ventures. 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%.Since their inception in 2015, the Solar Ventures have invested in more than 160 project-based loans that total $2.3 million of project debt commitments for the deployment and construction of over 660 renewable energy projects. But when completed, will contribute to the generation of over 6.2 gigawatts of renewable energy.Through December 31, 2019, 1.3 billion of commitments across 111 project-based loans were repaid with no loss of invested principal while generating a weighted average loan level IRR of 17.2% which was on average higher than originally underwritten. The pipeline of renewable energy debt opportunities remains robust and continues to represent an asset class with attractive risk-adjusted returns that also meet our environmental and social investment goals.As Mike mentioned earlier, we now have a revolving credit facility with a committed amount of $120 million which should enable our equity capital to remain fully invested which we believe will increase our returns in the future. We 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 December 31 was $30.9 million and $31.4 million, respectively, down slightly in the quarter as we continue to exit bond positions. With respect to the Hunt note, we previously disclosed prepayment in full of the 5% note as of January 3 with a significant portion of our repayment proceeds being redeployed into renewable energy investments.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 annual 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 in Item 7 of our Form 10-K. As Mike mentioned, book value increased $68.2 million in 2019 to $281.1 million. In this regard, book value per share increased to $48.43 per share which represented $11.14 per share increase in the fourth quarter and $12.23 per share on a full year basis.As noted earlier, a significant driver of the reported increase in book value in 2019 was the partial release of the deferred tax asset valuation allowance in the fourth quarter, which resulted in a recognition of a $57.7 million net deferred tax asset. The basis for this partial release is further discussed in Note 14 of the company's financial statements. But at a high level, the release was primarily driven by two factors.First, an evaluation of pre-tax book income for the last three years, exclusive of non-recurring items, as well as an analysis to company's core earnings provided positive evidence of the company's ability to utilize a portion of its tax benefits prior to their expiration.Secondly, the company's projection of pre-tax book income consequently improved after the third quarter given the full repayment of the Hunt note and an increase in the amount of leverage used in connection with renewable energy investments, which collectively enabled the company to redeploy capital into higher yielding renewable energy investments and achieved enhanced returns through the use of leverage.The overall weight of these factors and other types of evidence we considered at December 31, 2019 supported our assessment that it was more likely than not that a portion of the company's deferred tax assets would be realized. Consequently, we released a portion of the related valuation allowance that in consideration of the company's forecast of pre-tax book income reflected the projected utilization over time of $210.2 million of our federal net operating losses.As Mike mentioned, determining the likelihood the deferred tax assets will be realized entails making estimates and assumptions that are inherently uncertain, and therefore requires significant judgment. In this regard, the reported carrying value of the net deferred tax assets could potentially change in subsequent reporting periods and cause earnings volatility. Therefore, we expanded disclosures in the filing to identify various risks to the company's projection of pre-tax book income.We also added disclosures in the filing, press release and investor presentation of certain non-GAAP performance measures that exclude the impacts of deferred tax assets and that we think are useful in assessing the company's underlying financial performance and business trends, because they eliminate the potential volatility in the value of our deferred tax assets. We will continually evaluate the usefulness, relevance and limitations disclosed non-GAAP performance measures to determine how best to provide relevant information to the public.This said, increases in book value in 2019 were primarily driven by $70.9 million of comprehensive income, including $64.2 million recognized in the fourth quarter which was partially offset by $2.7 million of other reductions to book value that were in large part driven by the repurchase of approximately 87,000 common shares at an average price of $31.71.Comprehensive income that we reported in 2019, which exceeded what we reported in 2018, at $30.4 million included $101 million in net income and $30.1 million of other comprehensive loss. Net income reported in 2019, which included $69.3 million recognized in the fourth quarter, exceeded amounts reported in 2018 by $40 million with three key drivers playing into this year-over-year increase.First, as you can see in Table 6 of the company's filing, the company recognized $60.5 million income tax benefit in 2019 compared to modest income tax expense in 2018 with the change primarily being due to the partial release of the deferred tax asset valuation allowance in the fourth quarter of 2019.Secondly, as you can see in Table 7 of the company's filing, equity and income from the Solar Ventures recognized in 2019 increased $13.9 million compared to 2018, primarily as a result of a significant year-over-year increase in the volume of loans originated by the Solar Ventures which drove net income of the Solar Ventures and the company’s share thereof higher.This net increase was also in part attributable to the elimination of the preferred return that was previously earned by a former investment partner prior to the company's buyout of such partner’s interest in one of the Solar Ventures in the second quarter of 2018.Thirdly, as you can see in Table 8 of the company's filing, operating expenses recognized by the company decreased by $5.9 million on a year-over-year basis, which is primarily due to a reduction in non-recurring professional fees that were incurred in 2018 related to the sale of various businesses and assets.While these three items drove the largest changes in net income, there were several other drivers worth noting. First, net interest income decreased by $1.5 million on a year-over-year basis in large part due to the disposition and redemption of various bond investments and the termination of all outstanding total return swap agreements.Secondly, net gains decreased by $2.6 million compared to 2018 primarily due to a net decrease in fair value gains related to interest rate, foreign currency, foreign exchange derivatives, though this impact was partially offset by, among other items, an increase in holding gains that were realized in connection with the sale or redemption of bond investments.Lastly, other interest expense recognized in 2019 increased on a year-over-year basis primarily due to the recognition of $1.2 million of interest expense in 2019 associated with the UPB of amounts drawn from the company's revolving credit facility. This said, while net income increased $40 million in 2019, the amount of other comprehensive loss recognized during such reporting period also increased by $26.6 million. The consolidated statements of comprehensive income disaggregate the components of other comprehensive loss recognized in 2019 and 2018.In reviewing it, you can see that the net increase in other comprehensive loss recognized in 2019 was primarily driven by $13.8 million decrease in the amount of holding-related gains that were recognized in connection with bond-related investments and a $6.4 million increase in the amount of realized gains that were reclassified out of accumulated other comprehensive income and into earnings as a result of the disposition of bond-related investments. A year-over-year decrease in the amount of recognized cumulative translation adjustments was also a factor.Lastly, with respect to the company's liquidity and capital resources, the company had $12.8 million of cash, cash equivalents and restricted cash at December 31, 2019; 8.6 million of which was unrestricted.As reported in Table 9 of our filing, the total amount of the company's cash, cash equivalents and restricted cash decreased $21.1 million in 2019 which was primarily driven by $114.7 million of net cash used in investing activities associated with renewable energy investments.Such impact was partially offset by $84.7 million of cash that was provided by financing activities during 2019, which in large part was attributable to draws made by the company against the revolving credit facility that was closed in September. However, net cash flows of $8.9 million were provided by operating activities in 2019.With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. One comment before I get started. At least in my line, Gary broke up when he talked about total lending since inception. The number for that is 2.3 billion just in case – I don’t know if that was just my line or if that was a broader problem.Before we get to the Q&A, I’ll provide a brief update on our approach for the year ahead, current visibility in the wake of the coronavirus news and market reaction. From a business operations perspective, accessing reasonably priced sources of capital, continue to increase the scale of the company's renewable energy investments remains a priority. That’s going to include a combination of recycling out of our remaining non-core assets, further assessing credit markets and reviewing other strategic capital opportunities.Further, we will endeavor to identify additional investment opportunities that we think will produce attractive risk-adjusted returns and generate positive social or environmental impacts and we’ll seek to retain the flexibility to invest accordingly. Even apart from the current market dislocations, we realize some shareholders are interested in any new capital return programs for the company, including in particular share buyback.The Board considers many factors when determining the appropriateness of the share buyback or any other capital return program. Given the current market uncertainty, including volatile activity throughout the capital markets, the Board has decided to proceed more slowly before making any determination on a new plan at this time. The Board will monitor events during the balance of the trading window, but there are no assurances that sufficient clarity around current market events will be available for the Board to render a decision before March 31.Finally, I wanted to touch on the impact of the coronavirus on the company's operations. Obviously, this is a very fluid situation. But from the perspective of day-to-day operations, we have not seen an impact on our personnel or productivity. Hunt has worked hard with its IT and human resources to make sure that people can remain productive when working remotely, and we don't foresee a material impact from that aspect of operations.On the investment side, we haven't seen any direct impact on our renewable energy investments even in the form of defaults or slowdown and the ability to source new investment. Of course, as everyone knows, it’s too early to predict whether the coronavirus will have any longer-term impact on our borrowers, our current portfolio or our ability to generate new assets for investment.While we don't yet know the potential long-term impact on our liquidity or access to capital markets, we remain in compliance with all of our financial covenants and as of this call have access to approximately 29 million of liquidity under our revolving credit agreement, should we need that capacity to manage our investments in the renewable energy portfolio.In closing, even in this uncertain moment in time we remain excited about the future committed to our shareholders, and we thank you for your continued support. So I’ll now open the call to questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Stan Trilling of Morgan Stanley. Please go ahead.

[Stan Trilling:]

Gentlemen, once again thank you for doing a magnificent job. I have basically two questions. Number one, the value of the residual assets that you are contemplating liquidation, I think you said $30 million. Over what period of time do you think that liquidation could be done?

[Michael Falcone:]

This is Mike. I’ll let Gary or Dave speak to the exact number because I want to make sure we get that right. But I can speak generally. The two largest assets related to land development projects where we are the two largest non-renewables investments, I should say, relate to land development projects where we ended up taking back bonds in the last financial crisis. We were actively marketing both partials and overall projects within those, but it’s really hard to know how long that would take to move on. But the remaining taxes and bond that we would expect would move more quickly, but the land assets particularly with the recent changes in the world we just don’t know.

[Stan Trilling:]

Fair enough.

[Michael Falcone:]

It’s not weeks. We would hope it is months and it could be years.

[Stan Trilling:]

Okay, I understand. Second question is what level of premiums and net asset value would you consider doing a secondary offering to not only create capital too, but to create more liquidity to the company and its shareholders?

[Michael Falcone:]

Thanks for that question. I realized – let me go back one step. I realize I didn’t answer your question as to the total amount. The total amount is closer to 60 as opposed to 30 in terms of the assets that we haven’t rotated out. It’s 60 million which is close to 30% of our total net assets. In terms of an offering, that is a question that is actually a great question and gets to the heart of sort of long-term growth of MMAC. We believe today that we have investment opportunities that are out there where if we could sell equity around our adjusted book value, it would be accretive. And so somewhere around adjusted book value I think is probably the bogey that we would be looking at. Does it have to get all the way to par or a premium? I would say probably not, but we probably wouldn’t do it at a significant discount. It is all a function of at the time we have the opportunity to raise equity. Do we see reinvestment opportunities where we could deploy the capital and make it happen accretively? So that’s – we probably would be looking more if the adjusted value number for that decision than the GAAP book value number for that decision, but it will very much be a function of what the alternative investment opportunities are for the capital at the time.

[Stan Trilling:]

Okay. It’s always a matter of judgment based on what situation at the time, I understand that. But that being said, I’m pleased that you are being reasonable in your valuation at a time of doing a potential offering. Thank you very much. I appreciate it.

[Michael Falcone:]

Thank you.

[Operator:]

[Operator Instructions]. The next question comes from Colin McLafferty of Lapides. Please go ahead.

[Colin McLafferty:]

Hi. Good morning. Thanks for taking my questions. I had a couple of questions related to the solar loan portfolio. So the first would be, my understanding is that you’re providing development and construction loans so your borrowers need to eventually refinance those upon budget completion in order to exit that business model. And I want to get a better sense of who are the parties that are providing this permanent capital, so who are the lenders? If it’s parties who are tax credit equity syndicators? And then really what’s their access to capital? So are they relying on the capital markets to get that dry powder to refinance? I have a couple more follow ups on that as well.

[Michael Falcone:]

Dave, why don’t you take that?

[Dave Bjarnason:]

Yes. Thanks, Colin. The basic takeout for the construction loans and for the late-stage development loans are tax credit equity as well as perm loans. And they’re typically provided by kind of large financial institutions, often banks. We obviously have been spending a lot of time trying to understand how each of those counterparties are kind of reacting in this environment. And at least to date we have not seen issues with respect to liquidity or timing, but we’re still very early on in this. But we’re constantly assessing, but we don’t see an issue yet in any of the takeouts or the timing of takeouts. But if there’s more sheltering in place, there could be delays, but I think that we have kind of the plan to kind of deal with short-term delays.

[Michael Falcone:]

Okay. And I would just add to your specific question, Colin, our takeouts tend not to be “syndicators”. They tend to be the actual tax equity users. So it’s utilities, it’s banks. We did a loan by loan review over the week on all the loans that are due to repay over the next few months and I don’t remember seeing a “syndicator” as a source of equity in any of those. And the sources of permanent capital tend to be again insurance companies, utilities, some banks using various financing programs. Hopefully that helps.

[Colin McLafferty:]

It does, yes. And just to follow up, so if the folks who are refinancing this for the developers and the EPCs who are building these projects, if they have trouble or they’re little nervous about raising capital or putting capital to work here, what kind of levers do you have to pull to meet your capital goal? So you’ve got 312.5 million of unfunded commitment in the solar JV. What can you do in such a situation?

[Dave Bjarnason:]

We have a couple of options. One is, we have cash on our balance sheet; two is, we have a line of credit which is recently as Friday or Monday, I can’t remember which day it was, increased by $10 million that we’re continuing to look at increasing that line of credit by continuing to bring in other banks. And three is, we have a large partner in the solar joint ventures who has significantly larger balance sheet than we do and who is not legally obligated to, but who has welcomed the opportunity to fund more than their fair share of obligations because they like the returns, so particularly a risk return profile. So those are the three levers.

[Colin McLafferty:]

Okay, helpful. And then just on the last couple on the portfolio. So I noticed in the 10-K that the solar JV made $104 million loan in 2019 and it seems like a very large percentage of the portfolio, about 6 or 7 to the portfolio. Can you kind of speak to that loan? And is that type of – I guess is your appetite for making such large loans relative to the size of the JV, is that normal or are there kind of risk controls in place for that?

[Michael Falcone:]

Gary, I’ll give you that one too.

[Gary Mentesana:]

Yes. So it is larger than normal. So we typically target loans that are $15 million to $25 million. We have done loans as small as $2 million and at large is $130 million. It’s a loan that we have kind of done a lot to a counterparty that we’ve done a lot of business with. It is certainly getting kind of more attention than a $10 million loan might, but it’s a loan that we were comfortable making as well as kind of the joint venture partner was comfortable making and we’ll just kind of keep kind of asset managing it as we otherwise would.

[Colin McLafferty:]

Okay. I guess the big question that I think a lot of folks have is, if you look at the market you’re lending to, it’s been the beneficiary of tax code to the federal and state level that are incentivizing people putting in solar capacity, and those credits are rolling off soon. I’m just curious, what have you all seen about demand in this market? What kind you speak to that would kind of give us a sense for over the next few years whether this dries up a little bit as those credits roll off and the investments become most attractive? Just would be helpful to get your thoughts on that?

[Gary Mentesana:]

Sure. Last year we saw the federal tax credit fall from 30% at year end to 26% this year and then it falls again to 22% next year and then it’s down to 10% thereafter. We’ve saw around year end some accelerated activity as folks tried to get the benefit of the higher tax credit. That was really just moving some deals that would have been done early this year into late last year. And maybe in a slightly different form, right, where maybe it was in equipment finance loan as folks were getting the materials necessary to then do the construction. We continue to see a lot of demand, more kind of demand than probably we have capital for. The folks in the industry that kind of predict the future still believe that even with the step down in the federal tax credit that the amount of renewable energy projects, the commitments for renewable energy projects will double over the next five years and they think that is in large part because – and the comparative cost of renewable energy compared to fossil fuels is in some markets already at parity cost. So there seems to be a lot of demand and we don’t necessarily see that stepping down just because of the federal tax credit stepping away or down to 10%. And notwithstanding the fact that there is a bill to extend that credit, who knows if that will ever get extended, but we don’t foresee a big issue with demand for this type of product.

[Michael Falcone:]

I would also add that as a public policy matter, state policy matters just as much as federal policy, how utilities are being regulated and how rates are being set. So it’s both a federal and a state policy issue. And when you look at the investor presentation, you can see a map of where we’ve done business. That’s a function in many ways of where state policy is most favorable.

[Colin McLafferty:]

Okay, great. I don’t want to hog the line, so I can get back into queue if there are other questions. But I’m not sure if there are other folks waiting.

[Michael Falcone:]

Why don’t you just keep going?

[Colin McLafferty:]

Okay. Please cut me off whenever you guys have other questions.

[Michael Falcone:]

When the questions get hard or dumb, I’ll cut you off, but so far they’re both good questions and I think very relevant.

[Colin McLafferty:]

Okay, all right. Thank you. So the next one is still kind of related to risk around the portfolio. What is the revolver’s debt covenant? So you said that it’s basically limited by the assets that you have in the JV or your equity in the JV. Can you guys just explain what that is to save us the time of looking through the credit agreement?

[Gary Mentesana:]

Sure. I can kind of give a big picture and approach, and Mike can go into details as necessary. But it’s a facility but is collateralized by the equity that we have invested in the JV. There are various financial covenants in place and they’re basically set up to have advance rates based upon the type of the underlying loan. So lower advance rates for late-stage development, but higher advance rates for construction loans and even higher advance rates for permanent loans. And basically it’s a facility that’s set up so that there is a predetermined investment criteria box which basically serves as a collateral facility borrowing base amount, and then we can draw against that amount. Currently, we have kind of more collateral than we have drawn under the facility, but it’s constantly getting managed as existing loans draw up, as existing loans pay off and as new loans get added in.

[Colin McLafferty:]

So generally speaking I think you said before that your appetite for how much leverage you want to put on the portfolio is about 50%. Is that kind of in the ballpark of I guess with your current mix of loans between development, construction, permanent? Is that kind of the limit, if you will, on your facility? You had 50% of those --

[Gary Mentesana:]

The advance rates are higher than 50%, but we don’t feel like it’s prudent to kind of put too much on the portfolio. Currently, we have the subordinated debt at the company level which is really only senior to the common shares, but really doesn’t have much of any financial covenants in place. It basically prohibits us from putting $1.2 billion of debt ahead of them. So aside from the subordinated debt, the asset backed debt we have is really the revolver and the $120 million worth of commitments today is kind of we think a level that we could increase. The maximum committed facility amount is $175 million. But as we indicated we are looking for additional capital to deploy in this facility. We will not get kind of leverage up 5 to 1, 10 to 1. We think that this is going to be somewhere in that range of maybe $150 million, maybe $200 million in total relative to this portfolio.

[Colin McLafferty:]

Okay, great. I guess maybe the last one on the solar JV, you’re making development loans, construction loans, you’re getting a fairly high coupon on those loans and I think that’s generally commensurate with the amount of risk that one bears by lending to projects that have a lot of uncertainty and I think we’ve spoken offline about the types of projects that you’re lending against. But I’m just hoping you can kind of give us the sense for when you’re underwriting one of these loans, I’m assuming that you’re taking into account the potential or the probability for losses and then the loss given default for these loans. Can you walk us through what some of your expectations are at a high level for the loss experience of a portfolio like this across an entire cycle? I know you haven’t had any losses yet, knock on wood, in the five or so years you’ve been lending in this space. But I’m just curious for your kind of full cycle thoughts on those losses?

[Michael Falcone:]

You’re correct in that we have not realized any losses of principal invested to date, but that we’ve only been doing this since 2015. We don’t really look at this through the lens of the theory of large numbers and think that X% will kind of default over a long-term cycle. It’s really an asset by asset underlying credit analysis. I think that we have been fortunate in that we have kind of lent to good counterparties and we have been pretty accurate in estimating the underlying collateral that we’re lending against. But we have not gone through an analysis of kind of the length of a full cycle and how much losses we may kind of realize over time.

[Colin McLafferty:]

Have you all looked at adjacent industries or just lending in general for construction projects to get a feel for what the loss rate could be base rate, if you will, for the portfolio even through you’re not I guess assuming that for your loans?

[Michael Falcone:]

So we certainly have had experience in doing construction lending when we were primarily focused on affordable housing. I’m not sure how relevant that experience was or other industries to this. It’s certainly higher than zero. But I’m not sure how prudent it would be to kind of compare on different industries to what we’re doing on the renewable side.

[Colin McLafferty:]

Okay, that’s helpful. Can I keep going or are there other questions in the queue?

[Michael Falcone:]

There are some other questions in the queue. How about if we jump to those guys and then we can circle back.

[Colin McLafferty:]

Sure. Awesome. Thank you so much for answering my questions.

[Michael Falcone:]

Sure.

[Operator:]

The next question comes from Jesse Greenfield of Greenfield Investment. Please go ahead.

[Jesse Greenfield:]

Hi, Mike. I got on a little late, so if you could just recap what’s the story with the buyback program.

[Michael Falcone:]

Sure. What we said is given the uncertainty in the marketplace right now, the Board is taking a wait and see attitude and we may or may not revisit the question – we will revisit the question, whether we act or not prior to March 31 closing of the window is exceedingly fluid question based in part on the environment in which we operate today. On the one hand, it’s clear that relative to our book value, the share price is significantly off and it would accretive to the shareholders to buy shares. On the other hand, the sort of lesson from the last financial crisis was every nickel of liquidity matters. So we’re kind of watching and waiting to see where markets settle down, what stimulus looks like and I just don’t know if we will be in a position to make that decision by March 31. I can tell you that the sort of – how we might return capital to shareholders, whether we might return capital to shareholders has been a constant discussion at Board meetings over the last 6 to 12 months and recent events I think probably have caused us to go more slowly than we otherwise may have, given a bit of more stable environment.

[Jesse Greenfield:]

Okay. Now, the window is close at the end of the month. How long does the window stay closed?

[Michael Falcone:]

Probably to about May 15.

[Jesse Greenfield:]

Okay.

[Michael Falcone:]

In the normal course of events, the window would stay closed until May 15.

[Jesse Greenfield:]

Okay, fine. And now the quarter that we’re in right now is attracting pretty decently, meaning pretty much following what happened last quarter.

[Michael Falcone:]

We don’t really give forward guidance. I would say one of the things we’ve said in the script was that we haven’t yet seen disruptions, but we don’t know where things are going to go over the next couple of weeks.

[Jesse Greenfield:]

Okay, I understand. Thank you, Mike. I appreciate it.

[Michael Falcone:]

Sure.

[Operator:]

The next question comes from Ted Lou [ph] of Valley Financial Group. Please go ahead.

[Unidentified Analyst:]

Good morning, Michael. I just wondered what the remaining amount is on the NOL?

[Michael Falcone:]

The unwritten up part, if you will?

[Unidentified Analyst:]

Yes, sir.

[Michael Falcone:]

Dave, I think that that number is around 180 million. Is that --? One of you guys want to give me the right number.

[Dave Bjarnason:]

Yes, I’m just looking for it. Yes, Ted, if you look at our footnotes to the financial statements, it’s in Note 14 which is located or it starts on Page F41.

[Unidentified Analyst:]

Okay. I just didn’t get that far.

[Dave Bjarnason:]

Yes. No, it’s on --

[Michael Falcone:]

Come on, Ted.

[Dave Bjarnason:]

Yes, it’s pretty far back there. So we recognized a $57.7 million asset. I’m just looking for it. Give me one second. Scanning through this disclosure.

[Michael Falcone:]

Brooks, are you on a speaking line?

[Brooks Martin:]

I am. So there remains about 160 million of NOLs that are impaired at this point.

[Unidentified Analyst:]

Okay. Thank you so much and congratulations on being so creative. You’re still my favorite stock.

[Michael Falcone:]

Thank you.

[Operator:]

And we have a follow up from Colin McLafferty of Lapides. Please go ahead.

[Colin McLafferty:]

Hi. Thanks for taking the follow up. Just two really quick ones that should be fairly easy. So the first is, other than the management fee, incentive fee and expense reimbursement for the external management contract, what do you expect recurring operating expenses to be this year and then thereafter? For example, in last year you gave 10 million of additional OpEx aside from those three categories I mentioned. Can you guys walk us through how the income statement would shake out going forward?

[Michael Falcone:]

Well, we don’t really give forward guidance in that regard. I think Dave or Gary it could be useful to talk about the elements of last year’s operating expenses just to sort of give Colin a sense of which of those things are – he can conclude are steady and which are sort of one-time items. Gary, do you want to comment?

[Gary Mentesana:]

Yes, I was just kind of pulling up the income statement. I think that for the most part, the expenses on the income statement are largely recurring in nature. There certainly will be a change in the amount of expense reimbursements related to salary and benefits in 2020 as a result – compared to 2019 because of a change in the cap. But I can’t think of any other significant changes. Dave, do you see that differently?

[Dave Bjarnason:]

No, I was going to echo the same comment. So I don’t think besides the point on the cap that we would expect any sort of consequential change to amounts reported this year in 2019.

[Colin McLafferty:]

Okay, very helpful. And the last one for me is just when you look at the discount between your stock price and your adjusted book value, it seems to be about 30% and as you mentioned before on the call, about 30% of your net asset value is tied up in those other non-core assets that you’re slowly recycling into the solar lending portfolio. I’m just curious if you can kind of walk us through – I think there’s five categories there. Can you just walk us through of those five non-core asset categories, some of these are cash flowing, some of them are not. So can you give us a sense for your expectation for on a recurring basis how much income you’ll get from that 60 million of bucket of assets? And the categories I’m referring to are the multifamily tax-exempt bonds, the infrastructure bonds, the investment in U.S. real estate partnerships, the investment in South Africa workforce housing fund and then the real estate owned category.

[Gary Mentesana:]

Sure. If you took the last three of those; South Africa, real estate owned and U.S. real estate, those are essentially non-income producing assets and they will at some point in the future return capital to us maybe with a gain, maybe not depending on what happens in the world. The Spanish Fort bond, which is an infrastructure bond, pays in the neighborhood of 6%. Megan, you might have the exact number there. And the multifamily bond pays in the same neighborhood. The multifamily bond pays annual though because it’s paid out of net cash flow as opposed to paid quarterly like a normal bond. Was that close enough, Megan, Gary, Dave?

[Gary Mentesana:]

Yes, I think so.

[Michael Falcone:]

Those are what I call CEO numbers, Colin, which are the big round numbers I can keep in my head.

[Colin McLafferty:]

I appreciate that. That’s a very helpful answer. Thank you so much. No more questions from me.

[Dave Bjarnason:]

Colin, this is – just one other quick follow-up point related to your question on expenses. I think you may be aware potentially that for public companies like MMA qualify as small reporting companies. The SEC just recently announced a change to how they – basically if you look at our opinion as of September – I’m sorry, as of December 31, our external auditor KPMG is required to opine on both numbers as well as controls. But given a recent change to the rules related to small reporting companies in terms of what external auditors are now required to opine on, we think going in 2020 given a recent announcement of the SEC, an opinion on internal controls will no longer be required. And I mentioned that because I think when you look at expenses of the company, particularly compliance costs, we think the audit costs as a result of this recent development with the SEC will likely come in. So by what number I can’t really speak to, but at least sort of directionally I just wanted to clarify that we expect that particular type of cost to come in for the reasons I just mentioned.

[Colin McLafferty:]

Okay, great. So then the cost of the audit, the financial reporting, that’s all on the MMAC income statement and not – that’s not covered by the expense reimbursement paid back to your external manager?

[Dave Bjarnason:]

Yes, that’s correct. It’s a direct cost of MMA.

[Colin McLafferty:]

Okay, great. Thank you so much, guys. I really appreciate it.

[Michael Falcone:]

Operator, are there any other questions?

[Operator:]

The next question comes from – just to verify – Greg Benet [ph], a private investor. Please go ahead.

[Unidentified Analyst:]

Good morning. For the stock buyback program, are there any things in your credit facilities that prevent you from using cash for stock buyback right now?

[Michael Falcone:]

We could not directly draw the line of credit by shares. But I don’t think that there is an effective limit on a share buyback as a result, otherwise it would just be our cash on hand which is in the neighborhood of $10 million-ish.

[Unidentified Analyst:]

So if your Board decided to approve between now and March 30, you would roughly have 10 million free if you wanted to utilize that?

[Michael Falcone:]

If we wanted to utilize all of our cash, yes, but I don’t think we would do that. I think it would be – whatever we would do would likely be smaller than 10 million.

[Unidentified Analyst:]

Spanish Fort – not Spanish Fort, South African fund I think is supposed to pay you back roughly $7 million sometime – I guess it’s now in April. Do you still expect that?

[Michael Falcone:]

I expect that between April and the summer.

[Unidentified Analyst:]

And would that free up cash that you could use for a stock buyback if you wanted to?

[Michael Falcone:]

It would free up cash for whatever use we determine, yes.

[Unidentified Analyst:]

Okay. So on the tax deferred asset payment [ph], the accountants I would think have you go through a long process for determining that you can utilize that. So there must have been a projection for what you expect your taxable income to be at least for this year, for 2020? You say you don’t give financial guidance, but it seems like that would have been something – is there any way of sharing something with us for determining what you might have as far as taxable income from I guess what I would call the ongoing business of the solar lending business?

[Michael Falcone:]

The rules that you have to apply to determine your net operating losses for your deferred tax assets certainly have the elements of a forward projection in them, but they have to meet a standard which is in the GAAP literature called objectively verifiable. And so what we present to the Board now as sort of internal matter is a forward-looking income statement based on objectively verifiable numbers and then a kind of addition to that of aspirations to get to sort of our forward-looking projections that the Board uses. But the Board has not made a decision to sort of make any of those numbers public at this point. And so we are not going to speak to forward-looking information.

[Unidentified Analyst:]

Okay. And final question about loan to value or loans for solar since we have not had a bad experience yet. On the construction loans, the security behind that loan, is it the property itself or are there other guarantees in that or what is the security behind each one of these loans?

[Michael Falcone:]

Obviously, they sort of generally – there’s a high level of variability, but the general package is a mortgage and is some sort of usually payment performance bond on construction loans. Gary, I don’t know if you want to add anything to that description or Megan?

[Gary Mentesana:]

Yes. So there’s a first lien on kind of all of the underlying value. So deposits that are made, all of the underlying equipment, all of that serves as collateral. We really don’t always look to a guarantee of the borrower. We really are kind of most focused on the value of the underlying project and basically have a claim to kind of that value in addition to the first lien, first mortgage position we have on all the underlying collateral.

[Unidentified Analyst:]

Do you require the borrower to already have a contract for selling the asset or contract in hand for taking the power off the project before you will lend on a construction loan?

[Michael Falcone:]

Yes.

[Unidentified Analyst:]

So there’s no – I guess the terminology in homebuilding there’s not like – you’re not spec building, you’re not financing a spec building?

[Michael Falcone:]

Correct. So it’s a little bit different for late-stage development loans, but you can think of it as kind of all of the binary risks has been taken out of the equation. So there are basically permits in place and you have kind of line of sight as to kind of what the underlying project will be. You may not fully have a binding contract for the takeout at the time you close, but you may kind of have term sheets in place and kind of an understanding because of the various counterparties you previously worked with to understand what the underlying project will look like, how we’ll get to market and how we can kind of lend against it.

[Unidentified Analyst:]

Okay. So whatever it’s worth, thank you and thanks for the good performance. I think in these times, if possible, I think having the stock buyback program with the volatility in the market and a number of people, particularly in ill-liquid stocks just hitting the big would – anyway, I think it might be a good idea for shareholder value. And the discount’s probably the biggest it’s been certainly in several years. So if you’re confident going forward, then it would great if the Board were to approve the stock buyback program because the next window won’t be until May 15 whether you are in there buying or not, anyway I think would be a good idea. That’s my opinion. Thank you.

[Michael Falcone:]

Thanks, Greg.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Michael Falcone for any closing remarks.

[Michael Falcone:]

Great. Thanks, operator. Obviously, the sort of environment which we operate looks dramatically different from the environment that existed a few weeks ago when we did our business plan, a month or two ago when we did our business plan. But at this point we feel pretty good about our ability to continue to execute on the business plan.There certainly could be some disruption over the next month or so, but in the longer term we are excited about our future. But obviously there’s a great deal of uncertainty brought on by the virus and the economic impact of the virus.And we’re doing the best we can to keep up with what’s happening in that regard, but it frankly gives us a very cloudy picture as I’m sure most people who are trying to run companies or businesses would tell you the same thing these days.So thanks for your support. We continue to be dedicated to the success of this company and we thank you all very much for your continued support as shareholders and the time you took this morning. So everybody, be well. Thank you.

[Operator:]

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