MMA Capital Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 10 Aug 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Management, LLC 2018 Second Quarter Financial Results and Business Update Conference Call. My name is Andrew, and I will be your coordinator for today. [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 Management, 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. 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 Management, LLC.

[Michael Falcone:]

Thank you, Andrew. Good morning, everyone, and welcome. With me on the call today are David Bjarnason, our Chief Financial Officer; Gary Mentesana, who I am happy to call President and Chief Operating Officer; and Senior Vice President, Megan Sophocles. For our call this morning, Dave, Gary and I will deliver our prepared remarks, after which we will all be available to take questions. The purpose of our call today is to review MMA Capital Management's second quarter 2018 financial results and to provide an overall business update. With respect to the financial results, which Dave will review in detail later, the company ended the quarter with $186.7 million of common shareholders' equity, which represents an increase of $8.3 million or approximately 4.6% for the quarter. Diluted common shareholders' equity per share or book value per share came in at $32.02, an increase of $1.20 per share or 3.9% for the quarter, which primarily reflects the impact on book value per share of continuing operations, the exercise of stock options and the issuance of shares as part of the strategic transaction that closed with the affiliates of Hunt Companies, Inc., and who we will refer to as Hunt in our remarks that follow, in January, exclusive of the MGM transaction, which is yet to close. The net increase in common shareholders' equity in the quarter was driven by $6.8 million of comprehensive income, which was primarily driven by operations of the affordable housing and renewable energy partnership investments. This increase was also driven by $1.5 million of other increases to common shareholders' equity that resulted from the issuance to Hunt of 125,000 shares for $34 per share, the exercise of stock options during the quarter and the implementation of the share buyback plan that repurchased approximately 121,000 shares at an average price of $27.60 per share during the quarter. Overall, even with the capital activity, comprehensive income from continuing operations represented the most significant driver behind the second quarter increase in common shareholders' equity. The company saw quarterly increases in both net interest income and equity and income from our unconsolidated ventures, while, as Dave will further discuss, we reported a $5.2 million decrease in operating expenses in the second quarter. During the first quarter, the company adopted a share buyback plan that allowed share repurchases to begin in the second quarter. Pursuant to that share buyback authorization, as noted earlier, the company repurchased 121,000 shares, with an average buyback price of $27.60 during the quarter. Subsequent to quarter-end, the company completed the original 2018 authorization, with total purchases of 125,000 shares at an average price of $27.56 per share. Due to the completion of the initial authorization and the current trading price of our shares, the company has authorized another 62,500 shares for the 2018 share buyback plan at price of up to $31.50 per share. For a review of our operating portfolio, let me turn the call over to Gary. Gary?

[Gary Mentesana:]

Thanks, Mike. With respect to our Leveraged Bonds portfolio, the properties underlying investments in this portfolio continued to perform well, as there were no new defaults while the weighted average debt service coverage ratio and pay rate associated with our holdings held steady during the quarter. In addition, we recognized $5.6 million of net fair value gains in connection with the bond-related investments in the second quarter. At June 30, this portfolio of UPB and fair value were $229 million and $237 million, respectively. While at March 31, its UPB and fair value were $236 million and $230 million, respectively. Excluding the effects of subordinated cash flow bonds and other bonds as reported in Table 1 of our filing, the portfolio's weighted average pay rate and debt service coverage ratio were slightly higher in the quarter at 6.27% and 1.19x, respectively, versus 6.22% and 1.18x, respectively, at the end of the first quarter. Additionally, the weighted average effective interest rate of asset-related debt that partially finances this portfolio, which had a net carrying value of $96.6 million at June 30 was steady on a quarter-over-quarter basis at 2.9%. In our Energy Capital portfolio, the carrying value of our equity investments in Solar Ventures was $93.8 million at June 30, up from the $86.1 million reported at March 31. This increase was driven, in part, by the buyout of our investment partner in Renewable Energy Lending, or REL, for $5.1 million during the quarter. As a result of this buyout, the company is now the sole owner of REL, and in this regard, the company and affiliates of third-party alternative asset manager are co-investors in three other solar joint ventures that will continue to make and hold solar loans. We continue to believe that this should enable the company to grow its equity over time. Further, the buyout of our investment partner in REL is an important extension of the Hunt transaction as it enables the company to increase the amount of equity that it can deploy in the Renewable Energy Lending space through the termination of what was essentially a cap on the amount of equity that the company could invest in REL. Moreover, we believe that consolidating REL's decision control with Hunt Investment Management will enable the company to enhance its returns on equity invested in REL. In our view, opportunities within the Renewable Energy Lending space are compelling, and we are confident that this transaction will enable us to enhance shareholder value over time. Lastly, the other assets and liabilities portfolio includes three limited partner investments in Low-Income Housing Tax Credit funds that the company acquired during the year as well as the Hunt note and land development deals. With the exception of the Hunt note, we do not expect assets in this portfolio will contribute consistently to quarterly income, but we will continue to seek ways to maximize these assets to eventually realize what we believe will be their full market value. With that, I'll turn the call over to Dave, who will discuss the financial results in greater detail. Dave?

[David Bjarnason:]

Thanks, Gary, and good morning, everyone. As mentioned, common shareholders' equity increased $8.3 million in the second quarter to $186.7 million. In this regard, diluted common shareholders' equity per share increased $32.02 per share or $32.02 per share, which represented $1.20 increase on a quarter-over-quarter basis. As Mike also mentioned, increases in common shareholders' equity and diluted book value per share were primarily driven by $6.8 million of comprehensive income that we recognized in the second quarter. Comprehensive income that we reported in the second quarter, which was $20.7 million less than we reported in the first quarter, included $2.8 million of net income and $4 million of other comprehensive income. As I'll further discuss, this decline was primarily attributable to nonrecurring income that we recognized in the first quarter related to the settlement of the Hunt transaction. We also recognized $1.5 million of other changes to common shareholders' equity in the second quarter that essentially reflects the dollar impact of the difference between the amount of shares issued by the company versus the shares we purchased just during second quarter. From a liquidity and capital resources perspective, we ended the second quarter with $27 million of cash and cash equivalents, which decreased to $6.4 million since March 31, 2018. Additionally, in the second quarter, the carrying value of our debt decreased by $2 million to $203.1 million, while the average coupon of such debt obligations increased by 20 basis points to 3.6%. This said, I'll now briefly touch on key performance drivers in the company's second quarter results, including for each of the company's portfolios. With respect to our Leveraged Bond portfolio, as Gary noted, we reported $5.6 million of net fair value gain in the second quarter related to our bond-related investments. This net increase was largely attributable to the change of fair value of a property that secures a nonperforming multifamily tax exempt bond investment, an increase in value which considers third-party indications of value that were obtained in connection with the pending sales of such property. By comparison, we reported a $2.9 million of net fair value losses in the second -- or in the first quarter related to our bond-related investments. Net fair value gains on bond-related investments were augmented marginally by net fair value gains that we recognized in connection with interest rate swaps and caps that we used to hedge various sources of interest rate risks. We recognized $200,000 of net fair value gains on all interest rate hedge positions in the second quarter, a decrease of $1.6 million compared to net fair value gains that we recognized on these hedge positions in the first quarter. Net fair value gains on such positions softened in the second quarter as increases in referenced interest rate were less significant compared to the first quarter. From a yield perspective, we recognized $2.7 million of interest income in the second quarter related to our bond investments, which represents a $200,000 increase compared to the amounts recognized in the first quarter that was primarily driven by an increase in interest payments received in connection with our investments in nonperforming and subordinated cash flow multifamily tax exempt bonds. Our cost of funding associated with on-balance-sheet debt obligations with the Leveraged Bond portfolio was $670,000 in the second quarter, which increased slightly compared to amounts recognized in the first quarter due to an increase in the average balance and effective interest rates associated with our asset-related debt. With respect to our Energy Capital portfolio, we continued to see positive returns in the second quarter from investments in our Solar Ventures. At June 30, 2018, the unpaid principal balance of loans that were funded through the Solar Ventures was $174 million, while loans outstanding had a weighted average remaining maturity of 5 months and a weighted average coupon of 9.1%. As Gary mentioned, our equity investments in these ventures had a carrying value of $93.8 million at June 30, 2018. This said, in the second quarter, we recognized $1.66 million of equity and income from these ventures, which represented a $1.1 million increase compared to what we recognized in the first quarter. This increase was primarily driven by an increase in nonorigination volumes and by the buyout of our investment partner's interest in REL, the latter of which caused the company's returns to no longer be subordinated to -- or reduced by the return -- further return of our former investment partner's interest. The $5.1 million purchase price that we paid to complete this buyout was allocated to the net assets that we acquired based on their relative fair values. In this case, the adjustment that we recognized to the book value of our investments in the Solar Ventures that was in excess of our ownership interest of the net assets acquired will be amortized over a five year period as a component of equity income from these ventures. With respect to other assets and liabilities, we recognized $1.2 million of interest income in the second quarter in connection with cash, loans and other short-term investments in this portfolio, which represented a $200,000 increase compared to the amount of interest income that we recognized on these investments in the first quarter, an increase that was driven primarily by the recognition of a full quarter's interest on our $57 million note receivable from Hunt and the accrual of interest related to a solar loan that we recognized on our balance sheet when consolidating REL for recording purposes in the second quarter. This particular solar loan was fully redeemed at par prior to the end of the second quarter. The cost of funding associated with debt obligations in this portfolio was $1.2 million in the second quarter, which increased by approximately $100,000 compared to the first quarter as the weighted average effective interest rate on this debt increased by approximately 50 basis points. We recognized other income of $300,000 in the second quarter, which represented a $70,000 increase compared to amounts recognized in the first quarter. This increase was primarily attributable to a payment received by the company in connection with its consent to release a third party from a financial guarantee that it has provided on a real estate investment that the company disposed off in 2015. Lastly, equity and income that we recognized in the second quarter associated with real estate-related investments and the other assets in the liabilities portfolio was relatively negligible and decreased by $400,000 in a quarter-over-quarter basis. This decrease is primarily related to the company's ownership interest in the South Africa Workforce Housing Fund and was driven by a second quarter decline in the fair value of certain investment holdings of this fund. With respect to our core operating expenses, which include salaries and benefits, external management fees and reimbursable expenses, general and administrative expenses, professional fees and other expenses, we recognized $3.1 million of such expenses in the second quarter. This represents a decrease of $5.2 million compared to what we reported in the first quarter. This decrease was primarily driven by $2.6 million decline of professional fees, which decreased as nonrecurring Hunt transaction deal cost that we recognized in the first quarter are now behind us; and a $0.60 per share decrease in MMA's common share price, which caused the decrease in stock compensation expense that we recognized in the second quarter. The company also recognized in the second quarter $2.2 million of external management and reimbursable expenses payable to Hunt, our external manager. This amount is comprised $1 million of base management fees and $1.2 million of reimbursable compensation-related expenses of our external manager. The $2.5 million annual cap on employee compensation-related reimbursements that are payable to the external manager was reached in the second quarter, which partly explained the $300,000 quarter-over-quarter decrease in the amount of total management fees in reimbursable expenses that were paid by the company to the external manager. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. Before we get to the Q&A, I just want to turn the call briefly back to Gary to clarify something that he said earlier, and then I'll provide a brief update on some other matters. So Gary?

[Gary Mentesana:]

Yes. Thanks, Mike, and I apologize, everybody. In my remarks, I was talking about the UPB and fair value changes from the amounts at March 31, 2018 to June 30, 2018. And I indicated that at March 31, the UPB and fair values were $236 million, $230 million respectively. The actual numbers are $230 million and $232 million. Again, I apologize.

[Michael Falcone:]

Thanks, Gary. I'd like now to provide a brief update on the ongoing impact to the Hunt transaction given the changes to our business model and subsequent transactions. As we disclosed in various company filings related to the Hunt transaction, the company continues to defer approximately $14 million of additional income, where recognition would be triggered should Hunt decide to take an assignment of the agreements to acquire Morrison Grove Management, MGM, and certain-related assets and subject to the terms of such agreements to consummate the acquisition of the MGM Low-Income Housing Tax Credit business. We anticipate that subject to the receipt of satisfactory closing deliverables, Hunt will take assignment of the right to purchase MGM and close on the transaction. I cannot provide certainty as to timing, and I should also continue to mention that the estimated additional income to be recognized may differ from amounts that may ultimately be recognized in our financial statements, given that there are certain purchase price adjustments and transaction-related expenses that are not factored into our estimate, although these adjustments are not expected to be material. In addition, as we have previously reported, Hunt successfully closed on its commitment to acquire from us 250,000 common shares in two equal installments, with the first purchase occurring at $33 per share and the second occurring at $34 per share for an average of $33.50 per share. The first purchase of 125,000 shares occurred on March 9 in exchange for $4.1 million of cash, and the second purchase of 125,000 shares occurred on June 26 in exchange for $4.25 million in cash. As we have progressed throughout this year, we have seen increased organizational and reporting simplicity, which was a significant goal of the Hunt transaction. Increasing simplicity and investor understanding of our business remains an important goal, and one that we will continue to work on going forward. As we move forward, we have the opportunity to realize additional benefits from the Hunt relationship, including other debt-focused investment opportunities that are brought to the company due to the origination reach of the Hunt team. That said, we continue -- we expect to continue to invest primarily in debt associated with real estate and infrastructure, which we think will produce positive social or environmental impacts and can generate low to teens returns. As time goes on, the mix between the asset types may evolve, but the externalization of management leaves MMAC with access to origination capacity in both areas, even if from time-to-time, we will overweight or underweight particular elements of our investment mix. Further, the board has approved the conversion of the company from a limited liability company to a corporation for legal purposes. We expect to put this change through a shareholder vote via proxy in the fall after we complete certain regulatory steps. From a shareholder perspective, we have been taxed as a corporation since 2013, and this is the logical result of that earlier election. Ultimately, as a corporation, we believe that we expand our potential shareholder base, becoming eligible for certain indices, such as the Russell 2000 Index and eliminating a barrier to ownership for a number of mutual funds that would otherwise be unable to invest in our shares. We are taking this step as part of an overall effort to initially close the gap between our trading price and book value per share and to further enable the trading price of the stock to better reflect the value of the company. Now I want to take a moment to acknowledge Gary and his promotion. As some of you will have seen in the 10-Q filing yesterday morning, the MMAC board voted on Tuesday to acknowledge what have been the facts on the ground for a long time now and change Gary's title to President and Chief Operating Officer of MMAC. For some context, Gary has been involved with MMAC before it was MMAC. Even before it was MMA, Gary began as a fund accountant for the SCA Tax-Exempt Fund, a predecessor entity, about 30 years ago. He was a key member of the team that converted that entity to MMA and has been a driving force in the company ever since. I suspect most of you were fast to describe Gary's role whether I've already said that Gary was the Chief Operating Officer. His business acumen, moral compass and sense humor have all contributed to his long and successful leadership of the business. I'm certain he will continue to grow -- I'm certain we will continue to grow and prosper under his day-to-day leadership. Before we take questions from our callers, I just wanted to reiterate that we remain focused on improving the per share value of the company and maximizing returns through shareholders. We are excited about the future, remain committed to our shareholders, and we thank you for your support. We will now open the call to questions. Operator?

[Michael Falcone:]

Thanks, operator. I guess I ought to let Gary do this call -- all these calls from now on given that in his debut, we managed to explain this so clearly that there were no questions. We are excited about our future. We appreciate all of the shareholders' support that we've had to date, and we're hopeful of continued success going forward. I hope everybody enjoys the rest of their summer. Thank you.

[Operator:]

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