MMA Capital Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 12 Nov 2018

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Management, LLC 2018 Third Quarter Financial Results and Business Update Conference Call. My name is Andrea, 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 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. 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 conference call over to Mr. Michael Fe [ph], CEO of MMA Capital Management, LLC.

[Michael Falcone:]

Thank you, Andrea. Good morning everyone, and welcome, and happy Veterans Day. With me on the call today are Dave Bjarnason, our Chief Financial Officer; Gary Mentesana, our Chief Operating Officer; and Senior Vice President, Megan Sophocles. For our call this morning, Dave, Gary and I will deliver our prepared remarks, after which we will all be available to take questions. The purpose of our call today is to review MMA Capital Management's third quarter 2018 financial results and to provide an overall business update. On Friday evening, we filed our third quarter Form 10-Q and issued our earnings release. Last night, we posted our Investor Presentation on our Web site, which we will reference during our remarks. As you will see, we implemented a number of enhancements to the Investor Presentation in hopes of providing more information on our portfolio and on the strategic positioning of the company. With respect to the financial results, which Dave will review in detail later, the company ended the quarter with $193.5 million of common shareholders' equity, which represents an increase of $6.9 million, or approximately 3.7% for the quarter. Diluted common shareholders' equity per share or book value per share came in at $32.96, an increase of $0.94 per share, or 2.9% for the quarter, which primarily reflects the impact on book value per share of comprehensive income that we reported in the third quarter. In addition, I'm happy to say that just after quarter end Hunt exercised its right to take assignment of the company's right to acquire MGM. As a result of that assignment and subsequent closing by Hunt, the company expects to recognize an increase in shareholders' equity of approximately $14.2 million in the fourth quarter, or approximately $2.35 per share of book value based on the shares outstanding as of September 30, 2018. This represents the completion of the Hunt transaction and a significant step towards the realization of the company's goal of simplifying our business and related financial reporting. For a review of our portfolios, let me turn the call over to Gary. Gary?

[Gary Mentesana:]

Thanks, Mike, and good morning everyone. The company's portfolios consist of Energy Capital, Leveraged Bonds, and Other Assets and Liabilities. In the Energy Capital portfolio, the company has invested alongside an institutional capital partner in three Solar Ventures that primarily finance the development and construction of renewable energy projects. In the third quarter, the carrying value of our equity investments in the Solar Ventures increased by $21.7 million, to $115.5 million at September 30, primarily due to the capital contributions into the ventures during the quarter. As September 30, the loans in the Solar Ventures had an aggregate UPB of $178.7 million, a weighted average remaining maturity of five months, and a weighted average coupon of 9.2%; these loans generated origination fees that ranged from 1% to 2% on committed capital, and featured coupons that ranged from 7% to 13.5% on the UPB. From its inception in 2015 through September 30, 2018, over $1.1 billion of project-based debt financing has been originated for the Solar Ventures that will enable the completion of over 1.9 gigawatts of renewable energy. In excess of $800 million of these investments have redeemed, and I'm happy to report that most have performed better than underwritten, and none have experienced any loss of principle. The current strength of the pipeline, coupled with the buyout of a former investment partner, in June, affords the company the opportunity to make additional investments in the Solar Ventures at attractive risk-adjusted returns. Consequently, the company is looking to raise additional capital for this portfolio, which will likely include exiting investments that are generating below target returns. We believe that these efforts will increase the company's return on invested capital over time. Turning to the Leveraged Bonds portfolio, the fair value of bonds was $222 million, which represented 103.7% of their UPB at September 30, 2018. The associated Total Return Swap, or TRS financing, had a notional balance of $153 million, and a weighted average pay rate that was generally SIFMA plus a weighted average spread of 1.34%. In notional terms, we have hedged $95 million of the TRS interest rate exposure using both pay fixed interest rate swaps and a $45 million interest rate cap that are tied to SIFMA. Hedged positions with a combined notional amount, of $110 million, are contractually due to mature in 2019. The properties underlying our bond investments continue to perform well as there we no new defaults, while the weighted average debt service coverage ratio and collection rate were 1.12 times and 6.3% at the end of the quarter, and are relatively unchanged since June 30. The UPB and fair value of the bond portfolio declined by $15 million during the third quarter, primarily as a result of the disposition of two bond investments. As discussed on prior calls, sourcing new bond investments that meet our target investment returns is difficult in a low rate environment. Consequently, the bond portfolio is essentially in runoff, with approximately 88% of the bond portfolio being eligible to be prepaid at par by 2022. Therefore, regardless of changes in interest rates and credit spreads, most of the $8 million of net bond fair value premiums are expected to decrease to zero over the next few years. And the fair values in such bonds compress par with the passage of time, which will cause our projected returns to fall below our targeted returns over that period. As a result, we are looking to recycle some or all of the equity invested in bonds with premiums into energy capital investments to increase the company's return on invested capital. I should also briefly mention that the company agreed in early October to restructure two municipal bond investments that finance the development of infrastructure at the Spanish Fort Town Center, a mixed-use town center development near Mobile, Alabama. On September 30, these two bond investments had a combined UPB and fair value of $26.8 million and $21.6 million respectively at a coupon of 6.75% and a weighted average maturity of 15.4 years. Under the terms of the restructuring, a single tax exempt bond was issued to the company that has a UPB Of $27.2 million, a coupon of 6.3%, and a contractual term of 30.1 years. Additionally, the community development district in which the development is located will assess owners of undeveloped land parcels and undeveloped land license fee that will supplement the incremental tax revenues generated from the development. This new fee will increase the amount of funds available to the CDD to make principal and interest payments to the company on its bond. The real estate venture that owns the building also owns all undeveloped land parcels in the CDD. And the company is an 80% member in that venture. Members in the venture will make capital contributions in order for the venture to satisfy its financial obligations associated with the undeveloped land license fees. However, through amendments to the ventures operating agreement, the company will bear a 100% of the economic burden of those undeveloped land license fees until such time that the land parcels are sold to third parties or developed by the venture. With respect to other assets and liabilities portfolio, and except for the Hunt note, which increased in the UPB from $57 million in September 30 to $67 million upon the closing of the Hunt acquisition of MGM in October, we do not expect assets in this portfolio to contribute consistently to quarterly income, but we continue to pursue opportunities to monetize these assets and realize what we believe to be their market value. With that, I will turn the call over to Dave who will discuss financial results in greater detail. Dave?

[Dave Bjarnason:]

Thanks, Gary, and good morning everyone. As mentioned, common shareholders' equity increased $6.9 million in the third quarter to $193.5 million. In this regard, book value per share increased to $32.96 per share which represented a $0.94 per share increase on the quarter-over-quarter basis. Increases in common shareholder's equity and book value per share were primarily driven by $5.3 million of comprehensive income that we recognized in the third quarter. Comprehensive income, which included $8.6 million of net income, $3.3 million of other comprehensive loss, increased $1.6 million compared to the second quarter. Now I will touch on performance drivers in more detail. At a very high level, comprehensive income soften in the third quarter in large part due to decline in net revenue gains on our bond investments. However, a quarter over quarter increase in equity income and unconsolidated funding ventures partially offset this impact. Compared to the second quarter, net income increased $5.9 million in the third quarter. Table seven of our filing which is located on Page 13, desegregates the components of net income. And there were two key drivers for this quarterly increase. First, net gains increased by $5.2 million primarily as a result of the disposition of two bond investments that had approximately $5.1 million on unrealized holding gains that were reclassified out of AOCI into net income upon their de-recognition. Secondly, across all portfolios, equity and income in unconsolidated funding ventures increased to $1.7 million compared to second quarter. This increase was largely attributable to LP investments in the other assets and liabilities portfolio. Partnerships associated these investment saw two property investments in third quarter pushed the company's share of income higher compared to the prior quarter. While these two items drove the largest change in the net income, there are several other drivers worth noting. Net interest margin in the bond portfolio decreased $500,000 on a quarter-over-quarter basis. This decline was primarily due to a decline in interest payments received on both non-performing and subordinated cash flow, multifamily taxes and bonds. In this regard, our cost funding associated with asset-related debt was relatively unchanged on a quarter-over-quarter basis. Interest income associated with cash, loans, and other short-term investments as well as our cost of funding associated with debt obligations in other assets and liabilities portfolio was also relatively steady compared to the second quarter. We also recognized the third quarter $1.1 million of net fair value gains associated with our TRS, our interest rate derivatives in the foreign currency hedge position. Incidentally, compared to the second quarter this net gain reflected a $700,000 decrease in the net fair value adjustments on our TRS derivatives. It was partially offset by a $300,000 increase in net fair value adjustments on our interest rate hedge positions. Lastly, the company's operating expenses increased about $400,000 on a quarter-over-quarter basis. In this regard, professional fees increased $600,000 in third quarter due to non-recurring professional fees associated with the completion of the MGM transaction, while other expenses also increased by $600,000 due to foreign currency losses that were recognized in connection with the re-measurement of foreign currency dominated assets and liabilities. However, the impact of these two items was partially offset by a $1.1 million decrease in external management fees which declined in large part because of the compensation expense, reimbursement cap, the company's management agreement was reached in the second quarter, thereby reducing the amount of reimbursed flex bonds incurred by the company in the third quarter. As mentioned, while our net income increased $5.9 million in the third quarter, other comprehensive income decreased by $7.4 million compared to the second quarter. Table five of our filing which is located on the Page on 11, desegregates the components of other comprehensive income. And there were two primary drivers for the quarterly decrease in other comprehensive income. First, $5.1 million of unrealized holding gains were reclassified out of other comprehensive income in the earnings as a result of our third quarter disposition of two bond investments that I mentioned earlier. While this reclassification was equity-neutral, it consequently reduced the amount of other comprehensive income that company recognized them for the quarter. Secondly, there was a $3.4 million decrease in the amount of net fair value gains that we recognized in remaining bond investments. As discussed, we recognized $4.9 million home lien in the second quarter in connection with a non-performing bond investment. However, bond related for value adjustment of the similar magnitude were not recognized in the third quarter. As mentioned, in addition to comprehensive income, the company recognized $1.6 million of other changes to common shareholders' equity in the third quarter. These changes included a $2.3 million increase in common shareholders equity that was driven by the issuance of shares to settle stock ops that were exercised during the quarter. However, in the third quarter, the company also purchased approximately $28,000 shares at an average price of $27.11 per share which resulted in $800,000 of offsetting reduction in the common shareholders equity. Lastly with respect to the company's liquidity and capital resources, the company had $26.5 million of cash, cash equivalents and restricted cash as of September 30, 2018; $15.6 million of which was unrestricted. Table 17 of our filing breaks down the $73.7 million net decrease in the company's cash and cash equivalent and restricted cash during the first nine months of 2018. The impacts of deconsolidation of CFVs, conveyance of cash as part of Hunt transaction, and other investing activities including investments that we made in Solar ventures accounted for 90% of these decrease while the balance of decreased evenly split between cash used for operating and finance activities. And I am saying this one should keep in mind that when a value added net cash flow is used in operating activities during the first nine months of 2018, we classified a $9 million loan required from MGM affiliate as held for sale. As a result, investment that the company made in this fund was not permitted under GAAP to be treated as an investing activity. And given the magnitude of this transaction caused cash flow used in operating activities to be recorded as negative on a year-to-date basis. And importantly, spin-offs denoted [ph] during the third quarter, the company generated $5.2 million of net cash flows from operating activities. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. Before we get to the Q&A, I'll provide a brief update on the buyback plan, the evolution of our business model and subsequent transactions. With respect to the buyback plan, company continued a successful execution of buying shares with significant discount to book value. Year-to-date, the company has repurchased $187,500 shares at an average buyback price of $27.25 with approximately 28,000 shares of that total coming during the third quarter. Due to the success of that buyback, the company increased the 2018 authorization to 218,750 shares, an increase of 31,250 shares, and raised the price limit to our currently reported book value per share of $32.96. The company continues to view repurchases at a price up to book value per share as a good use of capital, especially in a market where trading prices remain at such a steep discount to book value per share. From a business operations perspective, following the settlement of Hunt's acquisition, the MGM LIHTC business, we have fully transitioned the business as initially envisioned with the Hunt transaction, which enabled us to achieve significant value realization from our tax credit in international businesses, simplified our balance sheet, reduced our overhead, increased transparency, and preserved both our net operating losses and our attractively priced long-term subordinate debt. As such, we are now solely focused on creating and maintaining the optimal investment mix in the current business environment. To that end, we continue to review our existing asset mix, and look at new initiatives in an effort to improve existing returns by identifying investments which we think will produce attractive risk adjusted returns and generate positive social or environmental impacts. At this time we are primarily focused on growth opportunities in the renewable energy infrastructure space as evidenced by our increased investment during the quarter and the buyout of our former venture partner earlier this year. To take advantage of current market opportunities and increase the company's return on invested capital, we are exploring various ways to raise capital to invest in this portfolio including by recycling equity out of existing investments such as bonds with fair value premiums that will decrease with the passage of time and certain other assets that are generating below target returns. In general, we see two primary paths to increase shareholder value. First, growing the value of the business and second narrowing the gap between book value per share and trading price. With time, we anticipate net income growth will be the e-driver of long-term value for our investors. In fact, that growth in net income will also inform our capital return policies as impacts cash available for shareholders. As Gary spoke to earlier, we have an actionable path to putting capital to work in growing those top and bottom-line numbers primarily through additional investment in the energy capital business. In addition, we have a series of ongoing efforts to improve our market trading price which includes our current buyback program and other initiatives such as our conversion to a corporation and an expected increase in investment community and capital market outreach as part of our 2019 business plan. Ultimately, the success of the company will include finding a balance between maintaining adequate capital levels to take advantage of the growth opportunities in front of us and pursuing initiatives that will benefit our investors long-term. Before we take questions, I want to remind everyone that the company has a special meeting of shareholders scheduled through November 20, 2018 to vote on the board's recommendation that we formally convert the company from a limited company to a corporation for legal purposes. The proxy was sent at the end of September and votes are due by next Monday, November 19. This action is one of the strategic steps we're using to help expand our potential shareholder base and achieve eligibility for certain indices such as the Russell 2000 Index as well as eliminating a barrier to ownership for a number of mutual funds that would otherwise be unable to invest in our shares. We strongly encourage shareholders to vote their shares if they have not yet done so. In closing, we are excited about the future, remain committed to our shareholders and we thank you for your super. We will now open the call to questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Now, our first question comes from Jesse [ph] Greenfield of Greenfield Investments. Please go ahead.

[Unidentified Analyst:]

Mike, you've shown a consistent path of increasing the book value, and I want to congratulate you on that. My major question is, isn't it time to reward the stockholders with a cash dividend? At what point do we try to enrich the stockholders other than in book value form? And if in fact, a dividend program were instituted my belief is that the stock price would follow on the upscale -- on the upside based upon the amount of the dividend. So if you could comment on that I'd appreciate it. And also explain what you think are the pros and cons of a dividend?

[Michael Falcone:]

Sure. And I would say, first of all, we have tried to return capital to the shareholders via the share buyback plan, and that has usually resulted in us buying back shares in the sort of high single-digits in every year. So, I kind of view that in some ways -- I view that, not in some ways, but I do view that as a program to return capital to shareholders. It ends up being returned to select shareholders and to those who in the current environment are willing to get out at a discount to book value, but nonetheless that's what it does. As a Board, we are not satisfied with the discount between the current share price and the equity value of the company measured on a GAAP basis and measured on what we think is the intrinsic value of the company. We are always looking at what we should be doing to try to close that gap. The current implementation of that is the move to convert to a C-Corp. We have talked about a range of other ways to return capital to shareholders, including having had discussions about a dividend. I think at this point it's the view of the Board that the dividend is not the most efficient way to return capital to shareholders. I'm not saying that is not something that we will consistently consider, because it is something that we have talked about with some regularity. We talked earlier today about the fact that we are moving down the path towards simplification. We're not quite there yet. Admittedly, this quarter and next quarter are going to be sort of messy quarters in terms of gains and cleaning up the balance sheet and all sorts of things. And I think when we get to a point where if you had a very clear run rate from our investments in Solar business, a very clear access to additional capital alongside of those investments, we know what our cost to capital is, we know what our operating expenses are, and we've gotten to a point of much more predictability and regularity around the income, I think that would be a time to once again address with great seriousness the question of a dividend, but at least right now, when those things are not as predictable as we would like, returning capital via the share buyback plan and using capital to invest in our business where we see particularly in the energy business, tremendous opportunity is, I think, important. But we certainly have continued to consider all options to improve value for shareholders as I think any company should.

[Unidentified Analyst:]

Okay. And the second thing I'd like to ask is can you give us any color on where you expect the book value to be a year from now, two years from now, are there opportunities on the balance sheet to realize some significant gains by converting it?

[Michael Falcone:]

So, I don't think we have put out the numbers that are surveying sort of prediction about future value. I think we have talked about things that are on the balance sheet that are -- or things that we -- we have made disclosures about things that we own that don't manifest themselves in the balance sheet. The two biggest things would be net operating losses, which are essentially valued at zero, and the disconnects between the fair value of the sub debt and its face value on our books. Those two numbers are significant, and they don't appear on the face of our income statement. We are also -- or in case of our balance sheet, we are also looking to try to monetize other assets, particularly the Russell and Spanish Fort assets. It's not entirely clear to us at this point that they are sort of gains in either of those parcels, though we believe that with a robust marketing program we can [indiscernible] some gains at least out of Russell, and part of the reason for the restructuring of the Spanish Fort bonds was to see if we could perhaps create some bonds there that eventually will be more marketable than they were. So we still believe we have some one-off gains on the balance sheet as we go forward, but we haven't yet quantified those for public consumption.

[Unidentified Analyst:]

Thank you, Mike, I appreciate it. Thanks for the update.

[Michael Falcone:]

Thanks, Jesse [ph].

[Operator:]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mike Falcone for any closing remarks.

[Michael Falcone:]

Yes, thank you very much, Andrea, and thank you to our shareholders. We appreciate the fact that folks have stuck with the company, that you have remained dedicated to your ownership in our shares, and we look forward to continuing our efforts, both to grow book value per share as well as to close the gap between the current share price and what we believe is the true value of the company. And so, thank you all very much, and enjoy your day and this upcoming holiday season. Thank you. Bye.

[Operator:]

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