MMA Capital Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 19 Mar 2018

[Operator:]

Good morning, ladies and gentlemen. And welcome to the MMA Capital Management LLC 2017 Year End and Business Update Conference Call. My name is Anita and I will be your coordinator 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. These could cause actual results to differ materially from those expressed in these forward-looking statements. The Company undertakes no obligation to update any of this information contained in the forward-looking statements. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Michael Falcone, CEO of MMA Capital Management. Plesae go ahead.

[Michael Falcone:]

Thanks, operator. Good morning everyone and welcome. With me on the call today are Dave Bjarnason, our Chief Financial Officer and Senior Vicce President, Megan Sophocles. Gary Mentesana, who usually joins us in on vacation this week and will not join the meeting this morning. That said, Dave 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 our full year 2017 results and to provide an overall business update, including updates following the recent transaction with Hunt and our transition to an external management arrangement. We will necessarily discuss some of the business lines we sold, because they are part our 2017 results. I will spend more time discussing our continuing operations rather than focusing on the recently sold businesses. With respect to our financial results, which Dave will review in detail later, we ended the year with $137.5 million of common shareholders equity, which represents an increase of $12.2 million or 9.8% for the year. Diluted common shareholders’ equity per share came in at $24.48, an increase of $3.73 or 18% for the year, which reflects the impact of both performance and our buyback plan on the book value per share. But increasing common shareholders’ equity in 2017 was driven by $22.7 million of comprehensive income, which was partially offset by $10.5 million of other reduction to common shareholders’ equity that was primarily driven by share buybacks. Overall, income that we recognized in 2017 reflect positive returns from realization events in our low income housing tax credits business lines from real estate related investments from our solar lending joint ventures and from investor capital raising efforts in South Africa. As a result, we saw year-over-year increases in fee and other income, equity and income from unconsolidated funds and ventures, and net income from consolidated funds and ventures that is allocatable to common shareholders. During the quarter, we purchased approximately 400,000 shares through our share buyback program at an average price of $24.01 per share, which caused 9.6 million reduction in common shareholders’ equity. We continue to view share buybacks as a tool in our tool box for creating shareholder value, but with the Hunt transaction, we have added other significant tools that we will use in addition to and perhaps in lieu of share buybacks as times goes on. Chief among these tools is the ability to make accretive investments based on investment opportunities that we expect to see as a result of the origination capabilities upon. In the long-term, the company will seek to invest capital and high-single and low-double-digit returns, which combined with our current un-invested capital ability to utilize tax losses and relatively in excess of borrowing costs, could provide significant long-term growth opportunities for the company for the investment of retain capital. Our long-term goal is to issue new shares in order to grow our investment base and to do so at such time since we determine that issuing new shares would be accretive. In the near-term, the Board has adopted 2018 share buyback authorization currently set at 125,000 shares and with a buyback price limit of $30 per share, roughly 9% discount to the price at which we issued shares earlier this month, which was $33 per share. Across our U.S. operations more broadly, we saw positive returns from our bond portfolio, experienced continued growth in our energy lending joint ventures and saw our LIHTC business line continue to perform as expected, resulting in a very strong year of performance for the U.S. businesses. Within our leveraged bond business line, our bond portfolio continues to perform at a high level but there were no new defaults while the weighted average debt service coverage and collection rate of our holdings further increased throughout the year. The leverage bond portfolio contracted slightly in 2017 due to run-off. At December 31, 2017, this portfolio's UPB and fair value was $231 million and $236 million respectively, while at December 31, 2016 the UPB and fair value was $249 million and $256 million respectively. Although this portfolio’s UPB decreased slightly in 2017 and excluding the effects of subordinated cash flow bonds, its weighted average pay rate increased by 13 basis points during the year to 6.21% at December 31, 2017. While the debt service coverage ratio will leverage bond portfolio also increase to 105 times to 110 times over the same period, the leverage bond business line was generally not impacted by the sale of Hunt, rather we expect that our investments in bonds will remain a primary source of revenue in the coming years. Within our renewable energy finance business, the carrying value of our equity investments in our renewable energy joint ventures was $97 million at December 31st, up from $75.5 million at the beginning of the year. This net increase was driven in large part by our initial capital investment in Solar Development Lending LLC or SDL, which originate solar development loans and also invested in construction loans during the year. Our investments in these joint ventures continue to be a source of future investment income and an opportunity to put additional capital to work and what we hope will continue to be a growth area. Our LIHTC business continue to meet or exceed our expectations with significant year-over-year asset management fee revenue growth. In prior quarters, this is where I would remark that while this year represented a strong performance in this business line, results in the future periods are expected to be lumpy and hard to predict. In light of the Hunt transaction, we can actually simplify that statement to say that we enjoyed a very good year of returns from that business line, but we are able to capture the future value from this business line as part of the Hunt transaction on which I will also provide a brief update shortly. With respect to international operations, for the year, our operations in South Africa performed well, mainly from our continued capital raising efforts for Fund II. Although, we saw performance improvement in international operations during 2017, it was part of what we sold in the Hunt transaction, including both the investment and property management operations. The only exceptions is that we retain an 11.85% ownership interest in the South African Workforce Housing Fund, the first investment fund that was purchased from an original investor in 2017 pursuant to a put requirement and that enable that investor to recycle their investment into Fund II. This retained equity investment is expected to be monetized over the next few years as the South African Workforce Housing Fund Property exits LIHTC operations. Lastly, from a corporate operations perspective during 2017, we executed a discounted purchase of approximately $26.4 million of subordinated debt during the year, which resulted in $4.8 million debt extinguishment gain. At year-end and based on its unpaid principle balance, we had $92 million of relatively inexpensive subordinated debt outstanding. Additionally, as Dave will further discuss, all material weaknesses in our internal control of our financial reporting that we identified in our 2016 Form 10-K as the remediated in this regard we received the clean opinion from our external auditor related to the effectiveness of our internal controls at December 31, 2017. Before turning the call over to Dave, I’d also like to provide a quick update on various elements of the Hunt transaction given the changes to our business model and subsequent transactions. As we disclosed in both our January announcement in Form 10-K filings, we will recognize an estimated $32 million increase in common shareholders’ equity in the first quarter of 2018 in connection with the sale of our LIHTC business, our international operations and certain assets. And as we previously discussed, we would also recognize an estimated $14 million increase in GAAP common shareholders’ equity should Hunt decide to take an assignment of the MGM agreements and subject to the terms of such agreements consummate the acquisition of the MGM LIHTC business. In saying this, I should mentioned that these estimated increases to common shareholders’ equity are expected to defer from amounts that will ultimately be recognized in our financial statements given that there are various purchase price adjustments that are pending finalization while various transaction related expenses are pending recognition in our financial statements. Further, as we discussed before, we will recognize an estimated $9 million increase to common shareholders’ equity at January 1st in connection with the adoption of new revenue recognition rules, the transitional impact of which was primarily attributable to contracts so the companies conveys LIHTC business. Separately, Hunt agreed to acquire from us 250,000 common shares in two-week of installments with the first purchase occurring at $33 per share and the second to occur at $34 per share for an average price of $33.50 per share. We reported a week ago that Hunt successfully closed on the first purchase acquiring 125,000 shares in exchange for [2 million] 125,000 of cash on March 9, 2018. Pursuant to the transaction terms, the final purchase requirement must be completed by July 9, 2018. With that, I’ll turn the call over to Dave who will discuss the financial results in greater detail before I revisit the changes to our business from the Hunt transaction. Dave?

[Dave Bjarnason:]

Thank you, Mike and good morning everyone. As provided in overview of our results, I’ll refer to various tables in item seven of our Form 10-K. In the fourth quarter, we recognized a net increase in common shareholders equity of $1.8 million, while as Mike mentioned, common shareholders’ equity increased on a full year basis by $12.2 million to $137.5 million. In this regard, diluted common shareholders’ equity per share increased to $24.28 per share, which represented $1.22 per share increase in the fourth quarter and $3.73 per share increase on a full year basis. As Mike also indicated, the increases in common shareholders’ equity and diluted book value per share was driven by $22.7 million of comprehensive income and we recognized in 2017 including $7.7 million in the fourth quarter. In this regard, comprehensive income that we reported, which exceeded what we reported in 2016 by $2.8 million included $19.4 million in net income and $3.3 million in other comprehensive income. I’ll discuss in more detail later the key drivers of comprehensive income that we reported in 2017. And partially offset the comprehensive income that reported in 2017, we recognize $10.5 million of other reductions in common shareholders' equity compared to $5.8 million in the fourth quarter and were primarily due to share repurchases. As Mike mentioned, we purchased approximately 400,000 shares through our share buyback program at an average price of $24.01 per share, which caused $9.6 million reduction in common shareholders' equity. And while reported in capital resources perspective, we ended 2017 with $39.3 million of cash and cash and cash equivalents, which decreased $6.2 million on a year-over-year basis and a net cash flows used in financing activities modestly exceeded net cash flows provided by operating investing activities. As part of this net decrease in our restricted cash position was driven by the deployment of $21.8 million of corporate cash to execute discounted purchases of fixed rate subordinated debt in 2017. And in the process, we recognized $4.8 million of potential gains. More broadly, however, while we used $23.3 million in net cash flows and financing activities in 2017, we generated net cash flows of approximately $17.1 million from operating investing activities. And taking a closer look at drivers of comprehensive income that we reported, investors have mentioned, we reported $19.4 million of net income eligible to common shareholders in 2017, including $5.5 million in the fourth quarter. As you can see on the table nine of our filing, net income allocatable to common shareholders that we reported in 2017 was $23 million less than we reported in 2016. However, it should be noted that as you can see in table seven and nine of our filing, $33.1 million of gains and $3.6 million of losses that we recognized in net income in 2016 and 2017 respectively represent equity neutral adjustments that were counter balance and full by offsetting adjustments that we recognized in other comprehensive income during this reported period. In other words, the year-over-year decline in net income allocatable to common shareholders is similar to what we met by year-over-year increases in other comprehensive income. With that, I'll now touch on in a little more detail our key performance drivers in results associated with each of our primary business and financing activities that affected common shareholder's equity, starting with a look at of our bond portfolio. Excluding equity inflow adjustments that I mentioned earlier we reported approximately $3.1 million of net fair value gains in 2017 related to both bond investments that recognized at our balance sheet and total return swaps or TRS that we account for its derivatives with net fair value gains on these initiatives and relatively flat in the fourth quarter. By comparison, we recognized $12.7 million of net fair value gains associated with our leverage bond portfolio in 2016. In this regard, net gains that we reported in 2017 on our leverage bond portfolio were primarily attributable to fair value increases associated with underlying properties to secure certain of our subordinated cash flow and non-performing bond investments. From a yield perspective, we recognized $9.2 million of interest income in 2017 related to our bond investments, including $2.1 million in the fourth quarter. As you can see from table 11 in our filing, this represents $2.3 million decrease compared to interest income that we recognized in 2016 on our bond investments. This decrease was driven primarily by portfolio run off for the pay down of the investment in this portfolio coupled with the elimination of certain bond investments for reporting purposes due to the consolidation of certain property partnerships in 2016. With respect to other investments in leveraged bond business line and at December 31, 2017, we directly owned one parcel of land and our equity and/or an equity partner in the Spanish Fort venture whose incremental tax revenues secure infrastructure bond investments. Net returns in 2017 from investments in the sub portfolio that we owned at December 31st, were relatively negligible. Although, as discussed in the third quarter, the Savannah River land development was sold and as a result, we recognized $3.8 million of equity and income from the partnership that account such real estate. With respect to interest rate hedges, we recognized $1.2 million of net fair value losses in 2017, including approximately $500,000 of net fair value gains in the fourth quarter. This compares to approximately $4.1 million of net fair value gains that we recognized on these hedge positions in 2016. This year-over-year decline in net fair value gains and losses was driven by the flattening of the yield curve. With respect to cash, loans and other short-term investments for the company, we recognized approximately $1.1 million of interest income in 2017, including $180,000 in the fourth quarter. As we continue to table 10 of our filing, we reported $2.4 million less in interest income in 2017 associated with these investments compared to the amount of interest income that we recognize on these investments in 2016, a decrease of which was in large part driven by the sale in 2016 of solar loans to solar ventures that we managed. With respect to our Energy Capital business, we continue to see positive returns in 2017 in the solar ventures that we managed at December 31, 2017, the unpaid principal balance loan that were funded through the solar ventures was $278.4 million, while loans outstanding had a weighted average remaining maturity and coupon of nine months and 8.7% respectively. In this regard, our related equity investments in these ventures fair value of $97 million at December 31, 2017. With that in 2017, we recognized $9.2 million of equity income from these ventures, including $2.2 million in the fourth quarter. As you’ll see in table 15 of our filing, we recognized in 2017 $2.9 million more of equity and income from our solar ventures relative to what we recognized in 2016, an increase of which was driven primarily by annual increases in the amount of loan origination and related fees earned by the solar ventures. We also recognized approximately $2.3 million of income in 2017 associated with reimbursements from the ventures for our direct costs associated with management related activities. With respect to return from our LIHTC business, we further discussed in our filing the various interest and obligations that pertain to this business line. In connection with our interest and obligations associated with TC Fund I, we recognized $9 million of asset management fee in 2017 and $1.1 million in the fourth quarter. We do not recognize any asset management fees in TC Fund I in 2016. We also recognized in 2017 approximately $1 million of other guarantee related income due to the amortization of deferred guaranteed fees and the repayment of a mandatory loan that we made to TC Fund I in connection with our guarantees. With respect to our interest and obligations associated with Morrison Growth Management or MGM, we collected about $1.9 million of interest in 2017 associated with $13 million subordinated loan that we made to MGM, including $900,000 in the fourth quarter. However, because this loan was not recognized for financial statement purposes at December 31, 2017, interest that we collected on those loans is referred on our balance sheet and therefore is not recognized in earnings. As of December 31, 2017, we recognized $10.2 million of deferred revenue in connection with principal interest payments received from MGM. In 2017, we reported $1.7 million in income from direct real estate investments in the LIHTC business line, which is primarily attributable to the disposition of key investments acquired during the fourth quarter of 2015. Additionally, as detailed in table 17 which is located on page 32 of our filings, in 2017 we recognized $4 million of net income from consolidated entities that was allocatable to common shareholders. These allocations which amounted to a net loss in 2016 of $3.3 million, primarily related to guarantee fees equity and losses from lower tier property partnerships and interest income on bond investments that are eliminated for reporting purposes. The year-over-year increase in net income from CFEs allocatable to common shareholders is primarily due to the sale of the underlying real estate of one of the company's consolidated partnerships during the fourth quarter of 2017 that resulted in the recognition of approximately $5.7 million of net income from consolidated funds and ventures that was allocatable to common shareholders. With respect to funds that we made from International Housing Solutions or HIS, we recognized $12.6 million in fee and other income of 2017, including $0.6 million in the fourth quarter. This represents $5.9 million increase compared to what we reported in 2016 and it was primarily driven by catch up management fees that we recognized in connection with additional invested capital that was closed in IHS Funds U.S.A. and IHS Bonds 2SA in 2017. In connection with our equity co-investments and funds managed by IHS, which we account for using the equity method, the carrying value of these investments in our consolidated balance sheet was $17.2 million at December 31, 2017, while we recognized equity and income with the corresponding funds that we manage of approximately $300,000 of 2017 which compares favorably to $500,000 of equity and losses at funds that we managed in 2016. The improvement in portfolio valuations coupled with the upsize of our equity co-investments in the South Africa Workforce Housing Fund in the third quarter drove this year-over-year increase. As far as interest and other operating expenses and I’ll start with a quick look at our cost of funding. You could see from our filings that our financing arrangements are divided into two groups based on the purpose; debt obligations with finance bonds and other interest bearing assets which we refer to as asset related debt and debt obligations that finance other assets and activities in the company which we refer to as other debt. With respect to asset related debt, the total UPB at this debt was $82.9 million at December 31, 2017 with only modest amortization occurred in 2017. We recognized approximately $1.8 million of interest expense associated with asset related debt in 2017, including approximately $500,000 in the fourth quarter. And you can also see from the table 10 of our filings, which represented a year-over-year increase in $400,000 in cost of funding associated with this debt and increase of which in large part was driven by both an increase in reference rates on our variable rate debt obligations and the execution of additional CRS on certain bond investments. Our reported cost of funding associated with other debt was $4.5 million in 2017, including $1 million in the fourth quarter. As you can see from table 12 in our filing cost of funding associated with other debt was steady in the aggregate on a year-over-year basis. This is because year-over-year decreases in our cost of funding associated with our subordinated debt, which was driven by discounted purchases of $26.4 million through company's subordinated debt in 2017, largely offset increases in the cost of funding associated with notes payable and other debt. The increase of which was driven by both an increase in reference rates associated with TRS that we used to finance certain of the company's bond investments and the issuance of debt in the third quarter of 2017 to finance the purchase of an equity investment in the South Africa Workforce Housing Fund. Lastly, with respect to our core operating expenses, which includes salaries and benefits, general and administrative expenses, professional fees and other expenses, we recognize $33.9 million in interest expenses in 2017, $28.9 million in the fourth quarter. And if you continue from table 13 of our filings, this represents a year-over-year increase of approximately $7.1 million compared to what we reported in 2016. This increase was tied to several factors; salaries and benefits increased on a year-over-year basis by $2.3 million in part due to an increase in the price of our common shares, which caused the amount of stock compensation expense to increase, as well as was due to an increase in incremental cost associated with additional headcounts incentive compensation. Secondly, professional fees increased by $2.4 million on a year-over-year basis in large part due to the cost of various legal valuation advisory services that we incurred in connection with Hunt transaction and the amendment of operating real estate government Fund II SSA. And lastly, other expenses increased by $1.3 million on a year-over-year basis, primarily as a result of the cost and fee related concessions that relate to certain investments in Fund II SSA in the fourth quarter of 2017. In considering our 2017 results and the various drivers that I touched on, it is important to bear in mind that as a result of the Hunt transaction, the company will no longer recognize in 2018 various revenues and expenses, including but not limited to, asset management fees and expense reimbursement revenues from HIS, LIHTC and renewable energy funds that we previously managed and employee salaries and benefits other than stock compensation expense associated with unexercised options that were not conveyed. In place of these and other revenues and expenses that are further discussed in page 22 of our filing that will no longer be recognized by us in future reported period and notwithstanding revenues and expenses associated with the assets and liabilities of the company that were excluded from the Hunt transaction, the company will recognize the future recording periods both interest income associated with lower receivable from Hunt and various costs set forth in the management agreement with Hunt, including base management fees, incentive management fees and reimbursements to the external manager for certain allocable overhead costs. And further discuss these and other reporting changes, including the deconsolidation with nearly all of our consolidated funds and ventures resulting from the Hunt transaction on pages 22 and 23. Before turning the call back over to Mike, I also briefly wanted to mentioned that as Mike noted earlier, we successfully remediated material weakness in our internal control of our financial reporting disclosed in our 2016 Form 10-K. As a result, we included the company’s internal control over financial reporting was affected as of December 31, 2017. And in this regard, we received from our external auditor a clean audit payment on the effectiveness of our internal control over financial reporting as of year-end. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. As we talked about at the closing of the Hunt transaction, for some time, we’ve heard from shareholders that our business is too small and too complicated to understand. With this transaction, we started the process to change that. And all elements of the transaction are complete and assuming that Hunt elect to exercise its option to acquire the MGM LIHTC business, we will have achieved significant value realization from our tax credit international businesses, simplified our balance sheet, reduced our overhead and increased transparency, while preserving our net operating losses and our attractive price long-term subordinate debt. Going forward, we will continue to invest primarily in debt related to affordable housing and clean energy. We expect to have other income producing investment opportunities as well with the additional reach provided by the Hunt organization. Over the long-term, we plan to continue to execute on our strategy to invest both new and recycled capital primarily in debt back by real assets to generate attractive risk adjusted returns. We expect to employ modest leverage we will target total returns of approximately 8% to 12% and we will focus on real assets with positive social and environmental impacts. 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 for shareholders. We believe that the Hunt transaction was the significant advancement towards those goals. In addition, it's important to note that the management team and staff that have served the company will continue to support it and we'll now have the added resources and expertise in Hunt team to draw upon as we move forward. I'd like to take this opportunity to personally thank our team for the extraordinary efforts that they have put in during the last six to nine months. Their efforts on behalf of all shareholders went above and beyond in all respects, which could be considered expected. Those efforts were and are much appreciated. Thank you. We are excited about the future, remain committed to our shareholders and we thank you for your support. We'll now open the call to questions. Operator?

[Michael Falcone:]

Great. Thanks, operator. Well, I'm glad this transaction that we've did in the first quarter was so clear that everybody completely understood it. But I suspect that it's the case that people are still stretching their heads a little bit perhaps. So to the extent that people do have questions, please feel free to call our Investor Relations line. As I've said, we're very excited about our future and we’re deeply grateful to our employees for the efforts that they put over the last six to nine months. And we're equally grateful to our shareholders, who have stepped with us through a long ride here and we're excited about the opportunities that we’re going to be able to deliver to shareholders in the future. So thank you all very much and have a great week.

[Operator:]

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