MMA Capital Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Welcome to the MMA Capital Management LLC 2016 full year financial results and business update conference call. My name is Stephen and I will be your coordinator for today [Operator Instructions]. Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital Management LLC, 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 conference call over to Mr. Michael Falcone CEO of MMA Capital Management LLC.

[Michael Falcone:]

Thank you, Operator and good morning everyone. Before we get to our prepared remarks, I want to go off script for a second. As you will soon hear, our performance in the fourth quarter was disappointing. In addition, our reporting on that performance came out too late relative to this call. Both of these barriers are my responsibility as CEO and I can assure you that we will work hard to keep from repeating these circumstances. In the meantime, there is a relatively clean way to fix the reporting problem this time. While we will read be our script and answer questions as we normally do this morning, we will also schedule a conference call at 5

[Dave Bjarnason:]

Thank you, Mike. Good morning, everyone. As I provide an overview of our results, I will refer to some various tables in Table 2 of our Form 10-K. As Mike mentioned, common shareholders' equity increased approximately $9 million in 2016 to $125.3 million while diluted common shareholders' equity per share increased to $20.75 per share, which represented more than a 19% increase in a year-over-year basis. However, our recognition in the fourth quarter of a $4.5 million comprehensive loss and a $2.3 million decrease in common equity, due to share repurchases, softened the total increase in book value that we reported through to the end of the third quarter. I will touch on the comprehensive loss that we recognized in the fourth quarter and in more detail later. The full-year increase to Company's book value in 2016 was driven by $19 million of comprehensive income, which was partially offset by a $10 million decrease in common equity due to share repurchases that Mike mentioned earlier. Comprehensive income that we reported in 2016 was the sum of $42.4 million of net income and $23.4 million in other comprehensive losses was $10.8 million less than what we reported in 2015. This overall decrease was driven primarily by declines in net gains of bonds, loans, real estate, and other items recognizing 2015, although increases in earnings from our Solar Ventures, coupled with year-over-year declines in operating and other expenses softened the impacts of decreases in comprehensive income from net gains. I will talk a little more about each of these drivers shortly. The $23.4 million of other comprehensive loss that we reported in 2016, which is broken down in more detail in Table 7 of our filing is, in large part, driven by $37.9 million of unrealized bond related holding gains that were reclassified out of AOCI and into net income as a result of the redemption or elimination of certain bond investments due to consolidation or real estate foreclosure. However, these adjustments have a mutual impact on common equity and therefore, when one strips away these and other equity neutral adjustments that affect the AOCI, you are essentially left with $9.8 million of bond fair value gains or incrementally recognized as other comprehensive income in 2016 which accounts for approximately one-half of total comprehensive income that we recognized in 2016. As Mike mentioned, the bond portfolio continued to perform at a high level in 2016. The underlying profit performance continued to improve while the fair value of the bond portfolio further increased relative to the unpaid principal balance of such investments. With respect to net income that is allocable to common shareholders, Table 9 of our filing which is located on page 24, breaks down the drivers of the benefit we reported. As mentioned, we recognize $42.4 million in net income allocable to common shareholders; however, once stripping out equity, neutral adjustments that I referenced earlier, we are essentially left with approximately $9.3 million of net income that was incrementally recognized in 2017 compared to the $19.3 million that we reported in 2015. There are a number of factors that played into year-over-year changes in net income. I'll [probably] touch on the more consequential themes in a minute. With respect to net interest income, which is covered in more detail on Table 10, which you will find on page 25 of our filing, this includes net interest income associated with all interest-earning assets, reduced by the interest expense associated with all debt obligations that we used to finance such assets. We reported $12.8 million of net interest income in 2016 which represented an $831,000 decrease relative to what we reported in 2015. The year-over-year decrease of this case was primarily driven by a reduction in the unpaid principal balance of our bond portfolio, which decreased from $223.4 million as of December 31, 2015, to $154.2 million as of the end of 2016. However, you can also see in Table 10, partially offsetting this decline was a year-over-year increase in interest income of loans and short-term investments which was driven by an increase in the unpaid principal balance of solar loans that were funded directly by the Company. With respect to fee and other income, which is covered in more in Table 11, this includes asset management fees and reimbursements, income on our preferred stock investments as well as other miscellaneous income. We reported $11.8 million of fee and other income in 2016, which was $1.8 million less than we reported in 2015. This decline was attributable, in large part, to the redemption of our investment preferred stock in the fourth-quarter 2015 which led to no income being recognized on this investment in 2016. However, this impact was partially offset by an increase in asset management fees and reimbursements that came from fee income, some of our property management business in South Africa, and reimbursements from our Solar Ventures. Additionally, as Mike mentioned, we did not recognize in 2016 any asset management fees and asset management services that we provided to TC Fund 1 because revenue recognition requirements were not met; however, we reassessed these reporting periods, whether such fees are reasonably assured of collection and therefore qualify for a revenue recognition. With respect to other interest expense, which is covered in more detail in Table 12, this includes interest expense associated with our subordinated debt, as well as interest expense associated with senior debt but does not finance our interest-earning assets. We reported $4.4 million of other interest expense in 2016 compared to $7.3 million in 2015. The decline in this case was driven primarily by the termination of the fourth-quarter 2015 of financing associated with other investment of preferred stock. This caused no interest expense to be recognized in 2016 and by the restructuring of subordinated debt in the second quarter of 2015 which reduced our cost of funding on such outstanding debt. With respect to operating expenses, which are covered in more detail in Table 13, this includes salaries and benefits, general and administrative expense, professional fees and other miscellaneous expenses. We reported $26.5 million in operating expense in 2016 which is about $3.9 million less than we reported in 2015. This decline was driven primarily by impairment losses that we recognized in 2015 on our co-investment in South African Workforce Housing Fund as well as those driven by foreign currency gains that we recognized in 2016 as a result of the strengthening of the South African Rand against the US dollar. There were also one-time nonrecurring fees that we incurred in connection with the restructuring of our subordinated debt through the second quarter of 2015. With respect to net gains on bonds and other assets and liabilities, which are covered in more detail in Table 14, these amounts include realized gains or losses associated with the sales of such assets and the early redemption of bonds and loans as well as include unrealized holding gains on losses associated with our derivative instruments and loans for which we have elected the fair value option. We reported $16.4 million of net gains in 2016, which was about $14.9 million less than we reported in 2015. This decline was, in part, driven by a reduction in sales of real estate in 2016 and by other nonrecurring gains that we recognized in 2015, including in connection with the extinguishment of certain liabilities and the redemption of our preferred stock investors. The other point to note about net gains that we recognized in 2016 is that, as Mike mentioned, we made a $10 million bridge loan to the corporate borrower who has since filed for bankruptcy. We account for this loan as well as for the [one] that we received from the borrower on a fair value basis and in consideration of the deterioration of the borrower's financial condition and other factors, we recognize mark-to-market losses in both instruments that were key drivers to the $4.5 million comprehensive loss that we recognized in the fourth quarter. With respect to equity of income from unconsolidated funds and ventures, which is covered in more detail in Table 15, this includes our portion of the income or loss associated with a certain non-consolidated funds and ventures in which we have an equity interest. We recorded $8.9 million of equity in income from unconsolidated funds and ventures in 2016, which represented an $8 million increase compared to what we reported in 2015. This increase was driven primarily by our equity in income of our Solar Ventures, the total assets of which increased from $104.1 million as of December 31, 2015, to $158.4 million as of the end of 2016. Also driving this increase was a $2.7 million distribution that we received in the second quarter of 2016 associated with one of our direct limited partnership investments that sold property that it held. With respect to net loss and CFVs allocable to common shareholders which is covered in more detail in Tables 16 and 17, we recognized an allocated loss of $3.3 million in 2016 which is relatively comparable to what we recognized in 2015. As you can see from Table 17, the majority of these losses are related to equity and losses from lower tier property partnerships, which are recognized in connection with certain of our bond holdings. However, as you can see on Table 7 of our filing, equity and losses of lower tier property partnerships allocable to common shareholders are offset by unutilized bond holding gains that are currently recognized as comprehensive income and therefore, are collectively equity neutral. Before I turn the call back over to Mike, I want to briefly touch on our internal control of remediation efforts as you will read in Item 9a of our filing, we have concluded that the Company's internal control of our financial reporting was not effective as of December 31, 2016, on the basis that certain material weaknesses that were previously identified as of December 31, 2015, were not fully remediated. In particular, while we executed a number of steps in 2016 against our original remediation plan and then a further step of Item 9a, various control deficiencies associated with our spreadsheet, including deficiencies in restricted access controls, [appropriate security] controls, the data input validations remain in process of remediation. Additionally, because certain management review controls used by the Company depend on the use of spreadsheets, control deficiencies associated with such management review controls that were identified as of December 31, 2015, also unremediated as of December 31, 2016, despite various procedural cadences that we implemented in 2016 that are further discussed in Item 9a. While these deficiencies have had an immaterial impact on the results, we take these control deficiencies very seriously and have established an updated remediation plan that is outlined in Item 9a that we are currently executing against and that we are confident we'll address these deficiencies this year. I will provide an update on remediation efforts at our next investor call. With that, I will turn the call back over to Mike.

[Michael Falcone:]

Thanks, Dave. Consistent with prior calls, I want to spend a few minutes talking about our view of the business in the quarters ahead. In the broadest sense, we continue to focus on maximizing the value in our affordable housing business and growing our renewable energy business, all while keeping an eye on the changing capital market conditions to ensure prudent capital investments with strong cash management over the coming quarters. When we detailed returns, our returns from our interest in affordable housing business are heavily based on our ability to monetize general underlying portfolios in real estate over time. The continuous process that provided some results, positive results last year in which we hope will deliver additional value for years to come. Additionally, we now have access to the capital required to invest in our robust pipeline of good opportunities in the solar energy lending business and now with more capital across more lending platforms, we can expand the addressable market. We continue to see these joint ventures in the interest and fee-based income streams they create as paths for growth in the coming years; one additional item of note, the current plan with respect to share buybacks. As it stands, the Company completed a 600,000 share buyback authorization for 2016 and [then show] it less than our published book value each quarter. The number of shares authorized to be purchased was set with an eye on maintaining a margin of safety with respect to the tax rules surrounding our NOLs and certain change of control provisions in the tax law. We believe that the buyback of our shares has been an effective way to drive value for our continuing shareholders, as seen by an incremental benefit of $0.34 of fully diluted common equity per share realized this year. The Board has concluded that a buyback at our current trading price continues to represent an attractive investment, even as we currently trade above book value. Our Board continues to support the idea of an incremental return of capital to shareholders through the buyback program, as evidenced by the 2017 authorization for 580,000 shares, which continues to see value at our current trading price. With the current trading price higher than our reported book, we have raised our buyback price to 116% of our diluted common shareholder equity per share to ensure that the Company can continue to return capital at the current price. With the fiscal and policy uncertainty created by the change in administration, we are approaching 2017 with more caution than we have in the previous couple of years. Our plan is to maintain a higher cash balances than in previous years in order to either react opportunistically to changing market conditions or to protect our positions should they seem at risk due to market conditions. 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 through a combination and the growth of our fee-based platforms, share buybacks, and strategic asset investments. We believe that the current business landscape is more uncertain than it has been in some time but that uncertainty does not change our commitment to work hard every day to create value in our business and for our shareholders. We are excited about the future and remain committed to our shareholders. Thank you for your support. We will now open the call to questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first question comes from Gary Ribe with MACRO Consulting. Please go ahead.

[Gary Ribe:]

I know you can't talk too much about the solar loan, the status of it or anything like that. And that's -- I do have a question about it. It's not really related to the process or anything like that. But can you, in any way, just kind of detail the thinking that went into making this investment? I just want to make sure that I understand it and in your Solar Ventures, if you guys are doing commercial development and this looks like it was kind of a residential bridge loan of some kind. So I just want to understand -- you have all these interesting investment opportunities. Why do this?

[Michael Falcone:]

This was a one-off loan. I would like to answer your question. I don't think I should answer that question until the bankruptcy process resolves itself. But I understand why you would ask the question. It's a question I would ask. It's a question for which I think I have a good answer but it is not one that I can put out there publicly at this time given the ongoing bankruptcy and litigation.

[Gary Ribe:]

Okay. Fair enough. You guys had up to your buyback authorization. Are you guys maybe considering doing some kind of tender or something like that at some point? I mean, I think you probably have some significant realizations on the horizon. Which if you -- I don't know if -- what you guys are thinking with regards to something like that but I think you could probably do a significant tender and I don't know where you are with regards to your ownership shift? I would guess you're very low but you could probably take out a fairly large chunk of shares.

[Michael Falcone:]

Sure. Couple of things. The -- first, to give some color to the shift in the buyback plan as it exists today. By going to 115% of the then published number, as opposed to changing the number quarterly, we believe will be in the market consistently over time. So there's no risk that we somehow -- well, there is always risk but we think there is less risk that we are somehow not in the market buying shares. That was the intent behind the switch. We'll see how it works over time. And our mark-to-market will reflect that and we will adjust it if need be. So, we are committed to buying shares. Relative to the question of the tender, there are sort of two elements to that, maybe even three. One is the tender in some way endanger our NOLs. The second is, can we tender at a price that we think is a good bargain both for the people from whom we are buying shares and for the remaining shareholders; and three is, do we have cash on hand that we want to put in a tender at this time or at some point in the foreseeable future? I think, to your point, relative to the first around the NOLs. I think that the managing the risks associated with a tender just as it relates to the NOLs is probably doable. You would adjust the size of the tender to make sure that it was accommodatable within our NOL requirements and I think you could do that. I also think you could probably find a balance in terms of determining what a price might be. Right now, for me, the primary reason not to go ahead with a tender is this sort of uncertainty in the market created by rising interest rates, changing tax laws and fiscal policy. And frankly, I want to -- I think it is important for the Company that we have significant cash on hand until we see where all these strands in the economy play out. So, we have certainly thought about and discussed the notion and it remains an arrow in our quiver to improve shareholder value over time. But right now, given the uncertainties in the US macro economy, our judgment is we would rather have more cash on hand until we had a better sense of what is happening in the world.

[Gary Ribe:]

And, okay. Yes, I think that's a reasonable enough approach to it. I appreciate that. And I guess, I'm just trying to -- you guys dropped the K the first thing in the morning, so -- [multiple speakers] I'm going to hop off and save some questions for them, maybe.

[Michael Falcone:]

We do apologize for that. And I do want to emphasize that we are going to announce another call at 5

[Gary Ribe:]

Yes, I find I need to read it a couple of times usually. So, thanks, guys.

[Operator:]

[Operator Instructions] It appears we have no more questions. This concludes our question-and-answer session. I would now like to turn the conference back over to Michael Falcone for any closing remarks.

[Michael Falcone:]

Okay. Thanks, operator. As I just said in my wrap-up with Gary, we look forward to the opportunity to answer questions at 5

[Operator:]

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