MMA Capital Holdings, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings Inc. 2020 Third Quarter Financial Results and Business Update Conference Call. My name is Emily, 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 the conference call. Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital Holdings, which are based on current expectations. These comments are subject to significant risks and uncertainties, which include those identified in the company's filings with the Securities and Exchange Commission that could cause actual results to differ materially from those expressed in the forward-looking statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to update any of the information contained in the forward-looking statements. I would now like to turn the call over to Mr. Gary Mentesana, CEO of MMA Capital Holding. Please go ahead.

[Gary Mentesana:]

Thank you, Emily. Good morning, everyone, and welcome. With me on the call today are Dave Bjarnason, our Chief Financial Officer; and Megan Sophocles, our Senior Vice President and Treasurer. As with many businesses during COVID, our offices remain closed and we're taking this call from remote locations. We apologize in advance for any connectivity issues or inconvenience that may cause. The purpose of our call today is to review MMA Capital Holdings 2020 third quarter financial results and to provide an overall business update. Our third quarter report was filed with the SEC on Monday, and an updated investor presentation is available on our website. For our call today, I will begin my prepared remarks with a brief overview of our quarterly results, followed by a summary of our investments in depth. I'll then turn the call over to Dave for a more detailed review of our financial performance. And before we wrap up our prepared remarks and open the call for questions, I'll provide a general update of the company's CEO selection process, as well as operating and capital plans for the near-term, as we continue to navigate a period of great uncertainty for the U.S. and global economies. With respect to the financial results, we reported that the company’s adjusted book value per share increased by $0.71 to $38.08 during the third quarter. As Dave will further discuss, this 1.9% increase was primarily driven by our core investments in renewable energy. The company’s investments in loans to finance the development and construction of renewable energy projects in the United States represented approximately 70% of the company’s total assets at quarter end. Nearly all of which are made through the Solar Ventures where the company invest alongside an institutional capital partner. At September 30, the carrying value of the company's renewable energy investments was $363.7 million approximately the same as that recorded at June 30. Year-to-date, the carrying value of these investments has increased $74.1 million, primarily due to net contributions of $45.8 million and $27.6 million of investment-related income. As you will see in Table 3 of our filing, the company recognized $9.3 million of income related to its renewable energy investments during the quarter. On a trailing 12 month basis, we have realized an unlevered net return on these investments of 11.1% for the period ended September 30, compared to 11.8% for the period ended June 30. The Solar Ventures closed $92.3 million of commitments across pipe loans during the third quarter of 2020, as compared to $247.5 million across 12 loans during the second quarter of 2020. While origination volume during the first nine months of 2020 also declined by a $162.1 million to $626.9 million, compared to the first nine months of 2019, the Solar Ventures have remained substantially invested year-to-date. While we continue to believe that there are ample opportunities to invest in renewable energy, and other infrastructure assets with attractive risk-adjusted returns that also meet our environmental and social investment goals, declines in origination volumes during these periods were primarily driven by the amount of available capital and a desire to not over expend the company’s liquidity, given our share of unfunded loan commitments of the Solar Ventures and other business needs. As reflected in Table 1 of our filing, at September 30, 2020, loans funded by the Solar Ventures have an aggregate unpaid principal balance or UPB in fair value of $745.8 million. Our weighted average remaining maturity of seven months, weighted average coupon of 10% which were substantially unchanged since June 30. As discussed on prior calls, we typically target loans that generate origination fees ranging from 1% to 3% on committed capital and coupons on funded loan balances ranging from 7% to 14%. Throughout the quarter, the company’s renewable energy investments continued to perform substantially as underwritten and today project schedules and loan payoffs have only been modestly impacted by COVID-19 and the general economy. However, it should be noted that certain components of the national and some local renewable energy finance markets, such as the Electric Reliability Council of Texas or ERCOT have been and may further be affected by changing market dynamics, resulting in supply and demand imbalances, particularly for tax equity investments. These market dynamics may materially and negatively impact the Solar Ventures; loan portfolio in a variety of ways including but not limited to, the availability and pricing of tax equity and the deterioration of underlying project value if a project has merchant exposure and the price of electricity falls due to competition or waning demand. Solar Ventures’ concentration in some of the effective markets could further impact when and how capital invested in late-stage development and construction loans is repaid and reinvested. At September 30, 2020, 54% of the total UPB of outstanding loans of Solar Ventures was associated with a single sponsor and financed projects located in the ERCOT. All but two of the underlying renewable energy projects in the Solar Ventures portfolio both of which are in ERCOT and whose related financing had an aggregate UPB of $365.9 million, had usual and customary take-outs in place as generally required under the loan agreements, and negotiations were actively proceeding to obtain such commitments for the remaining two projects. Given the prevailing macroeconomic conditions, uncertainty in the financial markets and our dependence on a functioning renewable energy finance market, we’ve remained focused on our investment and liquidity management programs. To that end, we ended the quarter with $21.8 million of unrestricted cash and $16.3 million of capacity under a revolving credit facility. We will continue to closely monitor loan performance and expected sources of a payment, while we explore ways to optimize the company’s capitalization including additional debt capital where appropriate. Turning to other assets, the net carrying value of our real estate-related investments, including our investments in debt securities was $59.6 million at September 30, substantially the same as those recorded at June 30, due to offsetting adjustments resulting from increases in capitalized investments in our property, offset by non-cash equity losses of the Spanish Fort joint venture due to depreciation and other non-cash expenses. There were not any material changes during the quarter in these non-core investments, which consists of investments in Spanish Fort, Alabama, Winchester Virginia, a subordinated multi-family housing bond on our legacy South African business. As stated on prior calls, we do not expect these assets will contribute consistently to quarterly income and we will continue to pursue opportunities to recycle capital from this part of the company’s balance sheet at attractive levels. Lastly, the company had debt with a UPB of $231.6 million that was carried at $238.4 million, a decrease in the UPB of $7.1 million in the quarter, primarily as a result of the pay down of our revolving debt. This debt had a weighted average effective interest rate of 3.9% at an estimated fair value of $188.2 million at September 30. As of quarter end, the company was in compliance with all the debt covenants. With that, I’ll turn the call over to Dave, who will discuss our quarterly financial results in greater detail. Dave?

[Dave Bjarnason:]

Thanks, Gary and good morning, everyone. As I provide an overview of our results, I will refer to various tables and item 2 of our Form 10-Q. The company ended the third quarter with $277.6 million of common shareholders equity or book value, while adjusted book value was $221.5 million. Book value increased $3.1 million or $0.50 per share in the third quarter, while adjusted book value increased $4.3 million or $0.71 per share during the same period. In comparison, book value decreased $3.2 million or $0.58 per share in the second quarter, while adjusted book value decreased by $1.1 million or $0.22 per share during that period. The third quarter increase in book value was primarily driven by $3 million of comprehensive income, which included $2.9 million of net income and $100,000 of other comprehensive income. Solid returns from renewable energy investments was the key performance driver in the third quarter. The company recognized $9.2 million of equity and income in the Solar Ventures, which increased reported year-to-date returns on these investments to $27.5 million. Returns on these investments though decreased by $4.5 million compared to the second quarter, with the difference primarily tied to mark-to-market adjustments recognized by the Solar Ventures. As we discussed on the Investor Call in August, the company recognized its share or $3.9 million of net fair value gains on the loan portfolio in the second quarter, while in the third quarter, the Solar Ventures did not recognize any consequential mark-to-market adjustments as the UPB of the loan portfolio remained indicative of its fair value at September 30. Concerning other investments and derivative positions, interest income on bonds, loans and other short-term investments, which totaled $0.5 million in the third quarter was relatively comparable to the second quarter. Returns on the company’s equity investments in the Spanish Fort joint venture and South African Workforce Housing Fund, which netted to $300,000 of equity and losses in the third quarter was also relatively comparable to the second quarter. Net losses and other investments in derivatives, which was approximately $350,000, decreased $400,000 on a quarter-over-quarter basis, primarily as a result of a decrease in the magnitude of net fair value losses related to the interest rate derivatives, given changes in reference interest rates. And with respect to the company’s expenses, its cost of funding which totaled $2.2 million in the third quarter decreased slightly compared to the second quarter given decreases in both LIBOR and the UPB of draws from the company’s revolving credit facility. While all other expenses which totaled $2.7 million in the third quarter, decreased $9.5 million or by approximately 98%, primarily because no investment-related impairments, which totaled $9 million in the second quarter were recognized in the third quarter. Annual capital and compensation-related expense reimbursements was also reached in the third quarter, which caused external management-related cost to come in at $600,000 compared to second quarter, while G&A, professional fees, and other operating expenses were in the aggregate relatively comparable to the second quarter. From a liquidity and capital resources perspective, the company had $39 million of cash, cash equivalents and restricted cash at the end of the third quarter, $17.2 million of which was restricted. As reported in table 8 of our filing, the total amount of the company's cash, cash equivalents and restricted cash increased $26.2 million in the first nine months of the year, which was primarily driven by $37.4 million of net cash flows provided by financing activities, including from financing transactions that closed in the second quarter involving the company's infrastructure bond investment, and direct investment in real estate. Additionally, the company generated net cash flows from operating activities of $4.3 million, and $10.7 million in the third quarter and first nine months of the year respectively. With that, I will turn the call back over to Gary.

[Gary Mentesana:]

Thanks, Dave. Before we get to the Q&A I want to provide an update on our continuing response to COVID-19, as well as our capital plans and CEO selection process. With respect to corporate operations and the performance of the external manager in response to COVID-19, we continue to report no disruptions in connection with the company's business operations. Business continuity task force continues to monitor the potential reopening upon offices with the safety of our employees at the forefront of our mind and the current rise of COVID-19 cases across much of the United States, we anticipate that we will continue to – our remote work model through the end of 2020. Any subsequent decisions related to the opening of any office will be consistent with the local timing and operational guidelines, set by the jurisdiction where the office is located. With respect to our capital allocation plans, there remains a balance of near-term conservatism and long-term optimism. In the near-term, we believe our liquidity decisions since the beginning of COVID-19 downturn have successfully provided adequate liquidity to fulfill our current obligations, including any funding requirements at the Solar Ventures, without needing to further pursue capital market activities. That said, should the right opportunity become available at the right cost, we could always pivot back to the capital markets at that time. We will continue to be deliberate in the pace of originating new investments by focusing on high-quality loan opportunities, while also continuing to manage outstanding commitments without significant additional capital cost in the company. With respect to our CEO selection, I first want to thank Mike Falcone for his 37 years of contributions to the company and his mentorship to me over the past 32 years. While it is certainly different to not interact with Mike daily, he remains a significant shareholder and committed to the success of the company through his position on the Board. As for Mike’s permanent replacement, the external manager is engaged in the selection process and anticipates providing a candidate with the Board’s consideration and approval at the appropriate time. Until then, I will continue in the CEO role. I will seek to maximize our current results of operations and facilitate continuity as we move forward. As noted above, we continue to believe that the long-term economic thesis favoring the transition to infrastructure-related investments remains very much intact. There are opportunities for high return investments or to complete the recycling of capital from various legacy assets into infrastructure investments including renewable energy we remain poised to take advantage and took those opportunities. In closing, even in this uncertain moment and time, we remain excited about the future, committed to our shareholders, and we thank you for your continued support. We will now open the call to questions. Emily?

[Operator:]

[Operator Instructions] Our first question comes from Mark Edinburg [Ph] private investor. Please go ahead.

[Unidentified Analyst:]

Hi, Gary. Mark, I am in Palm Bay, Florida. I am listening to the presentation, hard to absorb all the numbers. But thank you for everything and so I haven’t seen you and so we are not actually having actual meetings, physical meetings. But anyway, two questions. It’s hard to absorb, but from what I gather, the income on the portfolio, the 11% return should be around $40 million, $37 million, something like that and if the shares are $5.7 million, that’s something like the $6 range per share and that’s anywhere near correct me. And two, why now can’t there be dividends, so that’s my question. Thank you.

[Gary Mentesana:]

So, good morning, Mark and nice to hear from you again. So, I think your numbers are generally correct – correct me if I am wrong. But the 11.1% return that we generated through the renewable energy portfolio is accurate. And obviously, the shares outstanding are accurate at 5.7 million.

[Unidentified Analyst:]

Is it shares?

[Gary Mentesana:]

Shares, yes. So, I think that the answer to your question, with respect to not only dividends but the general capital return policy is one that the Board continues to assess. But just considering how much uncertainty there is in the marketplace, we feel like it’s prudent to be cautious with respect to initiating a dividend which obviously had some long-term components, as well as the share buyback plan at this point in time. We remain optimistic about the future and we currently have the ability to increase our investments in renewable energy and that’s kind of evidenced by the fact that we are currently not as a 50% investor member in the joint ventures. And where we obviously need to balance all of that with the ability to both reinvest, create returns and the fact that there is the NOLs out there that can shelter the income we are keeping that in mind too. So, we will continue to assess that and it is very much in the minds of the Board its dependence on the track of going forward.

[Unidentified Analyst:]

An important question about the labor is that, still that’s confusion on the book value that’s embedded, but it is $37, $38 per share and the market is somewhere now in 27 or so dollars and have been $22. So, I know you can’t the answer question, but why is it such a discount. So I leave it as a rhetorical question.

[Gary Mentesana:]

Yes. I mean, we share your and probably many investors concerned about the disconnect between the share price and adjusted book value per share, right. Share price today is roughly 75% of adjusted book value per share, which is basically book value excluding the deferred tax assets. There obviously could be ways to get some traction with the share price if a dividend were initiated. But obviously, at this point in time, there is lot of uncertainty in the marketplace and I am not sure if we are alone with trading at a discount to book which has been magnified since the beginning of COVID. But again, I appreciate the rhetorical question. But we do share your thinking.

[Unidentified Analyst:]

Thank you. Love to see in Baltimore in spring time or summer.

[Gary Mentesana:]

Sounds good. Thanks, Mark.

[Operator:]

[Operator Instructions] This concludes our question and answer session. I would like to turn the conference back over to Gary Mentesana for any closing remarks. Please go ahead.

[Gary Mentesana:]

Thank you very much, Emily, and thank you all very much for your continued support. These are certainly unprecedented times that we are all living through and we look forward to the future. We think it is full of opportunities for the company and we thank you very much for continuing to standby us. That’s all for today. Thank you very much.