MMA Capital Holdings Inc. (MMAC) CEO Michael Falcone on Q4 2018 Results - Earnings Call Transcript

Mar. 15, 2019 1:09 PM ETMMA Capital Holdings, Inc. (MMAC)
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MMA Capital Holdings Inc (NASDAQ:MMAC) Q4 2018 Earnings Conference Call March 15, 2019 8:30 AM ET

Company Participants

Michael Falcone - Chief Executive Officer

Gary Mentesana - President Chief Operating Officer

David Bjarnason - Chief Financial Officer

Megan Sophocles - Senior Vice President

Operator

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings Inc. 2018 Fourth Quarter and Full Year Financial Results and Business Update Conference Call. My name is Nicole 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 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 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. Please note this event is being recorded.

I would now like to turn the call over to Mr. Michael Falcone, CEO of MMA Capital Holdings Inc. Please go ahead.

Michael Falcone

Thank you, Nicole. Good morning everyone. This is Mike Falcone. With me on the call today are Gary Mentesana, President Chief Operating Officer; and Dave Bjarnason, CFO.

Unfortunately I have had a little bit of a travel snag this morning and while I will be participating in the call, haven't made it in front of the computer yet this morning.

So I'm going to ask Dave and Gary to cover the bulk of the prepared remarks. And then we will all be available to speak to any questions folks might have. So Gary.

Gary Mentesana

Thanks Mike. And I should also mention, Megan Sophocles our Senior Vice President is also on the call and as Mike said Dave and I will have prepared remarks and we'll all then be able to take questions.

The purpose of our call today is to review MMA Capital Holding's fourth quarter and full year 2018 financial results. And to provide an overall business update. Our annual report we filed with the SEC yesterday and an updated investor presentation is now available on our website.

With respect to financial results, which Dave will review in detail later, the Company ended the year with $212.9 million of the common shareholders' equity, which represents an increase of $19.4 million and $75.3 million for the three months and year-ended December 31, 2018 respectively.

Diluted common shareholders' equity or book value per share came in at $36.20, an increase of $3.24 per share or 9.8% for the quarter and $11.72 or approximately 47.9% for the year. Increases in common shareholders' equity were primarily attributable to net income from the sale of certain business lines and assets to an affiliate of the Hunt Companies Inc and net fair value gains on our bond investments.

In addition to that Hunk transaction, which also simplified our financial reporting, the Company completed a significant disposition of bond related investments in December 2018 and January 2019 that facilitated four key elements of the Company's business plan.

First, we exited a portion of our bond related investments in orderly manner and a fair value premiums that would otherwise decreased with - time. Second, we made capital available to fund the Energy Capital Portfolio, which we believe will generate higher returns.

Third, we deleveraged the overall balance sheet potentially creating an opportunity for better utilization of the corporate balance sheet ,and fourth, we further simplified our balance sheet and invest in thesis. When combined with other corporate initiatives, such as our conversion to a corporation, we are making steady progress towards our corporate goals.

Turning next to the Company's portfolios, the Company now has two portfolios, one of which is Energy Capital and the second of which is other assets and liabilities, which now includes the Company's bond related investments.

In the Energy Capital Portfolio, the Company typically invests alongside an institutional capital partner in three solar ventures that primarily financed the development and construction of renewable energy projects.

In the fourth quarter and for the full year, the Company - the carrying value of our equity investments in the solar ventures increased by $10.8 million and $29.3 million respectively to $126.3 million at December 31. The annual increase in carrying value of - was driven by $55.9 million of capital contribution, $33.5 million of distributions received and $6.9 million of equity income earned during 2018.

At December 31, project-based debt financing or loans and the solar ventures had an aggregated unpaid principal balance or UPB of $250.8 million, a weighted average remaining maturity of seven months, and a weighted average coupon of 9.2%. These announced at September 30th were $178.7 million, five months and the same weighted average coupon of 9.2%.

The loans outstanding at year-end generated origination fees that ranged from 1% to 2% on committed capital and features coupons that range from 7.0%, 13.8% on the UPB. On their inception in 2015 through December 31, 2018, over $1.3 billion of loans have been originated for the solar ventures. That will enable a completion of over 2.7 gigawatts of renewable energy.

Approximately 930 million of these loans have been repaid without any loss of investment principle generating a weighted average IRR of 15.8%, which was on average higher than originally underwritten.

The strength of the pipeline continues to represent an opportunity for the Company to make additional investments in the Solar Ventures at attractive risk adjusted returns, which is why the Company raise additional capital for this portfolio through the disposition of a portion of our bond related investments in December and January that I will further discuss in a moment.

We believe that the efforts to increase investments in the Solar Ventures combined with an orderly aggregate from other investments with lower returns will increase the Company's return on invested capital overtime.

Turning to the other assets and liabilities portfolio. The UPB and fair value of our bond related investments at December 31st was $110 million and $116.6 million respectively. The multifamily properties underlying our bond investments continue to perform well as there were no new defaults in the fourth quarter. While the weighted average debt service coverage and collection rate were 1.2 times and 6.2% at December 31, 2018.

At year-end, the associated Total Return Swap, or TRS financing, had a notional balance of $50 million, and a pay rate that was - spread of 1.35%. We had $30 million of this TRS interest rate exposure with a pay fixed interest rate swap that matures in 2023 and it's [indiscernible].

As alluded to earlier, the Company entered into a series of transactions in the fourth quarter that involves determination of 15 TRS agreements that had a total notional amount of $102.6 million. The sale of one multifamily tax exempt bond and one subordinate certificate interest in a multifamily taxes and bond with an aggregate UPB of $10.8 million.

The termination of a pay fixed interest rate swap agreement that had a notional amount of $65 million and the termination of basis interest rate swap agreement that had a total notional amount of $10.5 million.

Additionally, during the first week of January, the Company entered into additional agreements to sell one multifamily tax exempt bond and one subordinate certificate interest in a multifamily tax benefit with an aggregate UPB and fair value of $8.5 million and $8.6 million, respectively.

These transactions paid more capital available to fund renewable energy lending investments and monetize premiums of our bond related investments - amortized. As discussed on prior calls, sourcing new bond related investments that need our target investment is difficult in a low rate environment.

Consequently, our bond related investments are essentially in one off and we're reviewing individual investments to determine whether they remain suitable for investment purposes. As a result, we made continued recycles all of the equity investors in bond related investments into additional Energy Capital Investments to increase the Company's return on invested capital.

With respect to the rest of the other assets and liabilities portfolio, we do not expect assets in this portfolio to contribute consistently to quarterly income with the exception of Hunt - which end of the year with the UPB of $67 million and a pay rate of 5%. We continue to pursue opportunity to monetize these assets and realize what we believe to be their market value.

With that, I'll turn the call over today to Dave who will discuss the financial results in greater detail. Dave.

David Bjarnason

Thanks Gary. And good morning everyone. As I provide an overview of our results, I'll refer to various tables in Item seven of our form 10-K. In the fourth quarter as Gary mentioned, we recognized a net increase in common shareholders' equity of $19.4 million.

The common shareholders' equity increased on a full year basis by $75.3 million to $212.9 million. In this regard, book value per share increased to $36.20 per share, which represented a $3.24 per share increase to fourth quarter and $11.72 per share increase on a full year basis.

Increases in common shareholders equity and book value per share were driven by $57.5 million of comprehensive income that we recognized in 2018, including $18 million in the fourth quarter.

In this regard, comprehensive income that we reported in 2018, which exceeded what we reported in 2017 by $34.8 million including $61 million in net income and $3.5 million in other comprehensive of loss. I'll discuss in more detail later the key drives a comprehensive income we reported in 2018.

In addition to reported comprehensive income, we recognized $17.8 million with other increases to common shareholders’ equity of 2018 including $1.4 million the fourth quarter. Tables 10 of our filing provides more information about this net increase, but at a high level, it was primarily driven by the issuance of shares to both Hunt Companies, we acquired 250,000 shares in 2018 and two officers of the Company's who exercise stock options.

The cumulative effect to common shareholders' holders equity of adopting new revenue recognition standards on January 1, 2018, was an increase of $9.2 million, which was also a key driver.

The effects of these drivers however were partially offset by the impact of share repurchases.

We purchased approximately 219,000 shares through our share buyback program at an average price of $27.80 per share, which caused a $5.9 million reduction in common shareholders' equity.

In taking a closer look at drivers of comprehensive income. As I previously mentioned, we reported $61 million of net income allocable to common shareholders in 2018, including $31.3 million in the fourth quarter. As you can see on the table 11 of our filing, we reported $41.6 million more of net income allocable to common shareholders in 2018 compared to 2017.

There were two key drivers for this year-over-year increase. First, net gains increased by $24.5 million primarily as a result of TRS terminations and bond sales discussed by Gary earlier, which resulted in approximately $21.9 million of unrealized holding being reclassified out of AOCI and into net income.

Secondly, income from discontinued operations increased $16.5 million primarily as a results of $33.4 million of net gains recognized on the sale of certain businesses and assets to Hunt during 2018. Those two items drove the largest cases of net income, there are several other drivers worth noting.

Net interest income increased $2.2 million on a year-over-year basis, in large part due to the Company's loan receivable from Hunt. UPB increased by $10 million in the fourth quarter to $67 million in connection with the purchase by Hunt of low income housing tax credit assets from Morrison Grove Management or MGM as noted in our October press release.

The effect of this increase was partially offset by the increase in our cost of funding associated bond related debt. [indiscernible] reclassification notes payable and other debt, the bond related debt upon the recognition of previously eliminated bond investments during the fourth quarter of 2018. Separately for smooth portfolios equity and income for unconsolidated funds and ventures was $7.7 million in 2018, $2 million of which was recognized in the fourth quarter.

[indiscernible] in 2018 decreased $6.2 million compared to 2017 nearly evenly across our equity investments in the Solar Ventures, U.S. Real Estate partnerships and the South Africa Workforce Housing Fund.

Equity and income from Solar Ventures declined by $2.3 million in 2018 primarily as a result of the $1.1 million reduction in the amount of management fees earned by the Company related to Solar Ventures that were classified as equity and income from such entities. It was driven by the sale of Energy Capital business to Hunt earlier in the year.

Other contributing factors could be relative increase in the preferred return, earned by the Company's former investment partners and one of our Solar Ventures during the five months ended May 31, 2018, an amortization expense recognized 2018 associated with the purchase premium paid by the Company to buyout a former investment partners interest.

Equity and income from U.S. Real Estate partnerships declined by $2 million in 2018, primarily as a result of a non-recurring $2.8 million gain that was recognized in the third quarter of 2017 in connection with the sales, the underlying real estate partnership - Company held 33% interest. Well, equity and income from the South Africa Workforce Housing Fund declined $2 million compared to 2017. As a result of net unrealized losses on the fund investments recognized in 2018.

Lastly, the Company recognized $17.2 million of operating expenses in 2018, $2 million of which was recognized in the fourth quarter. Operating expenses decreased $4 million on a year-over-year basis, in large part due to a $10 million decrease the salaries and benefits expense - expense in the Company's conversions to an externally managed business model, which was actually Hunt.

The impact of this reduction was partially to offset by the occurrence of $6.9 million of external management fees and reimbursable expenses payable to our external manager in 2018. Net interest income or net income - increased $41.6 million in 2018. The Company recognized other comprehensive loss of $3.5 million in 2018, which compares unfavorably to $2.2 million of other comprehensive income that was reported in 2017.

To the mind of our filings, this aggregates the components of other comprehensive income and loss recognized in 2017 and 2018, the 2018 loss that we reported was primarily driven by the reclassification of $21.9 million of holding gains out of AOCI and into earnings as a result of the dispositions or bond related investments during the third and fourth quarters.

The impact of these reclassifications was partially offset by $15 million of bond related gains that were recognized in 2018 $9.4 million of which was related to bond investments that were no longer eliminated for reporting purposes beginning in the first quarter of 2018.

Company's reversal a $3.4 million of cumulative translation adjustments, which was driven by the sale of our international asset management, investment management business in the first quarter of 2018 also softened the impact on our AOCI limited bond sales.

Lastly with respects to Company's liquidity and capital resources. Company had $33.9 million of cash, cash equivalents and restricted cash at December 31, 2018. $28.2 of which was unrestricted.

Table 21 of our filings breaks down $66.3 million net decrease in Company's cash, cash equivalents and restricted cash during 2018. The impact of deconsolidation of CFPs the conveyance of cash was part of the Hunt transaction and other investing activities including investments that we made in the Solar Ventures - near on all of this entire decrease. The $9.1 million of cash flows provided by operating activities largely offset by $8.5 million of cash flows used in financing activities.

With that, I will turn the call back over to Gary.

Gary Mentesana

Thanks David. Before we get to the Q&A, I'll provide a brief update on the conclusion of the 2018 buyback plan and our approach to the 2019 business plan.

With respect to the buybacks plan, the Company concluded a successful execution of the 2018 buyback plan. As Dave noted, the Company repurchased prosper 219,000 shares at a significant discount to book value. The Board has not taken any action at this time to adopt the 2019 buyback plan.

From a business operations perspective, 2018 represented a significant transformation in balance sheet. First, with the realization events in the tax credit and institutional businesses that simplified our financial statements. And second, with the recycling of equity out of runoff business lines into our growing Energy Capital portfolio, which also significantly reduced our leverage.

We continue to analyze the optimal risk adjusted investment mix in the current business environment. And to that end, we plan to continue to cycle more equity into the Energy Capital portfolio as we begin the year.

As always, we continue to look at new initiatives in an effort to improve existing returns and if we can identify additional investment opportunities, which we think will produce attractive risk adjusted returns and generate positive social or environmental impacts we retain the flexibility to invest them quarterly.

In general, we continue to see two primary tasks to increase shareholder value. First, growing the value of our business through increasing investment in higher earning investment opportunities. And second, narrowing the gap between book value per share and trading price.

This time we anticipate that income will be the key driver of long-term value for our investors, in fact that growth in net income will also inform our capital return policies as it impacts cash available for our shareholders.

As previously mentioned, we have an actionable path to put in capital to work and growing our top and bottom line numbers primarily through additional investment in the Energy Capital business.

With respect to the second path, we have historically used our buyback program as one lever and pursued other initiatives exemplified by conversion to a corporation in January to generate increased interest in the Company’s shares. Although we still have additional opportunities in front of us on both pass, we have continued to see progress on both given our investment growth and the recent increase in our share price.

Before we take questions. I wanted to mention that the Company has set the date of the annual meeting of shareholders for May 21st. We anticipate a proxy will be sent around the second week of April consistent with prior years.

In closing we are excited about the future, remain committed to our shareholders and we thank you for your support.

We will now open the call for questions. Nicole.

Question-and-Answer Session

Operator

Operator

As we have no questions at this time, I would like to turn the conference over to Mr. Falcone for any closing remarks.

Michael Falcone

Great. Thank you very much Nicole. Again, I would like to thank our shareholders for their patients. We are certainly excited about the year that we just finished and we are equally excited about the year that is ahead of us.

I would also like to thank the team that has been working pretty tirelessly together for many years here to continue to drive value for shareholders. We are excited together about our future and look forward to continuing to work with all of you as we move forward.

So thanks. Thanks again to everyone and have a great weekend. Bye.

Operator

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

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