MMA Capital Holdings Inc. (MMAC) CEO Michael Falcone on Q1 2019 Results - Earnings Call Transcript

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MMA Capital Holdings Inc. (NASDAQ:MMAC) Q1 2019 Earnings Conference Call May 13, 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

Conference Call Participants

Operator

Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings Inc. 2019 First Quarter Financial Results and Business Update Conference Call. My name is Rocco 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. Please note today’s event is being recorded.

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.

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

Michael Falcone

Thank you, Rocco. Good morning everyone and welcome. 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 be available to take question.

The purpose of our call today is to review MMA Capital Holdings first quarter financial results and to provide an overall business update, a quarterly report was filed with the SEC this past Friday and an updated Investor Presentation is now available on our website.

With respect to operations, we continue to see strong returns from our investments in the Solar Ventures during the first quarter as our equity and income from such ventures increased 29% on a quarter-over-quarter basis, driven by strong origination volume in the first quarter. As Gary will further discuss demand for capital to fund renewable energy infrastructure projects, what we believe are attractive risk adjusted returns, remains very strong.

Also during the first quarter, we continue to dispose of bond related investment, a process which began in December 2018. As discussed on our March call with investors, dispositions of bond related investment facilitated four key elements to the company's 2019 business plan, in that we exited a portion of our bond related investments in an orderly manner and at fair value premiums that would have otherwise decreased with the passage of time.

We made capital available to fund the Energy Capital portfolio, which we believe will generate higher returns; we deleveraged the overall balance sheet potentially creating an opportunity for better utilization of our corporate balance sheet, and finally we further simplified our balance sheet and investment thesis.

The overall impact of the comprehensive changes in our business structure are just now being reflected in the comparative financial statements and in our Energy Capital investments, resulting in the noted significant increased year-over-year equity and income from the Solar Ventures.

With respect to the financial results, which Dave will review in detail later, the company ended the quarter with $212.5 million of common shareholders' equity, which represents a decrease of $400,000 for the three months ended March 31, 2019. Diluted common shareholders' equity per share came in at $36.11, a decrease of $0.09 per share or 0.2% for the quarter. Decrease in common shareholders' equity was primarily attributable to net fair value losses on interest rate hedge position.

Due to our remaining interest rate hedges being mark-to-market in the company's financial statement, because they are primarily now hedging interest rate risk associated with company's subordinated debt, which is not mark-to-market, we expect such hedging instruments provide a continued source of earnings volatility in the future.

However, we believe this strategy remains effective in managing the company's exposure to rising interest rate. Further, while compensation related expense reimbursements are subject to an annual cap, the cap is not applied ratably throughout the year, which resulted in higher expense than earlier reporting period and lower expense in later reporting periods for each fiscal year [indiscernible].

Now for a further review of our portfolio, let me turn the call over to Gary. Gary?

Gary Mentesana

Thanks, Mike, and good morning, everyone. The company's assets and liabilities continued to be organized into two portfolios, Energy Capital and Other Assets and Liabilities. In the Energy Capital portfolio, the company primarily invests alongside an institutional capital partner in three Solar Ventures that mainly finance the development and construction of renewable energy projects.

In the first quarter, the carrying value of our equity investments in the Solar Ventures increased by $4.1 million to $130.4 million at March 31. This quarterly increase was driven by $3.7 million of equity and income from the Solar Ventures, which was approximately $800,000 higher than what was earned in the fourth quarter. And a net capital contribution of $400,000 to the ventures.

At March 31, the loan held in the Solar Ventures which were substantially project-based debt financing and had an aggregate unpaid principal balance or UPB of $232.1 million, a weighted average remaining maturity of nine months and a weighted average coupon of 10.7% compared to $250.8 million, seven months and 9.2% at December 31.

Although there was a decrease in outstanding loan UPB during the quarter, the Solar Ventures unfunded loan commitments to borrowers increased from $89.1 million at December 31 to $156.1 million at March 31. The loans outstanding as of March 31, 2019 generated origination fees that ranged from 1% to 3% on committed capital and featured coupons that range from 7.0% to 18.0% on the outstanding UPB.

From their inception in 2015 through March 31, 2019, over $1.5 billion of loans have been originated for the Solar Ventures that will enable the completion of 4.2 gigawatts of renewable energy. Approximately $1.1 billion of these loans have been repaid without any loss of invested principle, generating a weighted average IRR of 16.1%, which was on average higher than originally underwritten.

We believe that the pipeline which remains robust continues to represent an opportunity for the company to make additional investments in the Solar Ventures at attractive risk adjusted returns. Accordingly, the company continues to seek additional capital for this portfolio.

Turning to the other assets and liabilities portfolio, UPB and fair value of our bond related investments at March 31 was $78.3 million and $83.6 million, respectively, down from a $110 million of UPB and $116.6 million of fair value at year-end. These declines were driven by dispositions of bond related investments that I will touch on further in a moment.

The performance of the multifamily properties to secure our bond investments was largely unchanged as evidenced by the fact that the weighted average debt service coverage ratio and collection rate remained constant during the quarter at 1.2x and 6.2% respectively.

At March 31, the associated total return SWAP or TRS financing of our bond investments had a notional balance of $33.4 million, down from $50 million at year-end and a pay rate that was SIFMA plus a spread of 1.35%.We have hedged $30 million of this TRS interest rate exposure with a pay fixed interest rate swap that matures in 2023 and is tied to SIFMA.

As discussed on prior calls, sourcing new bond related investments that meet our investment target returns is difficult in a low rate environment. Consequently, our bond related investments are essentially in runoff and we're reviewing individual investments to determine whether they remain suitable for investment purposes. As a result, we may continue to recycle some or all of the equity invested in bond related investments into Energy Capital investments to increase the company's return on invested capital as we did in April when a $13 million defaulted bond was redeemed.

With the exception of the Hunt note, which ended the quarter unchanged with a UPB of $67 million and a pay rate of 5%, we do not expect the rest of the assets in the other asset and liabilities portfolio to contribute consistently to quarterly income. We continue to pursue opportunities to monetize these assets and realize what we believe to be their fair market value.

With that, I will turn the call over to Dave, who will discuss our first quarter financial results in greater detail. Dave?

David Bjarnason

Thanks, Gary. Good morning, everyone. As I provide an overview of our results, I will refer to various tables in item 2 of our form 10-Q. In the first quarter, as Mike mentioned, we recognized a decrease in common shareholders' equity of $400,000. In this regard, book value per share decreased to $36.11 per share, which represented a $0.09 per share decrease on a quarter-over-quarter basis. Decreases in common shareholders' equity and book value per share were primarily driven by $200,000 comprehensive loss in the first quarter.

Comprehensive income, which included $2.9 million of net income, a $3.1 million of other comprehensive loss, decreased $18.2 million compared to the fourth quarter. While I will touch on performance drivers in more detail, comprehensive income softened in the first quarter, primarily as a result of material nonrecurring gain that the company recognized in the fourth quarter from the acquisition of Morrison Grove Management by subsidiary of the Hunt companies.

Quarterly decline in the amount of net fair value gains recognized by the company on its bond related investments was also a factor. In addition to a $200,000 comprehensive loss, the company recognized $200,000 of other decreases to common shareholders' equity in the first quarter. Majority of such changes were driven by a transition adjustment that was made to the company's retained earnings in the first quarter to recognize the cumulative effect of adoption of the new accounting standard that accelerated the amortization into earnings at premium cost basis adjustments associated with our bond related investments.

This transition adjustment coupled with the absence of any consequential share issuances, caused other changes in common shareholders' equity to decline by $1.6 million on a quarter-over-quarter basis. And taking a closer look at the drivers of the comprehensive loss recognized by the company as I previously mentioned, we report a $2.9 million net income in the first quarter, which represented a $28.4 million decrease compared to net income that the company reported in the fourth quarter.

There are two key drivers for this quarter-over-quarter decrease. First, the amount of bond related investments that were liquidated in the first quarter decreased compared to the fourth quarter. Consequently, the amount of net gains from bond investments that were reclassified out of accumulated other comprehensive income or AOCI and into earnings in the first quarter decreased by $13.2 million compared with fourth quarter.

Secondly, income from discontinued operations decreased $13.4 million, which was primarily attributable to the recognition of $13 million of deferred revenue in the fourth quarter, upon Hunt's settlement of its acquisition of Morrison Grove Management. While these two items drove the largest changes in net income, there are several other drivers worth noting.

Company reported $4 million in equity in income from unconsolidated funds and ventures in the first quarter, which represents a $2 million increase compared to the amounts reported in the fourth quarter. $2.7 million of the first quarter amounts [done] [ph] from the company's equity income from Solar Ventures, which represents an $800,000 increase compared to the amounts reported in the fourth quarter. This increase is primarily attributable to the company's equity investments in Solar Development Lending or SDL.

Company share of SDL's net income increased $1.4 million in the first quarter as a result of an increase in commitment fees from loan originations and an increase in interest income on funded loans due to the quarter-over-quarter increase in the UPB of SDL's holdings. This quarterly increase was partially offset by a $600,000 decrease in the company's share of net income from Solar Construction Lending, or SCL.

This capital distributions from SCL in the first quarter were redeployed into SDL, the funding with new commitments of such venture. The balance of the quarterly increase in equity income from investees was attributable to the company's equity investments in South African Workforce Housing Fund, as net fair value of the fund's holdings improved on a quarter-over-quarter basis.

Company also recognized $1.7 million of net interest income in the first quarter, which represents a $600,000 decrease on a quarter-over-quarter basis that was primarily attributable to dispositions of bond related investments in the fourth and first quarters. Further, the company recognized $2.1 million net gains from bond investments and derivatives.

However, $3.6 million of this amount was equity neutral and related to bond investment related gains that were reclassified out of AOCI and into earnings. In this regard, as Mike referenced earlier, company recognized $1.4 million of net fair value losses associated with its interest rate hedge position.

Lastly, the company recognized $2.7 million of operating expenses in the first quarter, which represents an $800,000 increase compared to amounts recognized in the fourth quarter. This net change was primarily driven by compensation related expense reimbursements that are payable by the company to its external manager and for which the company does not recognize expense in the fourth quarter as the 2018 annual cap on such items was exceeded earlier that year.

While net income decreased in the first quarter, other comprehensive loss decreased in the first quarter by $10.1 million compared to the fourth quarter. Majority of this decrease was driven by a quarter-over-quarter decrease in the volume of bond investment dispositions. Consequently, the amount of net gains that were reclassified out of AOCI and into earnings in the first quarter decreased by $13.2 million compared to the fourth quarter. The impact of these reclassifications was partially offset by a $3.1 million decrease in the amount of net fair value gains that were recognized on bond related investments in the first quarter.

Lastly with respect to the company's liquidity and capital resource, the company had $34.4 million of cash, cash equivalents and restricted cash at the end of the first quarter, $28.8 million of which was unrestricted. Table 15 of our filing breaks down the $600,000 net increase in the company's cash, cash equivalents and restricted cash during the first quarter, such increase was driven by $2.4 million of cash provided by investing activities, which was partially offset by approximately $1.8 million of cash that was used by the company in operating and financing activities.

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

Michael Falcone

Great. Thanks, Gary. Before we get to the Q&A, I'll provide a brief update on our approach to the 2019 business plan and the progress to date. From a business operations perspective, 2018 represented a significant transformation of the balance sheet and focus on directing our investments into the Energy Capital portfolio and away from the other assets on our balance sheet combined with significant deleveraging of our TRS borrowing.

The first quarter of 2019 continued these themes with additional dispositions of bond related investments and related deleveraging in order to continue to cycle more equity into the Energy Capital portfolio. We expect additional dispositions and cycling of capital into Energy Capital in the coming quarters. As always, we continue to look at new initiatives in an effort to improve existing returns and if we can identify additional investment opportunities that we think will produce attractive risk adjusted returns and generate positive social or environmental impacts, we retain the flexibility to invest accordingly.

As discussed on prior calls, we anticipate growing the value of our business through increasing investment and higher earning investment opportunities at the expense of declining returns from legacy portfolios that are winding down. With the planned additional investment in the Energy Capital business, we hope to begin the process of growing our top and bottom line numbers in the coming quarters. In turn, we hope those improving results combined with strategic capital management will translate into continued growth in our share price.

Before we take questions I wanted to remind everyone that the date of the annual meeting of shareholders is May 21, 2019 and all shareholders as of the record date are encouraged to vote. In closing, we are excited about the future. We remain committed to our shareholders, we thank you for your ongoing support.

We will now open the call for questions. Rocco?

Question-and-Answer Session

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

Michael Falcone

Thank you, Rocco. Again, I'd like to thank all the shareholders. We are in a bit of a transition for the first half of this year as we continue to rotate our balance sheet into the Energy Capital business, but we're quite excited about the long-term prospects of that business as we had discussed previously and look forward to reporting the ongoing progress in that regard as we move forward. So thank you all very much and have a great week.

Operator

Thank you, sir. This concludes today’s conference call, and thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.

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