MMA Capital Holdings, Inc. (NASDAQ:MMAC) Q3 2019 Results Conference Call November 12, 2019 8:30 AM ET
Michael Falcone - CEO
Dave Bjarnason - CFO
Gary Mentesana - COO
Megan Sophocles - SVP
Conference Call Participants
Jesse Greenfield - Greenfield Investments
Good morning, ladies and gentlemen, and welcome to the MMA Capital Holdings, Inc. 2019 Third Quarter Financial Results and Business Update Conference Call. My name is Jamie, 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.
At this time, I'd like to turn the conference call over to Mr. Michael Falcone, CEO of MMA Capital Holdings.
Thank you, Jamie. Good afternoon, 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 today, Dave, Gary 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 MMA Capital Holdings third quarter financial results and to provide an overall business update. Our quarterly report was filed with the SEC this past Friday, and an updated investor presentation is available on our website.
With respect to the financial results, which Dave will review in detail later, we are pleased to report that the Company ended the quarter with $219.6 of common shareholders' equity or book value, which represents an increase of $5 million from the three months ended September 30, 2019.
Book value per share finished the quarter at $37.29, an increase of $0.83 per share or 2.3%, compared to the second quarter. This growth was primarily attributable to an increase in income derived from our investments in loans that finance renewable energy projects within our Energy Capital portfolio.
Also during the quarter, we successfully raised $70 million of debt capital in the form of a three-year revolving credit facility at what we believe is an attractive rate. This facility, which was increased to $100 million in October, is expected to improve our returns as a result of leverage and a reduction in both the time and amount of that idle equity capital invested within the Solar Ventures.
With respect to operations, we continue to see strong returns from our Energy Capital investments during the third quarter as the income from such investments increased 38% on a quarter-over-quarter basis marking consecutive quarters with greater than 30% revenue growth, driven largely by initial investment due to the recent recycling of equity out of lower yielding investments and performance of the underlying renewable energy loans in which we invest.
As Gary will further discuss, demand for capital to finance renewable energy projects in North America remained strong. The solar market in particular is large and growing but remains segmented and underserved. We believe we are well-positioned to invest in this sector and can continue to generate attractive risk-adjusted returns which also generate positive environmental and social impacts due to our External Manager’s renewable energy loan origination platform.
The impact of the comprehensive changes in our business structure over the past two years will continue to be reflected in our comparative financial statements over the coming quarters. These changes include the recent recycling of equity from the bond related investments into the higher yielding Energy Capital portfolio. Results of these changes include significant increases in investment income from solar investments which more than offset decreases in net interest income, as Dave will further discuss. On balance, we anticipate greater comparability of financial results beginning as soon as next year as we continue to maintain our focus on growing the Energy Capital portfolio.
Now, for a further review of our portfolios, let me turn the call over to Gary.
Thanks, Mike, and good afternoon, everyone.
The Company's assets and liabilities continue to be organized into two portfolios, Energy Capital and other assets and liabilities. In the Energy Capital portfolio where approximately 58% of the Company assets reside, the Company invests alongside an institutional capital partner in Solar Ventures that mainly finance the development and construction of renewable energy projects in North America.
In the third quarter, the carrying value of the Company's Energy Capital investments increased by $44.1 million to $214.6 million at September 30th. Net investment made by the Company in the third quarter accounted for $37.2 million of this increase with balance attributable to the reinvestment of income recognized during the period. Since the start of the year, the total carrying value of investments in this portfolio have increased by $88.3 million or by 70%.
As you will see in table two of our filing, during the third quarter, the Company recognized $6.9 million of income from adjustments related to the Energy Capital portfolio, which amounted to a 14.3% annualized net return on investment during the quarter, based upon the simple average of the carrying values of the related investments as of September 30th and June 30th.
The total investment income recognized from these investments increased $1.9 million or 38% on a quarter-over-quarter basis, and $11.5 million or 288% for the first nine months of 2019 compared to same period for 2018. At September 30th, loans funded by the Solar Ventures have an aggregate unpaid principal balance or UPB of $362.7 million, a weighted average remaining maturity of nine months and a weighted average coupon of 10.8% compared to $273.8, 10 months and 11.5% at June 30th. The Solar Ventures closed $358.3 million of loan commitments during the third quarter of 2019. The External Manager typically targets loans that generate origination fees ranging from 1% to 3% on committed capital and coupons on funded loan balances ranging from 7% to 14%. From their inception, our External Manager has originated and the Solar Ventures have invested in over $2.1 billion of loan financed projects that will generate over 6.2 gigawatts renewable energy. Approximately $1.2 billion of these loans have repaid without any loss of invested principal while generating a weighted average loan level IRR of 17.1%, which was on average higher than originally underwritten.
The pipeline for renewable energy debt investments remains robust and continues to represent an asset class with attractive risk-adjusted returns that also meet our environmental and social investment targets. As Mike mentioned earlier, we now have a $100 million revolving credit facility which should enable our capital to be more fully invested, which we believe will increase our returns in the future. We continue to explore ways to optimize the Company’s capitalization including additional debt capital where appropriate.
Turning to the other assets and liabilities portfolio, the UPB and fair value of our bond-related investments at September 30th was $33.3 million and $34.1 million, respectively, down slightly in the quarter as we exited additional bonds positions. With the exception of the remaining bond-related investments and the Hunt note, which ended the quarter unchanged with the UPB of $67 million in a pay rate of 5%, we do not expect the rest of the assets in the other assets and liabilities portfolio to contribute the consistently to early income. We continue to pursue opportunities to monetize these investments and realize what we believe to be their market value.
With that I’ll turn the call over to Dave who will discuss the third quarter financial results in greater detail. Dave?
Thanks, Gary, and good morning, everyone.
As I provide an overview of our results, I will refer to various tables and Items 2 of our Form 10-Q.
In the third quarter, as Mike mentioned, we recognized an increase in book value of $5 million. In this regard, book value per share increased to $37.29 per share, which represented an $0.83 per share increase on a quarter-over-quarter basis.
Increases in book value in the third quarter were driven primarily by $4.9 million of comprehensive income. Comprehensive income, which included $5.6 million of net income and $700,000 of other comprehensive loss, increased $2.8 million compared to second quarter. The increase in book value compared to the second quarter had three key drivers: First, as Gary noted, returns from investments related to Solar Ventures increased by $1.9 million or by 38%, primarily due to growth of new loan commitments and the average UPB of funded loans at the Solar Ventures. Secondly, the fair value losses recognized in connection with interest rate hedge businesses decreased by $1.2 million, given changes in the interest rate environment. And thirdly, net fair value gains related to bond related to investments increased by $1.3 million, largely as a result of a decrease in the market yield of an infrastructure bond investment.
In considering the reporting impacts of interest rate derivatives though, it’s important to keep in mind that while these instruments are effective at reducing the Company’s interest risk, changes in interest rates in future reporting periods can lead to earnings volatility as mark-to-market adjustments associated with interest derivatives would not be offset because hedged items like subordinated debt are not reported at fair value in the Company’s financial statements.
As far as the other highlights from the quarter, to briefly mention, debt gains decreased by $18.5 million, compared to second quarter with the volume of bond investments that were sold or redeemed significantly decreased in the third quarter. Although I've mentioned on prior calls, these types of gains are largely equity neutral.
Equity income from real estate partnerships decreased by $1.1 million, compared to second quarter, the volume of capital transactions completed by such partnerships declined. Net interest income decrease by $0.5 million compared to the second quarter in large part due to non-recurring interest payments that received on subordinated cash flow bond investments in the second but not third quarters. Other interest expense associated with subordinated debt and other debt obligations was relatively consistent on a quarter-over-quarter basis. And non-interest expenses increased by $300,000 compared to the second quarter, primarily due to foreign currency-related losses that were recognized in connection with the re-measurement of the Company's non-dollar denominated debt in the U.S. dollars for reporting purposes.
The increase in noninterest expenses however was softened by a quarterly decrease in external management fees and expense reimbursements, which declined because the annual cap on reimbursements for compensation related costs was reached in the third quarter.
Lastly, with respect to the Company's liquidity and capital resources. Company had $17 million of cash, cash equivalents and restricted cash at the end of the third quarter, $10.8 million of which was unrestricted.
Table 7 of our filing breaks down the $16.9 million net decrease in the Company's cash, cash equivalents and restricted cash during the first nine months of 2019, a decrease that was driven primarily by the net impact of $60.3 million of net cash used investing activities and $38.1 million of cash that was provided by financing activities. Majority of cash provided by financing activities during this timeframe was attributable to draws made by the Company against the revolving credit facility that was closed in September.
With that, I will turn the call back over Mike.
Before we get to the questions and answers, I'll provide a brief update on our approach heading into the end of the year. From a business operations perspective, the third quarter represented a transition from the transformative transactions of 2018 and early 2019 to the maximizing of returns in operating efficiencies related to our Energy Capital portfolio. That process has meant the orderly exit and deleveraging of legacy bond-related investments, the closing of a revolving credit facility to support our investment in the Energy Capital portfolio.
Company expects to use the new financing to both grow our investment in Energy Capital, as well as ensure maximum efficiency in a portfolio by limiting idle capital of the Solar Ventures and at MMA Capital itself. In addition, 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 both produce attractive risk-adjusted returns and generate positive social or environmental impacts, retain the flexibility to invest accordingly. Finally, the Company initiated purchases under its 2019 share buyback authorization and as of November 1st have repurchased approximately 24,000 shares towards the 100,000 share limit.
I would like to make one comment on recent news about the External Manager. As you may be aware, Hunt last week announced that it has entered into a transaction with ORIX for the sale of Hunt's commercial real estate lending business. Hunt's management of MMAC is unaffected by that transaction. Accordingly, we cannot comment further on the Hunt or its transaction at this time.
In closing, we remain excited about the future committed to our shareholders, and we thank you for your committed support. We’ll now open the call to questions. Operator?
[Operator Instructions] And our first question comes from Jesse Greenfield from Greenfield Investments. Please go ahead with your question.
Michael, great quarter. I just did some little math on my own. And it looks to me like if you got this additional funding that we should see a positive trend in earnings in the future. And if I'm correct, then, my question is, you haven't paid a dividend to the stockholders who’ve stuck with you forever since 2008. You’ve got plenty of cash, you’ve got a trending plus on the earnings side. What's the likelihood of us seeing some sort of action as far as the existing stockholders receiving a dividend?
Thanks, Jesse. We have been returning capital, as you well know, through a share buyback plan. I do think, as we continue to turn the Company from one where there was a lot of one-off gains to one where those that income stream is more predictable that the question of paying a dividend becomes a more right one. I don't think that we are at that point yet. I do - it is something the Board discusses regularly and has discussed regularly for years. But, as our business model continues to change, I think, it is one which is a question which certainly gets more and more attention. At this point though, we have not made a decision to start paying a dividend, obviously.
Okay. Thank you, Michael.
[Operator Instructions] And ladies and gentlemen, at this point showing no additional questions, I’d like to turn the conference call back over to Mr. Falcone for any closing remarks.
Thank you, operator. Just to wrap it up. I would like to thank everybody for their support. We obviously remain very excited about the future of the business and look forward to our next conversation with shareholders. Thank you all very much.
Ladies and gentlemen, that will conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.