MMA Capital Management, LLC [MMAC] 2015 Third Quarter Results and Business Update Thursday, November 19, :30 AM ET - PDF

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MMA Capital Management, LLC [MMAC] 2015 Third Quarter Results and Business Update Thursday, November 19, :30 AM ET Company Representatives Michael Falcone, CEO and President Dave Bjarnason, Chief
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MMA Capital Management, LLC [MMAC] 2015 Third Quarter Results and Business Update Thursday, November 19, :30 AM ET Company Representatives Michael Falcone, CEO and President Dave Bjarnason, Chief Financial Officer Gary Mentesana, EVP Analysts/Investors Gary Ribe, Macro Consulting Group Ted Lou, Vale Financial Group Greg Bennet, Private Investor Bill Wyatt, Private Investor Presentation Operator: Good morning, ladies and gentlemen, and welcome to the MMA Capital Management, LLC, third quarter 2015 conference call. My name is Emily and I will be your coordinator for today. (Operator Instructions). We will facilitate a question-and-answer session at the end of this conference call. Please note, the event is being recorded today. Some comments today will include forward-looking statements regarding future events and projections of financial performance of MMA Capital, 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 over to Mr. Michael Falcone, CEO of MMA Capital Management, LLC. Please go ahead. Michael Falcone: Thanks, Emily. Good morning, everyone, and welcome. With me on the call today is Dave Bjarnason, our Chief Financial Officer, and Executive Vice President, Gary Mentesana. Dave 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 our third quarter 2015 results and to provide an overall business update, including some insights into how we see our business strategy moving forward. With respect to our third quarter results, which Dave will review in detail later, we ended the quarter with $104.9 million of common equity, which represented $15.55 of equity per common share on a fully diluted basis, an increase of over 11% for the quarter. The majority of the Company's growth in diluted equity per share in the third quarter was driven by a net increase in the fair value of our bond portfolio, as well as from gains recognized by the Company related to sales of real estate. During the third quarter, we also repurchased approximately 142,000 of our common shares at an average price of $12.71 per share, a price that we found attractive and that was also accretive to our book value per common share. Across our US operations, we continued to see credit quality improve during the third quarter, which drove further increases in the fair value of our bond portfolio. Our leveraged bond business continues to generate cash flow benefits consistent with or above our goal of mid-teen returns, and the remaining assets, including the remaining loan from the sale of the LIHTC business, are performing as expected. Within our REO portfolio, we closed on the sale of undeveloped land for approximately $8 million and recognized a $4.3 million gain in net income in the third quarter. We also fulfilled our original commitment to the renewable energy finance business by investing $25 million of cash into the new solar energy lending joint venture during the quarter. And both the Company and Fundamental Advisors have committed an additional $25 million to the JV to meet the significant demands we're seeing for energy capital. Investment returns on this joint venture continue to meet or exceed our underwriting expectations and are having a positive impact on our bottom line. Finally, and while a fourth quarter item, our preferred stock investment in a private national mortgage lender and servicer was redeemed by its issuer on October 30, including $6.8 million of cash collateral associated with terminated total return swaps that finance such investment. This redemption caused the return of roughly $18 million of cash to the Company and will result in the recognition of a pretax gain in the fourth quarter of $5.2 million. Although we'll miss the ongoing cash flows from our preferred stock investment, its redemption comes at a time when we continue to see exciting growth opportunities for our affordable housing and renewable energy finance businesses. And we hope to recycle investment capital fairly quickly in this case. With respect to international operations, we have three areas of focus. First, we're focused on value creation and asset sales in our original fund, the South African Workforce Housing Fund, which I'll refer to as IHS Fund I in the balance of our remarks. Second, we continue to raise capital for our second multi-investor fund, IHS Fund II. And finally, we're working with our partner, [Zeller RE] Properties, to build out IHS Property Management, which is taking over the day-to-day property management of many of our properties. During the third quarter, we continued efforts to opportunistically sell assets of IHS Fund I, but we also made progress to source new investor capital for IHS Fund II. The Property Management business is profitable, while the transition of the management of many of the properties owned by our South Africa funds is proceeding at a good pace. Such transition is helping to improve property performance, which is important to maximizing the value of fund assets prior to their disposition as we wind down the fund over the next couple of years. Importantly, we're already seeing bottom line benefits from the Property Management company after only a couple of quarters of operations. Finally, as we disclosed in Footnote 6 of our Form 10-Q on November 12, we reached an agreement to acquire all of the interest in the Company's subsidiaries and affiliates held by one of the co-founders of IHS, including $4.4 million of outstanding debt. The purchase will occur at a significant discount and therefore, we will report a net gain from this transaction in the fourth quarter that we estimate to be between $3 million and $3.5 million. With that, it's time to turn the call over to Dave for the financial highlights. Dave? Dave Bjarnason: Thank you, Mike, and good morning, everyone. As I provide an overview of our third quarter results, I will refer to Tables 1 through 5 of management's discussion and analysis, which is included in Item 2 of our Form 10-Q. So to the extent that you have our filing in front of you, I'd ask that you please turn to page 44 of the filing, where you'll find Table 1, which is balance sheet summary. In Table 1, you can see that we reported on line 17 common shareholders' equity of approximately $105 million, which is about $9.6 million more than was reported as of the end of last quarter. As Mike mentioned, and as you'll see on line 22, we also reported diluted common shareholders' equity per share of $ Additionally, we ended the third quarter with approximately $57 million of cash and cash equivalents, as reported on line 1 of the table, which is about $1.2 million less than was reported at the end of the second quarter of this year. Turning to Table 2, which begins at the top of page 45 of our filing, we attributed in this table a reported increase in common shareholders' equity between net income, other comprehensive income and other changes in common shareholders' equity. In the third quarter, you can see the majority of the change in common shareholders' equity was driven by an increase in other comprehensive income and is allocable to common shareholders, which I'll discuss in more detail when speaking to Table 4 of our filing. Turning to Table 3, which begins in the middle of page 45 of our filing, this table provides a slightly modified presentation of our interest [income]. Overall, you can see that on line 14, we reported in the third quarter $3.4 million of net income allocable to common shareholders, which is approximately $9.2 million less than was reported in the third quarter of As far as key drivers of net income that is allocable to common shareholders, I have several observations with respect to net interest income, which is covered in more detail in Table 6. This line includes interest income associated with all interest-bearing assets, reduced by the interest expense associated with all debt obligations that we used to finance such assets. As you can see on row 1 of Table 3, the amount of net interest income that we reported for the quarter was approximately $2 million less than was reported in the third quarter of The decrease in this case was driven primarily by the collection of approximately $1.8 million of delinquent interest associated with a nonperforming bond that was restructured in the third quarter of Excluding the impact of this item, net interest income declined marginally and commensurate with changes in our bond portfolio and funding mix. With respect to fee and other income, which is covered in more detail in Table 7, this line item includes income on our preferred stock investment, asset management fees and reimbursements, as well as other miscellaneous income. As you can see on line 2 of Table 3, the amount of fee and other income reported in the third quarter of this year was relatively unchanged compared to what was reported in the third quarter of However, you will also see that fee and other income reported in the first 9 months of this year was approximately $2.9 million more than was reported for the first 9 months of This increase was driven primarily by our deconsolidation of IHS Fund I, meaning during the period, IHS Fund I was consolidated, which was the case until December 31 of last year. Asset management fees and reimbursements were reported through line 8 of this table. However, effective the 1 st of this year, when we no longer consolidated IHS Fund 1, all fees earned in 2015 were recognized on line 2 of Table 3. With respect to other interest expense, which is covered in more detail in Table 8, this line item includes interest expense associated with our subordinate debt, as well as interest expense associated with senior debt that does not finance our interest-earning assets. As you can see on row 3 of Table 3, the amount of other interest expense that we reported was approximately $2.1 million less than was reported in the third quarter of This decrease is driven primarily by the restructuring of our subordinated debt in the second quarter of this year, which caused the accounting yield on such debt to decline from 6.9% to 1.6%. And thus, our reported cost of funding for such debt declined. With respect to operating expenses, which are covered in more detail in Table 9, this line item includes salaries and benefits, general and administrative expense, professional fees and other miscellaneous expenses. As you can see on row 4 of Table 3, the amount of operating expenses that we reported was approximately $800,000 more than was reported in the third quarter of This increase is driven primarily by a $1.1 million increase in employee incentive compensation, which was partially offset by an $800,000 decrease in professional fees. With respect to net gains on assets and derivatives, which are covered in more detail on Table 10, this line item includes net gains or losses associated with our bonds, our loans, our derivative instruments, sales of real estate and the extinguishment of recognized debt obligations. As you can see on row 5 of Table 3, the amount of net gains on assets and derivatives that we reported in the third quarter of this year was approximately $4.2 million less than was reported in the third quarter of This decrease is driven primarily by the sale of a multi-family taxexempt bond in the third quarter of 2014, which we recognized as a $6.5 million gain during that reporting period. As highlighted in Table 10, this decrease was softened by a $4.3 million gain that we recognized in connection with the sale of undeveloped land in the third quarter of Finally, and with respect to net losses of consolidated funds and ventures that are allocated to common shareholders, which are covered in more detail in Table 11, this line item includes revenues, expenses, net gains and equity and losses from lower tier property partnerships and consolidated funds ventures. As you can see on row 8 of Table 3, the amount of net income or loss that we reported in the third quarter of 2015 that was allocated to common shareholders was approximately $2.8 million less than was reported in the third quarter of This decrease is driven primarily by the deconsolidation of IHS Fund I and a not-for-profit entity, meaning while such entities were consolidated by us during 2014, allocated income was recognized through line 8 of this table. However, on the deconsolidation of such fund and ventures, income from these entities are reported in other lines of this table, which was the case for all reported periods of Turning to Table 4, which begins at the top of page 46 of our filing, other comprehensive income for the third quarter of 2015 was $7.9 million. As reported on line 1 of this table, most of this income is driven by the increase in the fair value of our bond portfolio, which was driven primarily by improvements in property operations and declines of both discount and cap rates associated with certain nonperforming and collateral-dependent performing bonds. Finally, and turning to Table 5, which begins in the middle of page 46 of our filing, other changes in common shareholders' equity in the third quarter were, as reported in line 1 of this table, driven primarily by share buybacks. As Mike mentioned, the Company purchased approximately 142,000 shares in the third quarter of 2015, and while this activity reduced common shareholders' equity, such buybacks drove a $0.05 increase to diluted equity per share, given that our average repurchase price of $13.21 was below our reported book value per share of $ 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 current thinking regarding strategy, mission and values before opening the call for questions. We are focused on analyzing new opportunities, while at the same time looking for opportunities to maximize the value in our existing portfolio and solidify our balance sheet. On our last call, we discussed an initial joint venture with Fundamental Advisors to provide additional capital for the solar construction lending business. At the start of the fourth quarter, we were able to extend that relationship through a new 50/50 joint venture aimed at placing permanent loans in the renewable energy space. In addition to providing a new platform for putting institutional capital to work, we believe the permanent loan space will provide a source of stable income from longer term loans to complement the short-term loans being underwritten by the original construction loan-focused joint venture. We still cannot fully quantify the potential growth of these platforms, but our pipeline continues to significantly exceed our original expectations. And we've been able to use that demand to maintain high underwriting standards, while still projecting low-teens returns. One additional item of note is the current plan with respect to share buybacks. As it stands, the Company has just over 40,000 shares remaining under our current 2015 buyback authorization. As discussed on prior calls, any further expansion of the 2015 buyback could potentially impact our ability to maintain our NOLs. And therefore, there are no additional changes planned for the current authorization. Both management and the Board believe that the buyback of our shares has been an effective way to drive value for our continuing shareholders, as seen by another incremental benefit of $0.05 of net book value per share realized this quarter, following an $0.18 benefit realized last quarter. Rather than propose an incremental change at the recent Board meeting, we will address the size and scope of the 2016 buyback program in a more comprehensive way as part of our 2016 business plan. Should we use the upcoming open trading window to address a 2016 buyback authorization, we will obviously make an announcement at that time. We continue to believe that a buyback at our current trading price represents an attractive investment, especially as we continue to trade below book value, and support the idea of an incremental return of capital to shareholders via a new buyback program in the coming year. Lastly, and as of this call, we have approximately $70 million of unrestricted cash available for future investment. We remain focused on improving the per-share value of the Company through strategic asset investments, including investments in our solar lending business, asset sales, management of our liabilities and share buybacks. We are excited about our future. We remain committed to our shareholders, and we thank you for your support. We'll now open the call to questions. Emily? Questions and Answers Operator: Thank you. We will now begin the question-and-answer session. (Operator Instructions). Gary Ribe, Macro Consulting. Gary Ribe: Good job on everything. Unidentified Company Representative: Thank you. Gary Ribe: I've got a couple of different questions if you wouldn t mind indulging me. The first is about this solar JV. I noticed in -- I don't know if it was before the quarter-end or subsequent to the quarter-end that it was disclosed, and I noticed you've transferred your existing solar loans to that entity because that's correct, but you didn t achieve the sale accounting. Michael Falcone: Um-hum, correct. Gary Ribe: Okay. Those loans are showing up in your [content] table there? Dave Bjarnason: Yes, the liability associated with the secured borrowing that we recorded is showing up in the debt table. The loans themselves are still in other assets. Gary Ribe: Okay. Dave Bjarnason: So in other words, to your point about not achieving sale accounting, the cash that we received in connection with the transfer of those loans was treated as a borrowing, if you will. And so that debt obligation that we recorded is (inaudible) provided in the debt (inaudible). Michael Falcone: It's a fair summary to say that while legally, we sold the assets and they're now part of the joint venture, on our books, we have $1 of assets and $1 of liabilities. Dave Bjarnason: Yes, that s exactly right. It was a technicality, if you will, in the sale accounting rules that precluded us from being able to recognize those funds. But I think the way Mike framed it is the right way to think about it. Gary Ribe: Okay. So you sold -- it's a 50/50 joint venture, so the $7 million represents half the value of the loans for the full amount? Michael Falcone: Yes. The $7 million represents the proceeds we had received in connection with the transfer of those funds to the JV. Gary Ribe: Got it, okay. And I think the value that they were showing, the interest costs in the quarter of 12%, along those lines. Michael Falcone: Um-hum. Gary Ribe: I think you had talked about mid-teens returns. So are you using a little bit of leverage of the JV entity? Dave Bjarnason: The difference is currently attributable to the fact that we had fees upfront to enhance the return on capital. Currently, there's not any leverage deployed, but we anticipate deploying some in the future. Gary Ribe: Okay. And just philosophically on the solar business, going through your history just a little bit, I know that you ve have had previous solar lending businesses, and it resulted in you owning the five facilities you own now. What's different this time about it? And how can we have some comfort that sort of thing is probably not going to happen again? Michael Falcone: So previously, we were solar in that we invested in solar equit
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