March 04, 2020 - 1:58pm EST by
2020 2021
Price: 30.90 EPS 0 0
Shares Out. (in M): 6 P/E 0 0
Market Cap (in $M): 182 P/FCF 0 0
Net Debt (in $M): 151 EBIT 0 0
TEV (in $M): 333 TEV/EBIT 0 0

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  • Discount to book


MMA Capital has been written up before - thus I will be brief here. The company has a legacy portfolio from the GFC era that has been substantially cleaned up. About $400MM of NOLs have been generated through the process. About two weeks ago (2/20/2020), the company issued a press release that anticipated a reversal of the valuation allowance of its deferred tax assets - indicating it will likely generate substantial profits over the upcoming years. It is now trading at a 24% discount to its 3Q19 NAV. Its 4Q19 NAV could be as much as $1 - $2 more than 3Q19 (excluding the effect of DTA). With the portfolio largely stabilized the company is actively considering a possible dividend. It could also be included in ESG indices down the road. Putting any macro issues aside, we consider the setup attractive. 


Some Recent History


In January 2018, Hunt Investment Management took control of the company externalized management. Hunt is an El Paso based family that built their family wealth through real estate and infrastructure projects, military housing in particular (it is unrelated to the Hunt brothers who tried to corner the silver market in the 1980s, for those who wonder). They quickly decided to liquidate the legacy portfolio and refocus on the renewable business. In December 2019/January 2020, Hunt repaid in full their $67MM seller notes. With this repayment likely 75% of 80% of the company’s assets will be in solar loans, giving it a much cleaner earnings profile. 




Solar Loans


The company developed a unique loan origination platform to capture inefficiencies in the solar construction industry. The company supports distributed generation, community solar, and utility scale solar developments. For smaller solar developers, it is hard for the developers to obtain traditional sources of short dated loans to support their late stage development/construction stage activities. In contrast, permanent loans with PPAs in place are very well bid and executed at low yields. Over the decades, the company established a deep expertise in this niche with connections with developers and municipalities. This allows them to: 1) efficiently assess the credit quality of business partners (these are typically long term relationships); 2) help sort out difficult issues with the local government if needed.  


These loans typically vary between $2MM to $50MM in size, with an average of $19MM. What makes these loans attractive is: 1) they charge an average coupon in the low teens (10% to 11% in recent quarters) with very little correlation with the broader markets; 2) there is typically a 1% to 3% origination fee upfront; 3) they are typically short dated (9 months average), and draws down slowly during the course of the loan (typically peaks 6 months into the loan). Thus the weighted average gross IRR for the realized loans as of 3Q19 achieved 17.1%. The coupons are high because: 1) the collaterals are not as strong as the typical senior secured loans (sometimes collateralized by equipment, sometimes by project pipeline, etc); 2) as mentioned above, there is quite a bit of sweat equity involved in sorting out development issues; 3) their niche (smaller projects) is underserved by capital. 


The loans are structured through three 50/50 JVs (one development, one construction, and one perm loan). The perm loan JV is effectively dormant right now due to lack of attractive opportunities. Fundamental Advisors, an alternative asset manager, is the passive partner in the JVs. There is no JV level leverage. The company just closed a credit line on top of the JVs that advances 60% to 90% of LTV to allow capital flexibility and some levered returns. 


It typically takes years to get all the approval needed to get a project going. Thus the developers have strong incentives to push through the finish line and make good on the loans. They also value efficiency and certainty of closing. Once the panels are installed, the cost of capital drops precipitously and new money can replace these bridge loans quickly. Of the $2.1BN loans originated so far, the company only has 4 technical defaults. 3 of them were fully repaid later with all penalties, and 1 was fully repaid with no penalty. Importantly, because these are short dated loans (9 months on average), it is easy to observe any deterioration in underwriting quality compared with other specialty finance platforms. 


With solar LCOE largely at parity with traditional energy, and PV prices continue to drop, there is a large pipeline of solar installations across the country (see below projections from BNEF). As a platform MMAC is currently capital constrained (partly due to large NOLs) - so the opportunity set is not a problem now. The company also extended the investment period for the solar JVs to 7/15/2023 (when utility scale new builds are projected to peak). It remains a valid question whether over the long term whether the strategy could pivot to other loans and whether investors should handicap the uncertainty. Also some people will dislike the “treadmill” style of origination here - it is a high velocity portfolio. But based on the project pipeline, these concerns are unlikely to be a serious issue within the next two years. 



Source: BNEF


External Mgmt Issues


Hunt charges a 2% management fee and a 20% promote over 7% hard hurdle based on GAAP shareholder return. Compared with other alternative asset strategies, the fees are at market. People dislike externally managed platforms for good reasons. The largest concern would be to issue equity at a discount to NAV. Since MMAC is currently Hunt’s only public platform (they sold HCFT to ORIX in Jan 2020) and they could launch other platforms (public or private) in the future, their incentive is probably skewed towards not sabotaging MMAC. One piece of evidence is that MMAC has Rights of First Refusal on all the solar loans originated through Hunt - which is arguably unnecessary as typically public shareholders are in an inferior position against other LPs. Also Chris Hunt owns ~5% of shares outstanding, and insiders collectively own ~17%. The company has been buying back shares instead of issuing shares despite the capital constraint - which also provides us some comfort.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Earnings (NAV write-up).


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