Q1 2020 Earnings Call
The conference call my.
My name is Rocco and I will be a coordinator for today.
[music] participants or they were so there's no.
So let's say the question answer session that's yet.
Please also note this conference is being recorded.
Some comments today will include forward looking statements regarding future projections.
Actual performance capital audience, which are based on current expectations.
These costs are subject to significant risks and uncertainties, which include those identified in the company's filings with securities sold transmission.
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 speak only as of today the hero.
The company undertakes no obligation topic information contained in the forward looking statements.
I would now like turn call over to Mr., Michael Sarcone to.
Make alcohol.
[music]. Thank you Rocco good afternoon, everyone and welcome.
With me on the call today, our Dave Johnson, our Chief Financial Officer, very much saw that our president and Chief operating Officer, Megan Sophocles Senior Vice President Treasurer.
Purpose of our call today is to review and then make capital holdings 2021st quarter financial results.
To provide overall business update.
First quarter report was filed with the FCC yesterday, I mean updated investor presentation is available on our website.
Our call today.
I will begin my prepared remarks, or the recapture results for the quarter, including the impacts you saw in Q1 Cobot 19.
And I'll turn the call over to Gary and Dave for more detailed review of our operations and financial performance.
Finally, before we wrap up the prepared remarks and open the call for questions I'll provide an update on Macau.
Companies operating in capital plans for the near term as we continue to navigate a period of great uncertainty for the U.S. and global economy.
With respect to financial results, we reported that the company ended the quarter with 277.7 million up common shareholders' equity or book value well adjusted book value, which represents book value, excluding the carrying value of the company's deferred tax assets.
It was 218 point threemillion.
Book value decreased 3.5 million or 61 cents per share on that first quarter.
<unk> adjusted book value solo 5.1 million or 90 cents per share decreased for the same period.
It's Dave will further discuss such decreases were primarily driven by 7.5 million is that fair value losses that were recognized in conjunction with bond investments.
Derivatives and certain loans originated assets held by our solar ventures as of quarter ended that fair value losses were themselves driven primarily by the impact to covert 19 on interest rates rather than credit quality.
Typically an increase in market yields associated with many of our investments and a decrease in benchmark interest rates to which interest rate derivatives positions are indexed.
Although the results for the quarter are disappointing all loans at the solar ventures were assessed to be adequately secured as of March 31st and we currently expect to be repaid in full.
In this regard we're cautiously optimistic about the status of the long portfolio and are hopeful that market conditions may present attractive opportunities in coming months, we're particularly concerned about the impact of cobot 19 on I remaining real estate related investments continue to monitoring and assess those.
Baskets.
So the long term impact of cobot 19 on our operational and financial performance ultimately depends on future developments, including the duration spread in intensity of Copel 19, all of which are uncertain and difficult to predict.
Due to the speed with which the situation is developing so we're not able to estimate the long term effects of these factors on our business, but at this time, we cannot go out having a material impact on our business results of operation financial condition and cash flow.
Now for a further review of our investments in funding, let me turn the call over to Gary.
Gary.
Thanks, Mike and good afternoon, everyone.
The company's renewable energy investments, which represented 58% of the company's investments at quarter end are generally done through solar ventures, where the company invest alongside institutional capital partner in loans that mainly funding the development and construction renewable energy projects in the United States.
During the quarter, the carrying value of the company's renewable energy investments increased by $56.2 million.
Third and $45.9 million at March 31st.
Represents 165% increase from $130.4 million invested at this time a year ago.
This increase was primarily due to the deployment of recycled equity, including proceeds from where it came at a behind.
And that draws on our revolving credit facility.
As you will see a table three of our filings during the quarter at the company recognized $4.6 million up income related to renewable energy investments.
On an annualized trailing 12 month basis.
Realized an unlevered not return on these investments of 10.4% for the period ended March 31st 2020 versus 9.3% for the period ended March 31st last year.
Equity and income from solar ventures was $800000 were 22% higher compared to the first quarter last year, what was $1.9 million lower compared to the fourth quarter.
The decrease compared to the fourth quarter was primarily driven by a 4 million dollar decline in a fair value marks share.
Solar ventures loan portfolio, which was marked at 98.8% of unpaid principal balance well you PB at March 31st down from part yearend.
All the fair value losses, largely related loans had longer remaining terms than average and like takeout financing commitments as of March 31st.
Given the performance expectations and short counter up loans.
We currently expect these unrealized losses to reverse overtime upon the full repayment of such loans.
Nonetheless, the measurement of fair value of solar alone solar ventures loan portfolio.
And future recording period to expect remain volatile until market conditions moderate.
At March 31st 2020 loans funded by the solar ventures.
Aggregate U.P.B. up $745.8 million fair value of $736.8 million.
Weighted average remaining maturity of eight on.
Weighted average coupon of 9.7%.
Compared to $654.4 million WPP and fair value.
Bonds and 10.8% somewhat 31st.
As discussed on prior calls, we typically target loans to generate origination fees ranging from 1% to 3% on committed capital and coupons on funded loan balances ranging from 7% to 14%.
We may 11, the construction and development of renewable energy projects that were financed loans made by the solar ventures are generally on schedule.
Element and construction of such projects qualified its critical infrastructure for central services.
However, state and local responses to cobot 19 have resulted in some minor delays.
Particularly in final utility commissioning for certain projects in Oregon.
Which we will believe will be resolved next month.
Given the prevailing macroeconomic conditions uncertainty in the financial markets and our dependence on the functioning renewable energy finance market.
We are fully drawn 120 million dollar.
All the credit facility and it slowed our origination efforts as part of our investment in liquidity management Croak program in the wake up 19.
Well, we continue to believe that there are opportunities to end basket renewable energy debt.
Racket risk adjusted returns.
Also meet our environmental and social investment goals you.
We will continue to closely monitor loan performance and in addition to expected sources over payment.
We continue to explore ways to optimize the company's capitalization.
Putting additional debt capital where appropriate.
Turning to other assets and liabilities, you PB and fair value of our bond related investments at March 31st it's $30.9 billion $29.6 million respectively.
Increases in market yield in the first quarter.
And that $1.8 million decreasing the fair value of these investments.
Although both of these investments were in an unrealized gain position at March 31st.
Concerning the company's real estate related investments, none of such investments worth just to be other than temporarily impaired at March 31st 2020.
However, with respect to the company's 80% ownership interest in Spanish work joint venture.
Oh, the mixed use town center development, which includes hotel and retail tenants.
The undeveloped land parcels, whose incremental tax revenues secure infrastructure bond.
The downturn in the economy, some coded 19, compared the underlying real estate value.
Consequently, we anticipate that we will continue to recognize equity losses from our investment in the Spanish sport venture.
That such losses may increase possibly significantly.
Well the severity and duration of the expected losses cannot currently be qualified quantified due to the current market uncertainty.
We believe that is reasonably possible that within the next 12 months.
Hospital material to the Companys financial statements could be recognized.
Due to the residual economic effects of the measures taken to combat corporate bank team.
However, the exact timing and amount of loss recognition if any is based upon future circumstances, and therefore cannot be predicted at this time.
Separately the book value of the company's debt obligations was $223.7 million at March 31st 2020.
<unk> increased $21.8 million in the first quarter.
In early as a result, net advances from the company's revolving credit facility.
As of May 11, 2020, a company with in compliance with all of its debt covenants.
As stated in prior quarters do not expect the other assets and liabilities to contribute consistently to quarterly income.
We will continue to pursue opportunities to recycle capital. This part of the company's balance sheet at attractive levels.
With that ill turn call over to Dave will discuss our quarterly financial results in greater detail.
Yeah.
Thanks, Gary and good afternoon, everyone.
As I provide an overview of our results I will refer to various tables item two of our form 10-Q.
Book value decreased $3 million were 61 cents per share in the first quarter, well adjusted book value decreased $5.1 million.
90 cents per share during the same period.
In comparison book value increased $61.5 million or $11 at 14 cents per share the fourth quarter.
At book value increased $3.8 million or $1.20 cents per share during this period.
First quarter decreasing book value was primarily driven by three to half million dollar comprehensive loss, which included $3.1 million of net loss.
$400000 have other comprehensive loss.
As Mike indicated the first quarter decreased the company's book value was primarily driven by the recognition of seven and a half million dollars a pit fair value losses.
The largest component of which was attributable to as Gary discussed earlier, a 4 million dollar decline the fair value the company share of the loan portfolio the solar ventures.
Therefore, despite strong origination volumes in operating income, but the solar ventures in the first quarter.
The company share at the solar ventures, net fair value losses significantly softened the amount of equity and income from the solar ventures that was recognized in the first quarter.
Increases in markets yields in the first quarter also drove he net 1.8 billion dollar decrease in the fair value the company's bond investments, although as Gary mentioned.
These investments repair it as of March 31st.
And changes in reference interest and foreign exchange rates in the first quarter resulted in a recognition of $1.7 million a bit fair value losses.
Related to the company's derivative instruments.
Part of the first quarter. However, the company recognized $500000 a bit fabby fair value gains in the fourth quarter.
In this regard net fair value adjustments can be volatile it significantly impact reported changes in adjusted book value.
He said well net fair value losses caused the largest impact on first quarter performance.
The company also recognize $600000 equity losses from our Spanish worked venture.
As Gary mentioned, we anticipate the company will continue to recognize.
Equity losses from dispatcher, that's such losses may increase possibly significantly.
Additionally, the company recognized $5 million, an operating expenses first quarter, which increased $2.9 million compared to the fourth quarter.
Primarily due to $1.1 billion, a foreign exchange losses stemming from the remeasurement of certain non dollar denominated assets liabilities.
Although the majority of these losses were offset by net fair value gains recognized first quarter related to the company's foreign currency hedge position.
Increases uncompensated compensation related expense reimbursements payable to the company's external manager also contributed to the quarter over quarter increase in operating expenses.
However, the company did not recognize any expenses related to such reimbursements in the fourth quarter.
Given that the annual cap on such items was met third quarter.
For this reason expense recognized by the company related to such reimbursement is typically higher in the first quarter compare to the fourth quarter.
Otherwise the company's overall cost of funding slightly increased in the first quarter given that draws from the revolving credit facility that closed in September.
From a liquidity in capital resource perspective, the company had $30.2 million a cash cash equivalents restricted cash do you know the first quarter.
$7 million, which was restricted.
As reported in table eight of our filing the total amount at the company's cash cash equivalents unrestricted cash.
Increased $17.4 million in the first quarter, which was primarily driven by $22.8 billion that cash flows.
Provided by financing activities that generally related to debt advances from the company's revolving credit facility.
Additionally, the company generated $3.4 million, if that cash flows from operating activities in the first quarter.
Lastly, as discussed earlier, the long term impacts of coping 19 of the company's results of operations and financial condition are uncertain.
Gary mentioned earlier risks that are specific to the company's equity investments the Spanish work venture.
Should note that as further discussed in the filing we believe that related to the company's deferred tax assets.
Also reasonably possible within the next 12 months the company could recognize a reduction to the carrying value of such assets that as material to its financial statements.
However, the exact timing and amount of plus recognition if any.
That's upon future circumstances, and therefore cannot be predicted at this time.
The sand specific risks posed by Copel 19 are disclosed in eight of one a part two of the first quarter filings.
That I will turn the call back over to Mike.
Thanks, Dave.
Before we get the QNX, let me address the company's ongoing response to cobot dying team and the near term capital allocation plans of the company.
With respect to corporate operations in the performance of the external manager since beginning of the office closures and state government responses to covert 19, we can report that there were no disruptions to services provided by the external manager and other third parties in connection with the business company's business operations.
Employees of the external manager continue to work from home and while we certainly Miss the day to day in person interaction with our colleagues our remote work capabilities had been validated so far we've managed through our first quarter and reporting cycle successfully.
In addition, the external manager continue to evaluate the portfolio maintain relationships with our borrowers from their homes carefully monitoring their performance of our existing loans and preparing for future investment opportunities.
As an organization the external manager has not set a formal target date to reopen any of our offices.
Are there any decisions related to the opening in operations within any office will be consistent with the local timing and operational guidelines set by the state in which the office located.
With respect to our capital allocation plans for both the near and long term. It remains a balance of near term conservatism and long term resolved.
In the near term, we're focused on maintaining adequate liquidity to fill our current obligations.
Putting any funding requirements at the solar ventures as well as remaining in position to take advantage of unique market opportunities that may result from the current disruption.
The end of Q1. This included drawing on our revolving line of credit for use in our investing activities and for the solar ventures to be very deliberate and the pace of underwriting by allowing loans with New York near term maturities to repay a building a cash balance to help manage outstanding commitments without significant and.
Additional capital calls on the company.
Well there was a marginal drag on our Q1 investment returns. It provides a strong base from which to operate during the balance of the year.
We anticipate the pace of underwriting will pick up as we move into the summer. It's the near term liquidity focus transition back to a focus on capital deployment.
Part of the focus on near term liquidity. The board has deferred any decision for 2020 capital return program until we have better visibility on the post cobot 19 recovery the economy.
It doesn't preclude implementation of a program later in the year, but this program will be based on capital planning and cash flows from operations and not on the availability of debt capital, which will be maintained solely for investment purposes.
Covert 19, and the resulting economic conditions that have us taking a cautious approach at this time.
An approach that we maintained for an extended period of time, while we carefully monitor any new unforeseen risk to our investment model.
That said our belief in the long term economic thesis favoring the transmission infrastructure related investments, including renewable energy over fossil fuels, you mean very much intact.
In addition, our belief in the intermediate term economic opportunities and renewable energy infrastructure investments as well as our ability to capitalize on those opportunities remains unchanged and as a company arc commitment to investments with positive environmental and social impact is not impacted by the current.
That environment.
If there are opportunities for high return investments are to complete the recycling of capital from our non renewable assets the infrastructure investments, including renewable energy, we are poised to take advantage of those opportunities.
In closing even in this uncertain moment in time, we remain excited about the future committed to our shareholders. We thank you for your continued support.
We'll now turn open the call to questions Rocco.
Yes, Sir we will now begin the question answer session.
To ask a question you My press Star then one on the cultural and keep.
If you are using the speaker phone we ask you. Please for governor handset will proceed the key.
So withdraw your question. Please press star one too.
At this time, we will pause momentarily to assemble a roster.
A women's alone as a reminder, if you'd like to ask your question. Please press Star then one at this time once again, we'll pause.
Apparently it's what are some or roster.
Today's first question cultural Greg <unk>, a private investor. Please go ahead.
Good afternoon.
Is there any mention of the South African investment.
I think that you're supposed to get back something like $7 billion sometime the first part of this year.
We did not mention in the call we've gotten some of that money back maybe Megan or Dave you know the exact number.
But we're expecting an additional return from that investment as the year goes on as as.
In the U.S. things have slowed down a bit in South Africa as a result cooler cobot 19.
Okay and.
Under other asset.
The other assets went from 17 million up to 26 million.
Other assets are the Russell 150, the a Spanish sport in the South African investment does that is that right.
Or is there any anything else in there.
[noise], Greg Yeah, that's that captures most of it.
There are some other items, including.
You know if you look at the fair values that we.
Our reported in connection with derivative assets there was also.
Well will make their way into that category, but I think I think that if that you mentioned cover the lion's share.
So in in the quarter.
Other assets grew.
Almost $9 million.
And then that you committed capital into other assets, which.
What did that didn't do with a Russell 150 that you put $9 million.
Yeah, that's right.
There was about $5.9 million plan to prove the cost that were.
Capitalized in the first quarter in connection with Russell and those costs.
Due to their nature are recognized as an increase to other assets. So that that was the primary driver for the change that you mentioned.
What were.
What are kind of put the other three mine.
[noise] in the first quarter other assets were up.
About $6 million. So if you look at.
Page 13.
<unk>, what you're asking.
Yes, I thought ended December maybe I read it I thought the in December 17 point 17.234 million.
Well I don't think it's correct. If you look at table for in our filings on page 13 at the end of December other assets.
Was 12.9, almost $13 million so the into the first quarter was.
Close to 19 million dollar so.
Approximately 6 million dollar increase on the quarter.
Hi, I'm looking at that.
Look at the.
Tend to the table your Powerpoint presentation.
Okay.
[noise] he's looking at the Investor presentation.
Yeah. The Investor presentation has a list of your assets under other assets its 26 million in December 17 million.
234.
<unk>.
Just trunk club depreciation second yeah, that's fine.
So.
I guess on the Russell you done putting money into the road construction bridge. It is at the end of it until you saw the property or is there.
Is there more to come.
I'm now there is.
And Mike.
Your head gear.
No we do anticipate continuing to.
Invest money into Russell 150.
Largely relative to our share of costs relating to the road and utility work.
How much more I.
I think the bridge and all that must be done but later this year.
How much more commitment of capital to try the hope that we get it out if you sell it.
It's like I think it's a couple of million dollars more.
In the near term.
But it's really a function of when we're going to be able to ultimately get out.
Right, except it's not like you're sitting on property and paying tax real estate tax on your actually pay you are investing more it out to get more out.
Correct, Yeah, we're investing and I apologize I've got a thunderstorm going on in the background here, but we're investing money in Russell against.
Contracts to sell parcels.
So we clearly haven't told the whole thing yet, but we we haven't started a process to sell parcels there and in order to do that sell the parcels we have to have access into the various parcel. So that's one.
Hi, being the investment in two Russell at this time.
So you had a point we have like a letter of intent for a contract that we've got option contracts. So we have deposit.
And we are.
Moving through the option periods for the most part.
Though your expectation about.
Recycling that capital that sometime later this year.
I suspect it it could be I would say our original expectation was later this year, but I would expect that that's something that's likely to be delayed into next year, given sort of overall economic condition.
Okay.
[noise] Spanish for what.
You in the call one I guess in the 10 key message to possibly a significant write down or write off that's where the equity portion of your 80% ownership what what is your carrying value sponge for.
No.
We own 80%.
This is.
We own 80% of Spanish for.
Oh right roughly speaking.
Again, I'm going to give you big picture numbers here, they won't be precise, but roughly speaking, there's 30 million a real estate value.
6 million of yeah.
4 million attributable to the general partner and.
The short a 20 million attributable to.
And you know we're looking at.
Yes.
The way sort of equity GAAP equity works is you you have to conclude that any loss in value is the other than temporary before you make a write down.
We didn't and neither we nor the general partner remembering here were limited partner not the general partner.
We concluded that was not the case at quarter end, but the longer the surgeon covert 19 crates economic crisis goes on.
I would say the more likely it is that we will conclude that as year goes on.
What that impairment will be you know I don't think I now.
But you know <unk>.
You can look Oh look around that at various real estate investments that are publicly traded and see that they've been discounted significantly.
And you can apply some of those discounts to the 30 million value and get some order of magnitude of.
What is the out there in the world as a possibility again the way. This really gets measured it will be you know looking at discounted cash flows and changes in values in appraisals and everything else.
But.
We think that there is.
If this crisis continues we think that there is reason to believe that we will be sometime in coming quarters looking at a write down there.
Yes.
Two though.
$20 million is the.
As the investment that we have in Spanish for that's our capital.
That's the carrying value.
Yes, so Greg just.
Along those lines. So we have at March 31st.
An equity investment that book value of about 90.2 million Bucks.
And that's separate from that.
The debt investment that we have.
Got a fair value of about $23 million to $5 million.
As of the desert on.
That's those are the bonds, which are our secured by sales tax revenues.
And and land taxes, not by the property themselves.
[noise]. So if you carrying it at 19.2 and you have other investments.
26 million or whatever that number isn't that includes Russell and South Africa the numbers.
Yes, so Greg maybe a couple.
It's a clarification so.
If you look if you're comparing the investor presentation.
In the appendix that you're referring to.
All other assets.
That number or the way we are classifying certain assets in that table was a little bit different then you'll see.
In the face of our balance sheet.
Specifically on table for in the filing.
Number two.
If you look at footnote number five.
In the filing which is on page 39.
You can actually see a breakdown of the specific components of other assets. So specifically within that the lions share of that relates to the Russell investments. So that's about you can see on page 39 of the filing about fourq at a book value up $14.3 million you also have.
Other items like debt issuance cost to get deferred on our balance sheet.
So.
There was like I said about $19 million of other assets tear.
So just to clarify what's in there now if you look back not to over like a fuse this but.
In the Investor presentation.
In addition to the items that you'll see that I just mentioned that are detailed in the footnote.
On page 39.
We have also for presentation purposes in the Investor presentation included restricted cash.
And so.
Given the decline in fair value over interest rate hedge positions in the first quarter.
We had to post additional collateral.
In connection with those positions so.
Part of the incremental increase.
As you see it in the Investor presentation in all other assets.
In part tied to the additional collateral calls that we had to answer so.
Just wanted to clarify a little bit earlier, what I had mentioned with respect to what was in other assets hopefully that's helpful.
So in that Investor presentation, where with the Spanish sports.
Spanish for yeah, so yeah, you'll find that in the third line.
Of the Investor presentation on the back on the selected balance sheet data that investments investment Yeah partnership Yeah, that's correct.
So that's not just here investment and the solar venture box there was that there is nothing.
Yes, so that's what's the partnerships will have.
So the things you imagine so our equity position it Spanish for isn't there.
Our equity in the South Africa Fund isn't there and then of course, the Lions share of that is attributable to our equity investment solar ventures.
The maximum that we could lose on Spanish borders $20 million.
If it gets written down to zero, but if that happens and you have a problem that the bonds to.
Is that correct no.
Not necessarily the the bonds are paid off to sales tax revenues.
What you are and true land taxes, which is separate from the real estate value the venture which is.
Largely based on a combination of.
Land value and existing retail assets.
<unk>.
How much other revenue that goes to support those bonds comes from.
Our investment in Spanish Board, how much is from other party third parties that nothing to do with us.
Mm.
Meghan correctly, if I'm wrong, but roughly.
[noise] he per center or so of the.
Oh, the bonds are paid by sales taxes.
People like bass pro shops.
Yes, yes, that's correct.
And bass pro shops, a tentative years right.
Correct.
Okay.
All right. So it sounds like the most would you say that the biggest problem asset.
I would say the equity in Spanish or.
Uh huh.
Is.
Uh huh.
In the area of concern as we move forward yes.
Okay, Alright, thank you I'll, let somebody else gone call. Thanks for answering I appreciate it.
Sure.
And ladies and gentlemen, as a final robot.
Ask your question. Please press Star then one at this time.
This concludes the question answer session or vice versa conference back over to Mr. Falcone for any final works.
Great. Thank you very much Rocco.
Thank you all for joining us this afternoon.
I hope.
Looking at the recall in list I see a lot of longtime shareholder. So I hope you all are.
Doing well in.
In this unusual time and as we said in the call Oh, well, we're being conservative in the short term we are excited about our long term future.
And I appreciate your support is shareholders. Thank you all very much bye.
Thank you serve this concludes todays conference call there now there's quite a long traveler.