MMAC MMA Capital Holdings Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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For the quarterly period ended March 31, 2021

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For the transition period from __________________ to __________________

Commission File Number 001-11981

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☑   No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑

There were 5,743,570 shares of common shares outstanding at May 10, 2021.

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MMA Capital Holdings, Inc.

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Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q for the period ended March 31, 2021, (this “Report”) should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020, (“2020 Annual Report”), filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”), to which reference is hereby made. This Report contains forward-looking statements intended to qualify for the safe harbor contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements often include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “focus,” “intend,” “may,” “plan,” “potential,” “project,” “see,” “seek,” “should,” “will,” “would,” and similar words or expressions and are made in connection with discussions of future events and future operating or financial performance.

Forward-looking statements reflect our management’s expectations at the date of this Report regarding future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties including the risks and uncertain aspects of the novel strain of the coronavirus (“COVID-19”) pandemic. Our actual results and financial condition may differ materially from what is anticipated in the forward-looking statements. There are many factors that could cause actual conditions, events or results to differ from those anticipated by the forward-looking statements contained in this Report. For a discussion of certain risks and uncertainties and the factors that could cause our actual results to differ materially because of those risks and uncertainties, see Part II, Item 1A. “Risk Factors” of this Report and Part I, Item 1A. “Risk Factors” of our 2020 Annual Report.

Readers are cautioned not to place undue reliance on forward-looking statements in this Report or that we may make from time to time, and to consider carefully the factors discussed in Part II, Item 1A. “Risk Factors” of this Report and Part I, Item 1A. “Risk Factors” of our 2020 Annual Report in evaluating these forward-looking statements. We do not undertake to update any forward-looking statements contained herein, except as required by law.

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Renewable Energy Investments

As of March 31, 2021, the construction and development of most of the renewable energy projects that have been financed through loans made by the Solar Ventures (as defined below) were not significantly impacted by the COVID-19 pandemic as the development and construction of these projects qualified as critical infrastructure or essential services. Furthermore, projects that were financed by loans made by the Solar Ventures did not experience any significant supply chain issues or construction delays during the three months ended March 31, 2021. Lastly, origination activity at the Solar Ventures was not meaningfully impacted by COVID-19 during the three months ended March 31, 2021.

As further discussed below, certain components of the national and some local renewable energy finance markets have been, and may further be, affected by changing market dynamics, resulting in supply and demand imbalances. These market dynamics have negatively impacted the performance of certain loans made by the Solar Ventures.

All loans made by the Solar Ventures are reported at fair value based upon the net present value of such instruments, which was estimated by applying discount factors that reflect market yields for similar credit risks to future contractual payments associated with such loans. The anticipated timing of near-term redemptions and underlying project values are also considered in such fair value measurements. The total fair value of loans outstanding at March 31, 2021, was 96.5% of their total unpaid principal balance (“UPB”) at such reporting date.

Other Investments and Hedging Instruments

We continue to monitor the economic impact of the COVID-19 pandemic on the performance of our other investments and underlying real estate values. We did not recognize any impairment charges in connection with our other investments during the three months ended March 31, 2021.

Hedging instruments used by the Company to manage interest rate and foreign currency risks have performed in accordance with the contractual terms.

DTAs

While COVID-19 caused a sharp deterioration in macro-economic conditions, the potential amount and permanence of long-term impacts of those conditions on the Company’s business continues to be uncertain. Given such uncertainty and other factors, we believe it is reasonably possible that, within the next 12 months, a reduction to the net carrying value of DTAs that is material to the Company’s financial statements could be recognized. However, whether we recognize such a loss, and the exact timing and amount of loss recognition depends upon future circumstances and, therefore, cannot be predicted at this time.

Liquidity and Capital Resources

During the three months ended March 31, 2021, COVID-19 has not prevented us from operating our business and making investments. However, we continue to have limited liquidity and rely on our capital partner for disproportionate funding contributions in connection with certain of our renewable energy investments. Our capital partner has continued to show a willingness to increase its commitment to the Solar Ventures, but we continue to consider our funding risk when assessing our liquidity and capital resources.

On February 24, 2021, a prospective purchaser filed a special litigation lien, known as a Lis Pendens, on the entire 150-acre property of our direct investment in real estate. The Company intends to vigorously defend against these claims and pursue available remedies, including a slander of title lawsuit. Although the Company has filed motions to dismiss the lawsuit and the Lis Pendens, unless and until dismissed, the Lis Pendens constitutes a default under the Company’s financing of this property. The Company has been in communication with the lender and does not expect the lender to take any action in respect of the default in light of the lender’s first lien position but can provide no assurance that the lender will not take any action. At March 31, 2021, the UPB of this note payable was $9.6 million. Refer to Notes to Consolidated Financial Statements - Note 9, “Commitments and Contingencies,” for more information. At March 31, 2021, the Company was in compliance with all other covenants under its debt arrangements.

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Renewable Energy Investments

We invest in loans that finance renewable energy projects to enable developers, design and build contractors and system owners to develop, build and operate renewable energy systems throughout the U.S. Renewable energy debt in which we invest is primarily structured as senior secured fixed rate loans that are made through joint ventures or directly on our balance sheet. We generally target loans that are short-term in nature, and that are typically made to borrowers when they are in the late stages of development or in construction of their commercial, utility or community solar scale photovoltaic (“PV”) facilities, but we may also make longer duration loans to these borrowers to finance completed facilities. These facilities are located across different states and benefit from various state and federal regulatory programs. The short duration of loans in which we have typically invested help us to manage interest rate risk, mitigate long-term risks such as credit exposure to off-take counterparties and provides us flexibility to target investments. However, there have been and there may in the future be opportunities to originate longer-dated investments that would potentially provide greater insight into our future earnings.

We generally invest in renewable energy investments through the following joint ventures: Solar Construction Lending, LLC (“SCL”); Solar Permanent Lending, LLC (“SPL”); and Solar Development Lending, LLC (“SDL”), these joint ventures are hereinafter collectively referred to as the “Solar Ventures.” We are a 50% investor member in the Solar Ventures, although we may periodically have a minority economic interest as a result of non-pro rata capital contributions made by our capital partner pursuant to non-pro rata funding agreements between our capital partner and us. Such non-pro rata funding agreements are generally executed in instances when the Company does not have sufficient liquidity at the time of a capital call. Distributions from the Solar Ventures generally are made in proportion to the members’ respective economic interests but may be made disproportionately to our capital partner, when our capital partner has made non-pro rata capital contributions, until such time that the amount of equity invested by the Company and its capital partner have come back into equal balance.

Investment Interests and Related Carrying Values

At March 31, 2021, through MMA Energy Holdings, LLC (“MEH” or “Borrower”), a wholly owned subsidiary of the Company, we held a minority economic interest of 34.8%, 45.0% and 34.9% in SCL, SPL and SDL, respectively, which represented a weighted-average economic interest of 37.1% in such ventures. At December 31, 2020, the Company held 45.2%, 45.0% and 42.3% economic interests in SCL, SPL and SDL, respectively. The Company is the sole member in Renewable Energy Lending, LLC (“REL”). The carrying value and income-related information related to investments that we have made in, or related to, the Solar Ventures are further discussed below.

During the period from March 31, 2021 through May 10, 2021, the Company and its capital partner in SCL and SDL funded various non-pro rata capital contributions, whereby our capital partner contributed $34.0 million of $44.0 million in SCL capital calls, while the Company contributed the balance of these capital calls, or $10.0 million. Additionally, the Company contributed the full $2.1 million in SDL capital calls. Furthermore, our capital partner received distributions of $38.0 million and 2.6 million from SDL and SPL, respectively, while the Company received distributions of $10.0 million and $2.1 million from SDL and SPL, respectively. As a consequence of these non-pro rata capital contributions and distributions, at May 10, 2021, our economic interest in SCL decreased to 32.2%, while our economic interest in SDL increased to 36.5%. There was no change in our economic interest in SPL. This resulted in a weighted-average investment of 37.4% at May 10, 2021.

Table 1 provides financial information about the carrying value of the Company’s renewable energy investments at March 31, 2021, and December 31, 2020.

Table 1:  Carrying Values of the Company’s Renewable Energy Investments

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The carrying value of the Company’s equity investments in the Solar Ventures decreased $20.2 million during the three months ended March 31, 2021, as a result of $10.3 million of net distributions and $9.9 million of equity in losses from the Solar Ventures that was recognized for such reporting period. Returns on equity investments in the Solar Ventures are further discussed below.

Lending Activities of the Solar Ventures - General

The Solar Ventures typically lend on a senior secured basis collateralized by solar projects, but may also invest in subordinated loans, mezzanine loans and revolving loans and may finance non-solar renewable technologies such as wind and battery storage or provide equipment financing and other customized debt solutions for borrowers. The Solar Ventures have historically targeted loans that are underwritten to generate internal rates of return (“IRR”) ranging from 10% to 15%, before expenses, with origination fees that range from 1.0% to 3.0% on committed capital and fixed-rate coupons that range from 7.0% to 14.0%. These loans typically range in size from $2 million to over $50 million and may exceed $100 million for utility scale projects.

Since their inception in 2015, the Solar Ventures have invested in more than 210 project-based loans that total $3.6 billion of debt commitments for the development and construction of over 815 renewable energy project sites. When completed, these projects are expected to contribute to the generation of over 9.6 gigawatts of renewable energy, thereby eliminating approximately 274.8 million metric tons of carbon emissions over their project lives. The Solar Ventures closed $182.7 million of commitments across nine loans during the three months ended March 31, 2021, as compared to $287.1 million across 11 loans during the three months ended March 31, 2020.

At March 31, 2021, loans funded through the Solar Ventures had an aggregate UPB of $841.1 million and fair value (“FV”) of $811.8 million, a weighted-average remaining maturity of 15 months and a weighted-average coupon of 12.6%. At March 31, 2021, 59.2% of the total UPB of outstanding loans of the Solar Ventures were associated with a single sponsor and were secured by three renewable energy projects located in the Electric Reliability Council of Texas (“ERCOT”) service area (such projects are hereinafter referred to collectively as the (“ERCOT Projects”) and, given developments through May 10, 2021, such percentage declined to 52.9%. Refer to “Lending Activities of the Solar Ventures – ERCOT Exposures,” for more information about loans made by the Solar Ventures to the ERCOT Projects.

Table 2 provides financial information about the composition of the Solar Ventures’ loan portfolio at March 31, 2021, and December 31, 2020.

Table 2: Composition of the Solar Venture’s Loan Portfolio

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At March 31, 2021, the Solar Ventures had $308.1 million of unfunded loan commitments that required borrowers to meet various conditions set forth in governing loan agreements in order for funding to occur. Based upon our 50% interest in these ventures, and various non-pro rata capital contribution agreements, the Company is obligated for up to $82.4 million of such commitments. Unfunded loan commitments that qualify for funding are anticipated to be funded primarily by capital within the Solar Ventures through a combination of existing loan redemptions and uninvested capital. Uninvested capital or capital shortfalls may arise due to the difficulty of aligning the timing of loan repayments with funding

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obligations on a dollar-for-dollar basis. To the extent capital within the Solar Ventures is not sufficient to meet their funding obligations, additional capital contributions by the members of the Solar Ventures is required.

Certain components of the national and some local renewable energy finance markets, such as the ERCOT service area, have been and may further be affected by changing market dynamics, resulting in supply and demand imbalances. These market dynamics may materially and negatively impact the Solar Ventures’ loan portfolio in a variety of ways, including, but not limited to, the availability and pricing of tax equity and the deterioration of underlying project value if the price of electricity falls due to competition or waning demand and a project has merchant exposure to variable market prices. Furthermore, energy generated by renewable energy projects is dependent upon suitable weather conditions and should unfavorable weather conditions be sustained or particularly severe, there may be significant supply and demand imbalances, or power production deficiencies, either of which could cause a significant increase in the price of power and a decrease in the availability of power, which may also cause merchant exposure to variable market prices to the extent power production agreements are not met. This could further impact the availability and pricing of tax equity or permanent take-out financing and result in a deterioration of the underlying project value. The Solar Ventures’ concentration in the ERCOT service area could further impact when invested capital is repaid and re-invested.

The repayment of the Solar Venture loans, or their “take-out,” is dependent upon the refinancing of the loans made by the Solar Ventures or the sale of the underlying renewable energy project to third parties, both of which typically require some combination of tax credit equity, sponsor equity and construction or term debt financing. The Solar Ventures may themselves participate in the take-out of such loans by providing financing, including long-term mezzanine financing or other credit enhancements. Additionally, the Solar Ventures may increase the size of funding commitments or extend the contractual maturity of loan receivables as necessary to preserve the value of loan investments made. Given the macro-economic conditions, uncertainty in the financial markets and our dependence on a functioning renewable energy finance market, we continue to closely monitor loan performance and expected sources of repayment.

At March 31, 2021, the Solar Ventures had four loans on nonaccrual status that had a combined UPB of $497.6 million. All such loans were made to the ERCOT Projects, which are further discussed below. At March 31, 2021, all but one of the ERCOT Projects that was financed by two loans from the Solar Ventures had usual and customary take-out commitments in place as generally required under the Solar Ventures’ development and construction loan agreements.

Lending Activities of the Solar Ventures – ERCOT Exposures

The Solar Ventures have provided financing to three ERCOT Projects:

On January 12, 2021, a notice of default was issued by SDL in connection with the development loan that was made to ERCOT Project 3 because the loan was past its maturity date with no take-out commitment in place. In turn, this default

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caused an event of cross default associated with all mezzanine-based financing that was made to ERCOT Projects 2 and 3. During the first quarter of 2021, $80.1 million of additional advances were made in connection with this loan, above its maximum loan commitment, to continue to fund the project’s construction activities and keep it on schedule to meet its target mechanical completion date in 2021.

During the second and third weeks of February 2021, a severe winter storm occurred in the southern and midwestern states in the U.S., including the ERCOT service area, that impaired the operational capabilities of numerous fossil fuel and renewable energy generating assets in the region. Extreme cold temperatures also caused the demand for electricity to surge to unprecedented levels, driving the market price of power to the maximum price permitted by ERCOT for multiple days. Weather conditions during this timeframe caused ERCOT Project 1 to be unable to meet its energy delivery requirements to its counterparty pursuant to various energy supply and pricing agreements. As a result, ERCOT Project 1 became obligated to purchase, at market prices in effect during that time, an amount of power equal to the shortfall in the electricity volumes that it was contractually obligated to deliver. The party which manages ERCOT energy deliveries and payments on behalf of ERCOT Project 1 under its supply agreements thereafter provided notification on March 10, 2021, that the net settlement cost associated with the power delivery shortfall during that period totaled $25.5 million (the “ERCOT Shortfall”). The project pledged $3.0 million of cash; however, given the liquidity constraints of the project and the sponsor member, the project owner was unable to meet the balance of the ERCOT Shortfall. At March 31, 2021, this loan was not borrowing base-eligible for our revolving credit facility.

On February 24, 2021, our economic interest in loans related to the ERCOT Projects, all of which were at that time owned by a single sponsor, became 45.0% and is expected to remain as such, based upon a non-pro rata capital contribution agreement executed with our capital partner.

On March 2, 2021, SDL and SCL executed loan amendments and other agreements in connection with financing provided to ERCOT Project 2 in order to facilitate the take-out of a development loan provided by SDL and a portion of a mezzanine loan provided by SCL that was allocated to ERCOT Project 2. To mitigate risk and reduce exposure to this project, SDL and SCL agreed to waive all interest and fees associated with SDL’s development loan and the allocated portion of SCL’s mezzanine loan. These loans were not borrowing base-eligible for our revolving credit facility.

On April 1, 2021, the sponsor equity loan agreement made to ERCOT Project 1 was amended to increase the maximum loan amount to enable the project to satisfy the balance of the ERCOT Shortfall of $22.5 million and to make a $7.4 million payment to the third-party term debt provider that was required in connection with the final closing of the recapitalization of ERCOT Project 1 upon substantial completion of the project.

On April 23, 2021, ERCOT Project 2 was sold to a third-party and recapitalized, which was completed through both $84.7 million of sponsor equity that was committed by the third-party purchaser of the project and a $105.0 million construction loan that was provided by SCL. At the time of closing, $41.7 million of the sponsor’s committed equity and $37.0 million of SCL’s construction loan were funded, which repaid the prior development loan provided by SDL and the allocated portion of SCL’s mezzanine loan. The construction loan made by SCL has a first position lien on the project, has a stated interest rate of 5.0% and matures on December 31, 2021, with repayment due upon ERCOT Project 2 reaching substantial completion. Upon substantial completion of this project and the fulfillment of tax-equity funding, which is expected by December 31, 2021, we expect SCL’s construction loan will be repaid and SPL will make a $32.6 million permanent loan that will be senior to the sponsor’s equity and subordinate to tax-equity. SPL’s permanent loan will bear interest at 5.0% and will partially amortize over its four-year term. Additionally, SCL’s new construction loan and SPL’s future permanent loan are expected to be borrowing base-eligible for the revolving credit facility. The sale of ERCOT Project 2 and its recapitalization have significantly reduced the Solar Ventures’ exposure to ERCOT Project 2, to the original sponsor of the ERCOT projects and to the ERCOT service area, more broadly.

Table 3 provides a summary at March 31, 2021, of the UPBs and fair values of loans made to the ERCOT Projects.

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Table 3: Summary of the UPBs and Fair Values of Loans Made to the ERCOT Projects

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During the first quarter of 2021, the Solar Ventures recognized net fair value losses of $31.9 million related to loans made to the ERCOT Projects (the “MTM Impact”), while $16.0 million of interest income was not recognized by the Solar Ventures related to such loans given their nonaccrual status (the “Nonaccrual Impact”). Table 4 attributes the Company’s share of such items to loans made to each of the ERCOT Projects.

Table 4: The Company’s Share of Net Fair Value Losses and Nonaccrual Interest Income Related to Loans Made to the ERCOT Projects

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In comparison, in the first quarter of 2020, the MTM Impact was a net fair value loss of $7.0 million and the Company’s share of such amount was $3.1 million. There was no Nonaccrual Impact in the first quarter of 2020.

While the MTM and Nonaccrual Impacts reduced the amount of equity in income of the Solar Ventures recognized by the Company in the first quarter of 2021, only the MTM Impact contributed towards a subsequent decrease to the Company’s common shareholders’ equity (“Book Value”) at December 31, 2020, since such adjustment subsequently reduced the book value of the loan portfolio of the Solar Ventures at December 31, 2020. The Nonaccrual Impact did not have the same effect since it did not result in the subsequent reversal of, or reduction in, the carrying value of assets of the Solar Ventures at December 31, 2020. Instead, the Nonaccrual Impact resulted only in the non-recognition of loan-related interest income in the first quarter of 2021. Refer to “Returns on Renewable Energy Investments” for more information about equity in income of the Solar Ventures recognized by the Company in the first quarter of 2021.

The ERCOT market remains volatile and uncertain primarily stemming from the February 2021 weather event and resulting energy crisis. There is litigation among various participants and potential legislative reform is being considered, all of which remain uncertain. Consequently, while fair value measurements at March 31, 2021, of loans made to ERCOT

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Projects reflect management’s best estimate of loan-related returns and value, it is possible that within the next 12 months, additional losses related to outstanding loans made to the ERCOT Projects could be recognized by the Solar Ventures that, based on the Company’s share thereof, could be material to the Company’s financial statements. However, whether we recognize such losses, and the exact timing and amount of loss recognition depends upon future circumstances and, therefore, cannot be predicted at this time.

Returns on Renewable Energy Investments

The Company applies the equity method of accounting to its equity investments in the Solar Ventures, which are not consolidated by the Company for reporting purposes. Accordingly, the Company recognizes its allocable share of the Solar Ventures’ net income based on the Company’s weighted-average economic interest during each reporting period.

Table 5 summarizes income recognized by the Company in connection with our renewable energy investments for the periods presented.

Table 5:  Income Recognized from Renewable Energy Investments

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The Company generated an unlevered net return on investment from our renewable energy investments, as measured on a twelve-month trailing basis, of 7.1% and 10.4% for the periods ended March 31, 2021, and March 31, 2020, respectively. These returns were measured on a trailing four quarter basis at each reporting period by dividing total income from renewable energy investments by the average carrying value of renewable energy investments.

The Company generated a leveraged net return on investment from our renewable energy investments, as measured on a twelve-month trailing basis, of 8.1% and 12.2% for the periods ended March 31, 2021, and March 31, 2020, respectively. These returns were measured on a trailing four quarter basis at each reporting period by dividing net income from renewable energy investments less the cost of funding associated with the Company’s revolving credit facility (as further described below in “Leveraging our Renewable Energy Investments”) by a net average value that incorporates the carrying value of renewable energy investments, the UPB of our funding from the revolving credit facility and restricted cash associated with our credit facility (where the UPB of attributed funding partially reduces the other two components in such net value).

Refer to the comparative discussion of our Consolidated Results of Operations for more information about income that was recognized in connection with the Company’s renewable energy investments.

Loan Portfolio Redemptions and Returns at the Solar Ventures

Through March 31, 2021, $2.3 billion of commitments across 164 project-based loans made by the Solar Ventures had been repaid with no loss of principal, resulting in a weighted-average IRR (“WAIRR”) to the Solar Ventures of 19.6% that was on average higher than originally underwritten loan IRRs. During the three months ended March 31, 2021, five loans totaling $46.2 million of commitments were repaid, resulting in a WAIRR of 12.2% to the Solar Ventures. WAIRR is measured as the total return in dollars of all repaid loans divided by the total commitment amount associated with such loans, where (i) the total return for each repaid loan was calculated as the product of each loan’s IRR and its commitment amount and (ii) IRR for each repaid loan was established by solving for a discount rate that made the net present value of all loan cash flows equal zero. WAIRR at the Solar Ventures has been higher than the net return on the Company's investments in the Solar Ventures because it is a measure of gross returns earned by the Solar Ventures on repaid loans and does not include the impact of certain items, including: (i) operating expenses of the Solar Ventures; (ii) the

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amortization of the purchase premium paid by the Company in the second quarter of 2018 to buy out our former investment partner’s interest in REL; and (iii) the opportunity cost of uninvested capital. 

Leveraging our Renewable Energy Investments

On September 19, 2019, MEH, entered into a $125.0 million (the “Facility Amount”) revolving credit agreement with various lenders. During the first quarter of 2020, the maximum Facility Amount was increased to $175.0 million and the committed amount of the revolving credit facility increased from $100.0 million to $120.0 million upon the joinder of an additional lender and an increase in commitment by one of the existing lenders.

Obligations associated with the revolving credit facility are guaranteed by the Company and are secured by specified assets of the Borrower and a pledge of all of the Company’s equity interest in the Borrower through pledge and security documentation. Availability and amounts advanced under the revolving credit facility, which may be used for various business purposes, are subject to compliance with a borrowing base comprised of assets that comply with certain eligibility criteria, and includes late-stage development, construction and permanent loans to finance renewable energy projects and cash.

Borrowing on the revolving credit facility bears interest at the one-month London Interbank Offered Rate (“LIBOR”), adjusted for statutory reserve requirements (subject to a 1.5% floor), plus a fixed spread of 2.75% per annum. The Borrower also has agreed to pay certain customary fees and expenses and to provide certain indemnities. In certain circumstances where the interest rate is unable to be determined, including in the likely event LIBOR ceases to be published, the administrative agent to the credit agreement will select a new rate in its reasonable judgment, including any adjustment to the replacement rate to reflect a different credit spread. The maturity date of the credit agreement is September 19, 2022, subject to a 12-month extension solely to allow refinancing or orderly repayment of the facility.  

The UPB and carrying value of amounts borrowed under the revolving credit facility was $79.1 million and $103.7 million at March 31, 2021, and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company paid down the amounts drawn on the revolving credit facility to remain in compliance with the borrowing base eligibility criteria of the facility due to increased lending on the ERCOT loans, which were ineligible for the facility during such reporting period. The Company recognized $1.3 million of related interest expense in the Consolidated Statements of Operations for the three months ended March 31, 2021, and March 31, 2020.

The liquidity accessed by the Company through the revolving credit facility since its inception has increased the amount of capital invested in the Solar Ventures. Not all of the loans made by the Solar Ventures are eligible for financing under our revolving credit facility.

Deferred Tax Assets

Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. DTAs are recognized if we assess that it is more likely than not that tax benefits, including NOLs and other tax attributes, will be realized prior to their expiration.

At March 31, 2021, the reported carrying value of the Company’s net DTA was $62.8 million, which increased $3.7 million during the first quarter of 2021 primarily due to the tax impact associated with the recognition of net loss before taxes during such reporting period. A valuation allowance was also maintained at such reporting date against the portion of our DTAs that correspond to federal and state NOL carryforwards that, based upon our forecast of pretax book income at March 31, 2021, we expect will expire prior to their utilization.

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Investments in Bonds

The Company has one tax-exempt municipal bond that financed the development of infrastructure for a mixed-use town center development located in Spanish Fort, Alabama that is owned by a joint venture (the “SF Venture”) in which we also maintain an equity investment (our bond investment is hereinafter referred to the “Infrastructure Bond”.) The Infrastructure Bond is secured by incremental tax revenues generated from the SF Venture’s development. At March 31, 2021, this Infrastructure Bond had a stated fixed interest rate of 6.3% and had a UPB and fair value of $26.4 million and $24.7 million, respectively. During the second quarter of 2020, a financing transaction was executed that involved the sale of this bond investment to a third-party with which the Company contemporaneously-executed a total return swap (“TRS”) agreement that referenced such bond investment. Given the economic interest retained in such bond investment through the TRS agreement, the Company reported the conveyance of such investment as a secured borrowing and, therefore, continued to recognize the Infrastructure Bond on the Company’s Consolidated Balance Sheets.        

During the three months ended March 31, 2021, the Company received $2.4 million of interest on its tax-exempt multifamily bond upon the sale of the underlying property and defeasance of the bond. At March 31, 2021, this bond investment had a UPB and fair value of $4.0 million and $4.1 million, respectively. On May 3, 2021, this bond investment was sold to a third-party at 102% of its UPB, or approximately $4.1 million.

Real Estate-Related Investments

At March 31, 2021, we maintained an 80% ownership interest in the SF Venture whose carrying value was $11.4 million. While we did not recognize any impairment charges in connection with this investment during the first quarter of 2021, we believe it is reasonably possible that we may be required to recognize one or more material impairment charges over the next 12 months, particularly if underlying economic conditions deteriorate. However, because any such impairment charge will be based on future circumstances, we cannot predict at this time whether we will be required to recognize any further impairment charges and, if required, the timing or amount of any impairment charge.

We also owned one direct investment in real estate consisting of a parcel of land that is currently in the process of development. This real estate is located just outside the city of Winchester in Frederick County, Virginia. At March 31, 2021, the carrying value of this investment was $15.5 million.

At March 31, 2021, the Company maintained an 11.85% ownership interest in the South Africa Workforce Housing Fund (“SAWHF”). SAWHF is a multi-investor fund that matured in April 2020. However, the fund does not anticipate fully exiting all its remaining investments until December 31, 2022. The Company also owns 7.2 million common shares of a residential real estate investment trust (“REIT”) that is listed on the Main Board of the Johannesburg Stock Exchange. These REIT shares, which trade under the trading symbol “TPF,” are reported at their fair value and are denominated in South African rand. The carrying values of the Company’s equity investments in SAWHF and the REIT were $1.5 million and $2.4 million, respectively, at March 31, 2021.

The carrying value of our real estate related investments are not necessarily indicative of the price we would receive upon a sale of those assets which would be affected, possibly materially, by the then current macroeconomic and microeconomic market conditions, including the matters described in Part I, Item 1A. “Risk Factors” of our 2020 Annual Report.

Other Debt Obligations

At March 31, 2021, the Company had other debt obligations that included subordinated debt, notes payable and other debt used to finance certain non-interest bearing investments and asset related debt that was used to finance interest bearing investments. The carrying value and weighted-average yield of the Company’s other debt obligations was $133.8 million and 2.4%, respectively, at March 31, 2021. Refer to Table 11, “Debt,” for more information.

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CONSOLIDATED BALANCE SHEET ANALYSIS

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This section provides an overview of changes in our assets, liabilities and equity and should be read together with our consolidated financial statements, including the accompanying notes to the financial statements.

Table 6 provides Consolidated Balance Sheets for the periods presented.

Table 6: Consolidated Balance Sheets

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Cash and cash equivalents decreased by $12.5 million, primarily due to payments made in the first quarter of 2021 to reduce the UPB of amounts drawn from our revolving credit facility. Refer to the summary of cash flows within the “Liquidity and Capital Resources” section below for more information about operating, investing and financing activities that contributed to the reported change in the amount of cash and cash equivalents.  

Restricted cash decreased by $2.4 million, primarily as a result of the partial release of cash collateral that was pledged in connection with outstanding interest rate swaps.

Investments in debt securities decreased by $2.3 million, primarily due to the realization of fair value gains in connection with the defeasance of the Company’s tax-exempt multifamily bond.

Investments in partnerships decreased by $20.4 million, primarily as a result of $10.3 million of net distributions and $9.9 million of equity in losses that were recognized during the first quarter of 2021 in connection with our investments in the Solar Ventures.

Deferred tax assets, net increased $3.7 million, primarily due to the tax impact associated with the recognition of net loss before taxes during the first quarter of 2021.

Other Assets increased marginally, primarily due to the accrual of interest on bonds and recognition of net fair value gains related to derivative instruments.

Debt decreased by $24.9 million, primarily as a result of $24.6 million of cash payments made in the first quarter of 2021 to reduce the UPB of amounts drawn from our revolving credit facility.  

Accounts payable and accrued expenses increased by $2.5 million, primarily due to management fees and expense reimbursements payable to our External Manager.  

Other liabilities decreased $1.6 million, primarily as a result of net fair value gains that were recognized in the first quarter of 2021 related to interest rate derivatives.  

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CONSOLIDATED RESULTS OF OPERATIONS

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This section provides a comparative discussion of our Consolidated Results of Operations and should be read in conjunction with our consolidated financial statements, including the accompanying notes. See “Critical Accounting Policies and Estimates,” for more information concerning the most significant accounting policies and estimates applied in determining our results of operations.

Net Interest Income

Net interest income represents interest income earned on our investments in bonds and other interest-earning assets less our cost of funding associated with the debt that we use to finance these assets.

Net interest income for the three months ended March 31, 2021, increased compared to that reported for the three months ended March 31, 2020, primarily due to recognition of $2.4 million of interest income on the Company’s tax-exempt multifamily bond in connection with the defeasance of such bond in the first quarter of 2021.

Equity in (Losses) Income from Unconsolidated Funds and Ventures

Equity in (losses) income from unconsolidated funds and ventures includes our allocable share of the earnings or losses from the funds and ventures in which we have an equity interest.

Table 8 summarizes equity in (losses) income from unconsolidated funds and ventures for the periods presented.

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Table 8: Equity in (Losses) Income from Unconsolidated Funds and Ventures

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Equity in income of the Solar Ventures for the three months ended March 31, 2021, decreased compared to that reported for the three months ended March 31, 2020, primarily due to (i) net fair value losses recognized by the Solar Ventures in the first quarter of 2021 related to four loans made to the ERCOT Projects (the Company’s share of such net fair value losses was $14.2 million) and (ii) a decrease in the amount of interest income recognized by the Solar Ventures in the first quarter of 2021 given the nonaccrual treatment of the aforementioned loans made to the ERCOT Projects (the Company’s share of interest income not recognized during such reporting period related to such loans was $7.0 million).

Equity in income from U.S. real estate partnerships for the three months ended March 31, 2021, increased compared to that reported for the three months ended March 31, 2020, primarily as a result of net income attributable to the Company from the SF Venture stemming in large part from an increase in the net assets of the venture.

Net Gains (Losses)

Net gains (losses) may include net realized and unrealized gains or losses relating to bonds, loans, derivatives, other assets, real estate and other investments as well as gains or losses realized by the Company in connection with the extinguishment of debt obligations.

The Company recognized net gains for the three months ended March 31, 2021, compared to net losses reported for the three months ended March 31, 2020, primarily due to changes in interest and foreign exchange rates referenced in the Company’s derivative instruments, which drove the recognition of $1.7 million of net fair value gains during the first quarter of 2021 as compared to $1.7 million of net fair value losses in the first quarter of 2020.

Other Interest Expense

Other interest expense for the three months ended March 31, 2021, decreased compared to that reported for the three months ended March 31, 2020, primarily due to a reduction in the cost of funding associated with subordinated debt that was driven by a decrease in three-month LIBOR.

Operating Expenses

Operating expenses include management fees and reimbursable expenses payable to our External Manager, general and administrative expense, professional fees and other miscellaneous expenses.

Table 9 summarizes operating expenses for the periods presented.

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Table 9: Operating Expenses

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Operating expenses for the three months ended March 31, 2021, decreased compared to those reported for the three months ended March 31, 2020, primarily due to (i) a $1.1 million reduction in the amount of losses recognized in connection with the remeasurement of foreign currency-denominated assets into U.S. dollars as the South African rand strengthened against the U.S. dollar during the first quarter of 2021 whereas the rand significantly weakened against the U.S. dollar during the first quarter of 2020 and (ii) a $0.5 million decrease in the amount of compensation-related expense reimbursements that were payable to the External Manager. These decreases were partially offset by a $0.3 million increase in legal fees associated primarily with business strategy and related matters.

Income Tax Benefit

Income tax benefit recognized during the three months ended March 31, 2021, increased compared to that reported for the three months ended March 31, 2020, primarily due an increase in net losses recognized from continuing operations.

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LIQUIDITY AND CAPITAL RESOURCES

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Liquidity

Liquidity is a measure of our ability to meet potential short-term (within one year) and long-term cash requirements, including ongoing commitments to repay borrowings, fund and maintain our current and future assets and other general business needs. Our sources of liquidity include: (i) cash and cash equivalents; (ii) cash flows from operating activities; (iii) cash flows from investing activities; and (iv) cash flows from financing activities.

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Investing Activities

Net cash flows associated with investing activities include, but are not limited to, principal payments; capital contributions and distributions; advance of loans held for investment; and sales proceeds from the sale of bonds, loans and real estate and other investments.

Net cash flows provided by investing activities during the three months ended March 31, 2021, increased $9.1 million compared to such net cash flows used in investing activities during the three months ended March 31, 2020. This net increase was primarily driven by (i) a $57.5 million decrease in net cash contributed to our Solar Ventures and (ii) a $5.9 million decrease in cash used for land improvements to our direct real estate investment. These net decreases in cash used were largely offset by a $53.6 million reduction in net principal payments that was largely driven by the repayment of the UPB of the Company’s loan receivable from Hunt on January 3, 2020.

Financing Activities

Net cash flows used in financing activities during the three months ended March 31, 2021, increased $47.7 million compared to such net cash flows provided by financing activities during the three months ended March 31, 2020. The increase in the amount of cash used in financing activities was primarily attributable to $24.6 million of payments made during the first quarter of 2021 to reduce the UPB of amounts drawn from our revolving credit facility whereas, during the first quarter of 2020, the Company received $25.5 million of net advances from such credit facility.

Capital Resources

Our debt obligations include liabilities that we recognized in connection with our subordinated debt, revolving credit facility debt and other notes payable. The major types of debt obligations of the Company are further discussed below. We use the revolving credit facility to finance our investments in the Solar Ventures. See Notes to Consolidated Financial Statements – Note 5, “Debt,” for more information.

Table 11 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at March 31, 2021, and December 31, 2020.

Table 11: Debt

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Subordinated Debt

At March 31, 2021, and December 31, 2020, the Company had subordinated debt obligations that had a total UPB of $85.9 million and $86.3 million, respectively. This debt included four tranches that amortize 2.0% per annum over their contractual lives, are due to mature with balloon payments between March 2035 and July 2035 and require the Company to pay interest based upon three-month LIBOR plus a fixed spread of 2.0%. At March 31, 2021, the weighted-average interest pay rate on the outstanding debt was 2.2%.

Revolving Credit Facility Debt Obligations

At March 31, 2021, and December 31, 2020, MEH, a wholly owned subsidiary of the Company, had borrowed $79.1 million and $103.7 million, respectively, from the revolving credit facility. This debt obligation, which is guaranteed by the Company and secured by (i) specific assets of the Borrower and (ii) a pledge of all of the Company’s equity interest in the Borrower, which in turn owns our equity investments in the Solar Ventures, matures on September 19, 2022, and is subject to a 12-month extension solely to allow refinancing or orderly repayment of the debt obligation. This debt obligation bears interest equal to one-month LIBOR (subject to a 1.5% floor) plus a fixed spread of 2.75%, which, at March 31, 2021, was 4.25%.

Notes Payable and Other Debt

At March 31, 2021, and December 31, 2020, the Company had notes payable and other debt with a UPB of $18.1 million and $17.9 million, respectively.

At March 31, 2021, and December 31, 2020, $4.1 million and $4.0 million, respectively, of this debt relates to financing that was obtained to complete the purchase of the Company’s 11.85% ownership interest in SAWHF. This debt, which is denominated in South African rand, has a maturity date of January 18, 2022, and requires the Company to pay interest based upon the Johannesburg Interbank Agreed Rate (“JIBAR”) plus a fixed spread of 5.15%. At March 31, 2021, the interest rate on this debt was 8.8%.

At March 31, 2021, and December 31, 2020, $4.3 million, of the notes payable and other debt relates to debt obligations to the Morrison Grove Management, LLC principals (“MGM Principals”). This debt bears interest at 5.0%. The $2.8 million debt obligation amortizes over its contractual life and is due to mature on January 1, 2026. The $1.5 million debt obligation is interest only until March 31, 2026 and then amortizes in three equal installments until its maturity date of January 1, 2027.

At March 31, 2021, and December 31, 2020, $9.5 million and $9.4 million, respectively, of our debt relates to financing that was obtained to finance the development of our direct investment in real estate. This debt obligation is secured by our direct investment in real estate and is guaranteed by the Company. The contractual maturity date of this facility is June 1, 2023, although the facility is subject to three extension options (at the discretion of the borrower and lender): (i) the first extension term would expire on November 1, 2023; (ii) the second extension term would expire on May 1, 2024 and (iii) the final amortized term would expire three years after the initial term, first extension term and second extension term, as applicable. Amounts drawn from this debt facility are repayable on an interest only basis at a rate of 4.85% with all outstanding principal due at maturity during the initial term, first extension term and second extension term. However, during the final extension term the debt bears interest at a rate of three-month LIBOR plus 3.0% per annum, subject to a 5.0% floor with principal amortization required monthly over the three-year extension term.

Asset Related Debt

Asset related debt is debt that finances interest-bearing assets of the Company. The interest expense associated with this debt is included within “Net interest income” on the Company’s Consolidated Statements of Operations.

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At March 31, 2021, and December 31, 2020, the carrying value of $23.2 million of asset related debt was recognized in connection with the conveyance of our Infrastructure Bond in the second quarter of 2020 to our counterparty for a total return swap (“TRS”) that was executed in connection with such conveyance. Such conveyance was reported as a secured borrowing and, therefore, proceeds received from the Company’s counterparty were reported as a debt obligation. The TRS agreement has a maturity date of June 6, 2022, and requires the Company to pay interest based upon the Securities Industry and Financial Markets Association index rate, subject to a 0.5% floor, plus a spread of 2.0%, which at March 31, 2021, was 2.5%. These payment terms are used to accrue interest related to the secured borrowing that was recognized upon conveyance of the Company’s bond investment. Additionally, under the terms of the TRS agreement, the Company’s TRS counterparty is entitled to share in 10% of the increase in fair value, if any, of the Infrastructure Bond between the trade and termination dates of the TRS agreement. For reporting purposes, this provision is treated as a freestanding derivative instrument that is reported on a fair value basis.

Covenant Compliance

On February 24, 2021, a prospective purchaser filed a special litigation lien, known as a Lis Pendens, on the entire 150-acre property of our direct investment in real estate. The Company intends to vigorously defend against these claims and pursue available remedies, including a slander of title lawsuit. Although the Company has filed motions to dismiss the lawsuit and the Lis Pendens, unless and until dismissed, the Lis Pendens constitutes a default under the Company’s financing of this property. The Company has been in communication with the lender and does not expect the lender to take any action in respect of the default in light of the lender’s first lien position but can provide no assurance that the lender will not take any action. At March 31, 2021, the UPB of this note payable was $9.6 million. Refer to Notes to Consolidated Financial Statements - Note 9, “Commitments and Contingencies,” for more information. At March 31, 2021, the Company was in compliance with all other covenants under its debt arrangements. At December 31, 2020, the Company was in compliance with all covenants under its debt arrangements.

Off-Balance Sheet Arrangements

At March 31, 2021, and December 31, 2020, the Company had no off-balance sheet arrangements.

Other Contractual Commitments

The Company is committed to make additional capital contributions to certain of its investments in partnerships and ventures. Refer to Notes to Consolidated Financial Statements - Note 3, “Investments in Partnerships,” for more information.

At March 31, 2021, and December 31, 2020, the Company had no unfunded loan commitments. Refer to Notes to Consolidated Financial Statements - Note 4, “Other Assets” for more information.

The Company uses derivative instruments to hedge interest rate and foreign currency risks. Depending upon movements in reference interest and foreign exchange rates, the Company may be required to make payments to the counterparties to these agreements. Refer to Notes to Consolidated Financial Statements – Note 6, “Derivative Instruments,” for more information about these instruments.

Other Capital Resources

Dividend and Share Buyback Policy

The Board makes the final determination regarding dividends and share buyback plans based on our External Manager’s recommendation, which is based on an evaluation of a number of factors, including our financial condition, business prospects, the predictability of recurring cash flows from operations and available cash, as well as other factors the Board deems relevant. The Board does not believe paying a dividend or repurchasing shares is appropriate at the current time.

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Tax Benefits Rights Agreement

Effective May 5, 2015, the Company adopted a Tax Benefits Rights Agreement (the “Rights Plan”) designed to help preserve the Company’s NOLs. In connection with adopting the Rights Plan, the Company declared a distribution of one right per common share to shareholders of record as of May 15, 2015. The rights do not trade apart from the current common shares until the distribution date, as defined in the Rights Plan. Under the Rights Plan, the acquisition by an investor (or group of related investors) of greater than a 4.9% stake in the Company, could result in all existing shareholders other than the new 4.9% holder having the right to acquire new shares for a nominal cost, thereby significantly diluting the ownership interest of the acquiring person. On March 11, 2020, the Board approved an extension of the original five-year term of the Rights Plan until May 5, 2023, or until the Board determines that the plan is no longer needed, whichever comes first. Subsequently, shareholders ratified the Board’s decision to extend the Rights Plan at the Company’s 2020 annual meeting of shareholders.

On January 3, 2018, the Board approved a waiver of the 4.9% ownership limitation with respect to Hunt, increasing the limitation to 9.9% of the Company’s issued and outstanding shares in any rolling 12-month period without causing a triggering event.

At March 31, 2021, the Company had two shareholders who held greater than a 4.9% interest in the Company, one of whom is its former Chief Executive Officer and current Chairman of the Board, Michael L. Falcone. Upon Mr. Falcone’s resignation as Chief Executive Officer on August 12, 2020, he became eligible for Board compensation. Pursuant to the policy of our Governance Committee, each Board member receives one-half of his or her Board compensation in common shares. On November 5, 2020, the Board adopted an Amended and Restated 2012 Non-Employee Directors’ Compensation Plan to coordinate elements of the Rights Plan and share compensation for directors. In addition, the Board named Mr. Falcone an exempted person in accordance with the Rights Plan for purposes of his share-based Board compensation.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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The preparation of our consolidated financial statements is based on the application of GAAP, which requires us to make certain estimates and assumptions that affect the reported amounts and classification of the amounts in our consolidated financial statements. These estimates and assumptions require us to make difficult, complex and subjective judgments involving matters that are inherently uncertain. We base our accounting estimates and assumptions on historical experience and on judgments that we believe to be reasonable under the circumstances known to us at the time. Actual results could differ materially from these estimates. We applied our critical accounting policies and estimation methods consistently in all material respects and for all periods presented and have discussed those policies with our Audit Committee.

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed any significant changes in judgments and assumptions in applying our critical accounting policies with the Audit Committee of our Board. See Part I, Item 1A. “Risk Factors” in our 2020 Annual Report for a discussion of the risks associated with the need for management to make judgments and estimates in applying our accounting policies and methods. We have identified three of our accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These policies govern:

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our 2020 Annual Report for a discussion of these critical accounting policies and estimates.

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ACCOUNTING AND REPORTING DEVELOPMENTS

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We identify and discuss the expected impact on our consolidated financial statements of recently issued accounting guidance in Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies.”

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USE OF NON-GAAP MEASURES

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We present certain non-GAAP financial measures that supplement the financial measures we disclose that are calculated under GAAP. Non-GAAP financial measures are those that include or exclude certain items that are otherwise excluded or included, respectively, from the most directly comparable measures calculated in accordance with GAAP. The non-GAAP financial measures that we disclose are not intended as a substitute for GAAP financial measures and may not be defined or calculated the same way as similar non-GAAP financial measures used by other companies.  

Adjusted Book Value represents Book Value reduced by the carrying value of the Company’s DTAs. We believe this measure is useful to investors in assessing the Company’s underlying fundamental performance and trends in our business because it eliminates potential volatility in results brought on by tax considerations in a given year. As a result, reporting upon, and measuring changes in, Adjusted Book Value enables a better comparison of period-to-period operating performance.

Adjusted Book Value per common share represents Adjusted Book Value at the period end divided by the common shares outstanding at the period end.  

Management intends to continually evaluate the usefulness, relevance, limitations and calculations of our reported non-GAAP performance measures to determine how best to provide relevant information to the public.

Table 12 provides reconciliations of the non-GAAP financial measures that are included in this Report to the most directly comparable GAAP financial measures.

Table 12:  Non-GAAP Reconciliations

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