MMAC MMA Capital Holdings Inc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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For the fiscal year ended December 31, 2020

OR

For the transition period from __________________ to __________________

Commission File Number 001-11981

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻   No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻   No þ

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of our common shares held by non-affiliates was $111,130,141 based on the closing sale price as reported on the Nasdaq Capital Market on June 30, 2020.

There were 5,742,286 shares of common shares outstanding at March 24, 2021.

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Portions of the registrant’s Proxy Statement to be filed on or about April 30, 2021 have been incorporated by reference into Part III of this report.

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MMA Capital Holdings, Inc.

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Cautionary Statement Regarding Forward-Looking Statements

This Annual Report on Form 10-K for the year ended December 31, 2020 (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 I, Item 1A. “Risk Factors” of this 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 I, Item 1A. “Risk Factors” 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 December 31, 2020, 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 year ended December 31, 2020. Lastly, origination activity at the Solar Ventures was not meaningfully impacted by COVID-19 during the year.

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, particularly for tax equity investments. These market dynamics may materially and negatively impact the Solar Ventures’ loan portfolio.

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 were also considered in such fair value measurements. The total fair value of loans outstanding at December 31, 2020, approximated their total UPB at such reporting date.

Other Investments and Hedging Instruments

The Company’s 80% ownership interest in a joint venture, which owns a mixed-use town center development that consists of hotel tenants, retail tenants and undeveloped land parcels and whose incremental tax revenues secure our tax-exempt municipal bond (“Infrastructure Bond”) (hereinafter, the “SF Venture”), was determined to be other-than-temporarily impaired during the preparation of our second quarter financial statements as of June 30, 2020, given the impacts of the downturn in the economy and local and state restrictions on retail tenants stemming from COVID-19. As such, this investment was written down to its fair value at June 30, 2020, using valuation inputs that were sourced from a third-party specialist. Consequently, the Company recognized a $9.0 million impairment loss in its Consolidated Statements of Operations in the second quarter of 2020. Additionally, this investment was assessed to be other-than-temporary impaired at December 31, 2020, and, therefore, was written down to its fair value at such reporting date. In this regard, an additional $3.7 million impairment loss was recognized in the fourth quarter of 2020 that partially offset $4.7 million of equity in income of the SF Venture that was recognized in the same reporting period that stemmed primarily from the termination of a lease with an anchor tenant, which accelerated the amortization of a below-market lease intangible liability into rental income. Refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for more information about income that was recognized in connection with this investment.

We continue to monitor the economic impact of the COVID-19 pandemic on the performance of our investments and underlying real estate values. Although we have not recognized impairment charges other than that for the SF Venture discussed above, 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 further. 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.

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 was uncertain at December 31, 2020. 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, the exact timing and amount of loss recognition depends upon future circumstances and, therefore, cannot be predicted at this time.

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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 increased $74.0 million during 2020 as a result of $34.4 million of net capital contributions made and $39.6 million of equity in income from the Solar Ventures that was recognized during the year ended December 31, 2020. 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 200 project-based loans that total $3.4 billion of debt commitments for the development and construction of over 780 renewable energy project sites. When completed, these projects are expected to contribute to the generation of over 9.4 gigawatts of renewable energy, thereby eliminating approximately 268.5 million metric tons of carbon emissions over their project lives. The Solar Ventures closed $1.1 billion of commitments across 35 loans during 2020 as compared to $999.0 million across 62 loans during 2019.

At December 31, 2020, loans funded through the Solar Ventures had an aggregate unpaid principal balance (“UPB”) of $701.2 million and fair value (“FV”) of $702.6 million, a weighted-average remaining maturity of 17 months and a weighted-average coupon of 12.4%. At December 31, 2019, loans funded through the Solar Ventures had an aggregate UPB and FV of $654.4 million, a weighted-average maturity of 10 months and a weighted-average coupon of 10.8%. The FV of loans made by the Solar Ventures is generally measured for reporting purposes based upon the net present value of such instruments, which is 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 for such purpose.

Table 2 provides financial information about the composition of the Solar Ventures’ loan portfolio at December 31, 2020 and December 31, 2019.

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

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At December 31, 2020, the Solar Ventures had $261.7 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, $114.7 million of such commitments were attributable to the Company. 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 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 would be required.

Certain components of the national and some local renewable energy finance markets, such as the Electric Reliability Council of Texas (“ERCOT”), 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 ERCOT could further impact when invested capital is repaid and re-invested.

At December 31, 2020, all but two renewable energy projects, both of which are located in the ERCOT service area and were financed by three loans from the Solar Ventures that had a total UPB of $214.3 million, had usual and customary take-out commitments in place as generally required under the loan agreements. In most cases, the repayment of the Solar Venture loans, or their “take-out,” is dependent upon the refinancing of a loan 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 permanent 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. As further discussed below, the two projects that, at December 31, 2020, did not have usual and customary take-out commitments are under construction or development in the ERCOT service area. On March 2, 2021, a take-out commitment was secured for one of these projects (“ERCOT Project 2”) that is under development and for which the total UPB of related development and mezzanine financing was $44.7 million at December 31, 2020, while we are in discussions to resolve any defaults and provide for the future ownership and operation of another project (“ERCOT Project 3”) that is under construction and for which the total UPB of related development and mezzanine financing was $169.6 million at December 31, 2020.

Lending Activities of the Solar Ventures – ERCOT Exposures

At December 31, 2020, 55.9% of the total UPB of outstanding loans of the Solar Ventures were associated with a single sponsor and were secured by three projects located in the ERCOT service area. On February 24, 2021, our economic interest in loans related to these three projects became 45.0%, and is expected to remain as such, based upon a non-pro rata capital contribution agreement executed with our capital partner.

In the fourth quarter of 2020, a renewable energy project in the ERCOT service area to which the Solar Ventures made construction and mezzanine loans, which had aggregate UPBs of $295.5 million and represented 39.6% of the total UPB of the loan portfolio of the Solar Ventures at September 30, 2020, began operational activities and was recapitalized with tax-equity and term debt provided by third parties and a $177.5 million sponsor equity loan provided by SPL (“ERCOT Project 1”). The renewable energy joint ventures provided certain guarantees of indemnity and project sponsor performance obligations to third parties to facilitate this recapitalization, which resulted in the full repayment of the Solar Ventures’ construction and mezzanine loans and reduced the Solar Ventures’ total loan commitment exposure to this project by $110.5 million. At December 31, 2020, the sponsor equity loan represented 25.3% of total UPB of the Solar Ventures’ loan portfolio and is categorized as a permanent loan in Table 2.

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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 project pledged $3.0 million of cash; however, given the liquidity constraints of the project and the sponsor member it is expected that they will be unable to meet the remaining net settlement payment. As a result, the Company and our capital partner expect that they will provide the capital to SPL to enable the project to satisfy its net settlement payment obligation of $22.5 million as well as any additional payment obligations, that may be required in connection with or to facilitate the final closing of the recapitalization of the ERCOT Project 1 in the fourth quarter of 2020 upon substantial completion of the project. Due to the project’s value, its capital structure and other repayment risk factors, we believe that recovery of these additional advances expected to be made by SPL would be at significant risk and, consequently, a related fair value loss is expected to be recognized by SPL in the first quarter of 2021 that, taken together with interest income that is not expected to be accrued during such reporting period (as further discussed below), could result in a substantial decrease in SPL’s net income.    

On March 2, 2021, SDL and SCL executed loan amendments and other agreements to facilitate the take-out of a development loan provided by SDL and of the allocated portion of a mezzanine loan provided by SCL, which are financing ERCOT Project 2. To mitigate risk and reduce exposure to this project, SDL and SCL agreed to waive all interest and fees on the repayment of SDL’s development loan and an allocated portion of SCL’s mezzanine loan which, at December 31, 2020, had a combined UPB of $44.7 million including the capitalization of $7.6 million of interest and fees, and further agreed to provide $30.2 million of bridge construction loan proceeds to the project in anticipation of an expected sale of the project to a prospective buyer by May 15, 2021. These agreements also provided the prospective buyer with a mezzanine loan facility of up to $9.0 million, the proceeds of which can be utilized upon the closing to refinance the existing development loan and allocated portion of the mezzanine loan. The terms of any such new mezzanine loan are subject to final negotiation, approvals and documentation. Additionally, in consideration for its waiver of interest and fees on this development loan, as part of this loan’s restructuring SDL will, upon closing, have the ability to recover up to $4.0 million of foregone interest and fees through a participation interest, subject to the prospective buyer receiving a specified rate of return on its investment. All loans will be reported at fair value and, given loan-related concessions made, a mark-to-market loss and other reductions in net income are expected to be recognized in the first quarter of 2021 by SDL and SCL and such impacts could be substantial.

On January 12, 2021, a notice of default was issued by SDL in connection with a development loan made to ERCOT Project 3 that had a UBP and fair value of $160.3 million and $168.4 million, respectively, at December 31, 2020, because the loan was past its maturity date with no take-out commitment in place. During the first quarter of 2021, $80.1 million of additional advances were made in connection with this loan to continue to fund the project’s construction activities and keep it on schedule to meet its target mechanical completion date. Discussions to resolve any defaults associated with this loan and provide for the future ownership and operation of this project are currently in process.

The ERCOT market remains volatile and uncertain primarily stemming from the February 2021 weather event and resulting energy crisis. There is litigation among various market participants and potential legislative reform is being considered, all of which remain uncertain. Assuming that the Company was unable to recover any of the additional advances made to ERCOT Project 1 (as outlined above), the Company’s allocable share of losses in the first quarter would, when taken together with loan-related interest income that is not expected to be accrued and other impacts stemming from the aforementioned actions taken to maximize the recovery of loans made to ERCOT Project 2, be $23.3 million, or approximately $4.00 per share (such loss would be recognized by the Company as a reduction in equity in income of the Solar Ventures). However, it is difficult to estimate first quarter impacts related to these exposures in absence of, among other things, the completion of fair value measurements of loans outstanding at the Solar Ventures at March 31, 2021, which require various valuation inputs that were not available as of the filing date of this Report. Further, additional events may occur that could cause this estimate to change by amounts that could be material.

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Loan Portfolio Redemptions and Returns at the Solar Ventures

Through December 31, 2020, $2.3 billion of commitments across 159 project-based loans had been repaid with no loss of principal, resulting in a weighted-average IRR (“WAIRR”) to the Solar Ventures of 19.7% that was on average higher than originally underwritten loan IRRs. For the year ended December 31, 2020, 48 loans totaling $1.0 billion of commitments had been repaid, resulting in a WAIRR of 23.0% to the Solar Ventures. The WAIRR was disproportionately increased during the year ended December 31, 2020, by one loan that provided an extraordinary IRR. Excluding this loan, the above WAIRR would have been 15.3% and 13.0%, respectively. 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 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. 

At December 31, 2020, the Solar Ventures had two loans on non-accrual status. Such loans were associated with ERCOT Project 1 and ERCOT Project 2, which had a combined UPB of $188.2 million. The Solar Ventures did not recognize $1.5 million of interest income in 2020.

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 percentage ownership during each reporting period. Separately, the Company recognizes interest income associated with the aforementioned loan using the interest method.

Table 3 summarizes income recognized by the Company in connection with our renewable energy investments for the periods presented.

Table 3:  Income Recognized from Renewable Energy Investments

The Company generated an unlevered net return on investment from our renewable energy investments, as measured on a twelve-month trailing basis, of 11.5% and 11.4% for the periods ended December 31, 2020 and December 31, 2019, 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 14.6% and 13.9% for the periods ended December 31, 2020 and December 31, 2019, respectively. These returns were measured on a trailing four quarter basis at each reporting period by dividing net income from renewable energy investments less attributed cost of funding (as further described below) by a net average value that incorporates the carrying value of renewable energy investments, the UPB of attributed funding and restricted cash associated with attributed funding (where the UPB of attributed funding partially reduces the other two components in such net value).

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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.

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 has also 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 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 $103.7 million and $94.5 million at December 31, 2020 and December 31, 2019, respectively. The Company recognized $5.8 million and $1.2 million of related interest expense in the Consolidated Statements of Operations for the year ended December 31, 2020 and December 31, 2019, respectively.

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.

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 December 31, 2020, the Company had pretax federal NOLs of $358.9 million that were available to reduce future federal income taxes. These NOLs will begin to expire in 2028. As of December 31, 2020, the Company concluded that, based on the weight of available evidence, it was more likely than not that the Company would utilize $215.2 million of these NOLs. Accordingly, during the fourth quarter of 2020, the Company recognized an incremental $2.9 million net DTA. At December 31, 2020, the carrying value of the Company’s net DTA was $59.1 million while a $63.4 million valuation allowance was established in connection with that portion of federal and state NOL carryforwards that were expected as of such reporting date to expire prior to utilization. Refer to Notes to Consolidated Financial Statements – Note 14, “Income Taxes,” for additional information about DTAs.

Investments in Bonds

The Company has one tax-exempt municipal bond that financed the development of infrastructure for a mixed-use town center development in Spanish Fort, Alabama and is secured by incremental tax revenues generated from the development. At December 31, 2020, 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 also referenced such bond investment. Given the economic interest retained in

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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.        

At December 31, 2020, we also held one subordinated unencumbered tax-exempt multifamily bond investment with a UPB and fair value of $4.0 million and $6.3 million, respectively.

Real Estate-Related Investments

At December 31, 2020, we maintained an interest in a real estate-related investment through our 80% ownership interest in the SF Venture. The carrying value of this investment was $11.2 million at December 31, 2020.

At December 31, 2020, 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. During the year of 2020, the Company invested $7.1 million in additional land improvements that were capitalized, increasing the carrying value of our investment. As of December 31, 2020, the carrying value of this investment was $15.5 million.

At December 31, 2020, 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. On May 22, 2020, the Company received a pro-rata distribution from SAWHF of 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 $1.8 million and $2.5 million, respectively, at December 31, 2020.

The carrying values 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 Item 1A. “Risk Factors.”

Other Debt Obligations

At December 31, 2020, 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. During the second quarter of 2020, the Company closed a $10.0 million lending arrangement that is secured by our direct investment in the Frederick County, Virginia property and a $23.5 million financing arrangement associated with its Infrastructure Bond investment. The carrying value and weighted-average yield of the Company’s other debt obligations was $134.1 million and 2.4%, respectively, at December 31, 2020. Refer to Table 9, “Debt,” within Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

Competition

We face competition from banks, private equity, infrastructure funds and other renewable energy investors related to new investments. Also, the properties that collateralize our bonds and real estate related investments compete against other companies and properties that seek similar tenants and offer similar services.

While we have historically been able to compete effectively as a result of our service, reputation, access to capital and longstanding relationships, many of our competitors benefit from substantial economies of scale in their business, have greater access to capital and other resources than we do and may have other competitive advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we are able to.  

Human Capital Resources

We have no employees. The Company engaged our External Manager to manage the Company’s continuing operations on January 8, 2018, and all former employees of the Company were at that time hired by the External Manager.

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Other Information Concerning Our Business

At December 31, 2020, our principal office was located at 3600 O’Donnell Street, Suite 600, Baltimore, MD 21224. Our telephone number at this office was (443) 263-2900. Our corporate website is www.mmacapitalholdings.com, and our filings under the Exchange Act are available through that site, as well as on the Securities and Exchange Commission (“SEC”) website at www.sec.gov. The information contained on our corporate website is not a part of this Report.

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The rapid development, fluidity of the circumstances and unknown long-term impacts resulting from COVID-19 preclude any prediction as to the duration and extent of its adverse impact and makes it more difficult to determine the fair value of investments, especially those that rely on estimates and are inherently judgmental. Accordingly, COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows.

To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the risk factors below, including, but not limited to, those relating to our revolving credit facility and our access to capital generally, our exposure to changes in interest rates, our exposure to collateral calls associated with agreements we used to hedge interest rate risk, our investments in bonds and real estate and the lack of liquidity related to the value and marketability of our non-cash assets.

We are exposed to various risks associated with our renewable energy investments.

Our renewable energy investments consist primarily of indirect investments in loans made by the Solar Ventures that finance renewable energy projects. The Solar Ventures generally invest in loans that have a duration of less than one year and need to reinvest their redemption proceeds in new investments with comparable returns in order to maintain their existing revenues. In most cases, the repayment of the Solar Venture loans, or their “take-out,” is dependent upon the refinancing of a given loan or the sale of an underlying renewable energy project to third parties, both of which typically require some combination of tax credit equity, sponsor equity and construction or permanent debt financing. The Solar Ventures may themselves participate in the take-out of such loans by providing long-term financing, including making loans that are subordinate to other loans secured by the renewable energy projects in which we have invested. Additionally, the Solar Ventures may increase the size of funding commitments or extend the contractual maturity of loan receivables or offer other credit enhancements as necessary to preserve the value of loan investments, although such actions, if taken, could potentially result in loss recognition by the Solar Ventures. Furthermore, lenders of permanent loans and syndicators of tax credit equity may require access to the credit markets, which could impact their ability to finance the take-out of the Solar Ventures’ loans.

The production of renewable energy depends heavily on suitable meteorological conditions. If weather conditions are

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unexpectedly unfavorable, the electricity production from the renewable energy projects that we finance may be substantially below expectations. Should unfavorable weather conditions be sustained or particularly severe, the operating projects in which we have invested may not be able to meet their power production obligations and the projects may have to make payments or buy power to make up for the shortfall. These conditions may also cause demand for power to increase. A decrease in supply or an increase in demand for power or both, could cause a significant increase in the price of power, which may cause our operating projects to have merchant exposure to variable market prices, and that exposure could be substantial. Such exposure, and the failure to meet power production requirements could cause a significant deterioration of the underlying project value and our permanent loan investments. For example, a severe winter storm during the second and third weeks of February 2021 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 the maximum market price that was in effect during that time, an amount of power equal to the shortfall in the electricity volumes that it was contractually obligated to deliver. As a result, the Company and our capital partner expect that they will provide the capital to SPL to enable the project to satisfy its net settlement payment obligation of $22.5 million as well as any additional payment obligations, that may be required in connection with or to facilitate the final closing of the recapitalization of the ERCOT Project 1 in the fourth quarter of 2020 upon substantial completion of the project. Due to the project’s value, its capital structure and other repayment risk factors, we believe that recovery of these additional advances expected to be made by SPL would be at significant risk and, consequently, a related fair value loss is expected to be recognized by SPL in the first quarter of 2021 that, taken together with interest income that is not expected to be accrued during such reporting period (as further discussed below), could result in a substantial decrease in SPL’s net income.

The Solar Ventures regularly have unfunded loan commitments to borrowers and, as of December 31, 2020, these unfunded loan commitments totaled $261.7 million. The unfunded loan commitments are anticipated to be funded primarily by capital within the Solar Ventures through a combination of uninvested capital and existing loan redemptions. In addition, SCL, SPL and SDL have provided, and may in the future provide, certain guarantees (which may be joint and several) of indemnity and performance obligations associated with the solar projects financed by the Solar Ventures. These guarantees have in the past and may in the future cover such costs as hail damage in excess of insurance coverage, renewable energy credit recapture loss or inability of a tax credit investor to claim investment tax credits due to breaches of the project sponsor’s representations, warranties or covenants. If the Solar Ventures are required to perform on these guarantees, they may not have sufficient cash to meet their other funding obligations. 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 would be required. The ability of the Company to fund its share of additional capital is currently, and may become increasingly, dependent upon our access to the debt and equity capital markets and the willingness and ability of our capital partner to continue to contribute its share of additional capital or capital in excess of its pro rata ownership of the Solar Ventures. If we are unable to meet our funding obligations, the Solar Ventures could default on their lending commitments to their borrowers, which would adversely affect our business, cash flows and financial condition and result in damage to our and our External Manager’s reputation.  

Our renewable energy investments are subject to various other risks that could adversely impact the demand or financial performance of these investments. We have project related risk including construction risk, permanent financing risk, repayment risk, collateral risks (such as value and ability to foreclose), project operations risk, concentration risk and meteorological risk.

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We also have market risk, including the following: (i) increased competition in renewable energy lending; (ii) if the cost of energy generated by other than renewable energy sources declines, the demand for projects that the Solar Ventures finance may consequently be reduced, which could harm new business opportunities; (iii) changes in various policies and regulations related to the functioning of the electricity market may adversely impact the use of renewable energy or encourage the use of fossil fuel energy over renewable energy; (iv) renewable energy projects generally rely on supply chains for equipment and transmission from third parties to distribute their output, which may make them susceptible to increased costs or access barriers; (v) development of new electric generating technologies that may be beyond the External Manager’s expertise; (vi) significant reliance on existing relationships to generate investment opportunities; and (vii) disruptions in the credit markets. In considering these market risks, it is important to understand that certain components of the national and some local renewable energy finance markets, such as ERCOT, have been and may further be affected by changing market dynamics, resulting in supply and demand imbalances, particularly for tax equity investments. 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. The Solar Ventures’ concentration in some of the affected markets could further impact when and how capital invested in late-stage development, construction and permanent loans is repaid and re-invested. At December 31, 2020, 55.9% of the total UPB of outstanding loans of the Solar Ventures were associated with a single sponsor and were secured by three projects located in the ERCOT service area. As of March 24, 2021, 61.9% of the Company’s total investment in the Solar Ventures represented our allocable share of the total UPB of the Solar Ventures’ outstanding loans to this single sponsor that financed these three projects located in ERCOT.

Further, federal and state governments have established various incentives and financial mechanisms to accelerate the adoption of renewable energy. These incentives include tax credits, tax abatements and rebates among others. These incentives help catalyze private sector investments in solar and other renewable energy. Changes in government incentives, whether at the federal or local level, or changes in federal law, such as tariffs on solar panels or change in policies or regulations related to the functioning of the electric markets could result in a significant reduction in the potential demand for renewable energy, which could adversely affect our renewable energy finance business.

Moreover, we do not control the Solar Ventures. In this regard, our capital partner may not consent to decisions that may be in our best interest or they may at any time have economic or other business interests different than ours. Additionally, as a consequence of various non-pro rata capital contributions made by our capital partner, we held a minority economic interest in SCL, SPL and SDL at December 31, 2020. In this regard, the Company ceded decision-making control over the workout of troubled loans, to the extent there are any, to its capital partner until such time that the amount of equity invested by the Company and its capital partner have come back into equal balance.

If we are unable to access the debt or equity capital markets in order to satisfy financial obligations to our capital partner under various non-pro rata funding agreements, our capital partner may have the right to either (i) cause the Solar Ventures to make special distributions disproportionately to it (without distribution to us) of net cash flow from any capital transactions (subject to limitations provided in such non-pro rata funding agreements) or (ii) enter into a mutually agreeable definitive amendment (to be negotiated in good faith) to the relevant operating agreements of the Solar Ventures reflecting the majority funding position of the Company’s capital partner. In the absence of our non-pro rata funding agreements, our capital partner could cause the Company to be assessed as a defaulting member under the Solar Ventures operating agreements and could subject us to a defaulting member loan that accrues interest at a rate of 18% until paid with repayment being made from distributions senior to other distributions that would otherwise be payable to us.

Lastly, the sale or transfer of our interests in the Solar Ventures is also restricted and subject to buy-sell provisions that could be triggered at a time when we may not desire, thus inhibiting our ability to sell our interests or realize the expected returns that may be generated by the Solar Ventures.

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We operate in an increasingly competitive market.

We compete against a number of parties who may provide financing alternatives to the investments in which we invest, including specialty finance companies, banks, private equity, institutional investors, independent power producers, pension funds, developers and others who provide capital solutions to renewable energy developers, EPC contractors and system owners. The continued low interest rate environment and increasing investor appetite in the renewable energy market have increased the level of competition that we face.

Many of our competitors are significantly larger than we are, have access to greater capital and other resources than we do, have a lower cost of borrowing or more favorable access to credit, and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than we are able to. We may lose business opportunities if we do not match our competitor’s pricing, terms and structure.

We face risks associated with the revolving credit facility.

Our ability to borrow from the revolving credit facility is dependent upon our remaining in compliance with a borrowing base, which is comprised of eligible renewable energy loans made either through the Solar Ventures in which we are an investor or that we have invested in directly. Compliance with the borrowing base depends on a sufficient percentage of the underlying loans remaining performing and eligible. A loan having an event of default or not adhering to pre-set underwriting criteria would cause a loan not to be borrowing base eligible. If the amount drawn from the revolving credit facility exceeds the available capacity under the borrowing base and this variance is not cured in a timely manner, the lender could declare an event of default that could have a variety of negative outcomes that include, but are not limited to, the lender foreclosing on our equity interests in MEH, which holds our interests in the Solar Ventures, all of which have been pledged to secure this financing.

The revolving credit facility contains certain financial covenants and collateral performance thresholds. An adverse change in the Company’s financial position could cause a financial covenant breach and lead to an event of default. An adverse change in the composition of the underlying loans, an increase in loan tenors or repeated loans extensions, an increase in defaults, principal loss, and or a material reduction in the interest rates being charged could cause us to breach a collateral performance or financial covenant test and lead to an event of default on the revolving credit facility.

We may have an UPB associated with amounts drawn from the revolving credit facility when it matures in 2022. If we are unable to repay or refinance the remaining balance of this debt, or if the terms of any available refinancing are not favorable, we may be forced to liquidate assets or incur higher costs which may significantly harm our business and financial condition.

Our ability to maintain and grow our shareholder value over the long term would be adversely affected if we are unable to make new investments, our lenders fail to meet their funding commitments to us or if we are unable to raise capital.

We need to identify, attract and obtain new capital in order to increase the number and size of the investments that we make. Our ability to raise capital depends on a number of factors, including certain factors that are outside our control. There can be no assurances that we can find or secure commitments for new capital or that new or existing lenders will meet their funding commitments to us. The failure to obtain or maintain capital in sufficient amounts, or to realize sufficient returns on the Company’s current investments, as well as the failure to reinvest investment or capital proceeds into new higher yielding investments could result in a decrease in the number and dollar value of our investments, or a decline in the rate of growth of these investments, any of which could adversely impact our revenues, cash flows and financial condition. If we are unable to raise capital, we may not be able to take full advantage of our External Manager’s pipeline opportunities.

Additionally, there is a risk that we will not be able to deploy our cash or the cash held by the Solar Ventures or expand our leverage to make investments that generate risk-adjusted returns that grow shareholder value. Furthermore, because there are no restrictions as to the nature of our investments, our investments in the future may result in additional or new risks that we do not face today.

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Real estate-related investments and bond investments are exposed to various risks associated with real estate.

Because all of our real estate-related investments and bond investments are secured by real estate, consist of real estate or investments in entities that own real estate, or are dependent upon incremental tax revenues generated from real estate, the value of these investments is exposed to various real estate-related risks. The value of these investments may be adversely affected by changes in macroeconomic conditions or other developments in real estate markets. These factors include but are not limited to: (i) overall development risk; (ii) changes in interest rates that affect the value of the real estate we own or in which we have an interest; and (iii) increasing levels of unemployment and other, adverse regional or national economic conditions. Should any of these investments decline in value, the Company would be required to recognize an impairment loss to the extent that such declines are assessed to be other-than-temporary.

Real estate may also decline in value because of adverse changes in market conditions, environmental problems, casualty losses for which insurance proceeds are not sufficient to cover the loss, or condemnation proceedings. The value of our real estate-related investments and our ability to conduct business also may be adversely affected by changes in local or national laws or regulatory conditions that affect significant segments of the real estate market. In such circumstances, cash flows from properties or developments that support our bond investments may not be sufficient to pay interest on our bonds, which would cause the value of our investments to decline.

LIBOR may not be available after 2021, which creates uncertainty around the future value of, and costs associated with, our interest rate derivative instruments and debt obligations that are indexed to LIBOR.

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The payment terms of our subordinated debt, revolving credit facility and certain interest rate derivative instruments that we use to hedge our exposure to interest rate risk are indexed to LIBOR. It is widely expected that LIBOR will not be quoted or available after 2021. In March 2021, the UK Financial Conduct Authority confirmed that one-week and two-month U.S. dollar LIBOR will cease to be published after 2021, as well as confirmed that overnight, one-month, three-month, six-month and one-year U.S. dollar LIBOR tenors will cease to be published after June 2023. We have exposure to one-month and three-month LIBOR.

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The Alternative Reference Rates Committee has designated the Secured Overnight Financing Rate (“SOFR”) as a recommended alternative rate for U.S. dollar-based LIBOR. SOFR is published by the Federal Reserve Bank of New York and is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury Securities. However, there are significant differences between LIBOR and SOFR and there can be no assurance that the alternative rate or index will be uniformly adopted or that we and our counterparty to our debt and interest rate derivative contracts will agree on a new rate. In any event, it is unlikely that the new rate will be exactly equal to what LIBOR would have been, so the amount of our borrowing costs may increase or the amount paid to us under our interest rate cap and swap agreements might be less than it would have been had LIBOR continued.

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Our subordinated debt documents contain alternative reference bank quotation mechanisms in the event LIBOR is discontinued, but there can be no assurance that banks will quote an alternate rate. If they do not, and we do not otherwise reach agreement with the servicers or the lenders of these obligations, the debt will convert to a fixed rate equal to the last quoted LIBOR plus our existing spread, which could have a material impact on us should LIBOR experience yield volatility or disruption before it is last quoted.

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Our revolving credit facility agreement contains fallback language in the event LIBOR is discontinued, whereby the administrative agent determines the replacement index in its reasonable judgment, including any adjustment to the replacement rate to reflect a different credit spread.

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Accordingly, it is impossible at this time to predict what our interest cost for our LIBOR indexed debt or the benefits of our LIBOR-based derivatives will be after 2021. The cost could be greater than it would have been had LIBOR continued and the difference could be material to our business, results of operations and financial condition.

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Increases in interest rates and credit spreads may adversely affect the fair value of our assets and increase our costs of borrowing.

Our investments in debt securities and derivative financial instruments are reported at fair value, the measurement of which is based upon estimated market yields that consider credit spreads for comparable investments. Consequently, changes in

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interest rates and credit spreads could cause the fair value of these instruments to change and, therefore, lead to volatility in our reported financial condition and results.

Interest rates can fluctuate for a number of reasons, including as a result of changes in the fiscal and monetary policies of the federal government and its agencies. Interest rates can also fluctuate as a result of geopolitical events or changes in general economic conditions, including events or conditions that alter investor demand for Treasury or other fixed-income securities.

Changes in market conditions, including changes in interest rates, liquidity, prepayment and/or default expectations, and the level of uncertainty in the market for a particular asset class, may cause fluctuations in credit spreads.

If interest rates increase or credit spreads widen, the fair value of our investments in bonds and other fixed rate financial instruments (whose fair value measurements are based upon contractual cash flows) will generally decline and, therefore, have a negative effect on our financial results and our shareholders’ equity. Declines in the fair value of these instruments could be significant in these circumstances.

If short-term interest rates rise, our borrowing costs would increase and our net income would decline as interest payments associated with a significant portion of our debt obligations are indexed to short-term interest rates and, therefore, would increase. However, the Company may, from time to time, enter into agreements with third parties that are designed to manage a portion of this risk.

We are exposed to various risks associated with agreements that we use to manage interest rate risk.

From time to time, we may execute agreements that are designed to reduce our interest rate risk. For example, we may enter into interest rate swaps whereby we agree to pay a fixed rate of interest and the counterparty agrees to pay us a floating rate of interest in order to synthetically fix our variable rate debt to better match assets that pay on a fixed rate basis. We also may enter into interest rate caps whereby we pay the counterparty an upfront premium and the counterparty pays us if the benchmark rate on the cap reaches a certain level. As further discussed above, derivative instruments are exposed to changes in fair value as a result of changes in interest rates. Additionally, interest rate swaps and caps expose the Company to the risk of counterparty default (including counterparty failure to meet its payment obligations). Further, there is a risk that these contracts do not perform as expected and may cost more than the benefits we receive. Moreover, in the case of interest rate swaps, we are exposed to the risk of collateral calls if the fair value of these instruments declines.

Virtually all of our non-cash assets are illiquid and may be difficult to sell at their reported carrying values.

Our renewable energy investments, bonds and other real estate-related investments are illiquid and difficult to value. Illiquid assets typically experience greater price volatility in volatile market conditions as validating pricing for illiquid assets is more subjective than more liquid assets. To the extent that we utilize leverage to finance our investments that are illiquid, the negative impact on us related to trying to sell assets in a short period of time for cash could be greatly exacerbated. If we need to liquidate all or a portion of our investments the price that we are able to realize may be significantly less than their carrying value in our financial statements, which could adversely impact our business, results of operations and financial condition.

Risks Related to Legislation, Regulations and Compliance

We could lose the tax benefit of our NOLs.

As of December 31, 2020, we had an estimated $358.9 million of federal NOLs that were subject to a partial valuation allowance. Our federal NOLs can be used to offset federal taxable income through 2035 at which time most of our NOLs will have expired if not used. However, there are events that could limit, or cause us to lose, the amount of NOLs available to us before that time. For example, our NOLs could be significantly limited in the event of a change of control event, as defined by the Internal Revenue Code. A change of control event may occur when a shareholder, or a collection of shareholders, owning at least five percent of our shares, acquire more than 50% of our outstanding shares within a three-year period. The Company adopted a Tax Benefits Rights Agreement on May 5, 2015 (the “Rights Plan”) as a measure to avoid a change of control event, although the Company cannot guarantee the effectiveness of the Rights Plan. Changes in tax laws could also cause us to lose, or could otherwise limit, the amount of NOLs available to us. On March 11, 2020,

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the Board of Directors (the “Board”) approved an extension of the original five-year term of the Rights Plan until May 5, 2023, or until the Board determines the plan is no longer required, whichever comes first. The shareholders ratified the Board’s decision to extend the Rights Plan at the Company’s 2020 annual meeting of shareholders.

Most of our NOLs are also subject to a 20-year carryforward limitation, which limits the time available to generate the income necessary to fully utilize our NOLs. In this regard, it is possible that some of our NOLs will not be utilized if the Company is unable to generate a sufficient amount of pretax book income before their expiration period begins in 2028. In this regard, should the Company assess that it is not more likely than not that it will utilize federal NOLs for which DTAs were recognized in its Consolidated Balance Sheets, an allowance would be established against the DTAs and a loss would be recognized in the reporting period in which the provision was made.

Our accounting policies and methods require management to make judgments and estimates about matters that are inherently uncertain.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. We are often required to apply accounting principles to complex transactions or fact patterns and apply judgment when interpreting such rules. In other cases, the application of these policies and methods involve the use of financial models to measure the fair value of certain assets and liabilities or produce other estimates that are reflected in our financial statements. Projections that are produced by such models are often based on assumptions and estimates that involve significant judgment and are inherently uncertain. In this regard, we have established procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. However, due to uncertainty surrounding management’s judgments, assumptions and estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements.

See Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and Notes to Consolidated Financial Statements – Note 1, “Summary of Significant Accounting Policies” for a description of our significant accounting policies and estimates.

Comprehensive tax reform and other legislation could adversely affect our business and financial condition.

The Tax Cut and Jobs Act of 2017 provides, among other things, for a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, which could adversely affect the market for tax credit investors to invest in solar tax credits that support our renewable energy investments. In addition, the government could make further changes in tax or other laws, such as the elimination of renewable energy tax credit incentive programs that while not directly affecting our portfolio, could make renewable energy investments less valuable to investors. For example, if tariffs on solar panels or other renewable energy components were increased, or if federal or state incentives were reduced or eliminated, our renewable energy business could be adversely affected. Congress could also pass laws or make changes in tax rates that make competing investments more attractive than our solar projects, which could also make our investments less valuable.

If we become subject to the Investment Company Act of 1940 (the “Investment Company Act”), we could be required to sell substantial portions of our assets at a time when we might not otherwise want to do so, and we could incur significant losses as a result.

We continuously monitor our business activities to ensure that we do not become subject to regulation as an investment company under the Investment Company Act. We currently rely on exemptions from the Investment Company Act for companies that are engaged primarily in the business of certain types of financing, including sales financing, based on our primary investments in loans related to the purchase and installation of renewable energy infrastructure. If we were to become regulated as an investment company under the Investment Company Act, either due to a change in the SEC’s interpretation of that Act or due to a significant change in the value and composition of our assets, we would be subject to extensive regulation and restrictions. Among other restrictions, we would not be able to incur borrowings, which would limit our ability to fund certain investments. Accordingly, either we would have to restructure our assets so that we would not be subject to the Investment Company Act or we would have to materially change the way we do business. Either course of action could require that we sell substantial portions of our assets at a time when we might not otherwise want to do so, and we could incur significant losses as a result. Any of these consequences could have a material adverse effect on our business, financial condition or results of operations.

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Risks Associated with Our Relationship with Our External Manager

We no longer have any employees and we are therefore dependent upon the External Manager to provide all of the services we need, including finding and underwriting suitable investments, conducting our operations and maintaining regulatory compliance.

Because we have no employees, we are dependent on the External Manager to find, underwrite and close suitable investments on our behalf and to conduct all of our operations. Although our former employees became employees of the External Manager, the External Manager is not obligated to require these, or any other, employees to devote their time exclusively to us. As a result, the employees may not devote sufficient time to the management of our business operations, and in particular to sourcing and placing investments with us. Further, the Management Agreement does not require the External Manager to dedicate specific personnel to our operations and none of our former employees’ continued service is guaranteed. If these individuals leave the External Manager or an affiliate thereof or are reallocated to other activities of the External Manager or its affiliates, the External Manager may be unable to replace them with persons with appropriate experience, or at all, and we may not be able to execute our business plan or maintain compliance with applicable regulatory requirements.

Various termination provisions in the Management Agreement, including termination by us without cause, require us to pay the External Manager a substantial termination fee, which could deter termination or adversely affect our results of operations.

The initial term of our Management Agreement extends to December 31, 2022 and, unless terminated, the Management Agreement automatically renews thereafter for successive two-year terms. Either party may elect not to renew the Management Agreement effective upon the expiration of the initial term or any automatic renewal term, both upon 12 months’ prior written notice. However, if we elect not to renew the Management Agreement on this basis, we are required to pay the External Manager a termination fee equal to three times the average annual management fee and incentive compensation earned by, plus one times the average annual amount of certain reimbursements received by, the External Manager during the 24-month period immediately preceding the effective date of termination, which could cause the termination fee to be substantial. These provisions may make it costly and difficult for us not to renew the Management Agreement. If we are required to pay the termination fee as a result of a termination, our results of operations and our shareholders’ equity will be adversely affected. The termination fee could also deter a third party who might be interested in purchasing the Company or depress the price they might be willing to pay.

If we terminate the Management Agreement without cause, we cannot hire the External Manager’s employees, including our former employees, which could make it difficult for us to conduct our operations following any such termination.

If we terminate the Management Agreement without cause, we may not, for a period of two years, without the consent of the External Manager, employ any employee of the External Manager or any of its affiliates, or any person who was employed by the External Manager or any of its affiliates at any time within the two-year period immediately preceding the date we hire such person. This restriction applies to all of our former employees except that, if we have paid the termination fee described above, we may hire persons serving in the capacity of Chief Executive Officer, Chief Operating Officer/President and Chief Financial Officer. The inability to hire the External Manager’s employees could make it more difficult for us to terminate the Management Agreement since we will need to find a new external manager or hire all new employees.

The fixed percentage component of the management fee payable to the External Manager is payable regardless of our performance.

The External Manager is entitled to receive a management fee from us that is based on a fixed percentage of our GAAP common shareholders’ equity, regardless of the performance of our investment portfolio. For example, we would owe the External Manager a management fee for a specific period even if we experienced a net loss during that period. The External Manager’s entitlement to a fee based on a fixed percentage of our GAAP common shareholders’ equity excluding the carrying value of DTAs may encourage the External Manager to invest in riskier assets in order to grow the equity base upon which the fee is paid and may reduce its incentive to find investments that provide appropriate risk-adjusted returns for our investment portfolio. Similarly, the incentive compensation payable to the External Manager is based on year-over-

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year increases in diluted common shareholders’ equity per share, which could also encourage the External Manager to invest in riskier assets.

External Manager’s liability is limited under the Management Agreement and we have agreed to indemnify the External Manager against certain liabilities.

Under the terms of the Management Agreement, the External Manager does not assume any responsibility other than to render the services called for thereunder in good faith and is not responsible for any action of our Board of Directors in following or declining to follow any advice or recommendations of the External Manager, including as set forth in the investment guidelines. Under the terms of the Management Agreement, the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders are not liable to us, our directors, shareholders or any subsidiary of ours, or their equity holders or partners for any acts or omissions performed in accordance with and pursuant to the Management Agreement, whether by or through attempted piercing of the corporate veil, by or through a claim, by the enforcement of any judgment or assessment or any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law, or otherwise, except by reason of acts or omissions constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. We have agreed to indemnify the External Manager and its affiliates and their respective directors, officers, employees, managers, trustees, control persons, partners, stockholders and equity holders with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from their acts or omissions not constituting bad faith, actual and intentional fraud, willful misconduct, gross negligence or reckless disregard of their duties under the Management Agreement. As a result, we could experience poor performance or losses for which the External Manager would not be liable.

Affiliates of the External Manager are engaged, or may engage, in similar businesses to ours and the External Manager may have conflicts of interest which could result in decisions that are not in the best interests of our shareholders.

We are subject to conflicts of interest arising out of our relationship with Hunt, including the External Manager and its affiliates. The External Manager may be presented with investment opportunities that we would find attractive, but which it offers instead to its affiliates, some of which are engaged in businesses similar to ours. The External Manager may also have economic or transactional interests that are inconsistent with or adverse to our interests. We and our External Manager have policies and procedures in place to address conflicts of interest, but there is no guarantee that the policies and procedures adopted by us, the terms and conditions of the Management Agreement or the policies and procedures adopted by the External Manager, will enable us to identify, adequately address or mitigate all potential conflicts of interest. These factors could adversely impact our ability to make investments with attractive risk-adjusted returns.

A breach of the security of our External Manager’s systems or those of other third parties with which we do business, including as a result of cyber-attacks, could damage or disrupt our business or result in the disclosure or misuse of confidential information, which could damage our reputation, increase our costs and cause losses.

Our business is reliant upon the security and efficacy of our External Manager’s information technology (“IT”) environment, as well as those of other third parties with whom we interact or upon whom we rely. Our business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in the computer and data management systems and networks of third parties, particularly our External Manager.

Our ability to conduct business may be adversely affected by any significant disruptions to our External Manager’s IT systems or to third parties with whom we interact or upon whom we rely. In addition, our ability to implement backup systems and other safeguards with respect to third-party systems is more limited than if those systems were our own. In the event that backup systems are utilized, they may not process data as quickly as needed and some data might not have been backed up.

As cyber threats continue to evolve, third parties with whom we interact or upon whom we rely, particularly our External Manager, may be subject to computer viruses, malicious codes, phishing attacks, unauthorized access and other cyber-attacks. Our External Manager may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to protect the integrity of systems and implement controls, processes, policies and other protective measures, third parties with whom we interact or upon whom we rely, particularly our External Manager, may not be able to anticipate all

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security attacks or to implement appropriate preventive measures against security breaches. Any security breach or unauthorized access could disrupt our operations, result in the loss of assets or harm our reputation. In addition, any of these events could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to Ownership of Our Shares

Our shares are thinly traded and, as a result, the price at which they trade may not reflect their full intrinsic value.

Although our shares are listed for trading on the Nasdaq Capital Market and are currently included in the Russell 2000 index, our shares remain thinly traded and any change in our representation in the Russell 2000 index may further reduce liquidity which could, in turn, adversely affect our share price. At this time, we do not have analysts actively tracking and publishing opinions on the Company and our stock, which may cause declines in trading volume or our share price due to limited visibility in the financial markets. Additionally, when we have repurchased our shares, the number of shares outstanding is reduced, which has the effect over time of further decreasing the trading volume of our shares. Accordingly, the trading price of our shares may not reflect their full intrinsic value. Since our shares are thinly traded, we can give investors no assurance that they will be able to sell their shares at market prices or at any price at all if they desire to liquidate some or all of their shares in the Company.

Our Rights Plan could depress our share price.

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. By discouraging acquisitions of greater than a 4.9% stake in the Company, the Rights Plan might limit takeover opportunities and, as a result, could depress our share price. At December 31, 2020, we had two shareholders, including one who is Chairman of the Board and our former Chief Executive Officer, Michael L. Falcone who held greater than a 4.9% stake in the Company. The Board named Mr. Falcone an exempt person in accordance with the Rights Plan. The Board determined that Mr. Falcone’s exercise of his options and the required share purchases did not constitute a triggering event for purposes of our Rights Plan. In accordance with the Master Transaction Agreement dated January 8, 2018, Hunt remains an exempt person for purposes of the Rights Plan and may purchase up to 9.9% of the Company’s shares in any rolling 12-month period, without causing a triggering event.

As a smaller reporting company and non-accelerated filer within the meaning of the Exchange Act, we utilize certain modified disclosure requirements, and we cannot be certain if these reduced requirements will make our common shares less attractive to investors.

We are a smaller reporting company within the meaning of the rules under the Exchange Act. We have in this Report utilized, and we plan in future filings with the SEC to continue to utilize, certain reduced disclosure requirements available to smaller reporting companies, including but not limited to, reduced comparative financial statements and related disclosure in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” disclosure about our executive compensation, including the omission of a compensation discussion and analysis; and quantitative and qualitative disclosure about market risk. In addition, as a smaller reporting company we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to utilize this extended transition period applicable to smaller reporting companies. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards as they become applicable to public companies.

Furthermore, as a non-accelerated filer we are no longer subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the additional testing of our internal control over financial reporting as may occur when our independent registered public accounting firm attests as to the effectiveness of our internal control over financial reporting. As a result, our shareholders may not have access to certain information they may deem important.

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We cannot predict if investors will find our common shares less attractive because we will rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our stock price may be more volatile.

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Provisions of our Certificate of Incorporation may discourage attempts to acquire us.

Our Certificate of Incorporation contains at least three groups of provisions that could have the effect of discouraging people from trying to acquire control of us. Those provisions are:

The above provisions could deprive our shareholders of acquisition opportunities that might be attractive to many of them.

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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 4 provides Consolidated Balance Sheets for the periods presented.

Table 4: Consolidated Balance Sheets

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Cash and cash equivalents increased primarily due to the Company’s financing activities. Refer to the summary of cash flows within the “Liquidity and Capital Resources” section of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.  

Restricted cash increased primarily as a result of cash collateral required by our counterparty in connection with the financing transaction involving the Company’s Infrastructure Bond investment.

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Investments in debt securities decreased primarily due to principal payments received on the Company’s Infrastructure Bond investment during the year ended December 31, 2020.

Investments in partnerships increased primarily as a result of net capital contributions of $34.4 million that we made to the Solar Ventures and the recognition of $39.6 million of equity in income of our investees. The impact of these items was partially offset by the effects of (i) $12.7 million of impairment losses recognized for the year ended December 31, 2020, related to our equity investment in the SF Venture; and (ii) a distribution from SAWHF of 7.2 million common shares of a listed residential REIT that reduced the book value of our equity investment in such fund by $2.9 million.

Deferred tax assets, net increased $1.4 million primarily due to a partial release of the valuation allowance related to these assets in 2020 that was driven by an increase in the Company’s forecast of pretax book income based on updates to assumed future investment returns and other assumptions.

Loans held for investment decreased primarily due to the repayment of the Company’s $53.6 million loan receivable from Hunt (the “Hunt Note”) on January 3, 2020.

Other Assets increased primarily as a result of $7.1 million of land improvement costs that were capitalized in connection with a real estate investment that is in process of development and the aforementioned distribution from SAWHF of REIT common shares.

Debt increased primarily as a result of proceeds received in the second quarter of 2020 related to the financing transactions involving the Company’s Infrastructure Bond investment and direct investment in real estate.  Additional amounts drawn on our revolving credit facility during the year ended December 31, 2020, was also a contributing factor.  

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Table 6: Equity in Income from Unconsolidated Funds and Ventures

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Equity in income from the Solar Ventures for the year ended December 31, 2020, increased compared to that reported for the year ended December 31, 2019, primarily as a result of an increase in both the amount of equity contributed into the Solar Ventures and weighted-average UPB of loans made by the Solar Ventures. However, as further discussed in Part I, Item 1. “Business,” the amount of equity in income of the Solar Ventures that will be recognized in the first quarter of 2021 is expected to be adversely impacted by losses borne by the Solar Ventures in connection with various advances and other loss mitigation actions taken by the Solar Ventures.

Equity in income from U.S. real estate partnerships for the year ended December 31, 2020, increased compared to that reported for the year ended December 31, 2019, primarily due to the recognition of nonrecurring net income at the SF Venture in the fourth quarter of 2020 that stemmed primarily from the termination of a lease with an anchor tenant, which accelerated the amortization of a below-market lease intangible liability into rental income. We anticipate that we will continue to recognize equity in losses from the SF Venture for the foreseeable future.

Equity in income from the Company’s equity investment in SAWHF for the year ended December 31, 2020, increased compared to that reported for the year ended December 31, 2019, primarily as a result of an increase in the amount of fair value gains recognized by SAWHF in connection with its investment holdings.

Net (Losses) Gains

Net (losses) gains 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 losses for the year ended December 31, 2020, compared to net gains reported for the year ended December 31, 2019, primarily due to nonrecurring gains of $28.6 million that were recognized in 2019 in connection with the sale or redemption of bond investments.

Other Interest Expense

Other interest expense for the year ended December 31, 2020, increased compared to that reported for the year ended December 31, 2019, primarily due to the recognition of a full year of interest expense in 2020 associated with advances on the Company’s revolving credit facility. The increase in interest expense was partially offset by a reduction in interest expense associated with subordinated debt that was attributable to a decrease in three-month LIBOR.

Impairment Losses

Impairment losses for the year ended December 31, 2020, were attributable to the Company’s equity investment in the SF Venture, which was determined to be other-than-temporarily impaired at June 30, 2020, and December 31, 2020.

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.

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Table 7 summarizes operating expenses for the periods presented.

Table 7: Operating Expenses

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Operating expenses for the year ended December 31, 2020, increased compared to that reported for the year ended December 31, 2019, primarily due to: (i) an increase in the amount of compensation-related expense reimbursements that were payable to the External Manager as the reimbursement cap increased by $1.0 million for 2020; (ii) an increase in general and administrative expense associated with director fees that stemmed from the addition of two independent directors during the first quarter of 2020 and our former Chief Executive Officer becoming a non-employee director during the third quarter of 2020; and (iii) an increase in legal and consulting fees associated with business strategy and related matters.

Income Tax Benefit

Income tax benefit for the year ended December 31, 2020, decreased compared to that reported for the year ended December 31, 2019, primarily due to a decrease in the magnitude of recognized releases of the DTA valuation allowance.

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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 used in investing activities during the year ended December 31, 2020 decreased $93.4 million compared to such net cash flows during the year ended December 31, 2019. This net decrease was primarily driven by: (i) a $100.6 million increase in capital distributions received from the Company’s investments in partnerships during 2020 that almost exclusively related to the Solar Ventures; (ii) the full repayment of the $53.6 million Hunt Note during the first quarter of 2020, which represented a $9.4 million increase in net principal payments received in 2020 as compared to the amount of bond-related sales proceeds and Hunt Note principal payments received in 2019; and (iii) an $11.0 million decrease in cash used for advances on, and originations of, loans held for investment. The effects of these items were partially offset by a $25.5 million increase in 2020 in capital contributions to the Company’s investments in partnerships that primarily related to the Solar Ventures.

Financing Activities

Net cash flows provided by financing activities during the year ended December 31, 2020 decreased $48.0 million compared to such net cash flows during the year ended December 31, 2019. This decrease was primarily attributable to an $85.3 million decrease in net advances from the revolving credit facility in 2020. This decrease was partially offset by: (i) $33.0 million of proceeds associated with second quarter 2020 financing transactions associated with the Company’s Infrastructure Bond investment and direct investment in real estate that is in process of being developed; (ii) a $2.7 million decrease in cash used during 2020 to repurchase the Company’s common shares; and (iii) a $2.2 million decrease in debt issuance costs incurred in 2020 associated with debt issuances in the second quarter of 2020 as compared to such costs incurred in 2019 in connection with the revolving 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 6, “Debt,” for more information.

Table 9 summarizes the carrying values and weighted-average effective interest rates of the Company’s debt obligations that were outstanding at December 31, 2020 and December 31, 2019.

Table 9: Debt

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Subordinated Debt

At December 31, 2020 and December 31, 2019, the Company had subordinated debt obligations that had a total UPB of $86.3 million and $88.0 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 December 31, 2020 the weighted average interest pay rate on the outstanding debt was 2.2%.

Revolving Credit Facility Debt Obligations

At December 31, 2020 and December 31, 2019, MEH, a wholly owned subsidiary of the Company, had borrowed $103.7 million and $94.5 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 December 31, 2020 was 4.25%.

Notes Payable and Other Debt

At December 31, 2020 and December 31, 2019, the Company had notes payable and other debt with a UPB of $17.9 million and $8.4 million, respectively.

At December 31, 2020 and December 31, 2019, $4.0 million and $6.8 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 December 24, 2021, and requires the Company to pay interest based upon the Johannesburg Interbank Agreed Rate (“JIBAR”) plus a fixed spread of 5.15%. At December 31, 2020, the interest rate on this debt was 8.7%.

At December 31, 2020 and December 31, 2019, $4.3 million and $1.5 million, respectively, 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.

On June 1, 2020, the Company entered into a $10.0 million construction loan that is secured by our direct investment in real estate that is in the process of development. The initial advance from this debt was $9.3 million and $0.5 million of capacity has been reserved for interest payments. The total amount advanced by the lender will not exceed 65% of the value of the pledged real estate plus 75% of the total development allowable hard costs incurred by the borrower. The loan is prepayable at any time without penalty, with all net proceeds realized from the sale of any portion of the real property required to be used to repay the outstanding UPB of the loan. Construction draws may not exceed a total principal sum of $11.1 million over the life of the facility, with the maximum outstanding UPB at any point in time not to exceed $10.0 million. 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. Obligations associated with this debt are guaranteed by the Company. At December 31, 2020, this debt obligation had a carrying value of $9.4 million.

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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Bond Related Debt

On June 5, 2020, the Company entered into a TRS agreement involving our Infrastructure Bond, which was sold concurrently to our TRS counterparty. Proceeds received in connection with the conveyance of such bond investment were reported as a secured borrowing. 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 December 31, 2020, was 2.5%. These payment terms are used to accrue interest expense related to the secured borrowing that was recognized upon conveyance of the Company’s bond investment. Additionally, as required under the terms of the TRS agreement, the Company pledged cash collateral of $10.0 million representing 37.5% of the referenced bond’s UPB. At December 31, 2020, this debt obligation had a UPB of $23.3 million. Additionally, under the terms of the TRS, 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.

Non-bond Related Debt

At December 31, 2019, the Company had a debt obligation to MGM Principals with a UPB of $3.5 million. Upon the full redemption of the Hunt Note on January 3, 2020, this asset related debt obligation to the MGM Principals was reclassified to notes payable and other debt.

Covenant Compliance

At December 31, 2020 and December 31, 2019, the Company was in compliance with all covenants under its debt arrangements.

Off-Balance Sheet Arrangements

At December 31, 2020 and December 31, 2019, 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 December 31, 2019, the Company, through its wholly owned subsidiary REL, had unfunded loan commitments of $1.6 million. On December 30, 2020, this loan was repaid in full. Refer to Notes to Consolidated Financial Statements - Note 4, “Loans Held for Investment (“HFI”)” 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 7, “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 December 31, 2020, 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. On March 11, 2020, the Board named Mr. Falcone an exempted person in accordance with the Rights Plan for open-market share purchases of up to an additional 7,500 common shares made on or before December 31, 2020, with the Board reserving all of its rights under the Rights Plan for any subsequent purchase. 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” of this 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:

Income Taxes

All of our business activities, with the exception of our foreign investments, are conducted by entities included in our consolidated corporate federal income tax return. To determine the financial statement impact of accounting for income taxes, including the provision for income tax expense and unrecognized tax benefits, the Company must make assumptions and judgments about how to interpret and apply these complex tax laws to numerous transactions and business events, as well as make judgments regarding the timing of when certain items may affect taxable income in the U.S. and non-U.S. tax jurisdictions.

Our interpretations of tax laws are subject to review and examination by the various taxing authorities in the jurisdictions where we operate, and disputes may occur regarding our view on a tax position. These disputes over interpretations with the various taxing authorities may be settled by audit, administrative appeals or adjudication in the court systems of the tax jurisdictions in which we operate. We regularly review whether additional income taxes may be assessed as a result of the resolution of these matters, and we record additional reserves as appropriate. In addition, we may revise our estimate of income taxes due to changes in income tax laws, legal interpretations, and business strategies. It is possible that revisions in our estimate of income taxes may materially affect our results of operations in any reporting period.

The Company’s provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. DTAs are recognized if, in management’s judgment, it is more likely than not that tax benefits, including NOLs and other tax attributes, will be realized prior to their expiration.

We perform regular reviews to ascertain whether our DTAs are realizable. These reviews include management’s estimates and assumptions regarding future taxable income, which also incorporates various tax planning strategies, including strategies that may be available to utilize NOLs before they expire. In connection with these reviews, if it is determined that a DTA is not realizable, a valuation allowance is established. Management’s estimates and assumptions, which generally reflect objectively verifiable expectations, involve significant judgment and are inherently uncertain. Risks to our forward-looking estimates of pretax book income include, but are not limited to, changes in market rates of return, additional competitors entering the marketplace (which would reduce rates of return due to competition for new borrowers), limits on access to investible capital that would limit new investments that could be made by the Company, changes in the law and the Company’s dependence on a small, specialized team of the External Manager for origination and underwriting activities. Given these risks, our forward-looking estimates could materially differ from actual results.

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At December 31, 2020, we maintained a valuation allowance against that portion of our DTAs that relate to federal and state NOL carryforwards that we expect will expire prior to utilization based on our forecast of pretax book income. Refer to Notes to Consolidated Financial Statements – Note 14, “Income Taxes,” for more information about the Company’s DTAs and other considerations associated with the Company’s income taxes.

Fair Value Measurement of Financial Instruments

Fair value measurement is a critical accounting estimate because we account, or provide disclosures, for a portion of our assets and liabilities based upon their fair value. The techniques that we use to determine fair value are described in Notes to Consolidated Financial Statements – Note 8, “Fair Value.”

Applicable accounting standards that govern fair value measurements provide a framework for measuring fair value and establishes a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based on the assumptions a market participant would use at the measurement date. The three levels of the fair value hierarchy are described below:

The measurement of fair value requires management to make judgments and assumptions. The type and level of judgment required is largely dependent on the amount of observable market information available to the Company. For instruments valued using internally developed valuation models and other valuation techniques that use significant unobservable inputs and are therefore classified within level 3 of the valuation hierarchy, judgments used to estimate fair value are more significant than those required when estimating the fair value of instruments classified within levels 1 and 2. These judgments and assumptions may have a significant effect on our measurements of fair value, and the use of different judgments and assumptions, as well as changes in market conditions, could have a material effect on our Consolidated Statements of Comprehensive Income and Consolidated Balance Sheets.

In arriving at an estimate of fair value for an instrument within level 3, management must first determine the appropriate valuation technique to use. Second, the lack of observability of certain significant inputs requires management to assess all relevant empirical data in deriving valuation inputs including, for example, market yields of thinly-traded investments, capitalization rates and NOI annual growth rates.

For further discussion of the valuation of level 3 instruments, including unobservable inputs used, refer to Notes to Consolidated Financial Statements – Note 8, “Fair Value.”

Imprecision in estimating unobservable market inputs or other factors can affect the amount of gain or loss recorded for a particular position. Furthermore, while we believe that our valuation methods are appropriate and consistent with those of other market participants, the methods and assumptions used reflect management judgment and may vary across the Company’s businesses and portfolios.

Consolidation

We have equity investments in partnerships and other entities to which we apply Accounting Standards Codification (“ASC”) Topic No. 810, “Consolidation” in order to determine if we need to consolidate any of these entities. There is considerable judgment in assessing whether to consolidate an entity under these accounting principles. Some of the criteria we are required to consider include:

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As of December 31, 2020, the Company had no entities that were consolidated for reporting purposes under ASC  810.

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

Table 10:  Non-GAAP Reconciliations

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Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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assessing the Company’s ability to generate sufficient future taxable income of the appropriate character. Specifically, performing procedures to assess management’s assumptions of projected future taxable income and expected utilization of net operating losses required subjective auditor judgment and the involvement of tax professionals with specialized skills and knowledge.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and implementation of certain internal controls related to the Company’s deferred tax asset valuation allowance process. This included controls related to the development of projected future taxable income, utilization of net operating losses, and the application of the relevant tax regulations. We assessed the likelihood of the Company’s ability to use its deferred tax assets associated with the Company’s net operating losses in the future by evaluating projected future taxable income and cumulative net operating losses. We also investigated any changes to the valuation allowance related to the Company’s net operating loss deferred tax assets that occurred during the year by comparing previous projections of future taxable income to actual results. We involved federal and state income tax professionals with specialized skills and knowledge, who assisted in assessing the Company’s application of the relevant tax regulations and evaluating the realizability of deferred tax assets associated with the Company’s net operating losses.

We have served as the Company’s auditor since 2006.

Baltimore, Maryland
March 31, 2021

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