Guardant Health, Inc. Q3 FY2020 Earnings Call

Good day, ladies and gentlemen, and thank you for being here. Welcome to the Third Quarter 2020 America First Multifamily Investors, L.P. Earnings Conference Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mr. Chad Daffer. Thank you. Please go ahead, sir.

Thank you, Howard. Good afternoon, and welcome to the America First Multifamily Housing Investors third quarter 2020 earnings call. With me today is ATAX's Chief Investment Officer, Ken Rogozinski; and ATAX's Chief Financial Officer, Jesse Coury. Both gentlemen will present the results of the Partnership for the third quarter. Upon completion, we'll look forward to taking your questions. At this time, I'd like to turn the call over to Chief Investment Officer, Ken Rogozinski. Ken?

Thank you, Chad. The third quarter of 2020 continued the trend of back to normal in the market for municipal bonds. As noted in our last two quarterly discussions, for the two weeks ended March 26, 2020, investors withdrew almost $26 billion from municipal bond mutual funds, according to Refinitiv Lipper data, an unprecedented level of activity. The normalization of the muni bond market has continued through the third quarter and into October. As of October 30, 2020, municipal bond mutual funds had seen 23 of 24 weeks of positive inflows, with the latest observation being a weekly inflow of approximately $600 million. This string of positive fund flows has overcome the March redemptions to the point where, on a year-to-date basis, fund flows are now a net positive by approximately $12 billion. Municipal Market Data's high-grade muni bond scale reached all-time low yields in mid-August, with the 10-year at 0.59% and the 30-year at 1.28%. At the same time, the Bond Buyer's general obligation 20-bond index reached the lowest yield level that it's seen since the end of the Truman administration. After those mid-summer yield lows, munis followed the move wider in rates that was seen in the broader fixed income markets, as uncertainty continued around the economic impact of COVID-19. As of October 30, 2020, the 10-year MMD rate was at 0.93%, and the 30-year MMD rate was at 1.71%. Since we are still in a relatively low-interest rate environment, we continue to be mindful of the absolute level of rates where we can originate new fixed income investments. We have continued to focus on shorter-duration investments where matched funding is more readily available and hedging is less costly. In terms of our debt investment activity for the third quarter, we were successful in making additional investments through new originations. We closed two additional shorter-term construction financing transactions with one of the largest and most active affordable housing developers in the country. The shorter maturity of these investments, at three years, changes the interest rate risk profile versus our historic portfolio. And by matching floating-rate assets with a matched-term floating-rate funding source, we are able to earn an acceptable net spread on the position. We also closed on a more traditional construction permanent bond structure for a new low-income housing tax credit project in California, plus a forward commitment for permanent financing on a second California LIHTC transaction. In terms of our current portfolio of Vantage investments, we have seen no delays in terms of construction activity or material supply chains for the six projects that are still under construction. For the four projects where construction is 100% complete and lease-up to stabilization is occurring, we have continued to see positive leasing activity at all projects. The managing member of each project is continually monitoring leasing activity and rent growth in order to determine the optimal time to list the projects for sale. During the third quarter, we made one new Vantage equity investment in a project located in Tomball, Texas, outside of Houston. We will also continue to monitor our existing investment portfolio for the potential impact of changes in the economy caused by the COVID-19 pandemic. To date, we have not received any forbearance requests for principal and interest payments from our multifamily MRB borrowers. However, we are assessing potential forbearance options for the MRB associated with the Live 929 student housing project located adjacent to the Johns Hopkins University Medical School campus. They are experiencing a lower-than-normal occupancy rate due to the impact of COVID-19 on the university's teaching models. With regard to the Pro Nova project, the bond trustee has retained an operational consultant as well as an accounting firm to review the current status of the project and make recommendations to the bondholders. That process is ongoing. Finally, we will continue to look to strategically work with our strongest sponsors on new investment opportunities where traditional sources of capital may not currently be available.

Thank you, Ken. For the third quarter of 2020, we reported total revenues of approximately $13.8 million, compared to $14.9 million for Q3 2019. Net loss per Beneficial Unit Certificate, or BUC, basic and diluted, was $0.03 per BUC, compared to a net income of $0.07 per BUC in Q3 2019. Our cash available for distribution, or CAD, was $0.06 per BUC for the current quarter, compared to $0.20 per BUC in Q3 2019. The net loss for Q3 2020 is due to a $3.5 million impairment of the Live 929 Apartments mortgage revenue bond and an $811,000 loan loss allowance for a Live 929 Apartments property loan. As Ken mentioned, we're considering forbearance requests related to that property due to continued covenant forbearance and a decline in debt service coverage that has been exacerbated by the impacts of COVID-19. Consistent with our CAD policy, such noncash impairments are added back in the calculation of CAD, as management will work to recover such impairments through future management of the assets. On a year-to-date basis, we reported total revenues of $42.1 million in 2020, compared to $46.9 million for 2019. Net income per BUC, basic and diluted, was $0.07 per BUC, compared to $0.26 per BUC in 2019. And CAD of $0.20 per BUC in 2020 compared to $0.39 per BUC in 2019. In terms of our investments, ATAX reported over $1.17 billion in total assets as of September 30, 2020. Our assets are primarily comprised of our three main investment classes: the first being our net spread portfolio; the second, our Vantage investments; and third, our MF Properties investments. Our net spread portfolio is primarily comprised of our mortgage revenue bonds, or MRBs, and governmental issuer loan investments. As of September 30, 2020, our mortgage revenue bonds totaled approximately $796 million, or 68% of total assets. This number represents 77 individual mortgage revenue bonds across 13 states. We hold significant amounts of MRBs related to properties located in Texas, at 43% of our total MRBs; California, at 17%; and South Carolina, at 17%. As Ken mentioned, we acquired one MRB in the third quarter related to a 75-unit affordable multifamily property in Brawley, California, and we have provided a forward commitment to provide permanent financing to a 45-unit seniors multifamily property in San Diego, California. As of September 30, 2020, we had investments in three governmental issuer loans to finance the construction, lease-up and stabilization of affordable multifamily properties in Midland, Texas; Roseville, Minnesota; and Centennial, Colorado. The governmental issuer loans are functionally equivalent to our MRBs in that they are nonrecourse obligations issued by governmental authorities secured by a mortgage on the property of an affordable multifamily project, and we expect and believe the interest earned on governmental issuer loans to be exempt from federal income tax. At September 30, the three governmental issuer loans had a total carrying value of approximately $62 million, and we had outstanding commitments to fund additional proceeds of approximately $45 million during the remainder of construction. All of our MRBs and governmental issuer loans were current on contractual principal and interest payments through October 2020. As Ken mentioned, to date we have received no forbearance requests of principal and interest related to MRBs and governmental issuer loans associated with multifamily properties. However, we have received forbearance requests related to the student housing MRB of Live 929 Apartments and a forbearance request related to our sole commercial property MRB, called Pro Nova, which is a proton therapy cancer center in Knoxville, Tennessee. As of September 30, 2020, we had investments in unconsolidated entities, commonly referred to as our Vantage investments, related to 10 market-rate multifamily projects. Our carrying value of these investments was approximately $99.2 million. These projects represent in the aggregate almost 2,900 rental units, with the 10 current projects being five in Texas, two in Nebraska, two in Tennessee, and one in South Carolina. As of September 30, six projects were completed and in lease-up, and four were under construction. All projects in lease-up have achieved increasing occupancy during the third quarter of 2020. For those under construction, there have been no material delays or disruptions on construction due to COVID-19. Since our first Vantage investments in late 2015, six of ATAX's Vantage investments have been sold or redeemed, resulting in total gain on sale and contingent interest of approximately $27 million for the benefit of our unitholders, providing proof of concept of the Vantage investment strategy. As of September 30, 2020, we own two MF Properties, consisting of 859 units, with a total net carrying value of approximately $60 million. Both properties serve primarily college students, which, as we have previously noted, has been more significantly impacted by COVID-19 than the general multifamily housing market. The 50/50 MF Property primarily serves students at the University of Nebraska-Lincoln, which is currently holding on-campus and in-person classes. The property is approximately 86% occupied as of September 30 and is meeting all mortgage and operating obligations with cash flow from operations. The Suites on Paseo MF Property primarily serves students at San Diego State University, which has suspended on-campus in-person classes for the fall 2020 and spring 2021 semesters. The property is 64% occupied as of September 30 and is meeting all operating obligations with cash flows from operations. The property has no debt obligations at this time. Moving to the liability side of our balance sheet, our debt financing associated with mortgage revenue bonds and governmental issuer loans totaled approximately $667 million as of September 30, 2020. In July 2020, we extended the maturity dates of 10 of our variable-rate TOB Trust financings that were set to mature in 2021 to July of 2023. These extensions provide us with longer-term liquidity commitments, with no change in interest rate terms. Also, in July 2020, we extended the maturity of our two lines of credit with Bankers Trust. One is an unsecured acquisition line of credit of $50 million, which provides a short-term source of funding for our investments. The second is an unsecured operating line of credit totaling $10 million. Both lines of credit were extended to June of 2022. Our most significant debt financing transaction during the third quarter was the issuance of approximately $103 million of secured notes to Mizuho that are secured by the cash flows from our residual interest in the TEBS financings with Freddie Mac. Our TEBS financing arrangements allocate all underlying bond principal received to senior certificates, such that they have delevered below our target leverage ratios. The secured notes transaction has allowed us to right-size our leverage on the assets in the TEBS financings. We entered into two total return swaps related to the secured notes, which essentially bifurcates our $103 million in loan proceeds into two tranches. The first tranche, currently at $40 million, provides unrestricted cash at 65% of the tranche total, or approximately $25 million. The remaining 35% of proceeds is posted as collateral against our total return swap obligation, which reduces our effective variable interest rate, which is currently at 4.25%. The second tranche, currently at approximately $63 million, is essentially a 100% collateralized line that allows us to obtain additional liquidity if and when needed. The second tranche has a variable fee, currently at 1% per year. Through March of 2022, we have the option to reallocate funds from the second tranche to the first tranche and obtain unrestricted cash at 65% of the reallocated amount. As of September 30, 2020, we have received unrestricted cash proceeds totaling approximately $25 million and can obtain additional unrestricted proceeds of approximately $41 million by exercising our reallocation options. In total, debt financings have a total outstanding principal balance of $670 million as of September 30. Of this amount, approximately 45% is fixed rate debt and 55% is variable rate. Of our $368 million of variable-interest debt financing, approximately $62.5 million is secured by investments that also have variable interest rates, such that we are at least partially hedged against rising interest rates without the need for separate hedging instruments such as interest rate caps or swaps. During the last few quarters, we have migrated to more variable-rate debt due to lower short-term interest rates and favorable financing terms available on a variable-rate mode through Mizuho. We regularly monitor our exposure to increases in interest rates through our interest rate sensitivity analysis, which is included on Page 69 of our 10-Q. The analysis shows the impact of our net interest income given various scenarios of changes in market interest rates, and these scenarios assume that there is an immediate rise in interest rates and that we do nothing in response for 12 months. The analysis based on those assumptions shows that an immediate 200-basis point increase in rates that is sustained for a 12-month period will result in a decrease of approximately $3.4 million in our net interest income and CAD. This decrease is approximately $0.055 per BUC over a 12-month period. Lastly, we regularly provide our net book value per BUC, which as of September 30 was $5.97 per BUC. This is up approximately 4% from our net book value per BUC of $5.75 as of June 30, with the increase primarily due to an increase in the value of our mortgage revenue bond portfolio due to generally lower market interest rates. At September 30, 2020, the closing market price of our BUCs on the NASDAQ was $4.05 per BUC, which is a discount to our book value of approximately 32%. With that, we're happy to take questions from the audience.

Our first question or comment comes from Jason Stewart from JonesTrading.

I was wondering if you could comment on your view on the sponsorship behind commercial real estate and who you're backing and how they're viewing potential properties that perhaps don't meet the NOI coverage.

Thank you, Jason. We've been fortunate over the last nine months to have a clear understanding of the quality of our sponsors and partners. The assets have performed better than anyone could have expected back in March. We are benefiting from the location of our assets and our relationships in certain markets. We have significant exposure to Texas and California, primarily in the affordable or market-rate sectors, where these markets have continued to perform well due to job growth and strong conditions. We've had several discussions about forbearance, but we haven't had anyone truly request it. The concerns in the multifamily marketplace are related to larger, high-cost markets, where people are relocating from cities to areas where we're active due to the ability to work remotely. There are some near-term challenges until vaccines and supplemental programs are available for those struggling. However, in the long term, which we define as six to twelve months, we anticipate benefiting from the migration away from high-cost urban areas to markets where we are more heavily invested. We're receiving positive feedback from our Vantage partners regarding increased on-site traffic at the properties, likely due to people leaving large metropolitan areas on each coast. While we are closely monitoring delinquencies, occupancies, and traffic, and we share the common concerns in the asset class, we believe that in the long run this could be a positive development for our portfolio.

I think that perhaps one of the misunderstood benefits is the partnerships that you do have on that side. So that's great to hear. And then secondly, on Live 929, I don't think it's any surprise that there are some struggles there. But could you walk us through what it looks like if we have to go through a workout there?

Jason, I'm going to let Ken take this. Ken has been actively involved in working with the folks on the ground, both the issuer and the sponsor. Ken, do you want to walk Jason through your efforts, if you would, please, on 929?

Sure, Chad. So Jason, in that circumstance, the MRB that ATAX owns is secured by a first mortgage lien on the student housing property located there in Baltimore by the Johns Hopkins Medical campus. So as both Jesse and I mentioned, we're currently in discussions with the project owner about the possibility of entering into a forbearance agreement, beyond the debt service coverage forbearance that we did earlier this year, to potentially defer some principal payments due in order for them to keep interest current on the bonds from the current level of operational cash flow that the project has been generating. So that's sort of our goal, is to keep operations as close to normal as possible, work closely with the project sponsor and our third-party management company to maximize the operation of the project, do what we can to help with leasing activity and managing expenses there and get to a place where we've got a level of NOI and cash flow at the property that can service as much of the debt as feasible. So that's our plan for the short term in terms of at least getting through the fall of next year when it comes time for lease renewal and turnover, as you see at most student housing properties, with their lease year sort of starting in the August timeframe. Hopefully, by that point in time, we'll have some improvements on the COVID front and a better understanding of what the Johns Hopkins teaching model is going to be for that academic year.

Right. Okay. And I share the hope on that one. My last question, then I'll duck out of the queue, it seems like there's some progressive momentum on the Greystone partnership for loan originations. So if there's anything you can share on that front, it would certainly be appreciated.

Jason, I think we're just over a year into the transition to our new general partner. I think we're really starting to see traction with... we went from a couple of guys originating to over 100. I think some of the new product development, along with the relationships that the Greystone originators have, are really starting to bear fruit. Access to best-in-class developers, having the ability to be creative with big balance sheet guarantors is going to bear fruit for not only 2021 but many years to come, Jason.

Our next question or comment comes from Jon Baum from America First.

Actually, a private investor. Guys, I know you are working through COVID, like everybody else, right now. A quick one here. As you wrap your arms around your exposure to potential forbearance and as it relates to COVID-19, what inning in the baseball game are you at here, do you think? Are we in the seventh, eighth inning as far as what you can project for what the impact is going to be to the P&L?

I think there's a three-part answer there, and I'm going to try to be quick. So first of all, I think the time that has been spent over the last nine months on achieving a vaccine has been crucial. I think that we're going to be challenged until there's a vaccine. That said, I think that the assets in the portfolio have outperformed all expectations to date. I think we will continue to see strong performance out of our multifamily housing portfolio. I think the student housing assets will be based on the decisions made by the higher-ed group on campus, as far as on-campus or hybrid type of learning delivery. And the Vantage assets are doing exceptionally well. We continue to see great traffic, good lease-up numbers. We monitor rental achievement, absorption, exit rate comps, cap rates, and all those metrics look to be pretty consistent with our underwriting when we put the trades on the balance sheet here a few years back or even last year. So I think we're better than we thought we were going to be. The two things that I think we're concerned about, obviously, is when is the vaccine going to be available to the masses and we can take the concerns about federal, state and local governments allowing for forbearance, preventing evictions. And those types of concerns are not going to go away until we have, I think, and this is my speculation, a vaccine in place that the marketplace can recognize. But as your baseball analogy, I think we're probably in a seventh-inning stretch, waiting to see what the bounce in new cases in COVID looks like and greater detail on when the vaccine is going to be available. But I think everybody on this call, both management and the investor community, are pleasantly surprised, and our expectations have been exceeded by the asset performance on the balance sheet today.

I agree with that. You all have done exceptional work with the quality of the assets during this challenging period. I also share your view that we’re closer to the end of this situation than the beginning, and I hope it’s soon. One last question. We may have talked about this before, but do you have authorization to repurchase the BUCs? If so, what’s the plan, considering there's a significant discount to book value at the moment? I haven’t had a chance to review the Q, but what’s the situation regarding the repurchase of BUCs at this discount?

The Limited Partnership does allow for repurchase of outstanding BUCs. To date, we've had no discussions with our Board to authorize such a transaction. As long as the management team continues to be able to see opportunities that we feel are accretive to the current portfolio of assets and can raise capital to fund those opportunities, we will continue to try and grow the platform, diversify the credit risk and create opportunities for us to grow and create share value for our investors.

Well, that's obviously the reason why we invested. Again, good work guys. And hopefully, we're going to see the end of this pandemic pretty soon and on to brighter days.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.