Greystone Housing Impact Investors LP Q2 FY2020 Earnings Call

I would like to welcome everyone to America First Multifamily Investors L.P., NASDAQ ticker symbol ATAX, Second Quarter 2020 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q2 2020, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded. On behalf of ATAX and its management team, thank you and welcome to ATAX's Second Quarter of 2020 Earnings Conference Call. During this conference call, comments made regarding ATAX, which are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend, focus and other similar terms. You are cautioned that these forward-looking statements speak only as of today's date. Changes in economic, business, competitive, regulatory and other factors, including the impact of the COVID-19 pandemic could cause ATAX's actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact ATAX's business, please review the periodic reports and other documents filed from time to time by ATAX with the Securities and Exchange Commission. Internal projections and beliefs upon which ATAX bases its expectations may change, but if they do, you will not necessarily be informed. Today's discussion will include non-GAAP measures and will be explained during this call. We want to make sure that you are aware that ATAX is operating under the SEC Regulation FD and encourage you to take full advantage of the question-and-answer session. Thank you for your participation and interest in ATAX. I would now like to turn the call over to Chad Daffer, Chief Executive Officer of ATAX.

Thank you, Bridget. Good afternoon and welcome to America First Multifamily Housing Investors' second quarter 2020 investor call. Thank you again for joining. Today, Chief Investment Officer, Ken Rogozinski will share his views on the markets and our Chief Financial Officer, Jesse Coury, will present the partnership financial results. Then we look forward to taking your questions. I'd like to update you on the effects of COVID on our partnership since our last call on May 7. First, the Partnership reported $0.09 of cash available for distribution with a book value of $5.75 on $1 billion of assets with leverage of 62%. The Partnership extended maturity on all Tender Option Bond programs. The Partnership extended maturity on all lines of credit and the partnership is currently in good standing with all lenders. Partnership mortgage revenue portfolio. Properties reported Q2 average loan collections above 90% with the July collection rate at 93% with physical occupancy of 95%. All mortgage revenue bonds are reported current on principal with interest payments. The Partnership has received no requests for forbearance from any of our multifamily housing borrowers. The Vantage portfolio. With the sale of Vantage in Waco in June, the current Partnership investment is $91 million on nine projects; four projects in Texas, two projects in Tennessee, two projects in Nebraska, and one project in South Carolina. Four projects are under construction, five projects are in lease up. No Vantage products have experienced supply chain or labor disruptions to date. All Vantage projects have experienced strong rental demand and higher occupancy. All projects will be evaluated for sale upon stabilization. Our Student Housing portfolio consists of two assets, 50/50 and Suites on Paseo. 50/50 is a 475-unit property located in Lincoln, Nebraska adjacent to the University of Nebraska campus. As of June 30, physical occupancy was 96%. Outstanding mortgage balance was $26.4 million. The property is currently in good standing. The University will resume on-campus learning this fall. Suites on Paseo, a 384-unit property located in San Diego, California adjacent to San Diego State University. As of June 30, physical occupancy was 80%. The property has no debt on it. The University will hold online and on-campus learning this fall. At this time, I'd like to turn it over to Ken Rogozinski, the Chief Investment Officer of ATAX.

Thank you, Chad. The second quarter of 2020 showed a marked improvement in the market for municipal bonds. As noted in last quarter's discussion, 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 municipal bond market that we spoke about in May continued through the balance of the second quarter and into July. As of July 30, 2020, municipal bond mutual funds had seen 12 straight weeks of inflows, with the latest observation being a weekly inflow of $1.8 billion. 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 net positive. All of this occurred in a rate environment where municipal market data has high-grade muni bond scale reached all-time low yields in 10 years at 67 basis points and in 30 years at 1.39% at the end of July. The benefits of this kind of market environment are that the rally in longer-term muni rates has resulted in a higher book value for our existing portfolio of longer-term fixed-rate bonds. It has also resulted in lower funding costs for us on those bonds that we have financed on a floating-rate basis. The downside is that it makes the absolute level of rates where we can originate new fixed-income investments lower than our historic levels, which we need to manage through matched funding when available and appropriate interest rate hedging. It has also caused us to focus on shorter duration investments where that matched funding is more readily available and hedging is less costly. In terms of our investment activity for the second quarter, we were successful in making additional investments through both new originations and secondary market purchases. On the new origination front, we closed our first shorter-term construction financing transaction for a property called Scarborough Flats with one of the largest and most active affordable housing developers in the country in June. The shorter maturity of this debt, 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 closed our second transaction of this kind in July with the same project sponsor and we'll continue to evaluate opportunities to further deploy capital in this fashion. On the secondary market side, we were successful in purchasing 100% of the first mortgage bonds on an existing Vitech property at an attractive fixed coupon over 5%. We will continue to look for other opportunities like this in the secondary market. 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. We will continue to look to strategically work with our stronger sponsors on new investment opportunities where traditional sources of capital may not currently be available. With that, I'll turn it over to Jesse Coury, our CFO, to discuss the financial data for the second quarter of 2020.

Thank you, Ken. For the second quarter of 2020, ATAX reported total revenues of approximately $14.2 million compared to $14.3 million for the second quarter of 2019. Net income for Beneficial Unit Certificate, or BUC for short, basic and diluted were $0.06 per BUC for the second quarter of 2020 compared to $0.05 per BUC for Q2 2019. Cash available for distributions, or CAD, was $0.09 per BUC for the second quarter of 2020 compared to $0.08 per BUC in Q2 2019. On a year-to-date basis, ATAX has reported total revenues of approximately $28.2 million, net income per BUC basic and diluted of $0.10 per BUC and cash available for distributions or CAD of $0.14 per BUC. Our top-line revenues for 2020 were boosted by additional investment income from the sale of Vantage at Waco and we also experienced savings on the expense side from lower interest rates on our variable rate debt financing. We reported total assets of just over $1 billion as of June 30, 2020. The assets are primarily comprised of investments in our three main investment classes that Chad mentioned earlier, the first being our mortgage investments to our net spread portfolio. The second being our Vantage investments and the third being our MF Properties. Our mortgage investments or net spread portfolio consists primarily of mortgage revenue bonds. As of June 30, we had 77 total mortgage revenue bonds valued at approximately $788 million or 76% of our total assets. Our mortgage revenue bonds provide permanent financing for properties in 13 states. We hold significant amounts of mortgage revenue bonds related to properties located in Texas, which presently represent 44% of our total mortgage revenue bonds. We also have a significant amount of mortgage revenue bonds in California and South Carolina, with each representing approximately 17% of our mortgage revenue bond portfolio. As Chad mentioned, all our mortgage revenue bonds were current on contractual principal and interest payments as of June 30, 2020. In addition, all mortgage revenue bonds remained current on contractual principal and interest payments during July. To date, we have received no requests for forbearance of contractual principal and interest payments from borrowers of our MRBs associated with multifamily properties. As Ken mentioned, in the second quarter, we closed our first shorter-term construction financing loan for a property called Scarborough Flats. We refer to this investment in our SEC filing as a governmental issuer loan. This initial governmental issuer loan totaled $40 million to fund the construction of a 300-unit affordable multifamily housing property in Midland Texas. The governmental issuer loan is functionally equivalent to a mortgage revenue bond in that it is a nonrecourse obligation issued by a governmental authority secured by a mortgage on real and personal property of an affordable multifamily property and we expect and believe the interest earned on the governmental issuer loan to be excluded from gross income for federal income tax purposes. Proceeds of the loan will be used to fund the construction, lease up and stabilization of a property at which point our investment will be redeemed. In July 2020, we closed on a second governmental issuer loan under similar terms for our 228-unit affordable multifamily project in Roseville Minnesota. Moving on our Vantage portfolio, our Vantage portfolio consisted of equity investments in unconsolidated entities related to 9 market rate multifamily projects. Such investments had a carrying value of approximately $91.6 million as of June 30, and represent approximately 2,600 rental units in the aggregate. Our investment in Vantage at Waco was redeemed in the second quarter upon the sale of the underlying property and we recognized approximately 930,000 of additional investment income upon sale. To date six of ATAX's Vantage investments have been sold or redeemed resulting in total gains on sale and contingent interest of approximately $27 million, providing the proven concept of the Vantage investment strategy we initiated in 2015. Our third asset class or MF Properties consist of two properties totaling 859 units with a net carrying value of approximately $60.2 million as of June 30. Both properties serve primarily college students, the 50/50 in Lincoln, Nebraska adjacent to the University of Nebraska and Suites on Paseo in San Diego, California adjacent to San Diego State University. As Chad mentioned, the universities have announced their plans for the upcoming fall semester with the University of Nebraska fully resuming on-campus in-person classes. San Diego State University currently plans to conduct limited on-campus in-person classes and reduced capacity at their residence halls. San Diego State University has also waived its previous requirement that all first and second-year students live on campus, which may help our fall leasing efforts at Suites on Paseo. We use leverage through various debt financing structures to generate returns on our investments. We had debt financings associated with our mortgage revenue bonds and governmental issuer loan totaling approximately $536 million as of June 30, 2020. Of this amount, approximately 56% have fixed interest rates and 44% have variable interest rates. For comparison, as of March 31, 2020, the ratio was 71% fixed rate to 29% variable rate. So during the second quarter, we migrated to more variable rate debt due to lower short-term interest rates and favorable financing terms available through Mizuho's Tender Option Bond or TOB program. During the second quarter, we terminated all of our debt financing arrangements with Deutsche Bank and replaced them with five new TOB trust financing arrangements with Mizuho. The terminated Deutsche Bank financings had fixed interest rates of between 4% to 4.5%, whereas the new Mizuho TOB trusts had variable interest rates initially at 2.1% which lowered our cost of financing by over 200 basis points. As we no longer have any debt finance outstanding with Deutsche Bank, we terminated the master trust agreement in April 2020 and are no longer subject to the related financial and nonfinancial covenants, which gives us more flexibility and to manage our liquidity and overall debt portfolio. There are two subsequent events related to our debt arrangements I'd like to highlight. First, as of June 30, 2020, we had 10 variable rate TOB trust financings totaling approximately $123 million that was scheduled to mature at various dates during 2021. In July, we successfully extended the maturity of each of these 10 arrangements to July of 2023 with no change in interest rate terms. These extensions provide us with longer-term liquidity sources at no increased cost. Second, in July 2020, we extended the maturity of our two lines of credit with Bankers Trust. We've had both lines of credit since May of 2015 and they provide us with two sources of liquidity. The first 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. The maturity date of each line of credit was extended to June of 2022. We regularly disclose our exposure to potential increases in market interest rates to our interest rate sensitivity analysis, which we report quarterly and is included on page 62 of our Q2 2020 form 10-Q. The interest rate sensitivity table shows the impact of ATAX's net interest income given various scenarios or changes in market interest rates. These scenarios assume that there is an immediate shift in interest rates and that ATAX does nothing in response for 12 months. The analysis based on these assumptions shows that an immediate 2 basis point increase in rates that is sustained for a 12-month period will result in a decrease of approximately $3.1 million in our net interest income and CAD, which approximates $5.1 per BUC. Lastly, we regularly provide our net book value per BUC. As Chad mentioned previously, our net book value per BUC as of June 30, 2020, was $5.75, which is up approximately 7% from our net book value per BUC of $5.38 as of March 31, 2020. The increase is primarily due to an increase in the value of our mortgage revenue bond portfolio caused by lower market yields as of the end of Q2. With that, Chad, Ken, and I are happy to take questions from the audience.

Our first question comes from Dan David from Stiefel. Your line is open. Mr. David, if you're on mute, please unmute.

Can you hear me now?

Mr. David, you are breaking up really badly, I apologize.

I'll try to speak up a little bit here, just wanting to know about the student housing, what percent have been rented now with just a week before school?

No, that's coming through much clearer, thank you. Today we've not reported the current occupancy lease-up on student housing assets. Right now we have the two student assets and our MF properties and we have one student asset, and our mortgage bond portfolio. Right now we're kind of putting our head down and keeping the leasing going as strong as we can into the fall semester. I would anticipate after the semester, we would have a press release to give an update to the marketplace on what the fall semester occupancy would be, both physical and economic going into the fall semester.

Thank you. Our next question is from Ben Warwick with QES. Your line is open.

Thanks. Yes, this question is for Chad. I was just curious about the share price. You guys are executing well and there's quite a bit of good news in this call, and I was just wondering if you'd ever contemplated having some sort of virtual Investor Day, where you can introduce yourself to analysts and I was also wondering if you've ever contemplated doing stock buybacks?

No, thank you for the question, Ben. First question as far as non-deal road shows, I agree that we need to have an opportunity to share the credit history and the valuation of the stock at this price, I think is compelling. We need to get out and share that message with investors and make sure they have the opportunity to ask us questions about the strategy going forward. As far as your second question relating to stock repurchase, we've never considered stock repurchase to date. Right now in this environment, we're continuing to see opportunities on the investment side that we feel are more attractive on a long-term basis than that of the stock repurchase. Some things will change and we may consider it at some point in the future, but it's not a consideration as of today, Ben.

Got it. Thank you very much.

Thank you. Our next question is from the line of Patrick Marsh with Alex Brown. Your line is open.

Hey Chad, how are you doing?

Patrick, good afternoon.

My question was just about the Vantage products. I think I heard you say that you currently still have nine assets, and you've sold six since inception of 2015. Can you just kind of give me a better sense of sort of what you guys think of Vantage going forward, and is this kind of - are you at the sweet spot with nine assets? Do you think you can grow it bigger? It seems like the return profiles are pretty attractive.

No, I totally agree. We've been fortunate to have a best-in-class development partner for proof of concept under our equity investments into multifamily housing real estate after the proxy in 2015. We've been very fortunate to have a great partner and a low interest rate environment and a low cap rate environment. We've exited these assets and I think approaching $30 million of gain on sale. I encourage you to take a look at page, I think it's 50 or 52 on the Q that outlines the current positions that we have in our ATAX advantage portfolio, 51, thank you, Jesse. What we tried to do here is just give the investors a feeling for the absorption rate year over year. Give you folks an opportunity to take a look at what our historical holds have been and to make the best estimates you can on exits of these assets going forward. Hence it's a big part of our business. I think if you look at our balance sheet, it's about a 10% position on our balance sheet. If you look at last year's income statement, it's just a little north of 30% of our gross revenues. As long as we can see continued opportunities when we take a look at both debt and equity opportunities, and if it's compelling enough from a credit perspective, and we have comfort in deploying equity into the right development partner, we will grow this business. Obviously, the risk profile under a development book is much different than that of the debt book from construction stabilization risk and where you're at on the capital stack. But we've been fortunate to have the right partner, the right environment and we've executed the strategy from 2015 to 2020 with some pretty attractive gains for our investors, Patrick.

Great, thanks.

Thank you. Our next question is from the line of John Barn. He is a private investor, your line is open.

Hi guys, how are you doing? Congratulations on a very good quarter in these unprecedented times.

Thank you.

So, let's see first question, you know, as I've been watching you guys now for about 10 years, and I was trying to get my arms around this thing as I'm reading the Q yesterday. I kind of get the idea that you've got three baskets of income basically like a bank, you're bowling on, and looking at page 44 in the Q right now. Past Platforms may be similar on three and a half and landing north of 596. Do you think you're making net interest margin on that? That's kind of like the bread and butter? And then you've got properties that are for closed that you take back, we've done admirable work on perhaps getting those properties and selling those for a gain. And then I guess you get your variance from this would be construction, etc. Given – and I know you lowered your distribution and it kind of seems like right now the 6% is again, that kind of is your bread and butter basket of net interest margin, etc. But if we take a look at nine sets of broth distributing six, if some of that relates to extraordinary transactions such as repossessing a property or a mortgage and rehabbing and selling it for profit with the Board, consider doing or keep in mind keeping that distribution rate there, it is right now or just slightly higher to the routine basis and then maybe growing with a special with these other two items of income was in the material.

No John. That's an excellent question, and thank you for your support over the years. When management tried to peg the appropriate reduction and distribution for the second quarter of 2020, it was critical we picked a number that we felt was sustainable. Our deficit was sustainable in the event that we have reoccurring income off our mortgage spread book. What do you think that number would be that we could continually deliver to the investors over time? Given the time in which we cut the distribution, the unknowns related to COVID and its relationship to the exits of Vantage products were previously unknown. So we tried to pick a number and make a recommendation to the Board at $0.06 that we felt was the appropriate number given the information we had at the time. Everything is on the table for a discussion going forward. We'll monitor the effects of COVID. My personal opinion is that the consumer and the rental base have been supported by governmental relief programs and unemployment benefits that I think we really now are going to start to see, and I hope that it's going to be minimal, but I think we'll start to see some of the effects of COVID come through in collections here in the third quarter. So we will continue to monitor the effects of COVID. We will be in contact with our Board regarding the distribution strategy depending on the effects, both positive or negative effects of COVID going forward. As far as the distribution strategy, it's very insightful. We've discussed a couple of different strategies. It's premature to discuss at this time. But I think just looking at our business and knowing it like you do, there is a material discussion to be had about tying our distribution to our cash flow. There's a reoccurring predictable cash flow from our spread book. The other line of business that we participate in is not so predictable, and maybe a special distribution upon exit of those assets could be a consideration by the Board when appropriate.

Well, I would recommend this, and again, after spending some time working through the queue, I think I finally got my arms around it because there was an issue. I mean, some years, it seemed you could go two or three quarters, and you weren't making your distribution and then the big profit and to what extent does it go into a basket? And to what extent is it carried forward, etc.? So I - it kind of seemed from an operational standpoint that I didn't appreciate the distribution, but it was a stretch, and you had to have these non-recurring transactions to make it work. So I guess, if not, the Board's asking for a recommendation, but set it at the recurring level. And then when you do have these extraordinary transactions, that doesn't paint you in a corner. But keep up the good work and you've done excellent work to this. Thank you.

John, I appreciate that, and your recommendation is duly noted and we'll be sure to share that with the Board when appropriate. To be clear, the Partnerships made over 30 years of continuous quarterly distributions and ATAX since 2015 has earned the distribution year-over-year. So I just want to make sure that your statement was not received properly from the other folks on this call. Thank you.

Thank you. And our next question comes from the line of Larry Linden. He is also a private investor. Your line is open.

Good day, gentlemen. How are you all?

Good afternoon.

All right, I have two simple questions. I'm a recent investor. I've been with you about nine months and I started investing when it was mid 6, had gotten up to 8.18. And then low and behold, along comes the Coronavirus. So my first question is, is the decrease in value attributed exclusively to the Coronavirus or are there other things that impacted this tremendous drop from 8.18 to 3.52?

Mr. Linden, it’s tough. It's tough for us to make a valuation on the stock price. I will share with you two points though for your consideration. The Partnership strategy has not changed in any way. The new general partner is more supportive and creating flow and opportunity and support than we've ever had in the past. I would speculate that the sole reduction in the stock price has to do with the nature of our business model related to commercial real estate. The investment community, and I speak with a number of you folks on a regular basis, has noted that when federal governments, state governments, and municipal governments take back the rights and remedies of a landlord as a rake through evictions and the right to forbear, it makes it very difficult for the investment community to predict the future value of the portfolio assets. So I think most people believe that a lot of it has to do with COVID. Our business is solid. Our opportunities are greater than we've seen in the past. Our management team has been enhanced by our partners from Greystone, our new general partner. And so, I cannot point you to one thing that would give you any feeling that something has changed in our business model or our ability to execute it that would drive the current stock price.

Second question if I may?

Please.

You reduced the dividend by 52% this quarter. Do you have any expectation that this will continue or do you have an expectation there would ever in the next three to six months go back to where it was before the 52% decrease?

No, I think that's the question of the day for not only our investors, but our management team. And I think you're asking us to predict the future effects of COVID that is yet to be determined. It's tough for me, as the manager and part of the management team, to provide you guidance today on tomorrow's data. And so, we're going to keep, we're going to continue to be very diligent and surveillance of the assets. When the opportunity makes the most sense for us to make a proper recommendation to the Board, we will go to the Board and ask them to approve an increase or a decrease depending on the effects of COVID in the future.

All right, thank you very much.

Thank you.

I'm not showing any further questions. So I'll now turn the call back over to Chad Daffer for closing remarks.

Thank you, Bridget. I'd like to take this opportunity to thank you for your interest today. These are interesting times. I assure you the management team will remain very diligent and responsive. I encourage all of you to call and ask questions of any member of the management team. In times like this, the ability to access the folks that are making the decisions with your hard-earned capital is paramount to us. So I encourage you to call in and we'll make sure that we take the time to answer any questions that you might have. Please be safe. We always continue to ask that the management team and our investors be safe and we'll look forward to talking to you, if not sooner here at the end of the next quarter.

Ladies and gentlemen, this concludes the program. Thank you for participating and good day.