Greystone Housing Impact Investors LP Q1 FY2022 Earnings Call

I would like to welcome everyone to America First Multifamily Investors, L.P's NASDAQ ticker symbol ATAX First Quarter of 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q1 2022, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded. During this conference call, comments made regarding ATAX that 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 those 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 could cause ATAX 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 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 you 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 participating and your interest in ATAX. I would now like to turn the call over to Ken Rogozinski, Chief Executive Officer of ATAX.

Good afternoon everyone, welcome to America First Multifamily Investors L.P's first quarter 2022 investor call. Thank you for joining. I will give an overview of our business and the markets, and then Jesse Coury, our Chief Financial Officer, will present the partnership's financial results. Following that, we look forward to taking your questions. On April 1, 2022, the partnership affected its previously announced one for three reverse split of our Beneficial Unit Certificates or BUCs. As a result of the reverse BUC split, holders of BUCs received one BUC for every three BUCs owned at the close of business on April 1, 2022. In our publicly filed financial statements, the one for three reverse BUC split has been applied retroactively to all net income per BUC, distributions per BUC, and similar per BUC disclosures. All periods presented are on a post-split basis. For the first quarter of 2022, the partnership reported net income per BUC of $1.3, cash available for distribution per BUC of $0.98, and a book value of $15.35 per BUC on $1.4 billion of assets, with a leverage ratio, as defined by ATAX, of 69%. In terms of the partnership's investment portfolio, we have received no requests for forbearance on our multifamily mortgage revenue bonds and all multifamily MRBs are current on principal and interest payments. Physical occupancy on the underlying projects averaged 96% for the MRB portfolio as of March 31, 2022. Our current Vantage portfolio consists of 12 properties, 5 where construction is 100% complete and one that will be completed in the second quarter of 2022. The remaining 6 properties are under construction or in the planning stage. For the 5 properties where construction is 100% complete, we continue to see good leasing activity, with 4 properties having achieved at least 90% physical occupancy and another property at 89% physical occupancy as of the end of March 2022. We continue to see no material supply chain or labor disruptions on the Vantage projects still under construction. As we have experienced in the past, the Vantage Group, as the managing member of each project owning entity, will position a property for sale upon stabilization. In March of this year, the Vantage at Murfreesboro property was sold for a gross sales price of $78.5 million or approximately $273,000 per unit. This transaction returned $12.2 million in original contributed capital to us along with $17 million in capital gains and preferred return realized upon sale. Our overall return of the property was at a 2.69 times multiple of invested capital. Our two owned student housing properties continue to have strong occupancy levels, both of which are covering all of their obligations from project cash flow, including operating expenses. In the case of the 50/50 University of Nebraska, we are covering debt service. Both the University of Nebraska and San Diego State are holding primarily in-person on-campus learning. As of March 2022, the Suites on Paseo was 93% occupied, which is above the level seen in years prior to the 2020-2021 COVID-19 pandemic. The 50/50 is currently 88% occupied, which is slightly below historic levels prior to the 2020-2021 COVID-19 pandemic. Both property managers are actively pre-leasing units before the 2022-2023 academic year. On the property that secures our student housing MRB for Live 929 Apartments at Johns Hopkins University, we have seen a similar reversion to pre-pandemic performance. Leasing currently stands at approximately 98%, with a waiting list for certain unit types. Like the University of Nebraska and San Diego State, Johns Hopkins University is currently holding primarily in-person instruction. As we have discussed before, the bankruptcy court has approved the sale of the Provision Proton Therapy Center in Knoxville, Tennessee, that secures our MRB. Once that sale has closed and other administrative items have been completed, net proceeds will be distributed to the bondholders. ATAX owns approximately 9.2% of the principal balance of the outstanding bonds, and we estimate that a final distribution to ATAX from the bond trustee will approximate our current $4.6 million valuation of those bonds, inclusive of accrued interest. We continue to advance funds for the construction of affordable multifamily properties, securing our existing governmental issuer loan and property loan investments. Such advances totaled approximately $55.3 million during the first quarter, which were partially funded by $48.6 million of debt financing proceeds. We have approximately $185 million in undrawn construction funding commitments currently outstanding, which will add to our asset base over the next 12 to 24 months. Turning to the markets, the first quarter of 2022 was the worst quarter in terms of total return on muni bonds in 40 years. Muni significantly underperformed the broader fixed income markets. The 10-year LIBOR swap rate increased approximately 70 basis points over the course of the first quarter, while 10-year MMD, the muni market's high-grade credit benchmark, increased by approximately 110 basis points. Uncertainty in the fixed income markets surrounding the performance of the U.S. economy, including recent inflation data and the implementation of the first Fed interest rate hike, with more signal to come, as we saw at yesterday's meeting, has continued to impact the municipal bond market hard. Muni mutual fund outflows totaled over $40 billion so far this year, according to Refinitiv Lipper data. According to Barclays Research, the increase in MMD yields in the first four months of 2022 has been the worst four-month period on record. 10-year MMD is currently at 2.78% and 30-year MMD is currently at 3.11%, roughly 110 basis points higher in yield than at the time of last quarter's call. This market volatility, the scale of interest rate increases, and cost inflation have presented challenges to our developer clients on new transactions. In terms of our debt investment activity during the first quarter, as I mentioned during last quarter's call, at the end of January, we closed on a $70 million MRB transaction to restructure the debt associated with the Live 929 Student Housing project in Baltimore, adjacent to the Johns Hopkins Medical Campus. In April 2022, we closed on a commitment to fund MRBs and taxable MRBs totaling $72 million for a new construction, low-income housing tax credit project in Los Angeles. We also implemented two interest rate hedging trades during the quarter. Four of our fixed-rate bond positions that are funded with floating-rate TOB financing had their funding cost hedged through the execution of two interest rate swaps with Mizuho. Under the swaps, the partnership will pay a fixed rate and will receive a floating rate that approximates the base rate used by our marketing agents to determine the weekly TOB certificate rate. The total notional balance of those swaps is approximately $104 million and have terms ranging from two to five years. Jesse will speak in greater detail about our management of interest rate risk during his remarks. Finally, we successfully exchanged $20 million of our Series A Preferred Units for newly issued Series A one preferred units at the end of April 2022, extending the duration of our low-cost preferred capital. With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the first quarter of 2022.

Thank you, Ken. As Ken mentioned, we affected our previously announced one-for-three reverse split of our Beneficial Unit Certificates or BUCs on April 1. During my presentation, all BUC and per BUC metrics will be on a post-split basis. For the first quarter of 2022, we reported total revenues of $19.2 million, net income per BUC, basic and diluted, of $1.03, and cash available for distributions or CAD of $0.98 per BUC. We reported total assets of approximately $1.4 billion as of March 31; such assets are primarily comprised of our debt investments, our joint venture equity investments, and our owned multifamily properties. Our debt investments portfolio consists of mortgage revenue bonds or MRBs, governmental issuer loans or GILs, and property loans. As of quarter-end, our MRBs, GILs, and property loans totaled $1.04 billion and represent approximately 74% of our total assets. We currently own 71 MRBs that provide permanent financing for affordable multifamily properties across 12 states. We hold significant amounts of MRBs related to properties in three states based on outstanding principal, with Texas representing 42%, California at 23%, and South Carolina at 12% of the total MRB portfolio. In January 2022, we participated in a restructuring of the outstanding debt of the Live 929 Apartments Student Housing property in Baltimore, Maryland. Our original MRB investments with principal of $61.1 million were redeemed, and we then purchased an MRB and taxable MRB totaling $70 million. The purchase of the new investments was partially funded through new tender-option bond or TOB trust financing proceeds of $56 million. We believe the restructured debt and expected future property operations will eliminate the need for further forbearance. We currently own nine governmental issuer loans that finance the construction of affordable multifamily properties across six states. The governmental issuer loans are functionally equivalent to our MRBs, in that they are non-recourse obligations issued by governmental authorities secured by a mortgage on real and personal property of affordable multifamily properties, and we expect and believe that the interest earned on governmental issuer loans is exempt from federal income tax. In most instances, we also commit to fund property loans in tandem with the GILs that share a first mortgage lien with the GILs and are typically funded after all GILs funds have been advanced. As of March 31, 2022, we had outstanding GIL funding commitments totaling $85 million and related property loan funding commitments totaling $90.7 million that will be advanced on a drawdown basis during construction. As Ken mentioned, to date, we have received no requests for forbearance of principal and interest payments for MRBs, GILs, or property loans associated with affordable multifamily properties. In December 2020, the borrower of our Provision Center MRB property, a Proton Therapy Cancer Treatment Center in Knoxville, Tennessee, filed a petition for Chapter 11 bankruptcy protection. The bankruptcy court has approved the sale of the underlying Proton Therapy Center, and we expect to receive net proceeds of approximately $4.6 million at the closing of the sale later in 2022. Our joint venture equity investment portfolio consists of 12 Vantage projects as of March 31, 2022, of which one investment is reported on a consolidated basis. All investments are for the construction of market-rate multifamily properties that represent an aggregate of over 3,400 rental units. The carrying value of our Vantage investments totaled $107.7 million as of March 31, exclusive of one investment Vantage at San Marcos that is reported on a consolidated basis. Of the 12 total projects, nine are in Texas, two are in Nebraska, and one is in Colorado. Five projects are complete and have substantially completed lease-up, and one property, Vantage of Tomball, is nearly complete and has commenced leasing operations. The remaining six properties are either under construction or in the planning phase, and there have been no material delays or disruptions due to supply chain constraints for properties currently under construction. We advanced additional equity under our current funding commitments totaling $12.8 million during the first quarter, and our remaining equity investment commitments totaled $19.3 million as of March 31. In terms of transactional activity, the Vantage in Murfreesboro property in Tennessee was sold in March 2022, and our equity investment was redeemed. Upon redemption, our initial $12.2 million investment of capital was returned, and we realized $658,000 of investment income and a $16.4 million gain upon sale. This is our 10th Vantage investment that has been redeemed, which in the aggregate has generated over $59 million of gains on sale and contingent interest to date. As of March 31, we own two multifamily properties with a total of 859 student housing beds and a net carrying value of $54.2 million. Both properties provide college student housing, and the universities, The University of Nebraska in Lincoln, Nebraska, and San Diego State University, are currently holding on-campus in-person classes. As of March 31, the 50/50 MF Property is 88% occupied, and the Suites on Paseo MF Property is 93% occupied, with both properties continuing to meet all operating and direct mortgage obligations with cash from operations and actively pre-leasing for the fall 2022 semester. Moving to our debt financing, we use a variety of debt financing facilities to leverage our investments in MRBs, GILs, and property loans, totaling $886 million in the aggregate as of March 31, 2022. We use a mix of fixed-rate and variable-rate debt financing, reporting our debt financing in three main categories on page 63 of our Q1 2022 Form 10-Q. The first category is fixed-rate debt associated with our fixed-rate assets, representing $280 million or 32% of our total debt. As both the asset and debt are fixed rate, our net return is not generally impacted by changes in market interest rates. The second category is variable-rate debt associated with our variable-rate investments, representing $294 million or 33% of our total debt. Variable indices and floors between the debt and the asset may vary, but we are at least partially hedged against rising interest rates without the need for separate hedging instruments, such as interest rate swaps or caps. The third and final category is variable-rate debt associated with our fixed-rate assets, representing $312 million or 35% of our total debt. This is the category where we are most exposed to interest rate risk in the near term. We regularly monitor our interest rate risk exposure for this category and may implement hedges when considered appropriate, as evidenced by the two interest rate swap agreements that we executed in the first quarter of 2022 to synthetically fix the rate on a $104 million portion of the debt in this category. As mentioned, we regularly monitor our overall exposure to potential increases in interest rates through our interest rate sensitivity analysis, which we report quarterly, and is included on page 67 of our Q1 2022 Form 10-Q. The interest rate sensitivity table shows the impact on our net interest income given various scenarios of changes in market interest rates. 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 as of March 31, 2022, that is sustained for a 12-month period, will result in a decrease of approximately $2.2 million in our net interest income and CAD, or approximately $0.10 per BUC, down from approximately $0.23 per BUC as of December 31, 2021, primarily due to the execution of the $104 million interest rate caps in the first quarter. Regarding our capital, in April 2022, we issued 2 million new Series A one preferred units in exchange for 2 million of our previously outstanding Series A preferred units held by a financial institution. This represents the first exchange transaction under our registration statement on Form S-4 allowing for exchanges of 94.5 million of our outstanding Series A preferred units for new Series A preferred units. The Series A preferred units have substantially the same terms as the Series A preferred units and are redeemable at the option of the holder on the 6th anniversary of issuance. As a result of the exchange, we maintain our access to non-dilutive fixed-rate and low-cost institutional capital. Lastly, we regularly provide our net book value per BUC, which as of March 31, 2022, was $15.13 per BUC, a decrease from our net book value of $16.82 per BUC as of December 31, 2021. Our closing market price on NASDAQ on March 31, 2022, was $18.15 per BUC, which was a premium to our book value of approximately 18%. As of market close yesterday, May 4, our closing market price was $17.82, which is a 16% premium over our net book value per BUC. Ken and I are now happy to answer questions from the audience.

Hi, good afternoon. Nice quarter and great gain on the sale on the asset. I guess I'll start there, with the current occupancy of the assets advantage that are above 90%. What's the outlook from here as far as monetizing those and recycling capital into new investments? How should we think about that as we look at the balance of the year?

Hi, Stephen. It's Ken. I think the one thing to make sure that we keep in mind on the joint venture equity investments is that we are a non-controlling investor member in those. We really don't have any control or direction in terms of the timing of when individual assets are sold. We'll give the Vantage team all the credit in the world for the process that they go through in terms of managing the lease-up, maximizing the rent roll, getting the project in the best possible position to come to market, and then during the marketing process doing everything they can to try to get the best possible result for us and them as partners on the investment. So we would expect to see that sort of consistent approach applied going forward by the Vantage team on the assets that have reached over 90% stabilization. So I think that will be unchanged from that perspective. As we think about new investment opportunities going forward, we continue to have dialogue in terms of pipeline and sites that have been identified, always keeping in mind the sort of new landscape that we're facing with higher construction costs and higher interest rates. So we're going to be consistent with our disciplined approach that we've taken in the past in terms of looking at those new joint venture equity investment opportunities. And so, I think we'll continue the successful course that we've been on in the past with regard to that segment of our portfolio.

Great. Thanks for those comments, Ken. And Jesse, on the interest expense. Apologies if I missed this in the prepared remarks, but the number that you guys are reporting this afternoon declined sequentially. Can you talk about the interest expense and kind of how we think about a run rate? I know you did have some comments around interest rate sensitivity, so do appreciate your comments towards the match funding, but can you give us any color on that?

Yes. We provide a host of information in our 10-Q, particularly in our discussion of liquidity and capital resources regarding our debt obligations and some information about the interest rates that we see on those debts and how we manage them. In general, we've seen, obviously, a rise in interest rates this quarter and that was the reason that we put in the interest rate swap positions that we did to somewhat fix those interest rates, but we'll continue to evaluate our debt financing options as we fund our existing investment commitments and look to close on new debt investing commitments. It will really be a determination of what pricing we can get from our leverage providers, as well as what our plans are for the assets, whether they're short-term, long-term, or what the interest rate outlook is at the time of closing.

Great. And then regarding the dividend distribution, given the big gain here early in the year, how do you think about distribution requirements and setting the right level or adjusting if necessary as you move through the year, or should we think about it more like last year with a special sort of at year-end?

So, Stephen, distributions to our BUC holders are made at the determination of ATAX’s General Partner, based on a disciplined evaluation of the Partnership's cash available for distribution and other factors deemed relevant by the General Partner. As always, the General Partner, in consultation with management, continually evaluates the factors that go into BUC distribution decisions consistent with the long-term best interests of BUC holders and the partnership. The General Partner and management have taken a diligent approach in the way we manage ATAX's balance sheet, recognizing that distributions are made as they always have been, determined by the General Partner. What I would add is that both we, as a management team, and the board are aware, at least as of the first quarter, of the returns associated with the particularly the Murfreesboro sale and the difference between the cash available for distribution that we reported in this first quarter versus the post-split $0.33 dividend distribution that was made to the unit holders for the first quarter.

Great. I appreciate the comments this afternoon.

Thank you, Steve.

Hi. Thank you. Ken, thanks for the comments on the broader muni market. I just wanted some perspective there. Given the performance we've seen in the broader muni market, typically where does that turn in the cycle? And how much of the mark-to-market, call it, unrealized loss that we see on the balance sheet today? Do you feel like it is recoverable? If you could give us some perspective that would be helpful.

Sure, Jason. So in terms of the muni market in general, it's a tough time. I mean, I haven't seen a quarter like this in the muni market since 1994. I think the first lead that we're going to have to see from a market perspective is stabilization in the broader fixed income markets, particularly treasuries. If muni market investors can see some stability there, that will be a good benchmark for them. One of the things I've learned about the muni market over the years is that it's not only a rates market, but it's also a very technical market. A lot of muni performance is driven by fund flows—how much money is coming into the muni market versus how much money is being withdrawn. Certainly, the $40 billion of negative fund flows that we've seen so far this year has not helped that performance. So in terms of what's going to turn the market in terms of stemming those outflows and bringing fresh cash in, I think the best chance the market has of regaining some footing and getting a positive tone back is going to be if we see a hopeful reduction in volatility in treasuries from that perspective.

Okay, that's helpful. And then, as we think about ATAX, this is one of the larger cash positions that we've seen on the balance sheet. Understand that you have some commitments that will require capital. Is ATAX in a position to take advantage of the current environment in that market for higher go-forward returns, or is it still too early to commit to that?

Your fourth point is very valid, Jason. In terms of looking at the existing commitments that we have on our books at this point in time, primarily from construction loans that we funded over the past 12 to 18 months, we've got a table in the Q that shows that we've got approximately $276 million worth of commitments that we have to fund in projects already on the books. Part of the liquidity management and the cash balance positions are generated by needing to honor those funding commitments going forward with our borrower clients as they make future draws to fund their construction activity. But in terms of new potential deals, it's early in the year. We have met a number of our developer clients receiving their volume cap allocation from the states across the country, and we still see demand and transaction flow from them, particularly on the new 4% low-income housing tax credit deals where we've historically been involved. So the deals become more challenging for those project sponsors; they had to deal with higher construction costs and somewhat higher rates. But as they always have, they are doing a great job of cobbling together other sources of soft money and government subsidies. We've seen a number of our clients receive allocations of COVID-related fiscal stimulus money allocated by the federal government to the states to help close funding gaps on these new transactions. So we're going to continue to do everything we can to work with our strongest and best relationships to keep their pipelines moving and to keep our funding activity going.

Okay, that's helpful. I appreciate that. And then, Jesse, one technical question for you. Can you remind us what the cap is on Tier 2 income to the GP? I guess it's a good position to be in when you hit that so early in the year, but just remind us of what that cap is? And how we might see that line item going forward if there should be other Vantage sales? Thanks.

Certainly. So, yeah, your question refers to Tier 2 income, which represents net interest income and net residual proceeds that arise from a repayment sale or liquidation of our investments. The gain on sale from Vantage and Murfreesboro had a large Tier 2 income impact during the quarter, and Tier 2 income is allocated 75% to the BUCs and 25% to ATAX’s General Partner. Regarding the cap under ATAX partnership agreements, the amount of Tier 2 income for any annual period is capped at 0.9% per annum of the principal amount of investments held by the partnership at the end of the year. For example, for the year ended December 31, 2021, ATAX’s investment assets were approximately $1.8 billion, which when multiplied by the 0.9% maximum Tier 2 was about $10.6 million. Accordingly, 25% of that $10.6 million or $2.65 million was allocated to ATAX's General Partner. Any income or net residual proceeds in excess of that 0.9% cap is treated as Tier 3 income and allocated 100% to our BUC holders. I will say that in Q1, the Vantage in Murfreesboro sale—the $16.4 million gain on sale exceeded our current estimate of what we think the annual Tier 2 maximum will be for 2022. Less than 25% of the Murfreesboro gain on sale was allocated to the General Partner. I would caution that the actual maximum Tier 2 income level will change throughout the year based on changes in ATAX's portfolio and other asset sales and redemptions, but we regularly analyze and update our estimates for the Tier 2 cap and modify our allocation of income according with the terms of the Partnership Agreement.

Great. Thank you for taking the questions. Appreciate it.

Hi, Jesse and Ken. Thanks for taking the questions and congrats on a nice start to the year. So along the same lines as Stephen's question, do you have any expectations for how the sales of any of the Vantage properties will be impacted by the recent rate increases? Or said differently, has your expectation for the pace of sales in 2022 changed at all?

Thanks, Chris. Echoing back to the comments that I made to Stephen, we really don't control that process—it's driven by the Vantage team as the managing member of the individual entities that own each property. I think from our perspective, looking at the broader landscape of what's happening in the multifamily environment, we see that to the extent that we have properties that are stabilized and have probably reached their optimal performance from a revenue perspective, the Vantage guys will be looking hard at making those decisions about the appropriate time. It's an interesting dynamic. We do see rates increasing, but in many of the markets that the Vantage assets are in, we've noticed significant year-over-year increases in rent levels. The data for certain communities in Texas, San Antonio, and Austin, in particular, shows double-digit year-over-year rent increases. While I hear your point about higher interest rates possibly making it more challenging for buyers to finance their acquisitions, at the same time, we're seeing double-digit year-over-year rent increases that also add value. So it's kind of a two-sided coin in terms of the positives and the negatives regarding the execution for exit, and I know that's something the Vantage team is keeping a very close eye on.

Got it. That's helpful. And the other one I have: you talked about branching into some skilled nursing and senior housing projects. Do you have any updates on any opportunities you're seeing in that space? Just any commentary around that?

Well, we do have the two senior housing investments that we made in the fourth quarter of 2021. We closed on a mortgage revenue bond transaction to fund the new construction of an ILAL memory care project in Traverse City, Michigan. We also closed on a taxable property loan for the acquisition of a profit-driven skilled nursing facility in Houston. We continue to look for opportunities there in those markets. We have regular dialogue with both for-profit and non-profit sponsors focused on that area of the market. We're looking to do what we can from our side as a management team in terms of continuing the dialogue with the broader Greystone origination platform in those asset classes, as well as exploring what we can do internally at ATAX to grow our organic ability to originate those deals ourselves. So it's an area of continued focus for us; we still see, in my mind, the opportunity for good risk-adjusted nominal leveraged returns in that asset class, and it's something we're going to continue to focus time and energy on as a management team.

Great. Thanks for taking the questions.

There are no further questions at this time. I'll turn the call back to you, Mr. Rogozinski, for closing remarks.

Okay. Thank you for joining us today, everyone. I hope it was informative for you, and we look forward to talking to you again next quarter. Goodbye.

This does conclude today's conference call. Thank you for participating. You may now disconnect.