Greystone Housing Impact Investors LP Q3 FY2022 Earnings Call

I'd like to welcome everyone to America First Multifamily Investors L.P.'s NASDAQ ticker symbol ATAX Third Quarter of 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q3 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, 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 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 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 your participation and 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 third quarter 2022 investor call. Thank you for joining. I will start with an overview of the quarter and our portfolio. Jesse Coury, our Chief Financial Officer will then present the Partnership's financial results. I will wrap up with an overview of the market and our investment pipeline. For the third quarter of 2022, the Partnership reported net income of $0.79 per unit and $0.53 of cash available for distribution per unit, another solid quarter on both those fronts. On a year-to-date basis, we have reported net income of $2.56 per unit, which exceeds the entire 2021 fiscal year net income per unit of $1.56. Similarly, our year-to-date cash available for distribution of $2.25 per unit exceeds our reported $1.92 per unit CAD for the entire 2021 fiscal year. We also reported a book value of $13.88 per unit on $1.45 billion of assets and a leverage ratio as defined by ATAX of 70%. On September 14, we announced the quarterly distribution of $0.57 per unit, which consists of our regular quarterly cash distribution of $0.37 per BUC plus a supplemental distribution payable in the form of additional BUCs equal in value to $0.20 per BUC. The supplemental distribution was paid at a ratio of 0.01044 BUCs for each issued and outstanding BUC as of the record date. The supplemental distribution reflects the Partnership's continuing intent to distribute a portion of the Partnership's recent gains on the sale of its Vantage investments. The payment of the supplemental distribution in the form of BUCs allows ATAX to retain additional capital to fund future investment opportunities at a low cost and is non-dilutive to current BUC holders. While the Board has not yet declared any distributions for subsequent quarters, the Partnership currently expects to be in a position to make a supplemental distribution in addition to the regular quarterly distribution for the fourth quarter of 2022. In terms of the Partnership's investment portfolio, we currently hold $1.1 billion of affordable multifamily investments in the form of mortgage revenue bonds, governmental issuer loans and property loans, $103 million in joint venture equity investments and $59 million in direct real estate investments. As far as performance of the investment portfolio is concerned, we have had no forbearance request for multifamily mortgage revenue bonds, and all such borrowers are current on their principal and interest payments. Physical occupancy on the underlying projects averaged 95% for the mortgage revenue bond portfolio as of September 30, 2022. Our joint venture partners sold Vantage at O'Connor in July 2022. Our remaining Vantage joint venture equity investments consist of interest in 10 properties, four where construction is 100% complete, one where construction and leasing is still underway, and the remaining five properties are under construction or in the planning stage. For the four properties where construction is 100% complete, we continue to see good leasing activity with three properties having achieved at least 90% physical occupancy as of September 2022. We continue to see no material supply chain or labor disruptions on the Vantage projects 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 October 2022, we executed a $16 million commitment to fund the construction of Freestone at Greeley, a 306-unit market-rate multifamily property in Greeley, Colorado. This is our first investment with the Freestone Development Group, as a managing member. The key principles of the Freestone Development Group were formally affiliated with the Vantage Development Group and were closely involved in our 20 Vantage joint venture equity investments to date. The Freestone and Vantage Development Groups will work collaboratively together to bring the Partnership's 10 remaining Vantage branded joint venture equity investments to completion and ultimate sale. The remaining key principles of the Vantage Development Group may present future joint venture equity investment opportunities to the Partnership, as made the Freestone Development Group. Our two owned student housing properties continue to have strong occupancy levels. Both are covering all of their obligations from project cash flow, including operating expenses and in the case of the 50/50 at University of Nebraska, debt service. Both properties have achieved over 97% leasing for the 2022-2023 academic year. We continue to advance funds for the construction of affordable multifamily properties securing our existing mortgage revenue bond, taxable mortgage revenue bond, governmental issuer loan and property loan investments. With that, I will turn things over to Jesse Coury, our CFO to discuss the financial data for the third quarter of 2022.

Thank you, Ken. As Ken mentioned, we paid a supplemental distribution in the form of additional BUCs at a ratio of 0.01044 BUCs, for each outstanding BUC on October 31. For GAAP purposes, this supplemental distribution is treated similarly to a stock split. As such, all BUC and per BUC metrics that I will discuss for Q3 2022 and all prior periods have been adjusted to reflect the supplemental BUCs distribution on a retroactive basis. Earlier today, we reported earnings for our third quarter ended September 30. We reported GAAP net income of $18.5 million and $0.79 per unit basic and diluted, and we reported cash available for distributions or CAD of $11.7 million and $0.53 per unit. Our quarterly earnings benefited greatly from the $10.6 million realized gain on the sale of Vantage at O'Connor in July 2022, which contributed approximately $0.48 per unit to earnings during the third quarter before related general and administrative expenses. The difference between net income and CAD per unit for the quarter is driven largely by the realization of losses on the Provision Center mortgage revenue bond for CAD purposes. As mentioned on our August call, the Provision Center, a Proton Therapy Cancer Treatment Center in Knoxville, Tennessee, for which we own $10 million of mortgage revenue bonds, was successfully sold out of bankruptcy in July 2022 with cash proceeds contributed to the bankruptcy estate. The borrower and the bankruptcy court are developing a liquidation plan for the settlement of the bankruptcy estate, such that the Partnership's share of proceeds can be distributed. As of September 30, our net carrying value of the mortgage revenue bond was $4.6 million for GAAP purposes, inclusive of accrued interest which equals our expected proceeds upon final settlement of the bankruptcy case. This net carrying value is approximately $5.7 million less than our original mortgage revenue bond investment. This expected loss was previously recognized as a reduction of GAAP net income in prior periods, such that GAAP net income is not impacted by the pending resolution of the bankruptcy case. However, the $5.7 million is considered a realized loss and a reduction in calculating CAD for the third quarter of 2022, as substantially all assets of the borrower liquidated in that quarter, which is consistent with our treatment of prior realized losses on investment assets. Our book value per unit as of September 30 was $13.88, which is a decline of $0.62 from $14.50 per unit as of June 30. The decline is largely a result of a decline in the fair value of our mortgage revenue bond portfolio caused by rising market interest rates. As of market close yesterday, November 2, our closing unit price on the NASDAQ was $18.37, which is a 32% premium over our net book value per unit. We regularly monitor our liquidity to both take advantage of accretive investment opportunities and to protect against potential debt deleveraging events. There are significant declines in asset values. As of September 30, we reported unrestricted cash and cash equivalents of $103.2 million. We also had $59.1 million of additional availability on our secured lines of credit. At these levels, we believe that we are well positioned to fund our current financing commitments, which I will discuss later and execute on additional investment opportunities in the near-term. I'd like to share current information on our debt investment portfolio consisting of mortgage revenue bonds, governmental issuer loans and property loans. These assets totaled $1.1 billion as of September 30, which is consistent with June 30, and such investments represent 76% of our total assets. We currently own 74 mortgage revenue bonds that provide permanent financing for affordable multifamily properties across 13 states. Of these mortgage revenue bonds, 42% relate to properties in Texas, 26% in California and 9% in South Carolina. The fair value of our mortgage revenue bond portfolio declined $32.2 million from June 30, due primarily to a $20 million decline in our overall unrealized gains due to rising market interest rates, and $11.6 million in redemptions and paydowns during the quarter. We currently own 13 governmental issuer loans that financed the construction or rehabilitation of affordable multifamily properties across six states. Alongside a governmental issuer loan, we will also commit to fund an additional property loan that shares the first mortgage lien. Our property loans typically fund after funding of the governmental issuer loan is completed. In the third quarter, we closed new governmental issuer loans and taxable governmental issuer loan commitments for three properties located in Elk Grove, California near Sacramento. The three projects will have 387 total units and our funding commitments totaled $153.6 million. During the third quarter, we advanced funds totaling $57 million for our governmental issuer loan, taxable governmental issuer loan and property loan commitments. In total, our remaining funding commitments for MRBs, governmental issuer loans and related debt investments totaled approximately $363 million on construction loans that have already closed. As these commitments are funded over the next 30 months, they will add to the Partnership's income-producing asset base. On the accounting front, I would like to remind the audience that we will be adopting Accounting Standards Update 2016-13 or the CECL standard effective January 1, 2023 for assets within the scope of the guidance. The CECL standards require a transition from the current incurred loss model to an expected credit loss model, which will generally result in higher credit loss reserves than our current GAAP accounting. We are continuing to assess the impact of CECL on our financial statements and will provide additional transition disclosures in our SEC filings through the adoption date. Turning now to our joint venture equity investments portfolio. The portfolio consisted of 10 Vantage projects as of the end of the third quarter, one of which was reported on a consolidated basis. Carrying value of our Vantage investments totaled $103 million as of September 30, exclusive of the consolidated Vantage at San Marcos. We advanced additional equity under our current funding commitments totaling $2.5 million during the third quarter. And as previously mentioned, we recognized a $10.6 million gain upon the sale of Vantage at O'Connor in July 2022, which continued the trend of significant returns on Vantage property sales. Our debt financing facility is used to leverage our investments and principal outstanding of approximately $965 million as of September 30. This is up approximately $30 million from June 30 as a result of leverage on funding of our investment commitments during the quarter. We manage and report our debt financings in four main categories on Page 81 of our Form 10-Q. First category is fixed rate debt associated with fixed rate assets and represents $264 million or 27% of our total debt financing. As both the assets and debt rates are fixed rate, our net return is not generally impacted by changes in either short-term or long-term market interest rates. The second category is variable rate debt associated with variable rate assets and represents $377 million or 39% of our total debt financing. Variable rate indices and floors will vary, but we are largely protected against rising interest rates without the need for separate hedging instruments such as interest rate caps or swaps. The third category is variable rate debt associated with fixed rate assets that have been hedged via SOFR denominated interest rate swaps, which limit our exposure to increased funding costs resulting from rising short-term interest rates. This category accounts for $104 million or 11% of our total debt financing. The final category is variable rate debt associated with fixed rate assets, which is where we are most exposed to interest rate risk in the near-term. This category only represents $221 million or 23% of our total debt financing. We regularly monitor our interest rate risk exposure for this category and implement hedges in the future if considered appropriate. In addition, in October, we executed an interest rate swap to hedge our interest rate exposure on debt associated with our three Poppy Grove governmental issuer loan and taxable governmental issuer loan assets, which have fixed interest rates, and our leverage of variable rate debt. The interest rate swap has an initial notional balance of $34 million, which increases over time to $100 million based on the projected funding schedule of our investment commitments. Given the mix of debt I just described, we regularly monitor our overall exposure to potential increases in interest rates through an interest rate sensitivity analysis, which we report quarterly and is included on Page 86 of our third quarter Form 10-Q. The interest rate sensitivity table shows the impact to our net interest income under 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 September 30 that is sustained for a 12-month period will result in a decrease of approximately $2.5 million in our net interest income and CAD, or approximately $0.11 per unit. This is down from $0.23 per unit as of December 31, 2021 due primarily to our execution of interest rate swaps during the current year. We believe this level of exposure is very low in comparison to our reported year-to-date GAAP net income of $2.56 per unit. Turning to our capital raising activities, in October 2022, we issued one million new Series A-1 Preferred Units in exchange for $1 million of our previously outstanding Series A Preferred Units, held by a financial institution. This represents the second exchange transaction under our registration statement on Form S-4 allowing for exchanges of all $94.5 million of our previously issued Series A Preferred Units for new Series A-1 Preferred Units. The Series A-1 Preferred Units have substantially the same terms as the Series A Preferred Units and are redeemable at the option of the holder and ATAX on the sixth anniversary of issuance. As a result of the exchange, we maintain our access to non-dilutive fixed-rate and low-cost institutional capital. And to date we have successfully exchanged $30 million of our originally issued $94.5 million of Series A Preferred Units for new Series A-1 Preferred Units, which extends the earliest optional redemption dates six years to 2028. I'll now turn the call over to Ken for his update on market conditions and our investment pipeline.

Thanks, Jesse. The third quarter of 2022 brought a continuation of the negative trends that we saw in the first half of the year in the municipal bond market. As of September 30, 2022, the year-to-date return on the Bloomberg Municipal Index was negative 12.1%. This correlates with the 12.4% decline in the book value of our mortgage revenue bonds that we have seen in the first nine months of 2022. Year-to-date mutual fund outflows were a cumulative negative $91 billion as of September 30, 2022, according to data. October continued the negative trend with another negative return on the Bloomberg Municipal Index of 8.3% for the month and another $14 billion in fund outflows which now topped $1 billion on a year-to-date basis. As of yesterday's close, the 10-year MMD is at 3.31% and the 30-year MMD is at 4.05% roughly 120 basis points higher in yield respectively than at the time of last quarter's call. The 10-year muni-to-treasury ratio is slightly elevated at an approximately 81% level due mostly to October's underperformance by municipal bonds. Volatility in rates, the magnitude of interest rate increases particularly in the short end of the curve and cost inflation have presented challenges to our developer clients on new transactions. The interest cost of new construction financing at 30-day SOFR plus 350 basis points has now exceeded 7% after the latest Fed rate hike, the sixth of the year just announced yesterday. Our affordable housing developer clients are needing to rely more and more on governmental subsidies and other sources of soft money to make their transactions financially feasible. We will continue to work with our clients to deliver the most cost-effective capital possible, especially the use of Freddie Mac tax-exempt loan forward commitments in association with our construction lending. Given the average 2.8 times multiple of invested capital return we have realized on the three joint venture equity investments that have sold this year, the Vantage at Murfreesboro, Westover Hills, and O'Connor properties, we will continue to look for other opportunities to deploy capital in this strategy. We are evaluating opportunities to expand our traditional investment footprint in Texas through seeking other experienced JV partners, expanding in other markets, or exploring other asset classes in order to achieve more scale in the joint venture equity investment segment of our portfolio. With that, Jesse and I are happy to take your questions.

Thank you. We have our first question from Jason Stewart. You are now live.

Okay. I was just wondering what the family cap rates sort of settle out at? And what do you think that return profile looks like?

Yes. It's an interesting question Jason. We've seen a lot of dynamics at work in the multifamily sector over the past year. In a lot of markets, we have seen significant year-over-year rent increases, which is consistent with what we expected or actually realized on the assets that we've sold to date this year, but we've also seen the cost of capital for buyers increase as well in connection with the increases in rates that we've seen this year in all points of the curve. I think from our perspective historically we haven't been focused so much on cap rates. We certainly kind of take a look at them on a retroactive basis once the sale has closed, but they can really be in the eye of the beholder. Do you look at a T1 income number? Do you look at a T12 income number? Do you make adjustments for the increase in property taxes that you see when a project sells for the first time? There are a lot of components that go into the income portion of the calculation of a cap rate versus a sales price. But I think certainly everything we're hearing from our colleagues over at Cushman & Wakefield is that they do expect to see an expansion of cap rates in the future. How big that expansion is and how much of that is driven by rates and is offset by rent increases I think is still to be determined on an ultimate value basis. But the wind has definitely shifted and is not fully at our back as the way that it has been for the past couple of years.

So what would you say same-store sales like year-over-year right now? And, I mean, I guess maybe what would you expect them to be next year?

Yes. I think that's really hard for us to forecast at this point in time, Jason. The bar that we have always used internally to measure our success on these deals has been two-fold. It's been the price per unit that we've achieved and it's been the multiple on our invested capital that we realized upon the sale of the property. I think if you look at the assets that we sold this year, the Murfreesboro, Westover Hills, and O'Connor on a price per unit basis, I think those are probably the three highest price per unit results that we've ever seen on a Vantage sale. I believe we've got a table in the 10-Q that Jesse is flipping to try to find.

I mean you guys have been very, very successful in selling. I'm just trying to ask for an idea of how this goes forward.

It's difficult for me to provide that kind of direction at this time, Jason. We've been fortunate with our sales this year since the projects were all contracted by the early part of the second quarter. Consequently, much of the decline we've observed over the past six months wasn't reflected in the pricing of those assets. However, the short-term future sales will depend on the Vantage Group and whether the rent increases they have achieved, as they approach potential marketing of those assets, can counterbalance the erosion of market cap rates alongside the higher acquisition financing costs buyers will face.

Got it. Thank you for that. And then Jesse, one for you. We were a little bit lower on expense. How should we be thinking about that going forward just in terms of a model perspective?

Just to clarify, Jason. You're talking G&A expense?

Correct.

We've experienced a slight decrease in our model. Overall, our G&A expenses have remained fairly stable, with only minor timing differences throughout the quarters, especially related to our restricted unit compensation expenses linked to the previously announced Vantage sales. We distributed those restricted unit expenses later in the year, which resulted in somewhat lower year-to-date expenses. However, salaries and regular administrative fees, which make up the majority of our G&A, have aligned with our adjusted balance sheet size. If you have specific questions regarding certain disclosures in the quarterly report, I would be happy to discuss them offline.

Jason, it's Ken. I think the other thing I'll add there is if you look at in particular the real estate operating expenses part of that is timing there. We're looking at nine months that ends September 30. And with our two owned real estate assets being student housing assets that's kind of the turn season for us is that July/August/September where units are made ready. So I think from a timing perspective we have a little bit of lumpiness in our expenses there just because of the start of the new lease year on the new academic year. And so I think that will smooth itself out into the fourth quarter as we have a quarter where those kinds of onetime annual expenses aren't incurred at the individual project level.

Okay. Got it. I mean you guys beat the number pretty solidly on the bottom line. I just want to make sure we get it right going forward but I'll follow up with you guys offline.

Okay. Thanks, Jason.

Thank you. And our next question comes from Chris Muller. Your line is now open.

Hey Ken and Jesse. Thanks for taking my question, and congrats on another nice quarter especially in this market. So you guys have been able to generate some pretty impressive gains on the sales of the Vantage properties. But Ken you mentioned this earlier, the macro has deteriorated pretty dramatically over the last six months. So have you seen any headwinds on either your existing portfolio, like maybe slower leasing or any slowdown in the pipeline as a result of that?

In terms of leasing activity, we currently have three projects operating at stabilized levels, with over 90% occupancy. From Vantage management's perspective, they are focused on fine-tuning the rent rolls and optimizing upcoming leases to ensure the properties are presented well when deciding to enlist a broker for sale. Historically, they have done a great job in this area, which gives us confidence in their continued success with these three stabilized deals. For the other projects still in the leasing phase, including one under construction, reporting from Vantage and the management companies indicates no decline in leasing velocity. We have moved past the peak leasing season, which typically occurs in the summer before the school year, but we are still observing strong leasing activity at those projects and satisfactory rent levels. Overall, we are pleased with their ongoing performance, and there are currently no concerns regarding the projects in lease-up based on the real-time data we are receiving.

Got it. That's helpful. And the second question is nice to see the new Freestone JV relationship. Do you have any expectations on what the size of that can grow to and maybe relative to the Vantage portfolio? Could those be running in tandem I guess going forward?

It's hard for me to answer that directly Chris. I think if you look at the bandwidth so to speak, the Freestone Group is a smaller group than when they were all together at Vantage. So in terms of their ability to do multiple transactions, I think if I was looking for a benchmark, historically I think we're probably in the range of what we saw on an annual basis historically from the Vantage Group, maybe a tiny bit behind that given they're somewhat smaller size than when they were all together. But I think we're going to continue to look at the opportunities that they present to us and work collaboratively with them to hopefully find some good solid transactions for the future.

Got it. Very helpful. Thanks for taking the questions.

Thanks, Chris.

Thank you. If we have no further questions, I'll turn it back to Ken for closing remarks.

Thank you very much everyone for joining us today. We appreciate the opportunity to communicate the results of the quarter to you, and we look forward to speaking with everybody again in February. Thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.