Greystone Housing Impact Investors LP Q2 FY2024 Earnings Call

Ladies and gentlemen, greetings and welcome to the Greystone Housing Impact Investors Second Quarter 2024 Earnings Conference Call. It is now my pleasure to introduce to your host, Jesse Coury. Please go ahead.

I would like to welcome everyone to the Greystone Housing Impact Investors LP, NYSE ticker symbol GHI, second quarter of 2024 earnings conference call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q2 2024, 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 GHI, which are not historical facts, are forward-looking statements that 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 using the 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 our 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 risk factors and other risks that may impact our business, please review the periodic reports and other documents filed from time to time by us with the Securities and Exchange Commission. Internal projections and beliefs upon which we base our 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 GHI 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 Greystone Housing Impact Investors LP. I would now like to turn the call over to our Chief Executive Officer, Ken Rogozinski.

Good afternoon, everyone. Welcome to Greystone Housing Impact Investors LP's second quarter 2024 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 second quarter of 2024, the partnership reported net income of $0.19 per unit and $0.27 of cash available for distribution or CAD per unit. In past quarters, we have noted that net income includes non-cash gains and losses that reflect the mark-to-market associated with our interest rate swap portfolio for the quarter. During the second quarter, we recognized a non-cash unrealized gain of $211,000 from that source. We are currently a net receiver on substantially all of our interest rate swaps as we receive compounded SOFR, which is now 5.35%, and pay a weighted average fixed rate of 3.49% on our approximately $366 million in swap notional amounts as of June 30, 2024. Assuming that the compounded SOFR level stays constant over the next six months, that 186 basis points spread would result in us receiving approximately $3.6 million in cash payments from our swap counterparties, which would not be reflected in our net income but would be reflected as an additional $0.16 per unit in CAD. We also reported a book value of $13.98 per unit on $1.53 billion of assets and a leverage ratio as defined by the partnership of 73%. On June 12, we announced a regular quarterly cash distribution of $0.37 per unit, which was paid on July 31, 2024. In terms of the partnership's investment portfolio, we currently hold $1.3 billion of affordable multifamily investments in the form of mortgage revenue bonds, governmental issuer loans, and property loans, and $158 million in joint venture equity investments. As far as the performance of the investment portfolio is concerned, we have had no forbearance requests for multifamily mortgage revenue bonds, and all such borrowers are current on their principal and interest payments. Physical occupancy on the underlying properties was 91.9% for the stabilized mortgage revenue bond portfolio as of June 30, 2024. Our Vantage joint venture equity investments consist of interest in seven properties, four where construction is complete, with the remaining three properties either under construction or in the planning stage, two of which have achieved over 95% construction completion. For the four properties where construction is complete, we continue to see good leasing activity. 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. As previously announced, the Vantage at Tombo property has been listed for sale. We have four joint venture equity investments with the Freestone Development Group, one for a project in Colorado, and three projects in Texas. Two projects have commenced construction. Our joint venture equity investment in Village Senior Living, Carson Valley, a 102-bed seniors housing property located in Minden, Nevada, is under construction, and the project currently has lease deposits for 55 of the property's 102 units. Our joint venture equity investment in the Jessiman Hays Farm, a new construction 318-unit market-rate multifamily property located in Huntsville, Alabama, has commenced construction as well. With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the second quarter of 2024.

Thank you, Ken. Earlier today, we reported our earnings for the second quarter, which ended on June 30. We reported a gap net income of $5.2 million, or $0.19 per unit, both basic and diluted. Our cash available for distribution, a non-gap measure, was $6.3 million, or $0.27 per unit. As of June 30, our book value per unit on a diluted basis was $13.98, which reflects a decrease of $0.61 from March 31. This change is mainly due to a decline in the fair value of our mortgage revenue bond portfolio and the difference between our reported net income per unit and the distribution for the second quarter. We estimate the fair value of our mortgage revenue bond investments quarterly, using models that primarily include NMDs tax-exempt multifamily yield curves. From March 31 to June 30, tax-exempt rates increased by about 15 basis points on average across the curve, leading to a decrease in the fair value of our mortgage revenue bond portfolio. We plan to hold our predominately fixed-rate mortgage revenue bond investments over the long term, so we don’t expect changes in fair value to directly affect our operating cash flows, net income, or cash available for distribution. As of market close yesterday, August 6, our closing unit price on the New York Stock Exchange was $14.33, representing a 2.5% premium over our net book value per unit as of June 30. We continually assess our liquidity to take advantage of worthwhile investment opportunities and to guard against potential debt deleveraging if asset values decline significantly. As of June 30, we reported unrestricted cash and cash equivalents of $34 million, along with around $56 million available on our secured lines of credit. At these levels, we feel confident in our ability to meet our current financing commitments, which I will discuss later. We regularly analyze our overall exposure to potential interest rate increases through interest rate sensitivity analysis, which we report quarterly and is included in our Form 10-Q. The interest rate sensitivity table illustrates the impact on our net interest income given different changes in market interest rates and various management assumptions. Our base case utilizes the forward SOFR yield curve as of June 30, reflecting anticipated SOFR rate declines over the next 12 months. The scenarios we present assume an immediate change in the yield curve, without any action on our part for 12 months. The analysis indicates that an immediate 200 basis point increase in rates would lead to a reduction in our net interest income and cash available for distribution of about $1.7 million, or $0.073 per unit. Conversely, a 50 basis point decrease in rates across the board would result in an increase in our net interest income and cash available for distribution of $423,000, or around $0.018 per unit. Thus, we are largely protected against significant fluctuations in our net interest income due to changes in market rates, assuming there are no major credit issues. Our debt investment portfolio, which consists of mortgage revenue bonds, governmental issuer loans, and property loans, totaled $1.3 billion as of June 30, accounting for 85% of our total assets. This figure has risen by $83 million since March 31, mainly due to funding our investment commitments and acquiring additional mortgage revenue bonds. We currently own 87 mortgage revenue bonds that provide permanent financing for affordable multifamily properties across 12 states. In our portfolio, 29% of the value relates to properties in Texas, 27% in California, and 19% in South Carolina. During the second quarter, we allocated $83.5 million toward our mortgage revenue bond and related taxable mortgage revenue bond investments. We also own nine governmental issuer loans for financing the construction or rehabilitation of affordable multifamily properties across five states. These loans frequently have companion property loans or taxable governmental issuer loans secured by the first mortgage lien. In the second quarter, we advanced $19.5 million for our governmental issuer loans and related commitments. Our outstanding future funding commitments for mortgage revenue bonds, governmental issuer loans, and related investments stood at $214 million as of June 30, to be funded over the next 24 months, contributing to our income-generating asset base. We expect to receive redemption proceeds from our existing construction financing investments nearing maturity, which will then be redeployed into our remaining commitments. We applied the CECL standard to establish credit loss reserves for our debt investments and related funding commitments, reporting a minimal provision for credit loss of $20,000 for the second quarter. This provision stemmed from an initial provision on a new property loan investment during the quarter but was offset by a recovery of $169,000 from prior credit losses associated with a resolved bankruptcy process related to one of our mortgage revenue bonds. The impact of the credit loss provision has been adjusted in our cash available for distribution calculation, consistent with our historical treatment of loss allowances. Our joint venture equity investments portfolio contained 12 properties as of June 30, with a reported carrying value of about $158 million, excluding one investment consolidated in our financial statements. We advanced equity amounting to $11.7 million during the second quarter, with remaining funding commitments for joint venture equity investments totaling $45.6 million as of June 30. We utilize debt financing facilities to leverage our investments, with an outstanding principal balance of roughly $1.5 billion as of June 30, an increase of $74 million since March 31, due to TOB financing proceeds linked to our mortgage revenue bonds, governmental issuer loans, and related investments made in the second quarter. We manage and categorize our debt financing in four primary categories, as detailed on page 88 of our Form 10-Q. Three of these categories—fixed-rate assets with fixed-rate debt, variable-rate assets with variable-rate debt, and fixed-rate assets with variable-rate debt hedged with interest rate swaps—are structured to insulate our net return from changes in short-term interest rates. These account for $990 million, or 93.8%, of our total debt financing. The remaining category is fixed-rate assets with variable-rate debt without designated hedging, which presents the most exposure to interest rate risk in the short term. This category makes up only $65 million, or 6.2%, of our total debt financing. We continuously evaluate our interest rate risk in this category and may implement hedges in the future if deemed necessary. Regarding preferred capital, we redeemed our remaining $10 million of Series A preferred units in April 2024. After this redemption, the next earliest date for redemption of our outstanding preferred units is in April 2028. We continue to explore additional issuances of preferred units under our active offering. In March 2024, we reactivated our at-the-market offering to sell up to $50 million of newly issued units into the market. During the second quarter, we sold 28,037 units under the ATM program, generating approximately $450,000 in gross proceeds. Issuing units through the ATM program allows us to raise additional capital without causing price dilution and at a significantly lower cost compared to a traditional follow-on offering. I will now turn the call over to Ken for an update on market conditions and our investment pipeline.

Thanks, Jesse. Pressured by higher U.S. treasury yields and MMD U.S. treasury ratios, the muni investment grade index ended up in the red for the first half of 2024. It was a different story for high-yield bonds with the high-yield muni index up 4.2%. July was a better month with the Bloomberg Municipal index posting a total return of 0.9% when we got back into the black for the year, and the muni high-yield index adding another 1.1% of total return. From a market technical perspective, the first seven months of the year saw $275 billion of gross issuance with many market participants still predicting 2024 total issuance of over $400 billion. Through July, year-to-date fund and ETF flows totaled $11.5 billion according to Refinitiv, an increase of almost $5 billion during the three months of May to July. As of yesterday's close, 10-year MMD is at 2.54% and 30-year MMD is at 3.43%, roughly 15 and 35 basis points lower in yield, respectively, than at the time of last quarter's call. A lot of that move has occurred since last week's jobs and unemployment data release. Five to seven-year MMD is the low point of the current muni yield curve as retail demand has expanded and rallied the belly of the curve. There were over $1.1 billion in muni mutual fund inflows just last week, a high for 2024. The 10-year muni-to-treasury ratio, however, is up to 65%. Continued volatility in rates, persistently higher interest rates, and cost inflation have presented challenges to our developer clients on new transactions. Our affordable housing developer clients continue to rely more and more on governmental subsidies and other sources of soft money to make their transactions financially feasible. We continue to work with our clients to deliver the most cost-effective capital possible, especially through the use of the Freddie Mac Tax-exempt loan forward commitment in association with our construction lending. We will continue to look for other opportunities to deploy capital on our JV equity strategy on a selective basis. We believe that getting new projects underway now while other sponsors face significant challenges will put us in a better position for success with our exits three to five years down the road when new supply may be limited. We believe that our new JV equity investments made in 2023 and 2024 are reflective of that approach. With that, Jesse and I are happy to take your questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Jason Weaver with JonesTrading. Please go ahead.

Hey guys. Good afternoon. Thanks for taking my question. So it looks like, at least on a gross basis, your deployment rate was nearly three times that of the first quarter. Can you comment a little bit on that? Is the timing and your expectation in terms of yields? I know you raised some capital and had some redemptions coming your way, but it just seems like the market might have been getting a lot more attractive to you.

Hi Jason, as we've mentioned for a few quarters now, we continue to find appealing opportunities across all our business lines. We experienced a reasonable amount of redemptions in Q1, which allowed us to invest that capital into new opportunities. While I wouldn't say there has been a significant increase in the number of investment opportunities, we have identified a steady range of solid options that have been available for some time.

Yes. I think the other thing to keep in mind, Jason, is that part of the deployment of capital that you see is the drawdowns on our existing construction financing commitments, as projects really get into the heart of their construction process, that's going to accelerate the timeline because, again, we make a full loan commitment upfront at closing, but that capital is drawn by project sponsors as they make their construction expenditures. So, I think the alignment was not in terms of capital deployment wasn't necessarily all new transactions. I think there was a fair amount in there of just the draws made by our project sponsors on accelerated construction spending.

Got it. That's helpful. What's your general comfort level regarding the level of cash on the balance sheet? I know you updated a credit line at the end of the quarter in June.

Yes. So we have two lines of credit that we maintain. One is a general line of credit that we can use for any purposes that's up to $50 million. Our second is an acquisition line of credit that we used to do initial fundings on asset acquisitions. And then we have cash on our balance sheet, as you mentioned. So we always like to keep a decent amount of cash on hand to be able to be both reactive to opportunities as well as to cover any cash needs from asset volatility or mark-to-market collateral calls that we need to be made. I wouldn't say that we peg ourselves to any particular level of cash. It's really whatever we think we need to have on the balance sheet to be able to be responsive to those potential cash needs.

Got it. Okay. And then one final one. Ken, I think you mentioned the estimate of $400 million in issuance this year on a market-wide basis. Do you think there's an upside to that number, given what we've seen since Monday and the general direction of rates?

I think certainly, if the trend in rates continues that we saw from the end of the trading week last week that you'll see more muni issuers get into the marketplace and try to take advantage of the window of opportunity there. It's been a little quiet on the refunding front over the past year or so. So, in my experience as a former muni investment banker, when those windows of opportunities open up, issuers like to try to take advantage of it. So, it wouldn't surprise me to see a building forward calendar in the broader muni bond landscape, and to, as a result, see a higher total volume level for the year.

Okay. Great. That's it for me. That's great color. I appreciate it.

Thank you. Our next question is from the line of Chris Muller with JMP Securities. Please go ahead.

Hey guys. Thanks for taking my questions. So, I guess what drove the sale of the MRB in the quarter? It looks like there was a $1 million gain with that? And would you look to take any more gains on that portfolio as rates start coming down? Or is hold to maturity kind of the prevailing strategy there?

That was really a unique situation, Chris. That was a transaction where it was an MRB, but the underlying project was sold by the developer. And so as a result, the bonds were defeased to their call date, which I believe, Jesse, was November of 2024. So, it had a little bit of short duration on it. The other thing was that we could have funded that and just held on to the maturity date. But given that, that was a legacy AMT bond, that was going to be difficult for us to fund on an effective basis. And so we talked to a couple of dealers, we got some indicative levels for people. We liked the price that we were seeing from the marketplace on that and decided that the right thing to do was for us to go ahead and sell that pre-REIT in the secondary market. So, from my perspective, a real unique set of circumstances there that led us to make that decision as opposed to a more holistic philosophical change where it's like we're going to continue to cull our portfolio by selling things on an opportunistic basis. I think that was really more of a one-off trade given those unique factors or circumstances surrounding that particular bond position.

Got it. Yes. You aren't really in the business of being bond traders, so that makes complete sense. I also noticed there were a couple of extensions on those two GILs in the subsequent event section of the Q. Are there any common themes there? Why are borrowers asking for extensions at this point? Any additional information you can provide on that would be helpful.

So, it is a common theme on those extensions and this really sort of gets into the weeds of how the Freddie Mac tell forward perm loan product works. Freddie Mac, in their underwriting and in their forward commitment, gives project sponsors the ability to upsize their loan by 10% from the original forward commitment amount if the permanent conversion underwriting supports that higher loan amount. And so since a lot of these deals had their perm loan amount rate locked 30 to 36 months ago, they're at pretty attractive rates versus the current market. And so what we're seeing project sponsors do is really try to optimize their gross potential rent in their underwriting NOI because they really only have one bite at the apple with this conversion upsizing with Freddie Mac. And so that's really the common theme there is that these sponsors are trying to squeeze every dime of underwriting and why that they can out of these properties in order to take advantage to the maximum extent possible of that upsizing at an interest rate that was rate locked three years ago. So I think we're going to continue to see that theme as some of our GIL investments get closer to their perm conversion dates because I think it just makes economic sense from the owner's perspective to try to get as much leverage at a favorable rate as you can in this current environment.

Got it. That makes a lot of sense. And then if I could just squeeze one more in for Jesse. I guess you probably don't have a post-June 30; book value estimate given your models are quarterly. But I guess, can you just comment on the post-June 30 move in book value? I mean, I guess the 10-year's come down about 40 basis points since June 30. So just curious how you guys are seeing that number move post quarter?

Yes. You're right, Chris. We only do those valuation models on a quarterly basis. The color I'll give you there is that we primarily pegged to the single A tax-exempt multifamily MMD curve. And what we saw from December 31 to June 30 was about a 43 basis point increase across the curve. And then from June 30 to early August, we saw a reversal of essentially 34 basis points to 35 basis points of that reversal. So in terms of what that means for our balance sheet, if we were to mark today, we would see an appreciation in those values of those MRBs, probably something close to what we had at the beginning of this year or the end of 2023, but we don't have that exact number available.

I think the only additional detail I would provide is to look at the 10-year high-grade MMD as a representative gauge for the overall municipal market. It's not the A-rated multifamily curve that Jesse mentioned, but if we examine the change in rates since the close on July 24, we found that the 10-year MMD was at 2.80%. Although the market experienced some decline today, the close in the ten-year MMD yesterday was 2.54%. This represents a 26 basis point change in the muni MMD index at the 10-year mark over approximately 10 trading days. This gives you an idea of what has occurred in the municipal space alongside trends in the broader fixed income markets.

Got it. It's very helpful. Thank you for your comments.

Thank you. Our next question is from the line of Jason Stewart with Janney. Please go ahead.

All right. Thank you for taking the questions. A couple on the liability side. First, it looks like the $10 million preferred redemption was funded through the general line of credit. Can you give us a sense of how that's going to be going forward? Are you going to leave it on that line? Or are there more cost-effective ways to fund that redemption? And then secondly, just more generally, as we're looking at forward rates, can we expect you to drop the hedge ratio on the overall portfolio? Or maybe think about it a different way, instead of removing swaps as you grow, just let that ratio fall a little bit.

Hi, Jason. I'll take the first one. In terms of the $10 million preferred redemption, it's not tied directly to the draw on the line of credit, but it ended up being that way just given how our capital and cash position moved throughout the quarter. We don't tie it to any particular event. We look at cash and available liquidity holistically, and we'll wait to see when we get redemption proceeds in and maybe potential proceeds from JV sales in the future if we can better pay down that line of credit and be a little more cost effective, as you mentioned.

Jason, it's Ken. I want to add that, as Jesse noted, we still have our active Series B preferred equity offering available. If we can successfully raise more of that low-cost preferred capital through this offering, it would be beneficial. Regarding your second question, part of the change is driven by the demand from sponsors. Starting in the second half of 2022, we noticed a shift in our construction lending from floating-rate to fixed-rate financing. This shift was influenced by the risk preferences of low-income housing tax credit equity investors, who became hesitant about the risks associated with rising rates that could threaten their debt financing. Consequently, they requested fixed-rate debt from project sponsors. We, remaining neutral on rates, initiated a significant hedging program to avoid any asset-liability mismatches in our funding. The future of this approach really hinges on whether low-income housing tax credit investors will return to floating-rate financing, particularly in an environment with declining short-term interest rates expected in the coming year. If they do, we may revert to our previous model of not hedging because our positions would align with floating-rate assets and liabilities. Ultimately, our main focus is not to speculate on rates, but to minimize interest rate volatility affecting our net income and CAD. We're aiming to secure a stable net interest margin that will support a consistent base of net income and CAD from our fixed-income positions as we establish them.

Okay. That's fair. One other question for me. In general, as we consider the overall capital raising environment and your comments on the attractiveness of investments and your pipeline, does it make sense to be more aggressive in raising capital? I understand it's challenging since spreads affect our book value, and we should be thoughtful about when we conduct capital raises in relation to our book. However, could you share your perspective on whether it’s advisable to become more aggressive in this environment?

I think at a high level, as Jesse noted, we are seeing good opportunities at accretive return levels to us. Leverage is still available. There are really no constraints on us from that perspective. So to the extent that we see what we believe are kind of outside the normal range of opportunities in credit or asset classes that we feel comfortable with, we're going to want to try to pursue those and wanting to try to pursue those is going to dictate us raising the capital to be able to fund those positions. So I think to the extent that opportunities present themselves, we're certainly going to take a hard look at them. We're going to press on things like that Preferred B offering to take advantage of the low six-year fixed rate cost of that capital, and we'll continue to look at other opportunities that might be available to us as well, again, driven primarily by having those investment opportunities open to us. I don't think at least us, as a management team, are of a philosophy where we just raised capital for the sake of raising capital. It's really driven by what we're seeing on the investment opportunity front.

Right. Yes. Okay. That's helpful. Thank you. Appreciate the time.

Thank you very much, everyone, for joining us today. We look forward to speaking with you again next quarter.

Thank you. The conference of Greystone Housing Impact Investors LP has now concluded. Thank you for your participation. You may now disconnect your lines.