Earnings Call Transcript - GHI Q1 2021

Operator, Operator

I would like to welcome everyone to America First Multifamily Investors, L.P.'s NASDAQ ticker symbol ATAX First Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q1 2021, 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 First Quarter 2021 Earnings Conference Call. During this conference call, comments 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 provision of the private securities litigation reform act of 1995.

Ken Rogozinski, CEO

Thank you, Michelle, and good afternoon everyone. Welcome to America First Multifamily Investors, L.P.'s first quarter 2021 investor call. Thank you for joining. I will give an overview of our business in 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. For the first quarter of 2021, the partnership reported net income of $0.09 Beneficial Unit Certificate or BUC, $0.11 of cash available for distribution per BUC, a book value of $5.65 per BUC, and on $1.2 billion of assets and a leverage ratio as defined by ATAX of 67%. The Partnership is current and in good standing with all of our lenders and leverage providers. In terms of the Partnership's investment portfolio, we have received no request for forbearance on our multifamily mortgage revenue bonds, and all multifamily MRBs are current on principal and interest payments. The collections rate at properties of service collateral for multifamily MRBs has averaged approximately 91% from January 2021 through April 2021. Physical occupancy averaged 93% for the portfolio as of March 31, 2020. Our current Vantage portfolio consists of 12 projects, seven where construction is 100% complete, one at 95% construction completion and four others, where construction or planning is still underway.

Jesse Coury, CFO

Thank you, Ken. For the first quarter of 2021, ATAX reported total revenues of approximately $14.4 million. Net income for Beneficial Unit Certificate or BUC basic and diluted of $0.09 and cash available for distribution or CAD for short of $0.11 per BUC. In terms of our investment, ATAX reported over $1.2 billion in total assets, such assets are comprised of our three main investment classes, the first being MRB and GIL portfolio, which is a collection of mortgage revenue bonds and construction type lending programs. The second being our investments in unconsolidated entities or Vantage investments, and the third being our owned MF properties. The mortgage revenue bond, and governmental issuer loan portfolio consists of MRBs for short and GILs for short of approximately $772 million of MRBs, and $104 million of governmental issuer loans. These MRBs and GILs represent approximately 73% of our total assets. We currently own 75 mortgage revenue bonds across 13 states. We hold significant amounts of such bonds related to properties in three states, based on outstanding principal, with Texas representing 44% of total MRBs and California and South Carolina each representing 17%.

Operator, Operator

Thank you. Our first question comes from a line of Jason Stewart with JonesTrading. Your line is open. Please go ahead.

Jason Stewart, Analyst

Thanks. Good evening. I wanted to start with credit exposure and the expense line item there. Ken, is it fair to say that given that we're back to zero, you're pretty comfortable with the valuation and the marks on the portfolio? And obviously, there are a couple of credit issues that you have?

Ken Rogozinski, CEO

Thanks for your question, Jason. Yes, I think given the performance of the core MRB portfolio and still being in a position where there have been no requests for forbearance and we've seen continued strong levels of both collections and occupancy. We have not seen a need over the past 12 months to make any adjustments or impairments at all on the core MRB portfolio. With regard to the assets where we have taken charges over the past year, the Live 929 and the proton therapy center, I think at this point in time with the proton therapy center working its way through Chapter 11, that's a bit of a lengthy process. We don't see a lot happening there on a day-to-day basis, at least at this point in time in the bankruptcy case that would lead us to make any additional adjustments on that side, on the 929 with the process that's going on there where John Sampson is making the announcement about the return to in-person learning for the fall 2021 semester, and the requirement for students to be vaccinated. We're monitoring the borrower's activities there in terms of leasing and project positioning for the new academic year that starts in August and will continue to monitor that process. And we'll make a judgment as we see that unfold over the next few months.

Jason Stewart, Analyst

Okay, got it. Thanks. What is your opinion in terms of when you do see some outcome out of the bankruptcy process for the proton therapy center, do we see a recovery in that line item, or is it more likely just to leave a little bit of conservatism on the balance sheet?

Ken Rogozinski, CEO

I think, Jason, it depends on what the ultimate resolution to it is. The only real benchmark that I have is what we've seen on some of the other proton therapy bond deal restructurings that have happened in the past. There has usually been some refunding bond transaction occur where the existing debt is refunded, and a new set of bonds is sold out into the marketplace. And so there's a cash recovery from the existing holders there. In some circumstances in connection with that, the existing debtors take back some series of either subordinated debt or capital appreciation bonds. So I think it's too early to tell still based on what's going on in the bankruptcy case. But if this happens, we follow the same method that the other cases have in the past, I think you'll see some combination of recovery, and then with us ending up with some certificate or security on our books that will then be valued.

Jason Stewart, Analyst

Okay, fair enough. It seems to me like you're in a pretty conservative position, which I think everybody appreciates. Moving into Vantage, when we think about the cap rate progression in the Sunbelt, southeastern markets and where the Vantage properties are located, how should we think about the progression of sale activity and potential gains in terms of just the lag between when you enter a contract and when it gets recorded into financials?

Ken Rogozinski, CEO

From our perspective, Jason, when we evaluate transactions for investments on the Vantage side, we tend to be conservative in the assumptions that we make there. And so the wind has certainly been at the back of multifamily asset acquisitions over the past three to six months. Just broadly based on what we're hearing from the apparent Greystone team in terms of the activity that they're seeing both on the lending side and on the asset sale side, there's been strong demand for the multifamily asset class in general and compressions of cap rates still in a lot of different markets. So the Vantage team does a great job of positioning these projects for sale. They're very active in terms of managing the rent roll once the project has been listed for sale in order to demonstrate the top earning potential and generate the best results from that competitive sale process. So, we don't think that that strategy is really going to change going forward. I think we will rely on their expertise and their success in the past in terms of managing that process and making those decisions about accessing the market when they see occupancy and rent roll hit the targets that they want to achieve.

Jason Stewart, Analyst

Okay. Do you have a sense of what cap rate you're exiting these projects at?

Ken Rogozinski, CEO

That's really hard to say, Jason, because from everybody's perspective, you can all determine what an NOI is. Is it a T-12? Is it a T-1? Is it some forecasts of what NOI is? So depending on what your NOI assumption is when you benchmark that against the actual sales price, you can come up with a wide variety of cap rates. So that's why from our perspective, we don't tend to focus on cap rate as a metric per se; it's really the gross sales price and then the return to the partnership through the waterfall and what sort of IRR we achieve there.

Jason Stewart, Analyst

Fair enough. And those have been pretty nice returns. You alluded to some commentary in terms of what plus 200 looks like in terms of rates. But I'm more curious globally, maybe if you pull up a little bit your view on the feds involvement in the mortgage market on an aggregate basis, inflation and rates overall, not necessarily the impact on the ATAX balance sheet, but just your view globally?

Ken Rogozinski, CEO

Yeah. It's been an interesting quarter from that perspective. I was looking at the just the 10-year itself in terms of what happened during the first quarter of the year. And I think it's easy to forget that the first trading day of January in 2021, the tenure was still at 91 basis points. And then three months later on March 31, at the end of the quarter, the tenure was at 173. That's a move of over 80 basis points in the 10-year during that short three-month time horizon. I know that there's been a lot going on in the economy and in Washington in terms of delivering additional levels of stimulus and the feds' and Treasury's desire to see the economy move and grow at a faster clip, as is seen by the first quarter GDP growth number at over 6%. So, at some point, the continued stimulus that we see out of Washington will be felt in the market. The 10-year has simmered down some from that end of the quarter level to seem to be more in this 155 to 160ish type trading range. I think a lot is really going to depend on both how aggressive Washington continues to be on the stimulus front, whether or not these two new announced plans that have come out of the administration make their way through Congress and what they end up looking like. More closer to home, the dynamic has been interesting to see the amount of money that continues to move into the mutual funds complex, particularly as you hear a lot of these plans to pay for some of the proposed spending programs coming out of Washington with higher marginal tax rates. More significantly, recently, the higher capital gains taxes that have been proposed. I think people will look at that and the old-school Muni coupon clipping strategy with its tax advantages, I think will pique a lot more investors' curiosity than it has over the past couple of years with rates at low levels and other attractive options in the marketplace.

Jason Stewart, Analyst

Yes, I tend to agree with you and thank you for the time, taking my questions. I appreciate it.

Ken Rogozinski, CEO

You're welcome, Jason. Anytime.

Operator, Operator

Thank you. And our next question comes from a line of Ron Lane with ValueForum. Your line is open. Please go ahead.

Ron Lane, Analyst

Hello, can you hear me? That's the first question.

Ken Rogozinski, CEO

Yes, we can, Ron.

Ron Lane, Analyst

Great. I have three brief questions. Number one, we have owned ATAX since February of 2014 and I looked at my old notes, which are difficult to read, and in the older years prior to 2018, I had a big note written down 92% to 95% tax-free from the CPA who does our taxes. And I noticed on a report that came out from I think Jesse's office in 2018, 2019 and 2020, that rate has come way down to where it is expected to be now, which I have been told many times to expect something in the rate of about 60% tax rate. So something happened in the way you run your business or the way you do the accounting to effect that kind of dramatic change. Now I was wondering if you can tell me what it was?

Jesse Coury, CFO

Yes, we believe the table you're referring to is the last page of our quarterly supplemental report in which we summarize the breakout between taxable income versus tax-exempt income as reported on the schedule K1 for individual investors. And you are correct. In 2018 and 2019 we reported between 60 to 65% taxable income. That was a result of a couple of different factors. One was the sale of owned real estate that the partnership either took back through mortgage revenue bond defaults during the credit crisis or through an investment opportunity in Florida where they could position the asset for sale within the mortgage revenue bond property and get excess proceeds, which did come to pass. Probably the more larger impact was the addition of the Vantage investment portfolio, which is a taxable investment for ATAX, and this began with the consent solicitation that was completed back in 2015 in an effort to capture opportunities that were seen in the market rate and taxable space. This diversifies ATAX’s operations to take advantage of opportunities that were outside of the tax-exempt space. Ken, anything you would add?

Ken Rogozinski, CEO

I think that was really the genesis of that shift you're referring to, Ron. As Jesse referred to the consent solicitation, the Vantage investments have been a great diversifier for us in our portfolio and have helped even out some of the origination ups and downs that we see periodically on the traditional tax-exempt MRB portfolio. I understand that there is a difference on a year-to-year basis between what's generating that income. But I think on the whole, the benefit of that additional asset class in our portfolio has outweighed any potential additional costs by that income being taxable as opposed to tax-exempt. The issue we’re facing with individuals in higher tax brackets is presenting a real challenge. I used to believe it was straightforward to hold assets in taxable accounts. Now, the pressing question I’m examining with our CPA and our family’s fiduciary is whether to keep these assets in the taxable account, considering that taxation may increasingly impact the R&D area. If there are other assets to liquidate for R&D funding, those would be tax-free. This situation is causing significant discussions in many meetings. Let me move on to point two.

Ron Lane, Analyst

Back in November of 2003, I was one of the folks that started a large investment group called ValueForum. We have 633 members today. I know a lot of them because we used to have annual conventions. We would have speakers from the group and outside speakers, CEOs of companies and folks like you all that would make presentations. Most of our members are retirees or folks that are getting ready to retire, preparing for it financially. There is a general consensus, which surprises me quite frankly, because I could care less, that most all folks that are retired in our group prefer to get paid monthly rather than quarterly. A significant change where they are for one investment over another one. And I think my concern is, when you pay quarterly, and it's happened today, because I can look at all the shared portfolios where people are doing, when you pay quarterly, anyone pays quarterly, you can open up the door for trading in between. We have some very skilled day traders that can sell down their Apex holdings for some quick opportunities, especially with all the craziness going on with cryptocurrencies, Robinhood, you name it, and they are doing it. I stay away from the whole thing. A lot of people are doing it, and some people are doing very well with it. So I've made my pitch once already to members, a member of your management team, and I know it's difficult to change. But I can tell you, another firm that was one of my largest holdings, up until spring of 2020, switched from quarterly to monthly, which is awkward. Sometimes it's easy if you make no sense, they just pay the first quarter to be paying three times for three, each of the three months. But they have to go to like 0.0385% to 6% and half of the percent. But it can be done. I didn't know whether that's something you would even consider, but I can tell you, you would get a lot more people investing in Apex; I know that's a given. So I want to run that by you all; I have done it with one of your people individually, but have any of the graph and you also in Investor Relations. So two of the people that have known, there's something you've ever spoken about at all in meetings, moving to monthly?

Ken Rogozinski, CEO

Ron, that's a topic that we haven't discussed. This is, at least from my perspective, the first time we're hearing that kind of feedback from people that there's an important distinction between a monthly and a quarterly distribution. I wouldn't say that there's certainly a larger administrative burden to doing a monthly distribution. While I think it may be more attractive to income-oriented investors, I think there also has to be consideration of the fact that it could become an outlier or an off-the-run security by doing something that's contrary to some market standard. But as I said, I think this is the first time that I'm hearing of this concept from people. So it's certainly something that we'll take a look at here on our side and have a discussion about.

Ron Lane, Analyst

You said exactly what I expected. I can't challenge it. All I can share is what people are thinking and saying. I always consider the group I’ll be calling in. That was overwhelmingly the number one issue: shipping and getting them to pay monthly. I’ve addressed that. Lastly, I should be able to answer this myself, but I'm not very good at accounting. I know you had $0.11, I'm sorry, $0.09 CAD for the first quarter, and you earned $0.11 CAD. Does that extra $0.02 get reflected anywhere in future numbers? I know your Board meets every month to declare what the dividend will be, but you earned $0.02 more than you expected?

Ken Rogozinski, CEO

I'll let Jesse talk about the accounting. I think the one point that I'll make for you there is with the individual Vantage sales; they do tend to be lumpy. For example, the Germantown sale this quarter generated $0.05 of our $0.11 of CAD, and timing on that can be uncertain. Project buyers have rights under their contracts to extend and things of that nature. So trying to wind up exactly when we think the sale is going to close, when we're going to receive our distribution from the Vantage entity, and do all the final accounting of that versus when the Board has to make a decision under the NASDAQ rules for declaration of a dividend, sometimes those dates don't all align together. So you could have a situation like we had this quarter, where the sale didn't close until a little over a week after we had to declare what the dividend distribution was for the first quarter. So, yeah, I think that's just the nature of the execution here; there may be situations where closing is still uncertain, or there may be some kind of time lag. But I think as the data has historically shown, if you look at on average, where the CAD has been versus where the dividend distribution has been on an annual basis, there's a very tight correlation on average, not necessarily quarter-to-quarter, but on average, when you look at it over either a year or an extended period of time. I'll let Jesse talk about the accounting piece of that.

Jesse Coury, CFO

Yes. And Ron, in terms of the cash available for distributions metric that we report in our filings, it is a non-GAAP operating measure that management and the board consider as a factor in determining the distribution. The Board has the discretion to consider various factors, one of which is the CAD metric, as well as net income per BUC. I will echo a lot of what Ken said in that the Board has historically taken a long-term view of the distribution, net income, and cash available distributions, trying to keep a consistency in the distribution, hopefully for the benefit of the unit holders rather than responding to spikes in operating results due to discrete events over time.

Ron Lane, Analyst

Okay. Let me sneak back real quickly to the previous question. If someone was thinking of buying ATAX today, and they were successful, and they had good taxable accounts, and they had a couple of hours to equal value and a relative brother, would you recommend putting it in an IRA or in a taxable account?

Ken Rogozinski, CEO

We really can't provide that kind of financial advice to people. I would recommend that you consult with your individual accountant, tax planner, or attorney as you consider those opportunities. We can't offer any general guidance in that area.

Jesse Coury, CFO

Yes, we're definitely looking into that. I keep compiling the numbers, and I'm realizing that if the IRAs are substantial enough, there's no need to liquidate them for RMDs. The income from that approach is slightly slower because cutting back on RMDs doesn’t have immediate cash implications, whereas typically about 60% is tax-free and 40% is taxable. However, it can be limiting. I'm uncertain on how to recommend this, but if I were starting fresh, I might pursue it. We are discussing whether to allocate funds to IRAs or not and considering whether to continue investing in both avenues. We'll see how it goes.

Ron Lane, Analyst

All right. Thanks for your time, gentlemen. I appreciate it. Keep up the good work.

Ken Rogozinski, CEO

Thank you, Ron.

Jesse Coury, CFO

Thank you.

Operator, Operator

Thank you. I’m showing no further questions at this time, and I would like to turn the conference back over to Ken Rogozinski for any further remarks.

Ken Rogozinski, CEO

Thank you very much, Michelle. No further remarks. We appreciate everyone's participation today. And we look forward to speaking with everyone again next quarter.

Operator, Operator

This does conclude today's presentation. Thank you for participating. You may now disconnect. Everyone, have a great day.