Greystone Housing Impact Investors LP (GHI) 2018 Q1 法說會逐字稿

I would like to welcome everyone to America First Multifamily Investors L.P.'s NASDAQ ticker symbol ATAX First Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I would like to turn the conference over to Craig Allen, Chief Financial Officer of the company.

Thank you, and welcome to ATAX' First Quarter 2018 Earnings Conference Call. Joining me on the call today will be Chad Daffer, ATAX' Chief Executive Officer; and Andy Grier, Senior Vice President of ATAX.

During this conference call, comments we make 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 defined by the use of words like may, should, expect, plan 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 factors and other risks that may impact our business, please review the periodic reports and other documents filed from time-to-time by ATAX with the Securities and Exchange Commission. Our internal projections and beliefs, upon which we base our expectations may change, but we will not necessarily inform you if they do.

Today's discussion will include non-GAAP measures, and we will expand during the call on these non-GAAP measures. We want to make you aware that ATAX is operating under the SEC Regulation FD, and we encourage you to take full advantage of the question-and-answer session.

Thank you for your participation and your interest in ATAX. I would now like to turn the call over to Chad Daffer, ATAX' Chief Executive Officer.

Thank you, Craig. Good afternoon, and thank you all for joining us for this first quarter ATAX earnings call. This afternoon, I'd like to share with you my thoughts on the first quarter. Craig will then present the financial results of the partnership. I'll have a few closing thoughts and we'll look forward to taking your questions.

The partnership reported year-over-year for Q1 revenue growth of 3% increase, a reduction in expenses of 20%, cash available for distribution of $0.10 per share, and Craig will share more details with you later in the call.

The first quarter was ripe with geopolitical events abroad and continued concerns about inflation at home, from the nuclear tensions with North Korea to threats of trade wars with China causing increased volatility in both debt and equity markets. The concerns about inflation and the U.S. employment rate below 5% for the first time since 2000, the Federal Reserve Bank increased rates for the fifth time in 2 years to 1.75%. This action by the Fed is material due to the effects on the tax-exempt rate markets as it relates to SIFMA and municipal market data indexes. Both are utilized for leverage and pricing of the mortgage revenue bond portfolio. In the last 12 months, SIFMA has increased 76 basis points to 1.61% as of the end of the first quarter, while 10-year MMD has increased 29 basis points to 2.4% as of the end of the first quarter.

I'm pleased to report that we continue to see very strong demand for all multifamily housing assets, with market evaluations continuing to surprise on the upside on our real estate portfolio and our Vantage assets.

At this time, I'd like to have Craig present the partnership financials for the first quarter of 2018.

Thank you, Chad. What I'd like to do is take you through at a high-level, some of the key highlights of the balance sheet and the income statement, and then a couple of areas of interest as well too, and then, I'll turn it back over to Chad.

Total assets at the end of March were slightly over $1 billion, virtually unchanged from December 31, 2017. We saw -- in our mortgage revenue bond portfolio at the end of March, we are now in 14 states totaling about $756 million, ranging from mortgage revenue bonds in Washington down to Texas, Minnesota to Florida in the Southeast. And that -- it's comprised of about 84 mortgage revenue bonds at the end of March 2018.

As mortgage revenue bonds are the core part of our asset portfolio and the core part of our fund, we've reported in past quarters that really we started back in 2012 with the rapid growth in the mortgage revenue bonds as a percentage of our total assets. And March -- at December 31, 2012, 35.1% of total assets were comprised of mortgage revenue bonds. At the end of March in 2018, about 73.2% of our assets were held in the form of mortgage revenue bonds.

During the quarter, we had 3 mortgage revenue bonds redeem, pay off in full and bring in about $10.4 million in cash, all in the normal course of business.

Another major component of our balance sheet are the MF Properties or multifamily properties that we own. At the end of March of 2018, our MF Properties totaled about $76.1 million, and we hold 3 MF Properties in 3 states, Suites on for Paseo in California, the 50/50 in Nebraska and Jade Park in Florida. Another component of our balance sheet is our investment in unconsolidated entities or advantage assets. We have an increase of about $12.3 million during the quarter in that investment category.

Our net book value at the end of the quarter was approximately $4.78, and as we've reported in previous quarters, that book value per unit can move dramatically based upon movement in interest rates and it's reflective of the unrealized gains or the unrealized losses that we may show in our portfolios on the balance sheet. As Chad mentioned, we had a nice increase in our total revenue for the quarter. We reported $16.5 million of total revenue in Q1 of 2018 versus $16 million in Q1 of 2017.

On a quarterly basis, our net income per unit was $0.09 this quarter versus $0.10 a year ago, and our cash available for distribution was $0.10 for the first quarter 2018 versus $0.14 a year ago in 2017. What may not be as obvious and why this -- and why we are encouraged by this is the fact that in first quarter of 2017, ATAX sold an MF Property by the name of Northern View for a gross gain of about $7.2 million and an after-tax gain of about $4.7 million, equating to about $0.08 per unit. So that's why we're encouraged more about Q1 2018 versus a year ago.

One of the things that we look at each quarter is our interest rate sensitivity and how sensitive are we to rises or increases in the interest rates. And again, we report this in our 10-Q and this quarter is no different, we reported on Page 46 of our 10-Q. And we measure the effect of a decrease of 25 basis points in interest rates all the way up to a plus-200 basis points.

And again, this gives our investors an idea of how sensitive we are to changes in interest rate. Just as a proxy and to show you where we've come from, in September of 2017, if interest rates increased by 200 basis points, our interest rate sensitivity was about a negative $1.6 million or a decrease, if you will, in net interest income. In December, that decreased to about $1.5 million decrease, and then we went further down, and in March of 2018, our sensitivity with a 200 basis points increase decreased to minus $1,271,000 or an impact of only about $0.021.

Now that 200 basis point rise assumes that, that happens over a 12-month period of time is relatively instantaneous, and we do nothing as a fund to counteract that increase in rate. So again, I think we've done a fairly good job over this time of trying to be a little bit -- to be more aware of the impact of rising interest rates, and I know as we've mentioned in previous calls, that has been a focus of ours since at least 2015.

Those are the key highlights of the balance sheet and the income statement. I'd like to turn it back to Chad for some closing comments.

Thank you, Craig. In closing, I'd like to share with you a brief update on a few of the strategic initiatives we put forth back in 2015 with the management team. Management's goals for investors have always been very simple, to increase share value and mitigate risk when possible. In achieving these 3 goals, management looked towards 3 areas of focus that we thought we could improve on; fine-tuning the balance sheet and tweaking the asset allocation; we achieved this as we started off with the liquidation of our non-core discipline of assets back in 2015 with the sale of our real estate assets along with our alternative bond investments.

Number two, diversification of our income streams. As you remember back in 2015, it was the start of a very long time of a low-interest rate environment. The Fed had just moved for the first time in 2015. We had concerns about rising interest rate environment and our ability to diversify our income streams. We've done this through a -- the change in our proxy statement in '15 would've given us the ability to go out and provide equity to regional institutional developers and diversify that income stream on our balance sheet.

And third, mitigation of interest rate risk when at all possible. I think, back in 2015, if you remember, we were talking about 30% of our leverage program was in a fixed rate mode and about 70% was in a variable rate mode. Since that time, we've been very proactive and working with our partners in the street to change that to about 60%, 57%, 58% fixed rate, and decreasing the variable rate exposure in a rising interest rate environment to about 42%.

As you can see, there has a lot of this been accomplished, but there is a lot yet to do. We're encouraged about the achievements and the team that we have. We'd like to thank you for your support of our company. And we look forward to taking your questions.

(Operator Instructions) And our first question comes from David Walrod of JonesTrading.

Could you -- you talked about the reduction in expenses. Is that something that you think you can continue to keep expenses at those levels? Or was there something lower this quarter that was more one time in nature?

Yes. Good question, David. The answer is a little bit of both. We've worked real hard over the past few years to reduce and optimize our operating expenses. This quarter, there were a couple of things. Number one, because of the sales of some MF Properties in Q4 of last year, that reduced the operating expenses from those properties that we carry on the income statement in Q1 of this year. So we're getting some of that effect from the sales not only in operating expense as well as depreciation expense at the same time too. Secondly, is we have seen a decrease in G&A little bit. I would say that we've done a great job over the past few years of trying to keep that G&A expense at a level we think is more optimal. We're running now at about a 42 basis point of total asset. G&A just -- just the G&A component without consideration of the 45 basis points paid to the general partner. So we think 2 parts -- the answer is really 2 parts. One is the sale of MF Properties, and the second is, I think we're at a fairly optimal level. We have been able to absorb growth in our balance sheet with the existing overhead that we have, so I think it's more optimization David that we've been able to achieve.

If I could just add a little bit to that to provide an additional color. From where I sit, I look at 2 different levels. One at the fund level, one at the project level. First, at the fund level, I look at it as fixed expenses and variable expenses. Variable expenses, obviously, in a rising interest rate environment providing leverage to the R -- our B portfolio, that's going to be a challenge, right up until our caps kick in, and we've been pretty proactive in rolling those strike prices down. At the fund level -- on the fixed side, like Craig had mentioned, we've been pretty good. Our platform has capacity for growth. And I think if you break down the numbers, you will see that we provided the partnership with some decent growth over the last 4, 5 years with very little incremental increase in fixed rate cost. So that's on the partnership side at the fund level. At the project level, I look at the same way, fixed and variable with one caveat. As we look to reallocate from our non-core investments in the bond portfolio and also in our fee simple real estate, those assets will come and go, and the related expenses and revenues will -- expenses will go, but the revenues, hopefully, will be redeployed back in our core discipline. So if you look to try and breakdown the expenses, I would do it from a fund level and I'd look do it from a project level, and I think it give you a better look into our segment performance, David.

Okay. You mentioned in your press release an agreement to sell the Jade Park property. Can you give us an idea of when do you expect that to close? And if we can expect any gains on that sale?

No. Those are very material questions, David. We currently have the property under contract. The buyer is currently going through its due diligence process. In the event that they are successful in getting to a closing table, we are hopeful that it would come in the months to come. I think the contract allows for them to complete their due diligence in the second quarter and then closing sometime shortly thereafter. As far as levels and gains on sale, without giving any nonpublic information, I -- just a generic type of response is that the assets in our asset class of multifamily are trading at, what I think, to be like 2006 levels. People are making overly aggressive assumptions to buy assets. The evaluations of our assets are coming in higher than we expect. And when those things happen, if people are willing to pay a price that are going to exceed our valuation, where we think we can replace the asset at some point in the future, that's kind of been our MO over the time of the -- the life of managing the portfolio. So I'm hopeful that she will be pleased with the press release that will happen sometime here in the second quarter. But please keep your foot on base knowing that the buyer is currently in his due diligence process and the asset closing has not occurred.

All right. And that kind of is a nice segue my last question, which is the remaining multifamily property portfolio. Can you talk about your willingness or interest in moving those properties as well?

It's an ongoing effort that hasn't changed, David. We continually evaluate each one of the assets on an ongoing basis. I think in the past, we've not been as aggressive as taking premiums out of the cycle as they were presented to us. I think that's going to be a -- that's the change that we've implemented with the new management team over the last couple, 3 years, and I think we can evidence that by our sale of our assets. We have the 50/50, Paseo and then the assets that we participated on an equity in the Vantage portfolio. And so we will continue to evaluate when the opportunities present themselves. What's highest and best use of each assets for the benefit of our investors and head that direction. That said, the asset class that we are in is as hard as I can remember it in recent times. You'd have to go back to 2006 before I've seen surprises on the upside as it relates to evaluations and the assumptions that people would make in order to acquire the assets. And so you're at the top of the cycle, and we're going to evaluate each opportunity for the benefit of our investors going forward, David.

(Operator Instructions) Our next question comes from [John Fam] of America First Multifamily Investors L.P.

Long time unitholder. I asked a couple of questions a year or so ago, in the Q, I think, 2 years ago, I reviewed, is there any restrictions on cash distributions in your underlying bank lending documents with your lenders?

No.

Okay. That was the same answer I got 2 years ago. Very good. And next, is there a goal to have the CAD equal to your cash distributions when you talk about operations and not from sales of MF Properties?

Yes, I think, I was probably on that same call, sir. You asked this answer and the answer was yes on that one. I think we've always shared with the investors that our goal is to reach that $0.50 on a non-reoccurring basis. While not providing substantial guidance or performance, we've always shared with investors to review the Qs and the Ks and figure the cash available for investment and leverage and redeployment and leverage of our assets that aren't currently levered. And then make your own assumptions on redeployment and leverage to see if you think that we will have a chance of hitting that $0.50 on a non-reoccurring basis in the near future.

In a rising interest rate environment with your hedges in place in what you're doing, is it more or less likely that you meet that objective?

Until the money is deployed and the asset is leveraged, it's tough for me to speculate. I think you're exactly right in making the assumption that in a rising interest rate environment and a flattening yield curve, the possibilities for an acceptable leverage spread and hitting a return is less than it was 2 years ago. That said, we will continue to chase opportunities and evaluate them on a one-off basis and work towards that as a goal.

And finally, this may be getting a little bit granular in the accounting spend, but in the statement of other comprehensive income, I see a swing of -- from unrealized gains to loss in securities of $19 million to a negative $22 million or a gross swing of $40 million that equates to about $0.80 in per unit. Can you guys comment upon that? And is that non-reoccurring? Is that unusual? Or can we look forward to that going forward?

Sure. Good question. When we talk about book value per unit, we've said in the past that there is some lumpiness or some movement that can be up and that can be done. The short answer of your question is, each quarter, we evaluate the unrealized gain or losses in our portfolio. And because of rising interest rates this quarter, it just so happens that some of that value eroded. And again, that's not a -- it's not an income statement impact, it's a balance sheet effect. In the future, that would be depended upon the types of investments that we own and it would be depended upon the interest rate environment that we're in as well too.

Well, $0.80 a unit is rather material, a little bit more than lumpiness. So can we expect that every quarter going forward in a rising interest rate environment? Or is the lion's share of this kind of like embedded in this statement right here?

Well, as we go forward, clearly, if rates were to continue to increase and we did nothing with our portfolio and kept it constant, you would expect to see some of that unrealized value erode.

Very good. And then, obviously, in closing with the value of your real estate rising and that isn't necessarily realized in the balance sheet, but you guys are putting up for sale MF Properties when you think that it's appropriate to do the same. I mean, that's kind of not reflected in the balance sheet, correct? So is there kind of a give here to the get of the -- in the OCI that there's some unrealized appreciation in the underlying assets to offset that?

There are always possibilities, as Chad mentioned that, as we consider the highest and best use of each of our assets, the MF portfolio being one of those, as you know, that's carried out at cost on the balance sheet. It's not carried at a -- at what may be reflective of true market value. So as we have opportunities and we take looks -- a look in the marketplace at what the value of an MF Property might be, it's very possible that, that result could be different that you see on the balance sheet.

Our next question comes from Patrick Marsh with Alex Brown.

All right, Chad. Chad, one of the questions I had when just looking through the quarterly statement was, it looks like you just began to use your ATM program for raising equity. Can you just give me a little sense of how much you anticipate using that versus standard common offering versus your pref equity going forward?

No, that's a good question. I'm going to let Andrew Grier address that question. He administrates the program for us, Patrick. And, Andy, if you can share your thoughts with Patrick on that topic.

Sure. Patrick, we initiated the ATM, At The Market, program in December as another opportunity to do a little different bit of an equity raise off of our shelf. And in order to kind of put that program to the test, we put in an order to place about 200,000 shares that are kind of placed in the market without being disruptive to the share price, hopefully. Over the course of December and into January, we completed that 200,000 share allotment, raised a little under $1.2 million in capital. It did well in terms of how the action was affecting the stock price. Everything that we felt we would learn and realize from the execution proved out accordingly, and that -- found that it was an efficient way to raise a small amount of equity capital and it fits in nicely with our spectrum of capital raise, where we really have about 8 opportunities to raise capital from short- to long term. This is just another option on the equity level -- the common equity level, it's not a full-on offering. It allows us to have another method of execution to raise capital as the market allows. So overall, we've been pleased with the result. Admittedly, we wanted to see how the program will work and we're very comfortable with it. And we think, it will be a valuable asset down the road.

Patrick, if I could just add a few points to that. It's as simple as a cost of capital. Our common cost is 7% to 8% to originate. It cost us around 8 in the current market conditions at the cost of capital. The common that we are doing to the ATM cost us a fraction of that, couple percent, and the cost is still the same. And so as long as we can access capital markets at a better price to originate or cost of capital in order to fund the growth of the platform, we will do so. And this was really nothing more than a case study in utilization of the program and the people that we've selected to work with. I think they exceeded all expectations and when the capital is needed, we will use go forward with utilizing them in the future.

Patrick, if I can add one more thing to it. I think another reason we did this was, if we look back in December of 2014, ATAX had 4 sources of debt and equity or what we would call liquidity in our liquidity stack. By doing this we've added another layer now. And at the end of March of this year, we actually have 9 layers to our liquidity stack. So much more diverse, many more sources of funding and clearly from December of '14 until today, it allowed us to grow substantially in terms of total asset -- total assets in terms of managing our interest rate risk, in terms of controlling our interest rate expense to the extent we could and providing the leverage we need as well too.

(Operator Instructions) And this does conclude our question-and-answer session.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.