Greystone Housing Impact Investors LP (GHI) 2018 Q2 法說會逐字稿

I would like to welcome everyone to America First Multifamily Investors, L.P.'s NASDAQ ticker symbol ATAX Second Quarter of 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 call over to Craig Allen, Chief Financial Officer of the company.

Thank you, and welcome to ATAX's second quarter of 2018 earnings conference call. During the 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 identified 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 expected -- 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 be explaining these 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 your interest in ATAX. I would now like to turn the call over to Chad Daffer, ATAX's Chief Executive Officer.

Thank you, Craig. Good afternoon, and welcome to the second quarter 2018 ATAX earnings call. This afternoon, I'd like to share with you a few of my thoughts from the second quarter. Craig will then present the Partnership financial results, and then we're looking forward to taking your questions.

Let's get started. Economic growth remained strong in the second quarter with the benefits of tax reform giving confidence to the consumer, while the labor markets continue to forecast creation over 2 million new jobs by year-end 2018, driving unemployment to below 4% for the first time in nearly 20 years.

Given these persistent threats of inflation, on June 13, the Federal Reserve Bank raised interest rates for the 7th time in 3 years, increasing the cost of borrowing to consumers to prevent the economy from overheating. As the Fed was raising rates, ATAX's variable rate index or SIFMA rose to near -- from near 0 at the end of 2015 to 1.5% in June of 2018.

Expectations of market participants are the 2 additional rate hikes in this year and 2 additional rate hikes for next year or potential increase on short-term rates of an additional 100 basis points by year-end 2019.

In our mortgage revenue bond segment, in -- the end of the second quarter, the partnership invested $19.45 million in an MRB to provide permanent financing for 222 units of Multifamily housing, located in San Antonio, Texas.

At the end of the second quarter, the Partnership held 81 mortgage revenue bonds that provided construction and/or permanent financing for 10,988 units of Multifamily housing, with an estimated fair market value of around $767 million.

In our development business, in Q2, the partnership committed to investing $10.4 million to the Vantage development segment, providing equity for the development of 288 units of Multifamily housing, located in Germantown, Tennessee. This being the 12th investment in the Vantage properties over the past 5 years.

Management is currently working with the Vantage team in assessing future development opportunities, while evaluating the highest and best use of currently stabilized assets.

In our public housing fund certificate segment as of the close of June 2, -- Q2, I'm sorry, the Partnership owned 100% of outstanding residual receipts of 3 tender option bond trusts, containing public housing capital fund certificates, each rated investment grade by Standard & Poor's ranging from AA minus to BBB, with an estimated fair value of $49.1 million.

In May, the partnership negotiated the extension of the tender option bond trust maturity date to May of 2019.

In our Real Estate segment, as of the close of Q2, the Partnership owned 3 Multifamily housing assets and one track of land held for development, with an estimated book value of $86.9 million.

In June, the Partnership entered into a purchase-sale agreement for the sale of Jade Park apartments, a 140-unit property located in Daytona Beach, Florida. I will look forward to sharing with you more details on this transaction during our Q3 earnings call later in the year.

At this time, I'd like to turn back to Craig Allen for the presentation of the Partnership's Q2 financial results.

Thanks, Chad. What I'd like to do is take you through some of the highlights of the financial results of the second quarter of 2018. At June 30 of 2018, we reported total assets of about $1.02 billion and that's our sixth consecutive quarter with -- where assets were in excess of $1 billion.

We had about $14.9 million of an increase and the market value of our securities on a year-to-date basis were fairly flat in the increase or decrease in the market value of those securities.

Total revenue for Q2 2018 was $15.8 million compared to $16.2 million in Q2 of 2017, and on a year-to-date basis 2018 and 2017 were at $32.2 million.

Our mortgage revenue bond holdings at the end of June 2018 spanned 14 states and are approximately $767 million.

Each quarter, we talk about mortgage revenue bonds compared to total assets in our portfolio. At June 30 of 2018, our mortgage-revenue bonds comprised about 75% of total assets of ATAX. Just as a comparison, on December 31, 2012 that number was 35.1% and on December 31, 2017 that number was about 73.7%.

During the quarter, as Chad mentioned, we acquired one mortgage revenue bond at about $19.6 million and the same on a year-to-date basis.

During Q2 2018, there were 4 mortgage revenue bonds that were redeemed for about $11 million, and on a year-to-date basis, there have been 7 bonds that have redeemed for about $21.4 million.

As these bonds redeem, our debt on those bonds or our leverage on those bonds are also reduced on a pro-rata basis.

As of June 30, 2017, we have 3 MF Properties, one located in the state of California, one located in the state of Nebraska and one in Florida.

There were no significant transactions to report either on a quarter-to-date or year-to-date basis in MF Properties.

On the debt financing side, we have been mindful of the fact that through the last 3 years and the fine tuning of our balance sheet that we have made a concerted effort to increase the amount of our fixed rate debt financing that we have in the portfolio.

Back in 2015, on December of 2015, about 68.2% of our debt was variable compared to 42.6% of our debt variable at June 30, 2018.

In 2015, about 31.8% of our debt was fixed, where at June 30, 2018, that percentage had increased substantially, that number was 57.4% on June 30, 2018.

Another thing that we've talked to you about, rather frequently on these calls and probably extensively in the past, is a conscious effort to be aware of the interest rate sensitivity in our portfolio. In our 10-Qs and our 10-Ks, we measure a decrease of rates of 25 points all the way up to an increase of 200 basis points in rates. And again, when we show you the interest rate sensitivity table, it assumes an immediate increase or decrease in rates and it assumes that we do nothing over a 12-month period of time and those rate increases or decreases just occur.

As of June 30, 2018, if interest rates were to rise by 200 basis points, our net interest income or our net income would go down about 1 point -- little less than $1.1 million or the effect on our CAD would be about $0.0174. If I was to take you back to September 30, 2017, that impact on income is about $1.6 million or about 2 point -- almost $0.027 on CAD. So we've been able to decrease that sensitivity from $0.27 down to $0.017 of CAD.

We had a couple of large transactions that we are able to -- we were able to close during Q2 of 2018 where first we extended the Bankers Trust acquisition line of credit -- that's a $50 million line of credit. We've been able to extend that now to June 30, 2020.

In addition to that, we've been able to extend to June 30, 2020, the $10 million operating line of credit also with Bankers Trust.

Our net income, basic and diluted, for the quarter was $0.04 per unit compared to Q2 2017 of $0.06 per unit. And on a year-to-date basis, 2018, we have reported $0.13 per unit as opposed to $0.16 per unit.

Our CAD for the same quarters were in Q2 2018, we reported $0.09 of CAD and on a year-to-date basis $0.19 of CAD.

Our book value per unit is unchanged from the previous quarter at $4.78 per unit.

And finally, last Wednesday, we were able to close on our first TEBS, which is TEBS M45 since July of 2015. Just as a little brief history, we've closed previous to this 3 TEBS, one in August of 2010, which was M24, with the current balance -- a current debt balance of about $55.1 million. In July of 2014, we closed M31, which has a current debt balance of about $80.7 million and in July of '15, M33 was closed at about $57.3 million of debt outstanding at June 30 of this year.

As I said, previously on August 8, last Wednesday, we closed TEBS M45, which is about $260.6 million TEBS and a TEBS is a tax-exempt Bond Securitization program through Freddie Mac.

We securitized 20 more -- 25 mortgage revenue bonds in the M45 TEBS, 24 of those mortgage revenue bonds were previously levered through the Term A/B Trusts and had lives of about 8 years or less. One of the mortgage revenue bonds was leveraged in the acquisition line of credit and its debt maturity was 1 year or less.

The 24 A/B Trusts were fixed rate in nature and the mortgage revenue bond that was in our acquisition line of credit was variable rate in nature.

The M45 TEBS allowed us to extend the maturity to 16 years on the debt financing and it's all fixed rate.

Again, no interest rate hedging is necessary as each of these TEBS are fixed rate in nature. So we're very, very pleased by the results and what we've been able to accomplish through the TEBS M45, and again, protecting us on an interest rate sensitivity basis for the next 16 years.

With that, I'd like to turn it back to over to Chad for a couple of closing comments.

Yes, just a few comments on M45. The evolution of that transaction started off probably about 9 months ago with the goal of really benefiting all 3 participants into the transaction. Freddie Mac, we were looking to trying to bring to the table, $200-plus million of additional bond product for them to put into their TEBS product. Our Term A/B Trusts restructuring those from a nonrated private placement to enhancing those A certificates will give them the ability to remarket those A certificates in the event that they choose to do so at some point in the future on a much broader marketplace.

And then three, it was the biggest benefits to our investors, we -- because of the time it took us to structure this and underwrite and close, we had the benefit of a flattening yield curve through the last 9 months plus or minus of working on this transaction allowing us. We evaluated fixed and variable, 3, 5, 7, type of maturity dates, and because of the flattening of the yield curve and the partners that we have in The Street, they allowed us to extend our maturity out to 2024 with little or no cost. So this is a great transaction from a risk-off perspective for our investors, and we're very pleased with the outcome of the closing of M45 here a week ago. And I'm sure some of you have seen the press release. At this time, I'd like to open it up for questions for Craig and I, on the second quarter of our financial performance.

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

I just wanted to get a few kind of specific things and then talk more broadly. Can you discuss the securities impairment during the quarter?

Sure. During the fourth quarter the -- every quarter the -- our investments are evaluated. And during the fourth quarter, we also had an impairment that we recognized on the PHCs as well, too. And we believe, that based upon what we saw on the valuation this quarter that another impairment was warranted. The PHCs are -- as Chad mentioned, we own 3 trusts and the proceeds from those trusts come from HUD proceeds. These are relatively unique in the marketplace. The credit is very sound, the credit is very solid. But David, at this point, we just determined that based upon the valuation that we were seeing from our outside valuation specialists that it was time that we recognize a slight decrease in the carrying value of those.

And again, from an accounting perspective, we always are required to take a little bit more conservative approach to how we value these securities, and then we'll let the market dictate what the true market value may be.

One additional comment there for you, David. As you may remember, this was a trade that was created by one of our friends in The Street and brought to us a few years back. There are no immediate comps in the marketplace, it's a unique structure with a unique credit profile. For that reason, I think and I shared this with our good friends of PWC here last week in our audit committee and while I'm supportive of the impairment and the accounting treatment, I think it's extremely conservative. And I hope to be able to prove that out at some point in the future.

Okay, that's helpful. The interest expense picked up about $1 million this quarter. Is there anything specific? Or is that where we should expect interest to kind of run -- the run rate going forward?

I -- that's just due to a general uptick in rates, and Chad had mentioned the increase in SIFMA that we experienced during this quarter and that we've really seen that small uptick throughout the quarter as well too. No, I don't believe that you'll see that market of an increase. Although with that said, I guess, David, we never can say -- we never know where SIFMA is going to go, so we do have some variable rate product that is still on our books. But remember, we've hedged -- predominantly that's M24, M31 and M33. And we do have interest rate caps that hedge to some extent that increase in interest expense.

Okay. Additional color, David -- If I could, David, real quickly there is -- if you look at the balance sheet, you'll see about 40% -- 43% of our debt outstanding is on variable rate mode. The majority that's capped at 1.5%, if you remember, we've been aggressive on rolling those caps down as the market presented opportunities and we thought it was money well spent to buy insurance on a rising interest rate environment. And so as SIFMA reset this week at 1.45%, we're approaching our caps, so you can make some estimates when and how that -- those caps may kick in. You can also see that some of the variable rate mode that we may or may not do in the future, we'll plan on trying to execute in the fixed rate mode. So some of that upside is going to move to their cap strike at 1.5%, and then hopefully, we'll see that kind of level off going forward from there, if we continue to have the opportunity to execute in a fixed rate mode, David.

Okay. The Jade Park, you said that is going to close this quarter?

No. I knew that was coming. Here's -- if I could bore you folks with a little detail. We've been talking about levels of assets trading in the Multifamily class at high levels since like 2006 till recently. We're seeing assets traded what we think are very elevated levels. People are not getting paid for the risk for owning the asset class, in my opinion. Therefore, we've been a net seller for a number of years. We are finally starting to see assumptions being made by the buy-side on the acquisition of assets, they're aggressive to the level where their capital stack, debt and equity are not willing to make the same assumptions.

Therefore, we entered into a purchase-sale agreement in the spring with one buyer, that buyer attempted to retrade the purchase price. We decided not to allow him to do that. We retained his hard deposit that we got at closing and moved on to buyer number 2. Buyer number 2 has moved through the due diligence, and we entered into a purchase-sale agreement in June, I think it's May or June, I don't remember the original -- the origination date of the PSA, David, I'm sorry. But we've entered into a new PSA agreement, the buyer has completed -- the second buyer is now complete with their due diligence. They have commitments for debt and equity, and they have a substantial amount of hard money down that is nonrefundable. We fully anticipate that they'll close sometime in the third or fourth quarter of 2018. In the event that doesn't happen, we will retain their hard deposit and move on to buyer number 3. I think it's evidence of the time that we're in and the assumption people are making in order to deploy capital. It's a seller's market, it really is. And we're doing the best we can to manage the buy-side and to not assuming more risk or erosion of return to our investors, knowing that they're making assumptions and disclosures that their debt and equity partners won't support. And so we've got a substantial amount of hard money down that is nonrefundable, there's a high probability that they will close on this from what we've been told to date. And hopefully, we'll be able to share more details -- deals with this transaction in the calls to come, David.

Okay. Did you ever give us any guidance as to what sort of gain we could expect on this transaction?

We have not. We have not. Until we close the transaction, David, we've never given any guidance on CAD and/or gains. We'd like to make sure that the buy-side performs before we share with our investors.

Okay. Then just broadly, you acquired 1 MRB and a few were paid off. I guess, can you kind of talk about the investment opportunities that you're seeing now and how we should think about that through the end of the year?

No, it's a good question, David. I think this dovetails into what I shared with you about our perception of the current state of the market for Multifamily assets are trading at very aggressive cap rates, I don't think people are getting paid for the inherent risk for the asset class that's therefore, we are net seller.

We continue to underwrite multiple opportunities and see opportunities from our development partners. Unfortunately, with a rising interest-rate environment, and the asset class trading at highs, we're not willing to make the aggressive assumptions that others are just to deploy capital. We'll stick to our credit discipline and our underwriting, we'll continue to underwriting multiple deals on a weekly basis and when one hits our yield targets, based on assumptions that we think we can defend, we'll move forward and deploy additional capital. We have -- currently working on our spread business, number of bonds that we'll hope to close in the third and the fourth quarter, all subject to credit approval. And we are currently evaluating a number of future Vantage sites with our development partners. They may or may not close subject to the numbers coming together and the entitlements being completed and construction loans being closed. So I think the asset class right now is, if I can share anything, I think it's trading at levels where people are willing to make assumptions that I think will have opportunities to see back in the marketplace 2, 3, 5 years out when the I/O period is up on their debt.

I just -- we're not willing to be aggressive on the assumptions to deploy capital. And when that happens your pipeline is still solid but your ability to close on growth of future assets becomes a little bit challenged. And it's all based on our historical credit. But we just -- we're not willing to make the same assumptions other will just to deploy capital.

(Operator Instructions) And our next question comes from [John Baum]of [America First Multifamily].

I guess kind of tiptoeing around it right now. But what could be the efficiency of the CAD from the cash distributions per unit? Is this relative to what we would calculate going forward, right now with maybe a 25 to 50 basis point rising interest rate environment if there are no asset sales? Are we going to see some lessening of that spread right there? Just an overall thought I guess as you think about CAD deficiency right now and going forward?

I think -- let me take it first. And then Craig you can jump in here. I think historically, we've been consistent on our answers that relates to CAD. We've not given any future guidance on cash available for distribution. We've asked that our investors will take a look at our cash and our unlevered assets, make their own assumptions on what they think the spreads achievable in this marketplace and what type of leverage returns we can deliver going forward.

I think since 2015, when we had the proxy statement changed and allowing us to pursue other development opportunities in the form of equity, I think we've got a number of different businesses now that instead of just our old-spread business from the late '90s and early 2000s that allow us to deploy capital and pursue opportunities. But as you know, in doing that, our earnings will become somewhat lumpy, and as assets become mature and available for sale, we'll evaluate them for the highest and best exits. And then we'll continue to manage the underlying reoccurring revenue and run rate at a level that you've seen over the last couple of quarters. Craig, do you have anything you would like to add to that?

No. I think that's a great overview of how we view CAD and how others should view CAD. And I think the only thing I would add is, over these past few years as we've begun this balance sheet fine-tuning, our access to capital remains strong, our access to liquidity remains strong and that allows us to take advantage of the opportunities that Chad spoke of earlier as well too.

If I could sneak in one more on that. Does this necessitate the deficiency right now, does it necessitate 1 or 2 asset sales a year on a go-forward basis to meet the -- for CAD to meet the actual distribution, and now just I'll go to mute and listen.

Sure, thank you. Yes, good question. As we've said in the past, our CAD that we report on an annual basis is really made up of 2 components. Both of those though are considered part of CAD and that would be from our spread business. We also have -- have revenue in CAD that we report from our development business. And then also from sale of assets and while those sale of assets are never guaranteed they are a normal part and recurring part of our business as well too. So you take all of those components, there are now about 3 or 4 different components of revenue that we may or may not report on a quarterly basis.

(Operator Instructions) Ladies and gentlemen, this does conclude today's question-and-answer session, and thank you for participating in today's conference. This does conclude today's program, and you may now disconnect. Everyone, have a great day.