America First Multifamily Investors, L.P. (NASDAQ:ATAX) Q2 2022 Earnings Conference Call August 4, 2022 4:30 PM ET
Company Participants
Ken Rogozinski – Chief Executive Officer
Jesse Coury – Chief Financial Officer
Conference Call Participants
Jason Stewart – JonesTrading
Chris Muller – JMP Securities
Operator
I would like to welcome everyone to America First Multifamily Investors L.P.’s NASDAQ ticker symbol ATAX Second Quarter of 2022 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q2 2022, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded.
During this conference call, comments made regarding ATAX, which are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause the actual future events or results to differ materially from these statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan, intend, focus and other similar terms. You are cautioned that these forward-looking statements speak only as of today’s date.
Changes in economic business competitive regulatory and other factors could cause ATAX’s actual results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may impact ATAX’s business, please review the periodic reports and other documents filed from time-to-time by ATAX with the Securities and Exchange Commission.
Internal projections and beliefs upon, which ATAX bases its expectations may change but if they do, you will not necessarily be informed. Today’s discussion will include non-GAAP measures and will be explained during this call. We want to make you aware that ATAX is operating under the SEC Regulation FD and encourage you to take full advantage of the question-and-answer session. Thank you for your participation and interest in ATAX.
I would now like to turn the call over to Ken Rogozinski, Chief Executive Officer of ATAX.
Ken Rogozinski
Good afternoon, everyone. Welcome to America First Multifamily Investors L.P.’s second quarter 2022 investor call. Thank you for joining. I will start with an overview of the quarter and our portfolio. Jesse Coury, our Chief Financial Officer will then present the Partnership’s financial results. I will wrap up with an overview of the market and our investment pipeline. Following that, we look forward to taking your questions.
For the second quarter of 2022, the Partnership reported net income of $0.75 per unit and $0.76 of cash available for distribution per unit, another solid quarter on both those fronts. On a year-to-date basis, we have reported net income of $1.79 per unit, which exceeds the entire 2021 fiscal year net income per unit of $1.56. Similarly our year-to-date cash available for distribution of $1.74 per unit is approaching our reported $1.92 per unit level for the entire 2021 fiscal year. We also reported a book value of $14.65 per unit on $1.44 billion of assets and a leverage ratio as defined by a ATAX of 70%.
On June 15th, we announced a regular quarterly distribution of $0.37 per unit, which is a $0.04 increase or 12% over the first quarter regular distribution of $0.33 per unit. In addition,n we announced a supplemental distribution of $0.20 per unit as a way of distributing recent gains on sale of our Vantage investments.
While the Board has not yet declared any distributions for subsequent quarters, the Partnership currently expects to continue to be in a position to make supplemental distributions in addition to the regular quarterly distributions for the remaining quarterly periods in 2022.
In terms of the Partnership’s investment portfolio, we currently hold $1.08 billion of affordable multifamily investments in the form of mortgage revenue bonds, governmental issuer loans and property loans, $108 million in joint venture equity investments, $59 million in direct real estate investments, and $14 million in seniors and skilled nursing mortgage revenue bonds and property loan 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 projects averaged 95% for the mortgage revenue bond portfolio as of June 30th 2022.
Our joint venture partners sold Vantage at Westover Hills in May of 2022 and Vantage at O’Connor in July of 2022. These most recent sales of two properties located in San Antonio, have set the record for the highest prices ever achieved on Vantage Texas projects.
Our remaining Vantage joint venture equity investments consist of interest in 10 properties, four where construction is 100% complete and the remaining six properties are under construction or in the planning stage.
For the four properties where construction is a 100% complete, we continue to see good leasing activity, with three properties having achieved at least 90% physical occupancy as of June 2022. We continue to see no material supply chain or labor disruptions on the Vantage projects under construction.
As we have experienced in the past, the Vantage Group as the managing member of each project owning entity will position a property for sale upon stabilization. Our two owned student housing properties continue to have strong occupancy levels.
Both are covering all of their obligations from project cash flow, including operating expenses and in the case of the 50/50 project at University of Nebraska, debt service. Both properties have achieved over 97% leasing for the 2022-2023 academic year.
We continue to advance funds for the construction of affordable multifamily properties securing our existing mortgage revenue bonds, taxable mortgage revenue bond, governmental issuer and property loan investments.
With that, I’ll turn things over to Jesse Coury our CFO, to discuss the financial data for the second quarter of 2022.
Jesse Coury
Thank you, Ken. Earlier today we reported earnings for our second quarter ended June 30th. We reported GAAP net income of 17.6 and $0.75 per unit basic and diluted. And we reported Cash Available for Distribution or CAD of 16.7 and $0.76 per unit.
Our quarterly earnings benefited greatly from the $12.7 million realized gain on sale of Vantage at Westover Hills, in May 2022. Our book value per unit as of June 30th was $14.65, which is a decline of approximately $0.70 from $15.35 per unit as of March 31st.
This decline is due to a decline in the fair value of our mortgage revenue bond portfolio caused by rising market interest rates. As of market close yesterday, August 3rd, our closing unit price on the NASDAQ was $19.57 which is a 34% premium over our June 30th net book value per unit.
We regularly monitor our liquidity position to both take advantage of accretive investment opportunities and to protect against potential debt deleveraging events if there are significant declines in asset values.
As of June 30th, we reported unrestricted cash and cash equivalents of $104.6 million. We also had $50.5 million of availability on our secured lines of credit. In addition, we received cash proceeds of approximately $19.4 million from the sale of Vantage at O’Connor in July 2022 which provides further liquidity.
At these levels, we believe that we are well-positioned to fund our current financing commitments which I will discuss later and to execute on additional investment opportunities in the near-term.
I’d now like to share current information on our debt investment portfolio consisting of mortgage revenue bonds, governmental issuer loans and property loans. These assets totaled approximately $1.1 billion, up approximately $56 million or 5.3% from March 31st and such investments represent 76% of our total assets.
We currently own 74 mortgage revenue bonds that provide permanent financing for affordable multifamily properties across 13 states. Of these mortgage revenue bonds 41% of our portfolio value relates to properties in Texas, 26% in California and 10% in South Carolina.
We had three significant mortgage revenue bond transactions during the second quarter. The first is the execution of a $72 million commitment to fund mortgage revenue bonds and taxable mortgage revenue bonds, for the construction and permanent financing for the residency at the Entrepreneur a 200-unit affordable housing property in Los Angeles, California.
The second transaction was the acquisition of a $3.8 million mortgage revenue bond for CCBA Senior Gardens, a 45-unit affordable multifamily property in San Diego California. And lastly, we had one redemption of the Bridle Ridge mortgage revenue bond with principal of $7.1 million during the quarter.
During the second quarter, overall, we advanced funds totaling $22.3 million under our mortgage revenue bond and taxable mortgage revenue bond commitments, with remaining funding commitments totaling approximately $121 million as of June 30. We currently own 10 governmental issuer loans that finance the construction or rehabilitation of affordable multifamily properties across six states.
Alongside, the governmental issuer loan, we will also commit to fund an additional property loan that shares the first mortgage lean. ATAX’s property loans typically fund after funding of the governmental issuer loans is completed. In the second quarter, we closed one new governmental issuer loan and property loan commitment for total funding of $30.7 million for Magnolia Heights a 200-unit affordable multifamily property in Covington, Georgia.
During the second quarter, we advanced funds totaling $62.5 million, for our governmental issuer loan and property loan commitments, with remaining funding commitments totaling approximately $154 million, as of June 30, which we expect to fund over the next 36 months.
On the accounting front, I would like to note for the audience that, we will be adopting Accounting Standards Update 2016-13 or the CECL standard effective January 1, 2023 for assets within the scope of the guidance. The CECL standards require a transition from a current incurred loss model to an expected credit loss model, which generally results in higher credit loss reserves than under our current GAAP accounting. We are continuing to assess the impact of CECL on our financial statements, and will provide transition disclosures in our SEC filings through the adoption date.
Lastly, regarding our debt investments, we’d like to provide an update on the only commercial property mortgage revenue bond in our portfolio. The Provision Center a proton therapy cancer treatment center in Knoxville, Tennessee, for which we own a $10 million mortgage revenue bond was successfully sold out of bankruptcy in July 2022.
The bankruptcy court will be completing a final accounting in the coming months and will distribute proceeds accordingly to the bond trustee. As of June 30, 2022, our net carrying value of the mortgage revenue bond was $4.6 million for GAAP purposes, inclusive of accrued interest, which is based on our expected proceeds upon final resolution of the bankruptcy case.
If ultimate proceeds equal, our reported carrying value we will realize a loss of approximately $5.7 million, on our original mortgage revenue bond investment. At this level, the realized loss would not impact our reported GAAP net income as the loss was previously recognized through provisions for credit losses in 2020 and 2021. However, such realized loss will be reported as a reduction of cash available for distribution in the period of final resolution, consistent with our treatment of prior realized losses on investment assets.
Turning to our joint venture equity investments portfolio, the portfolio consisted of 11 projects as of June 30, of which one investment is reported on a consolidated basis. The carrying value of our Vantage investments totaled approximately $108 million, exclusive of Vantage at San Marcos. We advanced additional equity under our current funding commitments, totaling $7.8 million, during the second quarter, and our remaining equity investment commitments totaled $11.5 million as of June 30.
As Ken previously mentioned, the Vantage at Westover Hills property was sold in May 2022, and we recognized a $12.7 million gain upon sale. In addition, Vantage at O’Connor was sold in July 2022 at a gain. We estimate we will report a gain on sale of approximately $10.6 million on this investment in the third quarter, before settlement of final proceeds and expenses.
Moving to the debt side of our balance sheet; our debt financing facilities are used to leverage our investments and totaled approximately $931 million as of June 30. This is up approximately $49 million from March 31, due to leverage on funding of our investment commitments during the second quarter.
We manage and report our debt financing in four main categories on page 73 of our second quarter Form 10-Q. The first category is fixed rate debt associated with our fixed rate assets and represents $272 million, or 29% of our total debt financing. As both the asset and debt rates are fixed, our net return is not generally impacted by changes in market interest rates.
The second category is variable rate debt associated with our variable rate assets and represents $335 million or 36% of our total debt financing. Variable indices and floors will vary, but we are at least partially protected against rising interest rates without the need for separate hedging instruments such as interest rate caps or swaps.
The third category is variable rate debt associated with fixed rate assets that have been hedged via SOFR denominated interest rate swaps, limiting our funding cost exposure to rising interest rates. This category accounts for $104 million or 11% of our total debt financing.
Our fourth and final category is variable rate debt associated with fixed rate investment assets, which is where we are most exposed to interest rate risk in the near term. This category represents only $24 million or 24% of our total debt financing. We regularly monitor our interest rate risk exposure for this category and may implement hedges in the future, if considered appropriate.
In July 2022, we executed an amendment to our secured acquisition line of credit facility with Bankers Trust, that among other items, extended the maturity date of the facility to June 2024, added two optional one-year extensions, subject to certain conditions and fees, eliminated certain restricted payment provisions and modified certain financial covenants and events of default to be consistent with our other secured financing arrangements. We believe these changes enhance our ability to utilize the facility for managing our asset acquisitions and overall liquidity.
Given the mix of debt I just described, we regularly monitor our overall exposure to potential increases in interest rates through an interest rate sensitivity analysis, which we report quarterly and is included on page 78 of our second quarter Form 10-Q.
The interest rate sensitivity table shows the impact to our net interest income, given various scenarios of changes in market interest rates. These scenarios assume that there is an immediate rise in interest rates and that we do nothing in response for 12 months.
The analysis based on those assumptions shows an immediate 200 basis point increase in rates as of June 30, that if sustained for a 12-month period will result in a decrease of approximately $2.1 million in our net interest income and cash available for distribution, or approximately $0.10 per unit.
This is down from $0.23 per unit as of December 31 2021, due primarily to the execution of two interest rate swaps for a total notional value of approximately $104 million during the first quarter of 2022. We believe this level of exposure is very low in comparison to our reported net income per unit of $1.79 for the year-to-date through June 30.
Lastly on our capital raising activities, in April 2022, we issued 2 million new Series A-1 preferred units in exchange for 2 million of our previously outstanding Series A preferred units, held by a financial institution. This represents the first exchange transaction under our registration statement on Form S-4, allowing for exchanges of all $94.5 million of our previously issued Series A preferred units for new Series A-1 preferred units.
The Series A-1 preferred units have substantially the same terms as the Series A preferred units and are renewable at the option of the holder and ATAX on the sixth anniversary of issuance. As a result of the exchange, we maintain our access to non-dilutive fixed rate and low-cost institutional capital.
Now, I’ll turn the call over to Ken for his update on market conditions and our investment pipeline.
Ken Rogozinski
Thanks Jesse. The second quarter of 2022 brought a continuation of the negative trends that we saw in the first quarter to the muni bond market. As of June 30, 2022, the year-to-date return on the Bloomberg Municipal Index was negative 9%. This correlates with the 8.4% decline in the book value of our mortgage revenue bonds that we have seen in the first six months of 2022.
Year-to-date muni mutual fund outflows were a cumulative negative $76 billion as of June 30, 2022 according to Refinitiv Lipper data. The market’s performance has stabilized somewhat during July. The July return for the Bloomberg Municipal Bond Index was a positive 2.64%, which lowered the year-to-date negative return to negative 6.54% as of July 31st.
10-year MMD is currently at 2.14% and 30-year MMD is currently at 2.83%, roughly 60 and 30 basis points lower in yield respectively than at the time of last quarter’s call. The 10-year muni-to-treasury bp ratio was back to a more normalized 80% level.
Volatility in rates the magnitude of the interest rate increases particularly in the short end of the curve and cost inflation have presented challenges to our developer clients on new transactions. The interest cost of new construction financing at 30-day SOFR plus 350 basis points is quickly approaching 6%.
Our affordable housing developer clients are needing to rely more and more on governmental subsidies and other sources of soft money to make their transactions financially feasible. We will continue to work with our clients to deliver the most cost-effective capital possible, especially the use of the Freddie Mac tax exempt loan forward commitment in association with our construction lending.
Given the average 2.8 times multiple of invested capital return that we have realized on the three joint venture equity investments that have sold this year the Vantage at Murfreesboro, Westover Hills, and O’Connor properties, we will continue to look for other opportunities to deploy capital in this strategy.
We are evaluating opportunities to expand beyond our traditional investment footprint in Texas through seeking other experienced JV partners, expanding into other markets, or exploring other asset classes in order to achieve more scale in the joint venture equity investment segment of our portfolio.
With that, Jesse and I are happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question comes from the line of Jason Stewart from JonesTrading. Your line is open.
Jason Stewart
Great. Thanks for taking the question and good job in a tough environment for 2Q. I was hoping you could start with sort of a little bit more detail on the cadence of your hedges and where you think interest cost goes going forward.
Jesse Coury
Yes. So, we — thank you Jason. We have two interest rate swaps in place that were both purchased in the first quarter the first being a roughly I believe $55 million swap in February and then another $48 million swap in March. The first of the swaps the $55 million was an initial two-year term. The second the $48 million was I believe a five-year term. And those were kind of where we at that point in time where we how long we wanted to hedge the exposure to those assets in the near term.
Ken Rogozinski
I think Jason the only other thing that I’ll add there is with the move that we’ve seen in short-term interest rates over the past few months by the Federal Reserve, we’ve actually gotten to the point now under those swaps where the initial spread that we had from spot rates to our fixed payer rate.
We are now at the point where spot rates have exceeded our fixed payer rate under those swaps. So, we are in a position now where we are actually receiving payments from our counterparty under those two interest rate swaps.
So we did see a bit of an increase in interest cost over the quarter as those short-term rates moved up. But now that we’ve reached the crossover point where we’re a net receiver under those two swaps, I think that will go a long way towards at least with regard to those two hedges offsetting the — any future interest costs that we might see from additional short-term interest rate increases by the Fed.
Jason Stewart
Great. Got it. And then second question on Vantage, how much — well, let’s start with 2Q leasing. What was that volume like? And how much visibility do you guys have through the next six months in terms of rent increases?
Ken Rogozinski
So we’ve been pleased by the pace of leasing activity on the deals that are still in lease-up there. If you look at what happened last year in a number of the markets where we’re concentrated in San Antonio and Houston and Austin, those markets saw double-digit rent increases on a year-over-year basis during 2021. From the data that we’ve seen from the property management companies on the Vantage assets this year that are leasing, it’s our expectation at this point in time that the rent increases that we will see for 2022 will be consistent with what those markets experienced in 2021.
Jason Stewart
Great. Thanks for taking the questions. Appreciate it.
Operator
And your next question comes from the line of Chris Muller from JMP Securities. Your line is now open.
Chris Muller
Hey, Ken and Jesse, thanks for taking the questions and congrats on another nice quarter. I guess starting off on the macro picture and kind of I appreciate your comments around the rate volatility. Can you help quantify the impact of that volatility on the pipeline? And maybe just contrast what the pipeline looks like today versus a couple of months ago would be helpful?
Ken Rogozinski
A couple of thoughts for you there, Chris. I think the first is from a macro level, we continue to see a great need in this country for additional affordable housing units. And so, all the tools that are available to affordable housing developer sponsors across the country are still there and are still being actively used. There still is private activity buying in cap, there still are low-income housing tax credits. And so that’s the positive backdrop is that all those programs are still there in place and in full force to help the traditional developer sponsor community bring new projects into the pipeline.
I think the challenge that we have seen from their perspective is with increasing rates and with increasing costs for construction materials and labor and things like that, most affordable housing deals are pretty tight to start with in terms of their margins and their costs. And so, when you see those costs move significantly without necessarily say accompanying increase in low income housing tax credit pricing as an example that increases their equity base for deals. There’s been a bit of a mismatch there.
And so our sponsor clients have had to work harder, value engineer, raise soft capital from governmental and other sources to be able to get transactions that are financially feasible. So I think at least from our perspective, that kind of additional layer of work that the project sponsors are having to do to get deals that are ready to go has slowed the pipeline down a little bit in terms of how quickly can the sponsor go from receiving a volume cap allocation from a municipality to having a deal that’s ready to close. So I think that lead time has lengthened and has added to sort of the life cycle from our perspective in terms of how long does it take for us to get a deal done from that point.
So I think that’s going to continue to be a challenge going forward as the macroeconomic environment I think continues to be against us from that perspective with inflation. And we’ll just continue to do everything that we can from our perspective to work with our clients to do what we can to close those gaps and make those deals more effective. I think the two items that I would add on that front is that, since a lot of our construction financing goes into the Freddie Mac forward TEL structure as the permanent financing vehicle, the roughly 80 basis point decline that we’ve seen in the 10-year treasury since that large Fed increase in June of this year that’s gone a long way in terms of helping deals penciled by having sort of a parallel reduction in their permanent interest rate there.
The other thing that we’ve seen from a funding perspective is that with what I would call kind of a normalization of the traditional relationship between short-term muni rates and short-term taxable rates now that we’ve moved out of the zero interest rate environment that we had been in for quite some time is that we’re starting to see more and more efficiency and cost benefit to our tax-exempt TOB funding.
And with that returning to the marketplace I think that will hopefully help us do a better job of structure and construction financing that helps alleviate some of these short-term interest rate increase cost from an overall sources and uses perspective. So that’s what we’re focused on on our side at this point.
Chris Muller
Got it. That’s helpful. And then the other one I have is on the Vantage portfolio. So if I see the gains there and the new investments, but the portfolio is only like 7% of total assets and I appreciate the comments around looking for other JVs. Is the current JV something that you could grow larger? And is there any limits on how much of your capital you can put in these type of vehicles?
Ken Rogozinski
So a couple of things there Chris. I think to the second half of your question, we do have the limitation under the limited Partnership agreement in terms of the size of our alternative investment portfolio which the Vantage investments fall into. We have the limitation that 75% of the Partnership’s assets must be invested in mortgage investments, which are our traditional mortgage revenue bonds and governmental issuer and property loan investments that currently make up 76% of our portfolio.
So if you assume that the partnership asset size didn’t grow at some point you would hit a cap in terms of the amount of capital that could be allocated to the other strategies that fall in that alternative bucket under the Partnership.
I think in terms of ability to grow going forward that’s driven by a number of factors. As we’ve said we’re looking to deploy more capital in this segment given the successes that we’ve had. We are starting to look in terms of diversification of markets and diversification of sponsors to bring that benefit to the overall portfolio.
So I think in terms of managing growth going forward that’s going to be the most effective way to do that is by evaluating other potential relationships and other investment options outside of the traditional Vantage relationship and footprint.
Chris Muller
Got it. Helpful. Thanks for taking my question.
Operator
Your next question comes from the line of Stanley Guys, Investor. Your line is open.
Unidentified Analyst
Hello, Ken, Jesse. Once again congratulations for a very solid performance and congratulations to your team. I just like to change direction for a little bit as being a major investor and obviously a major investor advocate. I’d like to talk about the distribution and I’d like to make some comments and questions.
One of the metric is appropriate whether it’s CAD or earnings there’s a significant amount of dollars per bcu of income that is available for distribution. And a large portion of this money, for instance, all the Vantage net income is fully taxable to the shareholders and it’s not entirely distributed or result in a considerable amount of phantom taxable income.
So far only a portion maybe 50% has been distributed. And my question is really what is the distribution policy or more specifically the commitment of Greystone and the Greystone Board for the entire distribution of this rather significant amount of CAD in this fiscal year?
Ken Rogozinski
Stan, a couple of comments that I would make to you there. I think first of all is that given our Partnership structure we are not a REIT. So we don’t have to for better or for worse abide by the rules or the regulations that the IRS has for REITs in terms of how much of their income needs to be distributed in order for them to maintain the REIT status.
Under the Partnership agreement, the timing and the amount of distributions, is really driven by the Board of the general partner. And so with that kind of backdrop on our structure, the Board is aware of the current levels that we’re at in terms of, how much distribution has been made to the unitholders, on a year-to-date basis versus the net income and the cash available for distribution on a year-to-date basis.
The Board and the management team, tend not to look at things on a quarterly basis in terms of, trying to keep those amounts in lot step. We know that there’s a lumpiness to the gains on sale that we have, on the joint venture equity segments and we tend to take a longer look over the year, since the unitholder income is recognized on an annual basis as well through the K-1.
So it’s certainly something — I think we saw a similar situation play out last year in terms of the timing of the distributions. And so I think, from this perspective as the Board noted in their announcement regarding the dividend distribution on June 15 of this year, that the Partnership currently expects to be in a position, to make supplemental distributions in addition to the regular quarterly distributions, for the remaining quarterly periods in 2022.
Q –Unidentified Analyst
I acknowledge that, Ken. And I just — like I said the point is that this money, is taxable. And in the past, there has been instances, where the shareholders have really paid significant amount of income tax of money they never received. And I understand, the idea that this is not agreed, it’s not regulated. You’re not required distribute 90%. I got that.
But the question is, that there is a significant amount of shareholders, who do have a financial — major financial interest in distribution, and the lack thereof. And I just was curious, and I would like to get a commitment that the taxable monies would be returned to the shareholders. That’s all.
Ken Rogozinski
Stan, from our perspective, it’s something that both the management team and the Board are aware of, and are mindful of in terms of the tax position, of our individual unitholders. As it’s always done, the general partner evaluates factors that go into buck-holder distributions, and makes decisions that are consistent with the long-term best interest of the unitholders and the Partnership.
I’m not in a position, to make any kind of commitment to you, in terms of a set percentage of distribution. But as I said, it is something that we as a management team and the Board are very mindful of, and it is certainly a very big part of our decision-making process, regarding the distribution understanding the individual income tax consequences to our unitholders.
Ken Rogozinski
I appreciate that as always. Thank you.
Ken Rogozinski
Thank you, Stan.
Operator
And I see no, further questions at this time. I would now like to turn the conference back to Ken Rogozinski.
Ken Rogozinski
Thank you very much, everyone. Thanks for joining us today and we look forward to talking to you again next quarter. Goodbye.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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