America First Multifamily Investors, L.P. (NASDAQ:ATAX) Q1 2019 Results Earnings Conference Call May 6, 2019 4:30 PM ET
Chad Daffer - CEO
Craig Allen - CFO
Conference Call Participants
I would like to welcome everyone to America First Multifamily Investors L.P. NASDAQ's Ticker Symbol, ATAX First Quarter of 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q1 2019, 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 First Quarter of 2019 Earnings Conference Call. During this conference call, comments made regarding ATAX, which are not historical facts, are forward-looking statements and are subject to risk 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 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 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 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 base its expectations may change, 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 Chad Daffer, Chief Executive Officer of ATAX.
Thank you, operator. Good afternoon, and welcome to the first quarter of 2019 ATAX's earnings call. This afternoon, I'd like to share with you a few of my thoughts on the first quarter results, the economy, interest rates, and the notable transactions. Then Craig Allen, ATAX's CFO, will present the first quarter partnership financial results, and then we'll look forward to taking your questions.
In the first quarter the partnership reported a 7.3% increase in total revenue to $17.7 million compared to the first quarter of 2019, with a 9% decrease in general and administrative expenses or $0.11 cash available for distribution per BUC.
Academic tariffs [ph] remain strong to start 2019 with first quarter gross domestic product exceeding expectations at 3.2%. Unemployment falling to 3.8% with average hourly earnings increasing moderately by 1.37%. With inflation muted in near target of 2% percent, all numbers are supportive of strong fundamental credits moving forward in multifamily.
In January the Federal Open Market Committee left Fed Fund unchanged from the previous rate hike in December of 2018 at 2.25% to 2.5%, with the yield curve continue to flatten with two year and 10 year treasury spreads narrowing to 40 basis points.
Providing continued challenge and sourcing new bond investments with acceptable leverage yields facilitated growth for the partnership of Mortgage Revenue Bond segment. In the first quarter the partnership recognized approximately $3 million of contingent interest income to the sale of Vantage at Brooks located in San Antonio, Texas.
This being the fourth Vantage asset sale in the past two quarters, at this time the partnership is currently invested in Tim [ph] Vantage assets, these assets are in some stages of construction, stabilization or evaluation for sale.
At this time, I'll turn the call over to Craig Allen, ATAX's CFO to present the partnership financial results.
Thanks, Chad. What I'd like to do is walk you through some notable transactions on the balance sheet. Talk to you a little bit about the income statement and then end up with some discussion on book value.
Total Assets as March 31 of 2019 increased by about $11 million to $993 million versus the $983 million at December 31 of last year. Looking at our mortgage revenue bond portfolio, right now we own mortgage revenue bonds in 13 states throughout the United States approximating about $739 million, that represents 79 mortgage revenue bonds and also represents about 10,800 units under management.
Every quarter we talk about the percentage of mortgage revenue bonds to total assets. At the end of March of ’19, mortgage revenue bonds approximated 74% of total assets. Again, if we go all the way back to when we started up these efforts of increasing ownership and mortgage revenue bonds back to December 31 of 2012, about 35% of our total assets were comprised of mortgage revenue bonds.
During the first quarter of this year, we acquired two mortgage revenue bonds for about $6.1 million in total value. Also we had one bond redeemed in the first quarter for about $5.6 million, and then in the first week in April of 2019 we had a subsequent event where one additional mortgage revenue bond was redeemed for about $6.2 million, and that's in Note 24 in the in the Q1 10-Q.
Another aspect of our total assets is MF properties are the properties that we own. Those - we own two MF property positions in two different states, one in California, one in Nebraska, both are student loan properties making up about 859 units and the value of those is about $64 million.
Chad talked a little bit about our investment in Vantage products. It's found on the balance sheet and it's called investment in unconsolidated entities. At March 31 of this year where about $85 million invested as equity investments in the unconsolidated entities. The $85 million was located in nine states, three in Texas, two in Nebraska, two in Tennessee, one in South Carolina and one in Florida. The $85 million represents about 2,598 units under management as well.
Last quarter we talked a little bit about our total equity dollars invested in the Vantage projects since we started investing in 2016. In the first quarter of 2019, we invested about $6.7 million of equity investments in the Vantage projects and since inception we've invested about $84.2 million in these assets.
We have a subsequent event that happened in April - in the first week in April of 2019 we acquired another Vantage project or we invested in another Vantage project, The Vantage at Conroe, a 288 unit multifamily project located just north of Houston, Texas, its kind of surrounded by the Sam Houston National Forest.
Our total equity commitment is about $9.1 million. When we consider the Vantage at Conroe investment we have a total of about just shy of 2900 units of Vantage project at our units under management, approximating about 21.1% of the total units that we are invested in between Vantage and the mortgage revenue bonds.
Chad spoke a little bit about a transaction that we did in the first quarter and that was a sale Vantage at Brooks. It was a 288 unit multifamily project located in San Antonio, Texas. We invested in the Vantage at Brooks through a loan in October of 2015.
We recognized about $3 million of contingent interest in Q1 of this year and that $3 million of contingent interest would be considered to be taxable income in 2019 and much like the other sale events that have transpired at ATAX, again, that would be considered to be a taxable event. Based upon this taxable event of $3 million in April we paid approximately 753,000 in Tier 2 income to our general partner.
Every quarter we look at the percentage of fixed versus variable rate, debt as well too. And really since 2015 we've had a concerted effort as we fine tune the balance sheet to shift our mix from variable to more fixed.
Back in 2015 we had about 68% of our debt that was variable. Today we have about 37% that's variable, at about 60, just shy of 63%, so say 63% fixed, 37% variable. Again we - this has been a concerted effort to gradually take more of our debt financing portfolio and convert it from variable to fixed rate. And we think that up to this point we've been fairly successful achieving that.
The other thing we look at every quarter is interest rate sensitivity and interest rates of sensitivity is on page 48 of the March 10-Q. What we do in the interest rate sensitivity table is we shock if you will our portfolio and we measure what that shock looks like all the way to a 200 basis point increase in interest rates.
So this measures if interest rates go up all at once 200 basis points and for 12 months we had ATAX do nothing to counteract the increase that we just felt, again, slightly hypothetical, but it's very similar to the shock treatment that banks do as well too.
So for Q1 if we were to realize a 200 basis point increase in rates our CAD or cash available for distribution would decrease about $1.4 million, $1.5 million or about $0.024 to $0.025 of cap. So again, well within the parameters that we as management consider to be acceptable, and it's something that we actively manage and again work where rates to increase of that magnitude clearly we would - we would take action to counteract that in some fashion.
Total revenue for the quarter was $17.7 million, an increase over the previous quarter in 2018 which was $16.5 million. The net income per unit both basic and dilutive we reported $0.08 per BUC in Q1 of 2019 versus $0.09 in Q1 of 2018.
The cash available for distribution is something that we look at and we utilize internally and then we communicate to you each quarter and then on an annual basis for Q1 2019 we reported $0.11 per BUC compared to $0.10 per BUC for the same quarter in 2018, so an increase of $0.01 per BUC.
And then finally each quarter we present to you the book value and the underlying value of our equity. At December 3rd - excuse me March 31 of 2019 our book value was $5.13 per unit, an increase of $0.10 from December 31 of 2018 when we reported $5.03 per BUC.
At this time we'd be happy to take your questions and answer them as you ask them.
Thank you. [Operator Instructions] And our first question comes from the line of John Barr with America First Mozart [ph] Your line is now open.
Hi, guys. How are you doing today?
Good John. How are you?
Good. Couple of - I guess the first question and a housekeeping. I’ve been with you guys for about five years right now and I noticed on this year's K-1 that roughly about 25% of my distributions consisted of taxable interest income and there were no ordinary or qualified dividends in contradistinction to 2017 and ‘16. Is there any reason why the interest income component was so large relative to dividends and qualified dividends in prior years?
Sure. This is Craig. Yeah, in 2018 there was a sale of Vantage at New Braunfels and the sale Vantage at New Braunfels was considered to be contingent interest and much the same as the Vantage at Brooks sale that we just talked about in January of this year, that would be considered to be taxable income on the - think of contingent interest as a gain on the sale, but yet not truly considered to be a gain. For me to…
Be able to calculate this years relative interest, would that be able to take the contingent interest allocable to the limited partners and divide by what the number of BUC’s outstanding and multiplied by my amount of units would that give me an approximation at least as to what the interest would be relative to this contingent interest transaction?
Yeah, I mean, that would be - that that would be a rough way to calculate. For example we've reported the contingent interests for the Vantage at Brooks sale in January and you could - what would be allocable in - for ease of calculation would be divided by total units and then times your position, yes.
That's fair enough.
You call us direct, off-line, and we got a good…
Sure. I don't want to occupy too much longer now. Let's see one other questions, you've got – and this kind of broader range right here, and I - kind of assets in prior quarters you've got a performance trend per BUC in your fact sheet and that's a nice - that's a nice chart right there to kind of look back like four or five years and do cumulative income and CAD, et cetera. And my quick calculations here look like, you got roughly - if you go back to the December 2014, you get $0.25 cumulative CAD in excess of the - of the distributions right there. You guys kind of – is that go to – into a bag [ph] so to speak in terms of where you stand as you look forward on this or I guess as I'm you know unless you have unusual transaction where you've got a sale of property, something else, your CAD [indiscernible] maybe $0.01 or $0.02 in excess - the distributions in excess of the CAD.
So how do I - investors kind of crank that handle into these new transactions that boost up CAD, but are not - what you might normally consider to be operating activity, I know it's kind of a broad question, but I've been trying to zero in on that and I'll let you take a shot at it?
Yeah, I think John, I'll try to answer a number of questions there. I think since 2015 you can see that where CAD is, have exceeded our payment of our distribution by CAD on a year-over-year basis and talking with investors and the direction of our board and the management team we've paid off of the $0.50 and continue to reinvest anything over and above that for the benefit of the unit holders long-term.
And I think that will continue to be the plan as it's - as we're executing currently. I really don't foresee that changing anytime in the near future.
Okay. And then finally if I take a look at the revenue side and I mean, if we exclude the contingent interest income this year, you probably would have fallen short on the - you know, on the net income would have dropped, and I guess, CAD would have dropped a little bit there too.
I tried to assess before, but our property sales, what property sales are considered to be normalized so to speak and what property sales would be outside the computation CAD?
Well, I think since 2015 we've asked the voters to allow us to invest equity into - direct equity into projects, so I think new sale of those projects would be considered normalized from that point forward.
You know, it's tough for us to predict sometimes with our asset class earnings can be a little bit lumpy. I don't know if that's a scientific term or not. But as we continue to invest in ATAX and Vantage like assets and we have the ability to stabilize, construct stabilize and then evaluate them for sale, the quarter by which those units - those units will be sold will be recognized.
And so sometimes if it moves a little quicker than others and as you know, we've not given any kind of future guidance on if and when those assets would be up for sale or close.
So we understand that it's a little bit tough to predict on an ongoing basis not knowing which bond, which assets or bonds in the portfolio may not be sold to recognize the gain or loss of each quarter.
With interest rate arbitrage, do you guys ever foresee a time when CAD from - without any other real estate operations CAD would equal the $0.125 per quarter? I mean, is that your game plan to kind of get there or what would it take for CAD to equal a $0.125 per quarter just on your interest rate sensitive products and lending and borrowing?
You know, I think we don't try and differentiate between the two. Our goal is $0.125 a quarter and $0.50 annually, John.
Okay. All right. Fair enough. Good quarter, guys. Appreciate it. Keep up the good work calculator. Bye-bye.
Thank you. [Operator Instructions] All right. It is at this time, I am not showing any further questions on the phone line. So that does conclude today's question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. Everyone have a great day. Thank you.