America First Multifamily Investors, L.P. (ATAX) CEO Chad Daffer on Q3 2019 Results - Earnings Call Transcript

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America First Multifamily Investors, L.P. (NASDAQ:ATAX) Q3 2019 Earnings Conference Call November 5, 2019 4:30 PM ET

Company Participants

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 Third Quarter of 2019 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of the third quarter of 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's third 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 risks and uncertainties that could cause the actual or 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 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.

Chad Daffer

Thank you. Welcome to the third quarter of 2019 ATAX earnings call. Today, we'll share my thoughts on the economy, interest rates and an update on the partnership. Then Craig Allen, ATAX CFO will present the partnership results. Craig and I are looking forward to taking your questions. Economic data reported slower growth in the third quarter with growth domestic projects at 1.97 %. Concerns of economic weakness around the globe and uncertainty with US trade policy with China have increased our concerns about continued economic expansion and the future threats of recession. Given the current economic data, the labor markets remain resilient.

For the quarter, the unemployment rate of 3.6% with average hourly earnings increasing year-over-year at 3%. All positive labor statistics for consumer and the continued strength of the household spending. With the equity markets trading at all-time high and the inversion of the yield curve being short-lived, FOMC cut rates for the third time this year to 1.75% on October 30th. Expectations are the Fed will pause their December 11 meeting with possibilities of future rate cuts in 2020.

With the prospects of lower interest rate environment in 2020 and beyond, a strong consumer to support credit fundamentals of multi-family housing with strong occupancy and rental growth, the horizon of the partnership is promising. First, our tax exempt mortgage revenue bond portfolio, 75% of the partnership assets providing reoccurring tax-exempt returns for our investors. We're optimistic about the opportunities we're seeing for strategic growth due to the increased demand for affordable housing, the missing middle workforce housing and inclusionary zoning.

In our development business, 10% of the partnership assets providing above market equity returns to our investors, and our core credit discipline of multi-family housing. The partnership has been rewarded for strong markets, low interest rate environment. While we are disciplining in the investment of the partnership capital into this asset class, we'll focus on the growth of this business segment and in the partnership in 2020.

At this time, I'd like to turn it over to Craig Allen to present the financial results of the third quarter.

Craig Allen

Thank you, Chad. Total assets at September 30th were a $1 billion. We've been able to increase our total asset base from about $983 million at December 31st of 2018. As Chad mentioned, our total mortgage revenue bonds to assets is about 75% at the end of September, 2019. We have gradually been increasing that percentage from about 72% of assets on December 31st of 2016. At the end of September, we had approximately $777 million of mortgage revenue bonds that we have invested in accounting for about 10,433 units within those mortgage revenue bonds. Of the $777 million of mortgage revenue bonds, we hold 76 bonds in 13 states. And within those 76 bonds, 60 of those bonds are held intact with properties in Texas, California and South Carolina.

And of those three states that accounts for 78% of the fair value of our mortgage revenue bonds held on our balance sheet today. Within our mortgage revenue bond portfolio, we have lent money to 18 different developers throughout the 13 United States, and the big takeaway from our mortgage revenue bond portfolio is all mortgage revenue bonds are current under debt service requirements at September 30th of this year.

In the past, we've talked about our MF properties; we continue to own two MF properties or multifamily projects. One is being Paseo, Suites on Paseo, which is a student housing multifamily project at right across the street from San Diego State University. And the other is a multi-family student housing project by the name of the 50/50 that's located in Lincoln, Nebraska on the University of Nebraska-Lincoln campus. Those two investments are approximately 859 units.

Chad mentioned a little bit about our investment in the Vantage or development assets or the equity investments that we make. Just to give you an update at September 30th, we have invested in nine Vantage projects totaling 2,597. We have four investments in the State of Texas. We have two investments in the State of Nebraska, one in South Carolina and two in Tennessee. We've invested approximately $87 million in the Vantage projects. Just to give you a benchmark for comparison on December 31st of 2018, we had invested in nine projects, a little bit different mix three in Texas; two in Nebraska; two in Tennessee; one in South Carolina and one in Florida. And I'll talk about the Florida project in just a minute.

We had invested about $77 million and those accounted for 2,598 units. We've had a subsequent event since September 30th. We invested in Vantage at O'Connor which is located in San Antonio. We committed the equity investment in October of 2019 and we've committed to invest over the life of the project $7.4 million. It's a 288 unit market rate investment similar in nature to the other Vantage deals and Vantage projects that we have done. The Vantage at O'Connor where presents the 14th Vantage investment since we first invested in Vantage in very early of -- late Q1 early Q2 of 2016.

A major event occurred, transaction, the Vantage at Panama City Beach there was redemption or a sale of our equity investment as Vantage sold its investment. The 288 unit market rate multifamily property is located --was located in Panama City Beach, Florida. ATAX committed to invest equity beginning in March 2017. To date, we've contributed -- we had contributed about $9 million of equity into the project at Panama City Beach. Our equity investment was redeemed through the sale in September of 2019 and the gross gain on sale that we reported in our Q3, 2019 was approximately $10.5 million. Just to give you a little bit of history on the sales of Vantage. We've had four Vantage projects that have been sold or redeemed. $21.5 million of gross gains and contingent interest has been recognized by ATAX through those four redemptions or sales.

And that accounts for about $0.305 of CAD per BUC. It's really important I mean as we back on why we invested, what has happened since we first invested and why we continued to invest and as Chad and I have mentioned on a numerous times on other calls, this is just a continued proof-of-concept of the Vantage investment and the benefit to our unit holders.

One last data point that you may find interesting is we track the amount of equity that we've invested in Vantage projects since the inception back in 2017. And when we look back at 2016, 2017, 2018 and 2019 with one exception in 2018, our investment is fairly consistent in that $17 million to $18 million range of equity per year. In 2018, we invested about $41.5 million in Vantage projects. In total since we commenced our investments in early 2016, we've invested about $95.8 million into this asset class. And we have approximately $6.5 million worth of equity committed yet to invest at September 30th of 2019.

Shifting now on to the liability side of our business as we continue on the fine tuning of our balance sheet that we've talked to you about since very early on in 2015. We had a couple of significant transactions during the quarter. First were we refinanced M-024 and the M-033 TEBS with Freddie Mac. We converted that variable rate debt financing to fixed rate and in doing so we also extended the maturity date on each M-024 and M-033. As an example, we extended M-024 to May of 2027 and that was from August of 2019, so we extended the duration about 7.3 years.

In addition, M-033, we extended the maturity to September 2030 from July of 2020 and extended that about 9.4 years. And that represents about $72.3 million of debt refinancing in July of this year. Another transaction was with Mizuho. We entered into tender option bond debt financing arrangements where we financed eight investments. So we've levered five mortgage revenue bonds and three of our PHC trust investments. The total amount that we levered was about $104.1 million of gross proceeds and each of those was entered into under a one-year variable rate debt financing.

This is an important part of the fine tuning of our balance sheet because one of the goals that we had set was to diversify the investment banking possibilities to that would provide us debt financing. So this represents our third investment bank now to provide debt financing, which provides us additional liquidity options to the partnership. Again, the other two that we use on a regular basis are Deutsche Bank and Morgan Stanley. The result of these transaction and the fine tuning that we've said about embarking upon trying to accomplish the this task over the last five years is a precipitous move from variable rate financing to fixed rate debt financing.

In 2015, 68.2% of our debt financing was in a variable rate mode. 31.8% was in a fixed rate mode. Fast-forward to September 30th of this year, 65.9% of our debt financing is fixed and 34.1% of our debt financing is variable. So to recap, we've moved the fixed rate from 31.8% to 65.9%. And we've moved the variable rate financing from 68.2% to 34.1% today. So again it was an intentional strategy that we've embarked upon to try to insulate better our fund from interest rate sensitivity. Another event that happened during the third quarter of some note was the extension of relationships that we have with Bankers Trust in the form of two lines of credit.

This is a relationship that we've had since May of 2015 and it provides ATAX with two additional sources of liquidity. The first being an operating line of credit, $10 million operating line. We've extended that $10 million operating line of credit with the maturity now to June of 2021. The second is an unsecured, $50 million unsecured line of credit and we've extended that maturity to June 30th of 2021 as well to. The fruits of all of these, this labor is interest rate sensitivity and we disclose this every quarter in our 10-Q and that can be found in page 63 of the Q3 10-Q that we just released. We measure the impact every quarter of an increase of anywhere between 50 and 200 basis points in interest rates.

It assumes that the change is instantaneous and it assumes that we do nothing for 12-months in response to this. So it's very, very similar to what you would find that banks measure as it's also referred to as a rate shock. We rate shock 200 points banks will typically rate shock 300 to 400 basis points. And again, the key here is it's an instantaneous increase and we don't react to it for 12-months. We've seen an improvement in our interest rate sensitivity and we're exposed at a plus 200 basis points at about $1.7 million or about $0.028 of cash or cash available for distribution. And again, this is the result of a strategic move in our debt financing portfolio from variable to fixed rate, and also the impact, a positive impact of our interest rate caps that we have placed on the books as well too over time.

Our total revenue for the quarter was $14.9 million and on a year-to-date basis $46.9 million. Our total net income per unit basic and diluted $0.13 per BUC and on a year-to-date basis $0.26 per BUC. Our cash available for distribution $0.21per BUC for the quarter and $0.39 on a year-to-date basis. And the last metric we typically share with you is net book value. And our net book value at the end of September, 2019 was approximately $5.60 per BUC.

With that Chad and I would be happy to take questions that you might have and talk to you a little bit more about the fund.

Question-and-Answer Session


[Operator Instructions]

Our first question comes from Jason Stewart with Jones Trading. Your line is now open.


Hi. Good afternoon. You've made a lot of progress optimizing or tuning the balance sheet. Where would you say we stand in that process that we expect --to be expected see over the next few quarters.


I know, Jason, we usually don't try and give any indication on things that we're going to do in the future and give future guidance. I think we've been very clear in the past about we want to move away some of the alternative best investments. And move back to our core discipline of multi-family housing. As far as when those events will happen, they'll be market sensitive and will execute the highest best price available for investors, Jason.


Let me ask a little bit differently. Are you comfortable with the six floating mix of the debt liability side of the balance sheet today? Are you going to continue to try to add more fixed-rate exposure there?


No. I think given where we think interest rates are going here in the next 12 to 18 months, I think we're content with what we've done with reducing the --basically inverting the relationships between variable and fixed to fix to variable over the last couple years. And so in the event that we feel that we have too much variable rate exposure, we'll do -- take the appropriate action in order to try and hedge to those positions with either caps or swaps. But I think we're pleased with what we've accomplished to date. I think M-045 took a big step towards that, given the advantages of a flat yield curve.

I think we've moved a big way in the direction of finding what we think is an acceptable risk metric for variables fixed.


Okay. I agree and it's been the tremendous progress. Congratulations on that part. My other question--


Thank you, yield curve.


Thank you, yield curve. On the yield, obviously, great proof-of-concept. I would say proof- of-concept plus on there. When you think about redeployment of capital, the opportunity set and incremental return. What does that look like today as you get paid back in your close returned on some of these investments? Obviously, big gain but what do you --what are you looking at to move into next? And then how do the returns profiles look?


We have two core disciplines, Jason, as you know. One is our spread book under our mortgage revenue book portfolio. That's our core discipline. Given the competitive environment and the flat yield curve over the last 12 to 18 -months, our originations are down. The yield profile on that book is leveraged into the low double digits. The opportunity for growth of the platform is going to move more into the development business and our ability to redeploy that at higher returns for our investors. The opportunities are still real solid. We're seeing deals outside of outside of the Texas area. We had a nice proof-of-concept with taking the team on the road and delivering very attractive returns in Florida.

We're looking at opportunities both in the Front Range, the Carolinas and so as we continue to try and manage that book of business to about somewhere between 10% to 15% of assets. I think that we're going to look to try and redeploy into like-type investments, replicating what we've done with our best-in-class developers in Texas and see if we can look to chase a little bit higher more opportunistic returns going forward in the 2020.

End of Q&A


I'm showing no further questions in queue at this time. So that will conclude today's question-and-answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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