America First Multifamily Investors, L.P. (ATAX) CEO Ken Rogozinski on Q3 2021 Results - Earnings Call Transcript

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America First Multifamily Investors, L.P. (NASDAQ:ATAX) Q3 2021 Earnings Conference Call November 4, 2021 4:30 PM ET

Company Participants

Ken Rogozinski - Chief Executive Officer

Jesse Coury - Chief Financial Officer

Conference Call Participants

Jason Stewart - JonesTrading

Operator

On behalf of ATAX and its management team, I'd like to welcome everyone to America First Multifamily Investors, L.P.'s, NASDAQ ticker symbol, ATAX, Third Quarter of 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator Instructions] 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, including the impact of the COVID-19 pandemic, 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 report 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 of ATAX.

Ken Rogozinski

Good afternoon everyone. Welcome to America First Multifamily investors LPS third quarter 2021 investor call. Thank you for joining. I will give an overview of our business and the markets. And then Jesse Coury, our Chief Financial Officer will present the partnerships financial results. Following that, we look forward to taking your questions.

For the third quarter of 2021, the Partnership reported net income of $0.19 per Beneficiary Unit Certificate or BUC. $0.22 of cash available for distribution per BUC, a book value of $5.68 per BUC on $1.28 billion of assets and the leverage ratio as defined by ATAX of 66%. The Partnership is current and in good standing with all of our lenders and leverage providers. In terms of the Partnerships investment portfolio, we have received no requests for forbearance on our multifamily mortgage revenue bonds, and all multifamily MRBs are current on principal and interest payments. Physical occupancy on the underlying projects average 96% for the MRB portfolio as of September 30, 2021. Our current Vantage portfolio consists of 12 projects, six where construction is 100% complete, and six others where construction or planning is still underway.

For the six properties where construction is 100% complete, we continue to see good leasing activity, with five of the six having achieved over 90% physical occupancy as of the end of October. We continue to see no material supply chain or labor disruptions on the Vantage projects still under construction. As we have seen in the past the Vantage group as the Managing Member of each project owning entity will position a property for sale upon stabilization. To date in 2021, three Vantage projects have been sold returning $29.8 million in original contributed capital to us and $25.4 million in capital gains and preferred return, a roughly 1.85x multiple on invested capital.

To date in 2021, we have invested $20.2 million in four Vantage projects and still own land and Hydro Texas and San Marcos, Texas for additional projects with a projected investment need of $16 million. Our two owned student housing properties have started the new academic year, which coincides with their standard lease terms. Both are covering all of their obligations from project cash flow, including operating expenses and in the case of the 50/50 at University of Nebraska debt service. Both University of Nebraska and San Diego State are holding primarily in person on campus learning. As of today, the suites on Paseo was 97% occupied, which is above the level seen in years prior to the 2020, 2021 COVID 19 pandemic. The 50/50 is 88% occupied, which is slightly below historic levels prior to the 2020, 2021 COVID 19 pandemic.

On our student housing MRB for Live 929 Apartments at Johns Hopkins University, we have seen a similar reversion to pre pandemic performance. The property owner recently transitioned third party property management at Live 929 to the same management company that manages Maryland Economic Development Corporation's portfolio of student housing assets. Leasing currently stands at 95%, with waiting lists for certain unit types. The existing forbearance of principal amortization agreement with the borrower runs through the end of 2021. The need for forbearance into 2022 will be evaluated as part of the 2022 budgeting process. Like the University of Nebraska and San Diego State, Johns Hopkins University has seen a broad resumption of in person classes this fall.

The borrower on the provision proton therapy center MRB filed for Chapter 11 bankruptcy in the fourth quarter of 2020. And that case continues to work its way through the bankruptcy court process. The debtor has retained Houlihan Lokey to evaluate their options with regard to the Knoxville Center and the two other centers that entered bankruptcy at the same time. Those options could be either an outright sale of facilities, or restructuring of the existing bond debt or something else entirely. There have been no new developments here since last quarter, and we saw no need to take further actions on the valuation of the position.

Turning to the markets, the third quarter of 2021 brought a modest widening in yields for municipal bonds. Municipal bond mutual fund inflows have continued their strong performance since March of last year. So far in 2021, all but six weeks have seen net inflows of over $1 billion, with only a single week of net outflows. However, three of those sub $1 billion inflow weeks have been the last three in a row. There have been a handful of weeks in 2021, with outflows in the municipal high yield funds segment. The uncertainty in the fixed income markets surrounding the performance of the US economy, the potential for inflation, and potential changes to US tax policy has had a negative impact on the overall level of interest rates. In the muni markets, 10 year MMD is currently at 1.21%. And three year MMD is currently at 1.69%, roughly 35 to 40 basis points higher in yield than last quarter. The three year AAA Muni to US Treasury ratio crept up to over 80% towards the end of the third quarter from its sub 70% level at the end of the second quarter.

In terms of our debt investment activity during the third quarter, we closed on an $85 million construction loan commitment in July, which I had mentioned on last quarter's call. In September, we closed on another construction financing transaction, $46 million for a new construction light tech project in Georgia. Additionally, at the end of October, we closed on $42 million of MRBs to provide construction and permanent financing for the adaptive reuse and to light tech affordable housing of an historic commercial property in downtown Los Angeles. We also provided a forward commitment to one of the nation's largest nonprofit housing providers for permanent financing on a new construction project in the Long Beach, California area. We continue to see lending opportunities in both deconstruction and permanent financing market segments.

In August 2021, the Vantage Jumbo Verde property, located in Val Verde Texas was sold. The Partnership recognized approximately $0.13 of net income in CAD per BUC buck, in conjunction with the redemption of our membership interest as a result of the sale. As I mentioned on last quarter's call, we closed the acquisition of a site in San Antonio for the development of Vantage at Fair Oaks. In September, we committed a fund our full equity investment of $11 million and construction is underway. We will continue to look to work strategically with our strongest sponsors on new investment opportunities where traditional sources of capital may not currently be available. Finally, with regard to the follow on equity offering that the Partnership completed at the end of September, we were pleased to be able to access the market for the first time in almost eight years. As you can see from our net Vantage activity in 2021, we have already committed roughly half of the equity raised through the offering, and the remaining equity is available to fund up to two additional Vantage investments.

We believe that common equity was the best source of funding for this additional advantage investment activity, as opposed to drawing on either one of our shorter term corporate debt facilities. The returns we have seen in our previous Vantage in debt investments exceeded the higher cost of common equity capital.

With that, I will turn things over to Jesse Coury, our CFO to discuss the financial data for the third quarter of 2021.

Jesse Coury

Thank you, Ken. For the third quarter of 2021, we reported total revenues of $17.7 million. Net income per Beneficiary Unit Certificate or BUC basic and diluted of $0.19, and Cash Available for Distribution, a non GAAP measured or CAD for short of $0.22 per buck. On a year-to-date basis, we reported $48.5 million of total revenues compared to $42.1 million for 2020. Net income for BUC basic and diluted up $0.42 per BUC compared to $0.07 per BUC for the same period in 2020 and CAD at $0.50 per BUC compared to $0.20 per BUC for the prior year.

We recorded approximately $1.28 billion in total assets as of September 30. Such assets are primarily comprised of our three main investment classes, the first being our net spread portfolio, the second our Vantage investment portfolio, and third our owned MF properties. Our net spread portfolio consists of investments in Mortgage Revenue Bond or MRB for short, and Governmental Issuer Loans or GIL, as of September 30, our MRB is totaled $744 million, and our GIL totaled $166 million. These MRBs and GILs represent approximately 71% of our total assets. We currently own 72 MRBs that provide permanent financing for affordable multifamily properties across 14 states. We hold significant amounts of MRBs related to properties in three states based on outstanding principal, with Texas representing 45%, California 19% and South Carolina at 12% of the portfolio.

During the third quarter, four of our MRBs with principal totaling $32.4 million were redeemed related to the Rosewood Townhomes and South Pointe Apartments properties in South Carolina. Two of the four MRBs were redeemed at a premium to outstanding principal, resulting in contingent interest of $1.8 million recognized during the third quarter. We currently own nine GIL that financed the construction of affordable multifamily properties across six states. The GILs are functionally equivalent to our MRBs and that they are non recourse obligations issued by governmental authorities secured by a mortgage on real and personal property of affordable multifamily properties. And we expect and believe the interest earned on GILs is exempt from federal income tax.

In most instances, we also commit to fund property loans in tandem with the GI Ls that share a first mortgage lien and are typically funded after all GIL funds have been advanced. We closed on two new GIL and associated property loan investments in the third quarter, consisting of an $86 million commitment to finance construction of a low income housing tax credit property in Florida, and a $46 million commitment to finance a low Income Housing Tax Credit property in Georgia. As of September 30, we had outstanding GIL funding commitments totaling $120.7 million and related property loan funding commitments totaling $152.1 million that will be advanced on a drawdown basis during construction.

As Ken mentioned to date, we have received no requests for forbearance of principal and interest payments for MRBs, GILs or property loans associated with affordable multifamily properties. In 2020, we granted forbearance for the Live 929 Apartments MRB associated with a student housing property in Baltimore, Maryland. The forbearance consisted of a deferral of contractual principal payments through 2021 while the property recovers from the effects of the cn COVID-19 pandemic. The property was 95% occupied as of September 30, which is above pre COVID levels, and we continue to monitor operations and potential needs for additional forbearance going forward.

As Ken mentioned in December 2020, the borrower of our Provision Center MRB property, a proton therapy cancer treatment center in Knoxville, Tennessee, filed a petition for Chapter 11 bankruptcy protection, and the borrower is working through the bankruptcy process, while we are assessing sale and restructuring options with other senior bondholders.

Moving on to our Vantage investments portfolio, it consists of 12 projects as of September 30, of which one investment is reported on a consolidated basis. All investments are for the construction of market rate multifamily properties that represent in the aggregate over 3,400 rental units. The carrying value of our vantage investments was $89.6 million as of September 30, exclusive of the One Investment Vantage at Hadow, which is reported on a consolidated basis. As of September 30, we had commitments to fund a total of $37.4 million of equity across five projects. Of the 12 projects currently, eight are in Texas, two in Nebraska, and one each in Tennessee and Colorado. Six projects are complete and in Lisa and six are either under construction or in the planning phase. As of the end of October five of the six completed properties have over 90% occupancy with the sixth property now over 85% occupied. On the six under development, there have been no material delays or disruptions due to COVID-19 for properties currently under construction.

As Ken mentioned the Vantage of Bulverde property and Bulverde Texas was sold in August 2021 and our equity investment was redeemed. Upon redemption, our initial $8.6 million investment of capital was returned. And we recognize $1.4 million of investment income and a $7 million gain in the third quarter. This is our ninth Vantage investment that has been redeemed, which in the aggregate have generated over $42 million of gains on sale and contingent interest. Our MRB properties portfolio owned consisted of two MF properties with a total of 859 student housing beds and a net carrying value of approximately $55 million as of September 30.

Both properties provide college student housing, serving the students of the University of Nebraska and San Diego State University. COVID-19 pandemic had a significant impact on MF properties during 2020 and the first half of 2021 as the University of Nebraska went partially remote, and San Diego State went fully remote. Both universities have resumed on campus in person classes for the fall 2021 semester. And as of September 30, the 50/50 MF property is 85% occupied, which is slightly lower than pre COVID levels and the suites on Paseo MF property in San Diego California is 97% occupied, which is higher than pre COVID levels. Both properties continue to meet all operating and direct mortgage obligations with cash from operations.

On the debt side, we use a variety of debt financing facilities to lever our investments in MRBs, GILs and property loans. This leverage totaled $761 million in the aggregate as of September 30. In the third quarter of 2021, we received gross proceeds of $46.2 million from various TOB trust financings related to our drawdown MRB, GIL and property loan investments. These proceeds were offset by repayment of approximately $25.7 million of debt financings associated with the redemption of the Rosewood Townhomes and South Pointe apartments MRBs mentioned previously. Of our $761 million of debt financing as of September 30, approximately 39% is fixed rate debt, and 61% is variable. Of the $465 million in variable interest financing, $178 million, or over 1/3 is secured by investments with variable interest rates such that they are at least partially hedged against rising interest rates without the need for separate hedging instruments such as interest rates caps and swaps.

In August 2021, we extended the maturity of our $50 million acquisition line of credit with Bankers Trust Company to June of 2023 and converted it to have secured facility. This facility is an important source of temporary funding for our investment acquisitions, and provides a valuable tool for managing our liquidity. In October 2021, we closed on our first debt financing facility with Barclays Bank PLC, as the lender to leverage a GIL and property loan investment. The addition of Barclays provides an alternative financing source and diversification of our lender relationships.

Lastly, on the financing side, we completed a public offering and sale of approximately $5.5 million BUC for net proceeds of approximately $31.2 million after discounts, commissions and direct expenses and that transaction closed in September. This was our first BUC capital raise since early 2014. And we expect to deploy net proceeds to fund our investment pipeline, primarily for our Vantage equity investment commitments in the coming quarters. We regularly monitor our exposure to potential increases in interest rates through our interest rate sensitivity analysis, which we report quarterly and as included on page 73 of our Q3 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 that an immediate 200 basis point increase in rates that is sustained for a 12 month period will result in a decrease of approximately $5.1 million in our net interest income in CAD or approximately $0.076 per BUC.

Lastly, we regularly provide our net book value per BUC, which as of September 30, was $5.68 per BUC, which approximates our June 30th net book value per BUC of $5.67. Our closing market price on the NASDAQ on September 30 was $5.96 per BUC, which is a premium to our book value of approximately 5%. For comparison, as of market closed yesterday, our closing market price was $6.46, which is a 14% premium over our book value per BUC.

With that Ken and I are now happy to answer questions from the audience.

Question-and-Answer Session

Operator

[Operator Instructions]

We do have a question from Jason Stewart from JonesTrading.

JasonStewart

Thanks and good afternoon. Obviously advances are accelerating pretty nicely, commitments remain pretty strong. With the sale advantage and the offering cash is at a high level. What -- how should we think about the cadence of capital deployment over the next couple of quarters relative to 3Q?

KenRogozinski

Hey, Jason, thanks for joining today. A couple of comments that I'll make there and then I'll have Jesse add his thoughts. You're exactly right in terms of looking at the volume, particularly of our Governmental Issuer Loans or GIL transactions going forward. As Jesse had mentioned, these are all drawdown construction loans. We do not fund 100% of them at closing. So as the construction process ramps up at the individual projects, we see more funding requests come in from the project sponsors, which then cause us to upsize our loans and upsize our TOB funding in conjunction with that. So given the fact that we closed our first of those transactions in June of 2020, and with the nine that we have on the books to date, I would expect that as you know, construction continues to ramp up and as sponsors really start getting deeper into their construction draw process that we'll see more and more capital deployed there.

We also have the new origination activity, the three transactions that we've closed over the past couple of months that are sizeable in nature and grand total of almost $170 million. And so as those get into gear and really ramp up with their construction process, I think it's right to assume that we're going to see a continued accelerated pace of deployment, particularly in the GIL market.

JesseCoury

Yes, this is Jesse, I agree with Ken, that we are seeing the GIL start to ramp up, you see an increase in fundings quarter-over-quarter, from approximately $26 million in Q2 to $35 million in Q3. And we expect to see a similar ramp up for the coming quarters. On the Vantage side, our deployment of capital is under a little bit a different timeline, on the construction side, so a longer 18 to 24 month build process. Whereas on the Vantage side, our equity comes in first. And then construction loan financing comes in second. So the deployment of advantage equity is under a shorter time frame, typically, in the six to nine months from closing timeframe.

JasonStewart

Got it, that's helpful. And then maybe you could share a little bit of insight. It sounds like that in terms of development projects you're not seeing many issues with supply chains and getting the proper products in place to hit timelines. Maybe you could share some insight in terms of why you think that's been as smooth as it is relative to some others who have publicly talked about some bigger supply chain issues.

KenRogozinski

I think Jason, part of that is just due to the fact that the Vantage team has done a really good job in working with their GCs and their suppliers in terms of accessing the materials that are needed. I mean, just as an example, Jesse refresh my memory, which project it was but one of the projects that we just got underway in Texas, I believe it was the Whole Lotus project, that what the Vantage guys actually did was negotiate a bulk purchase of the lumber needed for that project that was paid for immediately at closing with the draw. And then the lumber was then stored off site in a bonded warehouse to make sure that the materials were going to be available on an as needed basis. So you know that there are some, I think, very smart things that the Vantage guys have done, to manage their supply chain process and make sure that materials were there and available as needed on the projects that they have underway.

I also think that through the management of things like that, given the pullback we saw from a lot of other market participants in the timeframes earlier this year when there were high construction commodities prices, it freed up labor, like framing crews such that they were able to get more crews on site because there wasn't other work open or available to them and allow them to accelerate the pace of construction. So I hear what you're saying in terms of kind of what you're hearing from other market participants. But I think, quite candidly, from our perspective, that a little bit of that uncertainty and turmoil has actually worked to our favor. And I think the Vantage team has done a great job of taking advantage of that.

JasonStewart

I think it's great. I mean, obviously, the results sort of speak to themselves. And then if you pull way up on the Vantage segment, I mean, obviously multifamily rents are quite strong across the entire Sunbelt. I think you have two land parcels. But maybe you could pull up and share your long-term view of where you think the Vantage and development segment goes, if there are other partners that you would consider thinking about and just how it fits into the overall strategy.

KenRogozinski

I think we've been very successful with the investments that we've done with the Vantage group since the Partnership was amended in 2015 to allow those kinds of investments. I think we've got a very good pipeline now in terms of the deals that we've got underway, that the 12 projects we've seen, strong leasing we've seen good rent growth and the projects that are starting to lease up and so I think from that perspective, we continue to be pleased with the performance of the asset class and are looking to, from an asset allocation perspective, keep the percentage of the Partnership's assets that we have invested in that strategy, the same or even potentially grow it a little bit as opportunities present themselves.

Some of the markets that we're looking at doing further activity in like the Loveland Colorado market where we made an investment earlier this year, there are higher land costs, there are higher utility costs and things like that that will factor into the capital deployment that we make there. But I think by and large, it's a strategy and an asset class that I think our track record has shown that we can be successful with. And so we're going to continue to look for opportunities to both work with the Vantage team and also evaluate the possibility of developing similar relationships with other sponsors that might give us a bit of a diversification effect in terms of their home territory end markets and their particular strategies.

Operator

And there no further question on a queue. I'll now turn the call over back to Ken Rogozinski,

Ken Rogozinski

Thank you, everybody for joining us today. We appreciate your support and interest of ATAX. We'll talk to you next quarter.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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