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America First Tax Exempt Investors (NASDAQ:ATAX)
Q3 2018 Earnings Conference Call
Nov. 6, 2018 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

I would like to welcome everyone to America First Multifamily Investors L.P. NASDAQ ticker symbol ATAX third-quarter 2018 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. On behalf of ATAX and its management team, thank you and welcome to ATAX third-quarter 2018 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 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 the 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.

Change in economic, business, competitive, regulatory or 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, 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 Chad Daffer, chief executive officer of ATAX. You may begin, sir.

Chad Daffer -- Chief Executive Officer

Thank you, Norma. Good afternoon, and welcome to the third-quarter ATAX earnings call. This afternoon, I'd like to share my thoughts on rates and a few notable transactions of the partnership in Q3. Craig Allen, ATAX CFO, will present the partnership financial results, then we will look forward to taking your questions.

I'm pleased to report management improved top-line revenue, delivering excellent expense control, while earning $0.29 of cash available for distribution. In the third quarter, unemployment fell to its lowest level in 48 years to 3.7%, with average hourly wages increasing year over year by 2.8%. With the workforce at or near full employment at higher wages, the partnership continues to benefit from rental growth at many of the underlying properties, while occupancy increased to 94% across the portfolio of mortgage revenue bonds. With this continued economic expansion and historical unemployment, federal open market committees raised Fed's fund rates for the 8th time since December of 2015 by 25 basis points to 2.25%.

The FOMC targets Fed funds to influence variable rate and short-term fixed rate loans in an attempt to mitigate threats of inflation. This action by the FOMC directly affects the cost of borrowing utilized by management to provide leverage to the portfolio of partnership assets. Market participants forecast additional rate increases by the FOMC in December, meeting to 2.5% with three additional rate increases forecasted in 2019. To date, strong demand for multi-family housing assets and spread compression has offset cap-rate expansion in most markets.

In September, the partnership closed on the sale of Jade Park Apartments and the redemption of Lake Forest mortgage revenue bonds. The properties are adjacent and located in Daytona Beach, Florida. In 2016, the partnership purchased Jade Park Apartments in cooperation with the property owner of Lake Forest Apartments, management pursued a strategy to reposition both properties and to consolidate operations. The partnership invested $1.85 million in rehabilitation of the properties, increasing rental revenue by 19%, while reducing operating expenses by 13%, increasing NOI of consolidated entities by 28%, culminating in the sale of the property resulting in the partnership, recognizing gain on sale, payoff of property loans and contained entities of $14.5 million in the third quarter.

In September, the partnership executed equity commitments to fund construction of two additional Vantage multi-family housing development. Vantage at Coventry is an $8.1 million investment and 288-unit development located in Omaha, Nebraska, and Vantage at Murfreesboro is a $12.2 million investment and 288-unit development located in the suburb of Nashville, Tennessee. Estimated completion of both properties is January of 2020. This is the 13th and 14th Vantage development the partnership has invested in since 2013.At this time, I'd like to have Craig present the partnership third-quarter financial results.

Craig Allen -- Chief Financial Officer

Thank you, Chad. As we've done in previous quarters, what I'd like to do is highlight some activity and key and significant transactions on the balance sheet and the income statement. First of all, total assets at September 30 was slightly more than $1 billion and it represents the 7th consecutive quarter that we've exceeded $1 billion in total assets. Total revenue for the third-quarter 2018 was $26 million, compared to $16.2 million in the third quarter of 2017.

That represents an increase of about 60% quarter over quarter. On a year-to-date basis, total revenue is $58.2 million, compared to $48.5 million year to date 2017, representing about a 20% increase in total revenue. There were two significant transactions that occurred during the quarter and I'll talk about these transactions in more detail shortly. Mortgage revenue bonds at September 30 totaled about $743 million and are comprised of 78 mortgage revenue bonds in 13 states.

At September 30, 2018, about 74% of our total assets are comprised of mortgage revenue bonds. Just as a benchmark, on December 31, 2017 that percentage was about 73.7% and then we always go back to 2012, because that's when the growth in our mortgage revenue bond portfolio really started. And on December 31, 2012, 35% of our total assets were comprised of mortgage revenue bonds. Significant transactions related to mortgage revenue bonds, during the quarter.

We had three redemptions totaling about $17.6 million and on a year-to-date basis, we've had 10 mortgage revenue bonds redeemed and pay off for about $39 million. Our MF Properties or properties that we own and are managed on our behalf. We currently have two MF properties, totaling approximately $65 million. We have the Paseo student housing property in San Diego, California and the 50/50 student property located in Lincoln, Nebraska.

The two significant transactions on the income statement that impacted us during Q3 2018 were the sale of the Jade Park MF property and the Lake Forest mortgage revenue bond. As Chad mentioned, we've owned Lake Forest since 2001 and Jade Park since September of 2016. These two projects total 384 units and the sale on each closed in late September of this quarter. In addition, we continue to invest in our Vantage product and on the balance sheet it's called investment in unconsolidated entities.

At the present time, we have equity investment in 2,886 units represented by 10 Vantage projects. In December of 2017, we had invested almost $40 million and that's now increased at September 30 to $80 million. The last conference call, we talked to you a little bit about our Freddie Mac M45 TEBS transaction, in which we securitized in fixed-rate fashion 25 mortgage revenue bonds, 24 of which had been in a term AB trust and another that had been securitized by an acquisition line of credit. At September 30, approximately $219.6 million remained outstanding and what we accomplished by the M45 TEBS was locking in a fixed rate for 16 years and fixed term, fixed rate with an 11 year call to that.

No interest rate hedging was required because of this TEBS transaction. Why this continues to be important for us to do transactions like this, especially on the debt side, is as we continue to move more and more from variable rate to a fixed-rate product. At September 30 of this year, approximately 59% of our debt financing is fixed rate in nature and 41% is variable. And just to go back in time, when we started this effort back on December 31, 2015, 32% of our debt was fixed and 68% of it was variable.

So we've moved from 32% fixed back in '15 to 59% today. We talk each quarter about interest rate sensitivity and how insulated are we, or what is our exposure to rising interest rates? And again, we've come into a period of time, as Chad mentioned previously, of rising interest rates by the Fed and how that may impact our cost of borrowing. So each quarter, we take a look and we do a shock test, where we take a look at rates rising 200 basis points on any given day and for 12 months, we do nothing in response to that. Over the past, we've measured that and we've reported to you those results.

At September 30, 2018, our -- the impact of rising interest rates at 200 basis points is about $1.2 million decrease in CAD. And the CAD impact is about a decrease of $0.02. So again, we're fairly well insulated. If we look back one year, September 30, 2017, our exposure was about $1.6 million decrease or about $0.027 in CAD.

So we've come from a negative $0.027 to a negative $0.02. So we've improved our interest rate sensitivity, while increasing, again, our interest spread and our net income in our CAD as well too. And again, we do this in a number of ways. We do this first by converting variable rate debt to fixed rate, and second, through interest rate hedging.

Our predominant source of interest rate hedging is our interest rate caps and in the past we have used two interest rate swaps with Deutsche Bank being our counterparty for those interest rate swaps. During the third quarter, we terminated one of the interest rate swaps with Deutsche Bank and with no net cash changing hands. And then we've disclosed a subsequent event in our 10-Q as we terminated the second interest rate swap and that resulted in net cash to ATAX of approximately $7,000. Our total net income per unit, basic and diluted, for Q3 2018 was $0.25 per unit, compared to $0.05 per unit a year ago.

On a year-to-date basis, our net income per unit is $0.38, compared to $0.21 for a year ago. During the quarter, we took an additional $310,000 permanent impairment on our PHC trust investments. On a year-to-date basis, we've taken about a $1.1 million impairment on those instruments. Our total cash available for distribution or our CAD was $0.29 in Q3 2018, compared to $0.09 same period a year ago, and on a year-to-date basis, $0.48 per unit, compared to $0.33 per unit a year ago.

And finally, we talk every quarter about our net book value or our underlying value. Little bit different than net asset value, but somewhat similar. And again, this value can be influenced tremendously by the marks that we record and as rates increase or decrease from quarter to quarter. At September 30, 2018, we reported net book value of $4.81 per unit, which is fairly consistent with the two quarters preceding that as well too.

And with that, I'd like to turn it over to Chad for any final comments. And then we'd be happy to take your questions.

Chad Daffer -- Chief Executive Officer

Thank you, Craig. I think, we've been looking through like the lens of a rising interest rate environment. With the flat yield curve, we've seen our originations decrease, we've seen the efforts that we've made from years past to increase our development business and I think that's offset some of our originations and deployment of capital here in the third quarter. I foresee the similar events transpiring here in the last quarter of this year, going into 2019.

Our credit profile remains strong. I think, our credit discipline in underwriting the projects that we see has been consistent for many, many years, and we will continue to be disciplined in our execution and deployment of capital. At this time, we would like to take questions. 

Questions and Answers:

Operator

Thank you [Operator instructions] Our first question comes from David Walrod of JonesTrading. Your line is open.

David Walrod -- JonesTrading -- Analyst

Good evening, everyone.

Chad Daffer -- Chief Executive Officer

Good afternoon, David.

David Walrod -- JonesTrading -- Analyst

Wanted to, I guess, get your broad picture thoughts on, in a rising rate environment the ability to source and originate new mortgage revenue bonds.

Chad Daffer -- Chief Executive Officer

We touched on this a little bit, David. I think, as we continue to see the rates increase eight times over the last couple of years, we've seen spreads compress and cap rates remain constant, therefore leaving high valuations of our underlying asset class. When we have an increase rate environment with that asset class staying very high, obviously the deals that we're seeing, and we underwrite a number of deals each quarter, the assumptions that I think that either the borrowers or underwriters are doing internally for the acquisition of fee-simple assets or the assumptions that are being made are becoming very challenging to accept on a forward-going basis for rental achievement and operating expenses. We've seen that, I think, you followed the sale of Jade Park, Lake Forest here for a couple of quarters and that's pretty much the case study on which we've seen these assets continue to have assumptions made by borrower or buyers that their capital partners both on debt and equity will not accept.

And so we'll continue to stay disciplined. We probably have a half dozen deals in the queue for underwriting at this time for Q4. Some of those may or may not close, depending on how they pan out here, going forward. But we've -- I think, originations are down across the board in our asset class.

I know, that our competitors, the GSEs, were doing deals at plus 250 over 10s a year ago. We're seeing now quotes at 150 over, trying to eat up some of that interest rate increase in order to make deals work. That may be the right approach. It's not the right approach for us at ATAX and our disciplined underwriting.

So we'll continue to stay disciplined and as opportunities present themselves, we'll execute. But we definitely have seen a decrease in our originations going forward with the flat yield curve and rising interest rate environment.

David Walrod -- JonesTrading -- Analyst

OK, that's helpful. And then secondly, you're down to two multi-family properties. What can we think about that going forward? Will you -- are you going to continue to look to sell those assets?

Chad Daffer -- Chief Executive Officer

We will continue to evaluate them. We have, I think, the other portfolio that you need to focus on as well is we have two in our multi-family housing real estate portfolio. We also have the Vantage assets that are coming through stabilization and we continue to evaluate what's the highest and best use for those assets long term. So continue to evaluate not only the MF portfolio, but also the Vantage portfolio for possible fee-simple sales in the future.

David Walrod -- JonesTrading -- Analyst

OK, thank you very much.

Chad Daffer -- Chief Executive Officer

Thank you, David.

Operator

Thank you [Operator instructions] Our next question comes from Ron Lane of ValueForum. Your line is open.

Ron Lane -- ValueForum -- Analyst

Chad, great quarter. Congratulations.

Chad Daffer -- Chief Executive Officer

Thank you, Ron.

Ron Lane -- ValueForum -- Analyst

We've spoken before. And I know, you've spoken with my advisor. Real quickly, I'm one of the original members of ValueForum. We have slightly over 700 members.

I am confident that we are your largest group of retail investors. My math shows that we're at least $75 million and maybe closer to $100 million with -- value with ATAX, which is a lot of money for some of the guys. Most of our members are retirees or folks who are getting ready to retire. And they are investing for one thing over everything else and that's sustainable income and capital preservation takes second place.

The issue that comes up with ATAX and with all of our major holdings is everyone has great quarters, good quarters and not-so-good quarters. Different companies have different philosophies on protecting the distributions of dividends. The membership that we have, always hopes that even on a soft quarter if you have to -- well, a soft year make that, that you'll continue to sustain your dividends with maybe some increased return of capital. Otherwise, we see selling, not with you but with other people.

Some of it pretty massive and then they can't get back in because the price goes up. But that's the knee-jerk reaction to retirees. They've got to protect their income. So bottom line is for the most part, can we consider ATAX to be a sustainable income producer?

Chad Daffer -- Chief Executive Officer

I think, the question that you've asked is the same as in the past, Ron, and is any discussions about a reduction in the dividend and the answer has continued to be no. Our board has not discussed about reducing the dividend in any way. We've had three years of covering the $0.50 dividend. We have $0.48 earned year to date, with one quarter to go.

I think, the math would tell you that we're highly confident that we'll do it for the fourth year. We're comfortable with our approach to pass sitting on the sidelines and managing assets in the event that the marketplace does not give us the opportunities that we feel are worthy of us making investments. And so I would continue to think that we have a long-term sustainable platform and at this time, your distribution is not been ever contemplated to be reduced, sir.

Ron Lane -- ValueForum -- Analyst

One quick question as a side note. I've owned you for almost three years. I think, there was some return of capital early on, like the first year. When was the last time ATAX included some return of capital in a quarterly dividend on the distribution?

Chad Daffer -- Chief Executive Officer

On the quarterly dividend, and I don't have those numbers in front of me. On an annual dividend, it have been 2014.

Ron Lane -- ValueForum -- Analyst

'14, OK. Thank you. Appreciate the answer. I will -- I'll try not to bother you...

Chad Daffer -- Chief Executive Officer

Thank you for your support, Ron.

Ron Lane -- ValueForum -- Analyst

Thanks.

Operator

[Operator signoff]

Duration: 24 minutes

Call Participants:

Chad Daffer -- Chief Executive Officer

Craig Allen -- Chief Financial Officer

David Walrod -- JonesTrading -- Analyst

Ron Lane -- ValueForum -- Analyst

More ATAX analysis

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