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America First Tax Exempt Investors (NASDAQ:ATAX)
Q3 2019 Earnings Call
Nov 05, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


I would like to welcome everyone to America First Multifamily Investors, L.P.'s, NASDAQ ticker symbol, ATAX, third quarter of 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. On behalf of ATAX and its management team, thank you and welcome to ATAX third quarter of 2019 earnings conference call. During this conference call, comments 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' 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 you -- 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 -- Chief Executive Officer

Thank you. Welcome to the third-quarter 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 from the third quarter with growth domestic project at 1.97%. Concerns of economic weakness around the globe and uncertainty with U.S. trade policy with China has 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 the consumer and the continued strength of the household spending. With the equity markets trading at all-time highs and the inversion of the yield curve being short-lived, the FOMC cut rates for the third time this year to 1.75% on October 30. 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 multifamily 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 and our development business, 10% of ownership assets providing above-market equity returns to our investors and our core credit discipline of multifamily housing.

The Partnership has been rewarded for the strong markets, low interest rate environment. While we are disciplined in the investment of the Partnership capital into this asset class, we will 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 -- Chief Financial Officer

Thank you, Chad. Total assets at September 30 were $1 billion. We've been able to increase our total asset base from about $983 million at December 31, 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 31, 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 in -- 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 30 of this year. In the past, we've talked about our MF Properties.

We continue to own two MF Properties or multifamily projects, one, being Paseo -- Suites on Paseo, which is a student housing multifamily project in -- right across the street from San Diego State University; and the other is a multifamily 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 30, we have invested in 9 Vantage projects totaling 2,597 units. 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 31, 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 to the -- 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 30, 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 represents the 14th Vantage investment since we first invested in Vantage in very early of Q -- it would be late Q1, early Q2 of 2016. A major event occurred -- a transaction -- the Vantage at Panama City Beach, there was a 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 have contributed about $9 million of equity into the project at Panama City Beach. Our equity was -- our equity investment was redeemed through the sale in September of 2019, and the gross gain on sale that we reported on our Q3 2019 10-Q was approximately $10.5 million. Just to give you a little bit of historic -- a 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 buck. It's really important, I mean, as we look back on why we invested, what has happened since we first invested and why we continue to invest. And as Chad and I have mentioned on -- numerous times on other calls, this is just a continued proof of concept of the Vantage investment and the benefit to our unitholders.

One last out-of-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, '17, '18 and '19, 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 30, 2019. Shifting now onto 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 was we refinanced M24 and the M33 TEBS with Freddie Mac.

We converted those variable rate debt financing to fixed rate. And in doing so, we also extended the maturity date on each, M24 and M33. As an example, we extended M24 to May of 2027, and that was from August of 2019. So we extended the duration about 7.3 years.

In addition, M33, 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 were entered into under a one-year variable-rate debt financing. This is an important part of our -- the fine-tuning of our balance sheet because one of the goals that we have set was to diversify the investment banking possibilities 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 this transaction and the fine-tuning that we've set about, embarking upon trying to accomplish 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 30 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 31 -- 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.

a $10 million operating line. We've extended that $10 million operating line of credit with a maturity now to June of 2021. The second is an unsecured -- a $50 million unsecured line of credit, and we've extended that maturity to June 30, 2021 as well, too. The fruits of all of this labor is interest rate sensitivity, and we disclose this every quarter in our 10-Q, and that can be found on 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 -- the 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 buck and, on a year-to-date basis, $0.26 per buck. Our cash available for distribution, $0.21 per buck 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 buck. 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.

Questions & Answers:


[Operator instructions] Our first question comes from Jason Stewart with JonesTrading. Your line is now open.

Unknown speaker

Hi. Good afternoon.

Chad Daffer -- Chief Executive Officer

Good afternoon, Jason.

Unknown speaker

You've made a lot of progress optimizing or tuning the balance sheet. Where would you say we stand on that process that we expect -- should we expect to see over the next few quarters?

Chad Daffer -- Chief Executive Officer

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 multifamily housing. As far as when those events will happen, they'll be market-sensitive, and we'll execute the highest best price available for our investors, Jason.

Unknown speaker

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

Chad Daffer -- Chief Executive Officer

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 fixed to variable over the last couple of years. And so in the event that we feel that we have too much variable rate exposure, we'll do the appropriate action in order to try and hedge those positions with either caps or swaps. But I think we're pleased with what we've accomplished to date.

I think M45 took a big step toward 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 variable fixed.

Unknown speaker

I agree. And it's been a tremendous progress. Congratulations on that part. My other question is --

Chad Daffer -- Chief Executive Officer

Thank you, yield curve.

Unknown speaker

Thank you, yield curve. On the yield, you had some, obviously, great proof of concepts. I would say, proof of concept plus 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 and then you close return on some of these investments? Obviously, big gains, but what are you looking at to move into next? And then how do the return profiles look?

Chad Daffer -- Chief Executive Officer

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 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 from 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 into 2020.

Unknown speaker

Thank you for taking the questions. Great quarter. I'll jump out of the queue. Thank you.



[Operator signoff]

Duration: 26 minutes

Call participants:

Chad Daffer -- Chief Executive Officer

Craig Allen -- Chief Financial Officer

Unknown speaker

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