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America First Tax Exempt Investors (ATAX 1.18%)
Q4 2019 Earnings Call
Feb 27, 2020, 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, the fourth 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' fourth 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 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'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 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 Chad Daffer, chief executive officer of ATAX.

Chad Daffer -- Chief Executive Officer

Thank you, and welcome to the fourth-quarter 2019 ATAX earnings call. Today, the ATAX team will discuss our thoughts on the economy, interest rates, markets and the financial performance of the partnership. I'm pleased to introduce ATAX chief investment officer, Ken Rogozinski. Ken joined the ATAX team in September as part of the Greystone acquisition of the ATAX general partner.

Prior to joining our team, Ken was head of debt capital markets for Greystone Advisors. Ken brings over 30 years of experience in affordable and senior housing markets as an investor, investment banker, and credit analyst. Ken will be a participant on the earnings calls, sharing his views on the markets as a key member of management. Jesse Coury, ATAX' CFO, will present the financial results of the partnership.

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We look forward to taking your questions at the end of the call. As I reflect on 2019, it was a year of discipline and opportunity. Discipline as it relates to the limited growth of the mortgage-backed revenue bond portfolio. Management stood firm with no vacillation on credit, quality, and an acceptable leverage return.

As market demand for high-yield investments drove yields on multifamily housing revenue below 4%, this move in the market, coupled with a flat yield curve, created challenges for management in sourcing acceptable levels of returns for ATAX investors. Opportunities as it relates to the growth of the partnership, equity investment and Vantage multi-family housing developments with 3 interest rate cuts in 2019 by the FOMC providing low-cost borrowing for multifamily housing investors and the lowest unemployment in over 50 years at 3.6%, supporting multifamily housing fundamentals with an excellent cap rates near or at 5%. This is providing the opportunity for us to sell at the attractive returns for ATAX investors. We look for similar returns and opportunities in 2020.

At this time, I would like to turn it over to Ken, the chief investment officer of ATAX.

Ken Rogozinski -- Chief Investment Officer

Thank you, Chad. I'm pleased to be participating in today's call. Looking at the performance of the overall municipal bond market, 2019 saw a follow-on from 2018's positive performance. Many of the features of the December 2017 Tax Cuts and Jobs Act served to focus individual investors on the benefits of holding tax-free municipal bonds in their investment portfolios.

Taxes and bonds gained more than 7% in 2019, their biggest annual jump in five years according to Citigroup. December 19, 2020, marked the 59th consecutive week of net inflows into municipal bond funds according to Refinitiv Lipper data, a positive technical sign for the market. New issued transactions across the credit spectrum continue to be well-received by the investor community. Muni high-grade yields have been impacted by the most recent rally in rates as well.

The bond buyer indices for the high-grade E market have reached levels not seen since the 1940s. MMD data shows an inversion in the muni high-yield or high-grade curve with their 10-year data point through 1% at 0.98%, more than 15 basis points through SIFMA seven-day VRDN Index. Focusing our view further on the municipal high-yield sector, which includes mortgage revenue bonds similar to those in ATAX's portfolio, we have seen a spread tightening that is consistent with almost all fixed income sectors as investors have searched for yield. According to Bloomberg, high-yield muni bond interest rate spreads continue to be below historical averages, at 229 basis points over AA-rated municipal debt.

Since January 2015, the spread has tightened by 215 basis points due in part to continued demand and fund flows into the sector. As a benchmark over that same time horizon, high-yield corporate spreads have tightened just 45 basis points. This strong level of investor demand for this type of muni bond credit has led to competition for new transactions. ATAX's modest new bond investment activity in 2019 is in part a result of this increased level of competition, with several new market participants looking to deploy capital in the multifamily mortgage revenue bond sector.

In order to expand our universe of potential mortgage revenue bond investment opportunities, we will begin evaluating investment opportunities in broader market segments where bond position financing is cost-effective and good risk-adjusted returns are still available. These would include seniors housing projects like age-restricted communities, independent living communities, assisted living communities and memory care facilities or some combination of all of the above. In some of these transactions, we would have the additional benefit of low-income housing tax credit capital as part of the overall project debt and equity structure as we currently do with many of our traditional multifamily bonds. The operational model followed by these facilities is a 100% private pay rental style with a la carte additional services.

This model is very similar to the traditional multifamily market segment where ATAX has historically invested. We will also begin to evaluate 501(c)(3) bond transactions for skilled nursing facilities with experienced nonprofit owners and third-party operator managers. Additionally, we will also begin evaluating shorter-duration opportunities in our traditional multifamily sectors with a focus on transactions where forward commitments can be attained for permanent take-out financing. Finally, given the successful performance of our investments in the Vantage properties, we will continue to look at implementing that strategy as opportunities are identified.

As we expand the scope of our potential bond investments, we will also look to potentially expand the scope of our joint venture equity investing in different asset classes like seniors housing. With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the quarter and year.

Jesse Coury -- Chief Financial Officer

Thank you, Ken. I would like to start by highlighting some key metrics from ATAX's balance sheet as of year end. At December 31, 2019, ATAX reported a little over $1 billion in total assets, which is consistent with the balance on September 30, 2019, and up approximately $47 million from December 31, 2018. Of ATAX's total assets at December 31, 2019, mortgage revenue bonds represented approximately $774 million or approximately 75% of total assets, which is consistent with prior quarters.

At December 31, 2019, we owned 76 mortgage revenue bonds across 13 states, ranging from California and Washington on the West Coast to North Carolina and South Carolina on the East Coast. We hold significant amounts of mortgage revenue bonds related to properties located in Texas, California and South Carolina. In terms of overall value, approximately 44% of our mortgage revenue bonds are related to properties located in Texas, 18% in California and 16% in South Carolina. We work primarily with developers to acquire mortgage revenue bonds, and the current portfolio represents deals with 18 different developers.

At December 31, 2019, all of our mortgage revenue bonds were current on their debt service payments. At December 31, 2019, we owned two MF Properties, consisting of 859 total units and a total carrying value of approximately $62 million. Both properties serve primarily college students. The Suite on Paseo is located in San Diego, California adjacent to San Diego State University; and the 50-50 MF Property is located in Lincoln, Nebraska and adjacent to the University of Nebraska.

At year end, we had investments and unconsolidated entities, which we commonly refer to as our Vantage equity investments related to nine multifamily market-rate projects. These projects have a total of approximately 2,600 units and a total carrying value on our balance sheet of approximately $87 million. Of the nine projects, four are located in Texas, two each in Nebraska and Tennessee and one in South Carolina. During 2019, ATAX made equity investments and Vantage projects totaling $25 million, which is consistent with ATAX's average annual investment for the years 2016 through 2018.

ATAX commits to fund a certain amount of equity for each project, and total outstanding equity commitments at year end were $5.4 million. In addition to this December information, ATAX closed on another Vantage investment in January of 2020 for the construction of Vantage at West Over Hills, a 288-unit project in San Antonio, Texas. Which represents ATAX's 15th Vantage investments since 2015. In the fourth quarter of 2019, the Vantage at Boerne property, a 288-unit market-rate project in Boerne, Texas outside of San Antonio was sold, and ATAX's equity investment was redeemed.

Upon redemption, ATAX realized a $5.7 million gross gain on the sale. Including the sale of Vantage at Boerne, five of ATAX' Vantage investments have been sold or redeemed to date. As a result of these sales, ATAX has recognized total gains in sales or contingent interest of approximately $27 million for the benefit of our unitholders. These sales continue to provide the proof of concept of the Vantage investment strategy initiated by ATAX in 2015.

One other additional subsequent event on the asset side I would like to point out relates to ATAX's investments in the three public housing capital fund trust certificates commonly referred to as the PHC certificates. All three of which were sold in January of 2020. The PHC certificates were investment-grade-rated tax-exempt investments acquired by ATAX in 2012. ATAX sold all three PHC certificate investments at prices equal to their par value, which was approximately $43.3 million-plus accrued interest.

Upon the sale of the PHC certificates, the three TOB trust financing facilities associated with those assets were collapsed and paid off in full. Switching over to the asset side of the balance, the liability side of ATAX's balance sheet, I'll give some summary on the debt financing arrangements as of year end. At December 31, 2019, ATAX's debt financings associated with its MRBs and other securities totaled approximately $539 million. Of this amount, approximately 66% have fixed interest rates and 34% have variable interest rates.

As a comparison, at December 31, 2015, ATAX's debt financing was only 32% fixed rate and 68% variable rate, so the ratio has almost entirely flipped to a heavier weight on fixed-rate financing designed to insulate the portfolio from potentially rising interest rates. One subsequent event, I would like to highlight in ATAX' debt position is the extension of the mortgage loan associated with the 50/50 MF property that was completed in February 2020. Upon refinancing, we were able to extend the term of the mortgage loan by seven years to April 2027, and taking advantage of the flat yield curve, we're able to decrease the interest rate to a fixed rate of 4.35%. As we typically report, we regularly monitor our exposure to potentially rising interest rates through our interest rate sensitivity analysis, which we report quarterly and is included on Page 48 of our 2019 Form 10-K.

The interest rate sensitivity table shows the impact on ATAX's net interest income given various changes in market interest rates. These scenarios assume there is an immediate shift in interest rates and that ATAX does not make any response for 12 months. The analysis shows that an immediate 200 basis point increase in rates Will decrease ATAX's net interest income by approximately $1.6 million or $2.07 decrease in net income and CAD per unit. Regarding operating results.

ATAX reported total revenues of $15.4 million for the fourth quarter and reported year-to-date revenues of $62.3 million. On a net income per BUC, or beneficial unit certificate basis, basic and diluted was $0.16 per BUC in the fourth quarter and $0.42 per BUC on a year-to-date basis. Cash available for distribution, or CAD, per BUC, was $0.18 for the fourth quarter and $0.57 per BUC on a year-to-date basis. Lastly, our net book value per BUC was $5.61 at December 31, 2019, which is up approximately 11.5% from December 31, 2018, when the net book value per unit was $5.03.

With that, Chad, Ken and I would be happy to take questions from the audience.

Questions & Answers:


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

Jason Stewart -- JonesTrading -- Analyst

Thanks. Good afternoon, everybody. Thanks for taking the question. Chad, my question centers around the recycling of capital.

I mean, you've demonstrated a really nice ability to exit positions and take advantage of investments. How should we think about the redeployment of that capital and the size of the balance sheet going forward?

Chad Daffer -- Chief Executive Officer

Thank you, Jason. It's a two-part answer and one has to do with each underlying business. Historically, we've had the spread business that's related to our portfolio of mortgage-backed securities. I think we've tried to be very transparent here in disclosing some of the challenges within that segment based on the increased competitors in our space.

Over the last 18 to 24 months, we've seen coupons on those underlying mortgage revenue bonds go from high fives, low sixes, to low fours, high threes. Given the interest rate curve there, it's been difficult in-sourcing acceptable leverage returns for the growth of that portfolio. You've seen our originations go down year over year for that very reason. That's based on a disciplined strategy that the management has executed for the last couple of years.

The options there is to increase leverage or lessen your credit profile, and we chose to do neither of those. Our leverage currently is about 60%. I think we've been consistent with that year over year. I think our credit history speaks for itself.

And we've had very low credit losses for many, many, many years. Right now, in the current environment, it's a challenge. I mean, there's a lot of folks that are in that space, the agencies are competing very aggressively against each other. And for us is to deploy partnership capital at those type of risk/rewards we feel is unacceptable at this time.

That said, markets do change. Our relationships are solid. We still see opportunities on a daily basis. So when market changes or the right opportunity presents itself, we stand ready to grow that book.

We look at that as our core discipline in the business model. On the other side, it's the opportunity side of the discussion. In 2015, with the approval of our investors, we have the opportunity to move in deploying hard equity into multifamily housing developments. We've been the beneficiary of very strong markets and very good partners.

From that, we proved the concept, exiting five of the assets, averaging somewhere in the mid-20s to high-20s returns for our investors. So kind of a two-part answer, Jason, but I think it's the market that we're in currently that we will continue to source opportunities for both sides of our business and our current credit profile. The one thing that I do want to bring attention to our investors for consideration is that with the depth and strength in the credit history with our new general partner at Greystone, we have the opportunity to look at alternative asset classes that we've not participated in the past. Greystone has been an active owner and operator of both senior housing and skilled nursing for many, many years, and we're currently considering those as opportunities for us to look for higher-yielding types of investments where we think that we can find acceptable leverage returns for the growth of that portfolio.

So I think those are the opportunities in our ability to employ capital across those two businesses going forward, Jason.

Jason Stewart -- JonesTrading -- Analyst

That's helpful. Thanks. And then specifically with regard to Vantage and recycling of capital there, are there any changes to your thought process in terms of size of that business, the cadence of capital development and potential partners or should we take history and send it forward?

Chad Daffer -- Chief Executive Officer

Jason, I think we've always tried to look at ourselves as investors and not lenders. We focus on quality and not size. Hopefully, we'll continue to do that with the recruitment of good, high-powered partners. We've enjoyed the returns for the benefit of our investors and proved that concept and look to deploy additional capital into that strategy.

We've talked historically about having four Vantage-like assets and construction of four and stabilization, and four prepared for marketing because of the lumpiness of that asset class, we sometimes hit it, sometimes we're slightly a quarter behind. But we will continue to pursue that strategy with the Vantage team and allocate more capital into it. As long as we can make the conservative credit assumptions in our underwriting. It's a challenge right in this part of the cycle to make sure that you're not stretching for yield based on increases in the cost of labor, cost of materials and the chance of some markets being overbuilt.

And I think that's just standard considerations for us to participate in that asset class and that type of investment. But we'll continue to pursue that given the historical returns, and I would anticipate that we would allocate a greater amount of capital going forward in pursuit of that.

Jason Stewart -- JonesTrading -- Analyst

Great. Thanks for taking the questions.


[Operator instructions] Our next question comes from the line of Ed Fleming, a private investor.

Unknown speaker

Chad, first off, congratulations on another strong year for ATAX. One question I have is, and I think you touched on this a little bit is the purchase of the general partner interest by Greystone. I'd like you to dive in a little bit further on your thoughts on how that transition is going and the impact on the business.

Chad Daffer -- Chief Executive Officer

No. Appreciate that. We had the pleasure of working for our previous general partner for many years and executing the strategy of creating some value with the goal of exiting at some point in the future. I have the privilege of knowing Ken for many years when he was at Greystone.

Throughout the competitive process, we always knew that the strategic landing of ATAX for growth and taking it to the next level would be at a platform who had access to agency-type financing, access to capital, access to flow, meaning that we have more originators seeing a greater number of opportunities. Throughout the transaction, we were extremely pleased that the folks at Greystone and Mr. Rosenberg decided to move forward with the transaction. I think we're in the right place for taking the platform to the next level.

The risk of sounding almost cliche would be our experience with the support staff at Greystone has been second to none. They're as top-notch as there is. I think the strategy and the important thing to the investors that the message that I have to send and be received is that the strategy will not change, the management team is in place. I would look at it as we went from a really, really nice family office in Omaha to a really nice, big, big family office in New York with the ability to allocate resources, capital, people, history, credit, all the things that we need to grow, and we couldn't be more excited with the opportunity to work with the Greystone team going forward.

Unknown speaker

Thanks, Chad.


[Operator instructions] I'm showing no further questions in queue at this time. So that will conclude today's question-and-answer session.[Operator signoff]

Duration: 28 minutes

Call participants:

Chad Daffer -- Chief Executive Officer

Ken Rogozinski -- Chief Investment Officer

Jesse Coury -- Chief Financial Officer

Jason Stewart -- JonesTrading -- Analyst

Unknown speaker

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