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America First Tax Exempt Investors (ATAX -3.06%)
Q2 2021 Earnings Call
Aug 05, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


I'd like to welcome everyone to America First Multifamily Investors, L.P.'s, NASDAQ ticker symbol, ATAX, second-quarter of 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q2 2021, you will be invited to participate in a question-and-answer session. 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 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 -- Chief Executive Officer

Good afternoon, everyone. Welcome to America First Multifamily Investors, L.P. second-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 partnership's financial results. Following that, we look forward to taking your questions. For the second quarter of 2021, the partnership reported net income of $0.13 per beneficial unit certificate or BUC, $0.17 of cash available for distribution per BUC, a book value of $5.67 per BUC on $1.23 billion of assets, and a leverage ratio as defined by ATAX of 68%. The partnership is current and in good standing with all of our lenders and leverage providers.

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In terms of the partnership's investment portfolio, we have received no request for forbearance on our multifamily mortgage revenue bonds and all multifamily MRBs are current on principal and interest payments. Our collections rate reported by properties that serve as collateral for our multifamily MRBs has averaged approximately 92% with 30 days of billing from January 2021 through June 2021. Physical occupancy averaged 93% for the portfolio as of June 30, 2021. Our current Vantage portfolio consists of 13 projects, seven where construction is 100% complete and six others where construction or planning is still underway.

For the seven properties where construction is 100% complete, we continue to see good leasing activity, with four of the seven having achieved over 90% physical occupancy as of the end of July. 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. Our two owned student housing properties are now approaching the start of a new academic year, which coincides with their standard lease term.

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 have announced their intentions for the fall 2021 semester to be primarily in-person on-campus learning. Our two property managers are actively pre-leasing units for the fall 2021 semester, and as of today, both are over 85% pre-leased, which is consistent with their leasing in years prior to the 2020-2021 COVID-19 pandemic. On our student housing MRB for the 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 manager at Live 929 to the same management company that manages Maryland Economic Development Corporation's portfolio of student housing assets. Pre-leasing currently stands at approximately 88% with additional lease applications still being processed. 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 2002 budgeting process once final leasing results are known.

Like University of Nebraska and San Diego State, Johns Hopkins University has announced that they expect 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 the facilities or a restructuring of the existing bond debt or something else entirely.

Based on those potential outcomes, we felt it appropriate to make an additional credit loss impairment this quarter. The second quarter of 2021 brought a modest improvement in the market for municipal bonds. Municipal bond mutual fund inflows have continued their strong performance since March of last year. First half of 2021 saw inflows of approximately $57 billion according to Refinitiv Lipper data.

That is the highest level of muni bond flows for the first six months of the year since 1992. Of that $57 billion, almost $14 billion was directed to municipal high-yield funds. Municipal market data's high-grade muni bond scale reached all-time low yields in mid-August 2020 with a 10-year index at 0.59% and a 30-year index at 1.28%. The recent rally in treasuries has had a positive impact on the muni market.

Ten-year MMD is currently at 0.82% and 30-year MMD is currently at 1.35%, roughly 20 to 25 basis points lower in yield than last quarter. This past week, the Bloomberg Barclays index for unrated and non-investment-grade muni bonds hit its lowest level ever, through 3% at 2.91%. Since we are still in a relatively low-interest rate environment, we continue to be mindful of the absolute level of rates where we can originate new fixed-income investments. We have continued our focus on shorter duration investments where match funding is more readily available and hedging is less costly.

In terms of our debt investment activity during the second quarter, I had previously mentioned during May's call, the early April closing on a longer-term financing on an acquisition rehab LIHTC project in Mississippi. In July, we closed on our largest construction financing transaction to date, $85 million for a new construction LIHTC project in Orlando. We continue to see lending opportunities in both market segments. In May 2021, the Vantage at Powdersville property located in Powdersville, South Carolina was sold.

The partnership recognized $0.10 of net income and CAD per BUC in conjunction with the redemption of our membership interest as a result of the sale. As I mentioned on last quarter's call, in April 2021, we closed one new Vantage equity investment for a project located in Loveland, Colorado. This is our first investment in the Colorado Front Range market with Vantage and continues our diversification of the Vantage portfolio locations. Later on, during the second quarter, we closed on Vantage at Helotes, another Vantage project in the San Antonio area, which was followed by the acquisition of a second site in San Antonio for the development of Vantage at Fair Oaks.

We will continue to look to strategically work with our strongest sponsors on new investment opportunities where traditional sources of capital may not currently be available. With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the second quarter of 2021. 

Jesse Coury -- Chief Financial Officer

Thank you, Ken. For the second quarter of 2021, we reported total revenues of 16.4 million. Net income per beneficial unit certificate or BUC, basic and diluted, of $0.13 and cash available for distribution or CAD of $0.17 per BUC. On a year-to-date basis, we reported total revenues of 30.8 million, net income per BUC, basic and diluted, of $0.22 per BUC, and CAD of $0.28 per BUC.

We reported $1.23 billion in total assets as of June 30. Such assets make up our three main investment classes: first, being our net spread portfolio; second, our Vantage investments; and the third, our MF properties. In our net spread portfolio, we currently hold 76 mortgage revenue bonds or MRBs across 14 states. We hold a significant volume of MRBs related to properties in three states based on outstanding principal with Texas representing 44% and California and South Carolina, each representing 17%.

As Ken mentioned, to date, we have received no request for forbearance of principal and interest payments for MRBs with multi -- associated with multifamily properties. In 2020, we granted forbearance for the Live 929 Apartments MRB associated with the student housing property in Baltimore, Maryland. Forbearance consisted of the deferral of contractual principal payments through 2021 while the property recovers from the effects of the COVID-19 pandemic. As of mid-July, the property is 87% leased for the upcoming fall 2021 semester, which is on pace with pre-COVID lease trends.

The borrower of our Provision Center mortgage revenue bond, a proton therapy center -- treatment center located in Knoxville, Tennessee, filed a petition for Chapter 11 bankruptcy protection in December 2020. As Ken mentioned, the borrower is working through the bankruptcy process, and we are assessing forbearance and restructuring options with other senior bondholders. We recognized an additional impairment charge of $900,000 in the second quarter of 2021 based on our evaluation of the potential outcomes, the debtor reorganization process. As of June 30, we have investments in seven GILs or governmental issuer loans, totaling $130 million.

The GILs are investments to finance the construction, lease-up, and stabilization of affordable multifamily properties in four states and are functionally the 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. 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 GILs that share our first mortgage lean and are typically funded after all GIL funds have been advanced. As of June 30, we had outstanding commitments to fund additional proceeds for GIL investments totaling $71 million and related property loan commitments totaling $120 million.

Such funding commitments will be advanced during the periods of construction. Not reflected in the amounts I just listed are the new GIL and property loan commitments for the construction of a new affordable multifamily property, New Orlando, Florida, that we closed in July 2021. Our commitments for the GIL and property loans are 60 and $25.5 million, respectively, and will be funded during construction. Also in July, we entered into a new TOB Trust financing to leverage the GIL and property loan investments and funds will be advanced as we fund our investment commitments.

Moving to the Vantage portfolio. The Vantage portfolio consists of 13 projects as of June 30, of which two investments are reported on a consolidated basis. All investments are for the construction of market-rate multifamily properties that represent, in the aggregate, over 3,700 rental units. Carrying value of our Vantage investments totaled $92 million as of June 30, exclusive of the two investments reported on a consolidated basis.

Of the 13 current projects, nine are in Texas, two in Nebraska, and one each in Tennessee and Colorado. Seven projects are complete and in lease-up and six are either under construction or in the planning phase. Two of the completed properties have achieved over 90% physical occupancy as of June 30, with two additional properties exceeding 90% occupancy by the end of July. There have been no material delays or disruptions due to COVID-19 for projects currently under construction.

As Ken mentioned, the Vantage at Powdersville property in South Carolina was sold in May 2021, and our equity investment was redeemed. Upon redemption, our initial $10.7 million investment of capital was returned, and we realized $2.4 million of investment income and a $5.5 million gain upon sale. This is our eighth Vantage investment that has been redeemed, which, in the aggregate, has generated approximately $35 million of gains on sales and contingent interest to date. Moving to our MF properties portfolio.

As of June 30, we owned two MF properties with a total of 859 student housing units and a net carrying value of approximately $56 million. Both properties provide college student housing, which has been more significantly impacted by COVID-19 than the general multifamily housing market. The 50-50 MF Property and the suit on Paseo MF Property primarily serve students of the University of Nebraska and San Diego State University, respectively. Both universities have announced their attempt to resume on-campus in-person classes for the fall 2021 semester.

Both MF properties are leasing for the fall 2021 semester, and leasing velocity is relatively consistent with pre-COVID levels. Both properties continue to meet all operating and direct mortgage obligations with cash from operations. Moving to the liability side of our balance sheet. We use our debt financing to leverage our investments in MRBs, GILs, and property loans, which totaled $742 million as of June 30.

In the second quarter of 2021, we received gross proceeds of $31 million from various TOB Trust financings related to one new MRB investment and continued funding of our GIL and property loan commitments. Of our $742 million of debt financing, approximately 40% is fixed-rate debt and 60% is variable rate. Of our $445 million of variable interest rate debt financing, $132 million or roughly one-third 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 rate caps or swaps. In June 2021, we obtained a new secured line of credit facility with two financial institutions for up to $40 million, subject to a borrowing base calculation.

The line of credit is secured by a first priority security interest in our Vantage investments, the suites on Paseo MF Property, and the bank account. Proceeds will be used to purchase additional investments and to provide flexibility in meeting our general working capital and liquidity needs. Our unused capacity on the secured line of credit was $33.5 million as of June 30. Greystone Select Holdings LLC, an affiliate of ATAX's General Partner has provided the deficiency guarantee of ATAX's obligations under the facility.

Greystone Select Holdings did not charge a fee in connection with the deficiency guarantee, demonstrating Greystone's continuing support for ATAX's operations. We regularly monitor our exposure to potential increases in interest rates through our interest rate sensitivity analysis, which we report quarterly and is included on Page 72 of our most recent 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 $5.2 million in our net interest income and CAD or approximately $0.085 per BUC. Lastly, we regularly provide our net book value per BUC, which as of June 30, was $5.67, which is up slightly from $5.63 as of March 31. Our closing market price on the NASDAQ on June 30 was $6.74 per BUC, which is a premium to our book value of approximately 19%. With that, Ken and I are now happy to answer questions from the audience.

Questions & Answers:


Thank you. We will now begin the question-and-answer session. [Operator instructions] And from JonesTrading, we have Jason Stewart. Please go ahead.

Jason Stewart, your line is open.

Jason Stewart -- JonesTrading -- Analyst

Yeah. You got to unmute it. All right. My bad.

First question -- thank you. Sorry about that. It's really more on the affordable side. So, first time I've really -- we've never heard anything about affordable from ATAX.

What do you think the strategy is there going forward?

Ken Rogozinski -- Chief Executive Officer

Well, I think, Jason, in terms of affordability, that really is the core focus of the MRB and the GIL investments. All of them, in order to have the ability to have tax-exempt debt issued for them, have some level of affordability associated with it. There are regulatory agreements that restrict, in most cases, both the tenant incomes and the rents that the underlying project owners can charge. So, you know, that, I think, is something that we're going to continue to focus on.

From a debt perspective, that's where we've historically been an investor, I think we have value that we can add to project sponsors around the country. And so I think that will continue to be a focus from our perspective on the debt side. On the Vantage side, though, those are traditional market-rate projects. There is no regulatory agreement or rent or tenant income restrictions associated with those.

We've been pleased with that strategy and results that the Vantage team and we have been able to see from those investments. So at least at this point in time, I don't foresee any kind of change there from a market-rate approach to an affordable approach.

Jason Stewart -- JonesTrading -- Analyst

How does the new rating that you've achieved, help you accomplish that?

Ken Rogozinski -- Chief Executive Officer

I think from our perspective, we were really pleased to see the announcement earlier this week of KBRA's BB+ rating of the partnership's senior unsecured credit. It's something that we worked hard with that team to educate them about our business, educate them about the -- what we feel is the strong quality of our underlying investment base. And so I think it was beneficial for us to be able to have that kind of dialogue with them and see the result that we saw with a rating that's just one notch below investment grade. It's new news to the market.

It has only been out there for four days at this point in time. But our goal is that by having that sort of public third-party view of our credit, that it will help us with our existing counterparties in terms of pricing for our credit and liquidity facilities. It will help us with credit capacity with our existing lenders and will hopefully open the door for us to develop relationship with new lenders and counterparties who might not have necessarily focused on us absent this side of public view of our senior unsecured credit.

Jason Stewart -- JonesTrading -- Analyst

OK. Got it. And then pivoting to the overall balance sheet. When you look at the exposure to plus or minus lean the number on interest rates, like let's say we get a 1% and then 2% on two -- on 10 years.

What do you think the exposure is to ATAX? I mean this has to -- it really seems like incredibly resilient to any sort of plus or minus move?

Ken Rogozinski -- Chief Executive Officer

A couple of things there, Jason, to give you a little more detail. I think the first is -- and, Jesse, I'd appreciate any color you want to add here as well. The first is that a fair amount of that volatility that you see in that analysis is as a result of our undrawn proceeds on the Mizuho secured note financing. We've got another nine months, I think, at this point in time left to be able to fully draw the balance of that facility.

If that is not drawn, those notes will be redeemed, and that will have a significant, I think, improvement in that analysis. Since we weren't sure at the time of closing of that transaction in August of last year, we didn't put any sort of long-term hedge on that cost of debt because we weren't sure how much of that we were going to be used. And so I think if that redemption of those secured notes does happen, we'll see a significant improvement in how that analysis works because that's right now, a potential interest cost increase as a result of an increase in rates there is adding significantly to that analysis. The other thing is that from an investment perspective, we've got probably roughly $80 million worth of MRBs that we have funded through one of our tender auction block counterparties.

We view that as warehouse financing. That is not going to be our long-term capital solution for how we're going to fund those positions. We have them now in that form as we aggregate assets and fully get to a place we can do these virtual [Technical difficulty] strategy like the tenant's trust that we've done four other times previously. So again, I think that's more of a sort of [Technical difficulty] once we decide what the long-term funding deal bill is going to be for those assets, we'll have a much tighter interest rate match funding to be useful at this point.

Jason Stewart -- JonesTrading -- Analyst

OK. Last one for me, and I'll jump out. What's your best guess in terms of the core ROE of MRB right now?

Ken Rogozinski -- Chief Executive Officer

That's a difficult question to answer, Jason, because there are a lot of things that go into that. Part of it is what the tenure is of the vehicle, whether it's a longer-term 15 to 18-year MRB on a new construction LIHTC deal that's being both construction and permanent financing from us versus the governmental issuer loans that we're doing, which are roughly a 36-month facility. It also depends a lot on where our funding vehicles are structured in terms of what the advance rates are from the counterparties and what and cost for credit liquidity are on those vehicles as well. So, everything is pretty much different for each transaction.

I can't really give you a firm level of what those levered ROEs are. But I think the one blanket statement that I can make is that we are only doing additional transactions on both the MRB side and the GIL side, where based on our analysis, they are accretive to the current dividend yield at the partnership level.

Jason Stewart -- JonesTrading -- Analyst

Appreciate it. Thank you.


[Operator instructions] Looks like no further questions at the moment.

Ken Rogozinski -- Chief Executive Officer

OK. Well, thank you, again, everyone, for joining us, and we'll look forward to speaking with you next quarter. Thank you. 


[Operator signoff]

Duration: 30 minutes

Call participants:

Ken Rogozinski -- Chief Executive Officer

Jesse Coury -- Chief Financial Officer

Jason Stewart -- JonesTrading -- Analyst

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