America First Multifamily Investors, L.P.
Q4 2017 Earnings Call Transcript

Published: 2 Mar 2018

[Operator:]

At this time, I would like to welcome everyone to America First Multifamily Investors, L.P.’s NASDAQ ticker symbol ATAX Fourth Quarter 2017 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. After the speakers’ remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded. At this time, I would like to turn the conference call over to Craig Allen, Chief Financial Officer of the company.

[Craig Allen:]

Thank you and welcome to ATAX’s fourth quarter 2017 earnings conference call. Joining me on the call today will be Chad Daffer, ATAX’s Chief Executive Officer; and Andy Grier, Senior Vice President of ATAX. [Technical Difficulty] Reform Act of 1995. Forward-looking statements can be identified by the use of words like may, should, expect, plan or intend. You are cautioned that these forward-looking statements speak only as of today’s date. Changes in the economic, business, competitive, regulatory and other factors could cause our 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 our business, please review the periodic reports and other documents filed from time-to-time by ATAX with the Securities and Exchange Commission. Our internal projections and beliefs upon which we base our expectations may change, but we will not necessarily inform you if they do. Today’s discussion will include non-GAAP measures and we will explain during this call those non-GAAP measures. We want to make you aware that ATAX is operating under the SEC Regulation FD and we encourage you to take advantage of the question-and-answer session. We thank you for your participation and your interest in ATAX. At this time, I’d like to pass the call to Chad Daffer, ATAX’s CEO.

[Chad Daffer:]

Thank you, Craig. Welcome everyone to the fourth quarter and year end 2017 America First Multifamily Housing investor call. This afternoon I’d like to share my thoughts on 2017 and my vision for 2018. Craig will then present our financial results. I’ll have a few closing statements and we look forward to taking your questions. I’m pleased to share in 2017 the partnership delivered $0.60 per share of cash available for distribution. This is up 37% over 2016. Management continues to attract low cost capital for the future growth of the partnership, evidenced by our ongoing placement of non-voting, non-cumulative 3% preferred stock. At year-end 2017, $94.5 million had been placed with institutional investors. Offering of additional shares of preferred stock in 2018 is currently being evaluated. We continue to benefit from strong market demand for our multifamily housing assets. In 2017, we closed on the fee simple sale of four real estate assets, with a cumulative gain on sale of approximately $18 million. Sale proceeds will be redeployed into our core holdings in the months to come. We currently have two assets that are being marketed in Florida, the possible sale and closure in the second quarter of this year. Capital markets did provide the partnership with a unique set of near-term challenges in 2017. The fixed income markets were driven by political headlines out of Washington D.C., Brexit [ph] negotiations, threats of inflation and three rate hikes from the Federal Reserve Bank. Concurrently the tax credit market was fractured due to proposed changes in corporate tax rate, this causing a decrease in our originations for 2017. While threats of inflation still exist, tax credit equity markets are now open for business. Expectations for new bond originations in 2018 were hopefully returned to the levels achieved back in 2015 and 2016. In our Vantage development business, we closed two assets in 2017, deploying approximately $22 million of capital. We are currently evaluating sites in Nebraska, Tennessee, Texas and Florida for possible development in 2018. At this time, I’d like to have Craig present the fourth quarter financials and the year end financials. Craig.

[Craig Allen:]

Thank you, Chad. As Chad talked about some of the results that occurred [Technical Difficulty]

[Operator:]

Ladies and gentlemen, please stand by. Your conference will resume momentarily. Once again, thank you for your patience, please stand by.

[Craig Allen:]

In 2017, I wanted to present to you a few of the highlights that we were able to realize. Total assets increased to slightly over $1 billion. We increased about 13% from $944 million of total assets in 2016 to slightly more than $1 billion at December 31 of 2017. Our total revenue in Q4 increased approximately 38%, as we realized about $22 million in total revenue compared to about $16 million of revenue in Q4 of 2016. And in 2017, we reported $70 million in revenue compared to $59 million in revenue in 2016 or an increase of about 19%. One of the major components of our balance sheet and, obviously, our income statement as well too is our mortgage revenue bonds. At December 31 of 2017, ATAX owned approximately $789 million of mortgage revenue bonds, spanning 15 states. In total we own about 87 mortgage revenue bonds at the end of December 2017. During Q4 of 2017, we acquired 7 new mortgage revenue bonds totaling approximately $49 million. And year-to-date we have acquired 15 mortgage revenue bonds, totaling $121 million. Also during Q4, five mortgage revenue bonds were redeemed at about $40 million, and on a year-to-date basis 2017, six mortgage revenue bonds were redeemed totaling about $42 million. One of the stats that we’ve talked to you about in the past is our percentage of mortgage revenue bonds held compared to total assets. At December 31 of 2012, 35% of our balance sheet was comprised of mortgage revenue bonds and at December 31 of 2017, we now hold about 74% of our total assets in mortgage revenue bonds. Chad talked a little bit about MF Properties and four MF Properties sales that we had in 2017. At the end of December 2017 we now hold $77 million of Properties – MF Properties in three states, one is California, one is Nebraska, and one in Florida. Again, we did have the four sales, one in Q1 2017, three in Q4 of 2017, and gain after taxes and before internal expenses was approximately $12 million. And again, we do hold three remaining MF Properties

[Chad Daffer:]

Thank you, Craig. In closing, I’m pleased with the financial performance of 2017. Importantly, I’m excited about the opportunities in 2018. Our goals are consistent and simple. They’re consistent year-over-year from the initiatives we put in and to our strategic plan back in 2016. Focus on shareholder value through deployment of the cash in the balance sheet, used leverage when it’s appropriate and disciplined. Strategic growth through deployment of our capital, utilizing our quality relations with our developers, when the market presents an opportunity to mitigate risk, we take it. I’d like to thank you all for the support of our company. At this time, I’d like to take your questions.

[Operator:]

[Operator Instructions] And our first question comes from Patrick Marsh with Alex Brown. Your line is now open.

[Patrick Marsh:]

Hey, Chad. Hey, Craig. How are you guys?

[Chad Daffer:]

Good afternoon, Patrick.

[Craig Allen:]

Hi, Patrick.

[Patrick Marsh:]

Craig, you made a comment earlier about the impact of a 200 basis point move on the CAD. Is that something that’s a short-term rate movement, long-term rate movement? And, I guess, sort of a bigger question is how do you view some of the most recent fed statements coming into 2018 and how it’s going to impact sort of your planning and the difference between your fixed and floating rate financing over the next 12 to 24 months?

[Craig Allen:]

Sure. Thank you, Patrick. So the interest rate exposure, the movement to interest rates, assumes very similar to that shock test used in banking. It assumes an immediate 200 basis point increase in rates and it assumes that for a period of 12 months we would do nothing to counteract that increase. So in our 10-K, we would present the exposure at 50 basis points, 100, 150, 200 basis points. And again, we – this is something that we spend a reasonable amount of time watching and planning for throughout the quarter. And as I mentioned, in September that exposure was about $1.6 million if rates went up 200 basis points and that’s really decreased now to about $1.5 million. And we do two things. Number one, we have consciously moved our portfolio to be more fixed rate versus variable rate. We’ve been doing that since 2015 and we’re able then to absorb if you will the effect of rising interest rates a little bit better. Secondly, we also use and employ interest rate caps with various strike prices to hedge and cushion our – the effect of our variable rate product that we have on the balance sheet right now. I think Chad will take the second half of that question and talk a little bit about strategy too going forward.

[Chad Daffer:]

Thank you, Craig. Craig did a good job of discussing the risk and relationship to a rising interest rate environment and how we mitigate it or try to mitigate a portion of that in a portfolio, which are moved from variable to fixed, in the couple of last years. I’d like to exit a few seconds and talk to the opportunity and strategy as we see the flattening of the yield and how we capture opportunities as they present it to us as the rate environment changes. As we talked about in the past, a portion of our business on the bond side is nothing more than a spread business. We have a fixed rate coupon. We leverage the bonds with either a fixed rate or a variable rate execution. At the start of 2017 we had decent spreads throughout, the [shift within] [ph] spread. We saw deals being presented to us, where we thought we could have the opportunity to capture it, a weighted average coupon, plus or minus toward 6%. The short end of the interest rate curve did not move as much as it currently had. So we’ve experienced some rise in interest rates over the last 12 months. We’ve experienced flattening of the yield curve due to fed rate moves on the short end, three times in 2017. The talking folks are predicting another three to four in 2018. So we’ll continue to monitor the ability for us to execute in our opportunities on our spread business, over the course of 2018 knowing that there will be a time, if rates move against us, where the yield curve will flatten, the short-end will come up, long end would go down and our spread would be compromised to the point where the leverage returns would not be accretive to the existing portfolio. It’s a great question, Patrick. You need to break it down, the answer needs to be break down and how it affects the risk profile of the portfolio with our use of leverage and how we underwrite opportunities in relationship to spread compression and flattening the yield curve going forward in the growth of our portfolio in 2018.

[Patrick Marsh:]

And just one follow-up question, guys, does that kind of lead you to make additional decisions on the percentage of variable versus fixed? I know as Craig mentioned, you brought it down from 60-40, now it’s almost 60-40 the other way. I mean, obviously, that’s going to impact how you guys look at your funding for new assets going forward.

[Chad Daffer:]

That’s exactly right, Patrick. In 2015, we started – we were 100% variable and we started initially knowing that there was a great threat of rising interest rates in the years to come. Well, we’ve experienced that two years later. We moved to – from 100% in 2015 to somewhere approximately 40% to 60% in 2018. We will continue to explore opportunities to move away from variable rate mode financing. If we can find the right execution with the right partner, we’re always looking to grow our base of partners and providing leverage to the portfolio. But it’s – we have to be nimble and we able to be react quickly in the event that rates move for or against us. They move for us, we want to be able to move quickly to capture opportunities. And if they move against us, we want to be in the position to play defense immediately.

[Patrick Marsh:]

Excellent. Thank you.

[Operator:]

Thank you. And our next question comes from David Walrod with JonesTrading. Your line is now open.

[David Walrod:]

Good afternoon, guys.

[Chad Daffer:]

David, how are you this afternoon?

[David Walrod:]

Good. Chad, in your prepared remarks you talked about the impact that the tax changes had on your ability to do business this year. Could you elaborate on that?

[Chad Daffer:]

In 2017, we had a fracture in the equity market due to uncertainty in the pricing from the syndicators and then allowing us to bring equity into – at the project level of our investments. So if you’re a developer and you’re looking to bring in tax credit equity through the syndication and pricing that market was fractured, because the unknowns and the changes in the proposed tax rate that was on the table. This went out through the balance of pretty much 2017. Coupled with that, we had some volatility on the debt side, with the things that I talked about. Three rate moves from the fed, BRICSA [ph], all kinds of chatter out of D.C. that was moving the market around. And so it was a challenging from originations for those two reasons. Long-term, I don’t – I think those things will fix themselves. The equity market is currently open for business. Obviously, with the decreases in the tax rate at the corporate level, the demand for those credits has decreased, the pricing is decreased and the amount of equity generated through the syndication of said credits has decreased accordingly. I see that as an opportunity as a debt provider to creating and structuring capitals, I mean, debt structures that will help our developers still be able to execute their development plan. And that’s how – I still think it’s short-term though, David. There is no long term effects from what happened last year, as it relates to changes in the tax law.

[David Walrod:]

Okay. That’s helpful. And then, in your written press release, you mentioned $4.5 million equity investment. Can you give us some color on that?

[Craig Allen:]

Yeah. The $4.5 million equity investment, we had $94.5 million of equity investments through preferred units, and then we had a – we made an equity investment in two projects of the Vantage – the Vantage product that Chad spoke of.

[Chad Daffer:]

I think for little clarity, David, there was – we did two equity investments in the Vantage product for the development side of our business in 2017. There was partial funding post-closing to the amount of $4 million. That’s why I just have to put what the actual investment was against what money flowed year-to-date. And so, I’m sorry for the confusion. But we had two equity investments in Vantage, one in South Carolina, one in Florida, those – all those deals are roughly $30 million deals, some $89 million worth of equity and then the construction loan in front of us. So that – hopefully that clarifies some of your questions.

[David Walrod:]

Sure. And then the last question is a little more broad. Can you talk about the opportunities you’re seeing in the MRB or other investments, and your ability to, I guess, replace some of the lost revenue from the sale of the MF portfolio, achieving your earnings objectives?

[Chad Daffer:]

That’s a great question. Deployment – the redeployment of those sale proceeds and the proceeds that we are generating from the additional placement of the preferred stock, is obviously concern concerned. We’ve got flattening yield curve. That will create spread compression, financial feasibility and yield targets being achieved in that environment will be a challenge. And you also get to take a look at competitive environment from the agencies, what I call non-economic investors either through CRA investment and/or agency investment, where they have very low cost of capital. Those programs will continue to be strong, cannot compete with this, because it relates to just bare cost of borrowing. I do believe that our ability to be creating structure optionality, and be able to close quickly and be a true capital partner with some of the developers that we work with, will remain in place. I wish, I had – I can look at my crystal ball, and we’ve been doing this for a long-time. We always find a way to deploy capital and the good credits. I think, our credit history evidences that. But the environment is changing and we have to be able to change with it. And compete with the said competitors [ph].

[David Walrod:]

I guess, just to follow-up on that. Are there any new investments that you might be looking at outside of your core that might be applicable?

[Chad Daffer:]

Our fine-tuning the balance sheet was based on our demand for our core discipline. We’ve been selling alternative buckets. We’ve been selling real estate assets, because of where we’re at in the cycle and their great opportunity to sell at a very attractive level. I am not there yet for us looking to give up on our core discipline. That’s what we know. We’re going to stick to our discipline. We’re not going to have any kind of mission drift on what we do. We do multifamily housing real estate. We don’t spec dirt. We don’t do single-family, office, retail, hospitality. I think our credit history is evidenced by our discipline to stay with our core credit. That’s what we do.

[David Walrod:]

Okay. Thank you very much. Have a good night.

[Chad Daffer:]

Those opportunities don’t present themselves, David, as I shared with you in the past. We’ll go to the sidelines and wait for the cycle to change. Over the last two cycles, we’ve been very successful in bad times, almost more than we are at good times, where we have to compete with hot money from the agencies on our bond business or hot money in the Street on our fee simple development business from other players in that space. So we’ll be patient, disciplined and stick to our core discipline.

[David Walrod:]

All right. That’s great. Thanks a lot.

[Operator:]

Thank you. And our next question comes from Bud Jordan with Merrill Lynch. Your line is now open.

[Bud Jordan:]

All right, gentlemen. I appreciate the update. I have a question relative to your portfolio and the taxability of it and what lies in the future. Are you able to replace tax free with tax free at all?

[Craig Allen:]

Yeah. Let me give you some estimates for 2017. We believe right now that for 2017 our tax-exempt income in the fund will be about low to mid 90% range. We believe that the AMT component of our income is about 7.5%. We would see that being consistent going forward into 2018. We’ve historically have been right around 91%, 92%, 93% tax-exempt income, and don’t really see any reason why that wouldn’t materially change in 2018 either.

[Bud Jordan:]

One follow-up question, if you would, is there any research by any companies that is out there? I’m a little bit distressed with a lack of trading in the stock?

[Chad Daffer:]

There are two houses right now that provide coverage, Jones Trading and Oppenheimer.

[Bud Jordan:]

That’s it. Thanks a lot, guys.

[Chad Daffer:]

Thank you. One additional comment, Bud, on our liquidity, the challenge that we’ve had over the years that when we do a common follow-on offering and sell stock into the investors, that it’s a buy and hold position for most people. And that always provide challenges and liquidity from our perspective. It’s come long ways over the last 15 years, when I started with days without trading and now we are up to plus or minus 100,000 shares a day and we think we are a big company. But the management team focuses on the credit and the relationships with our borrowers in our projects. We focus on the – have a highly predictable distribution on the tax-exempt basis to our investors. And we really don’t focus on the stock price maybe as much as we should and the liquidity will take care of itself. But it’s a different analysis in my opinion than if you were buying – this is an income stock based on first mortgage tax-exempt revenue bonds and multifamily housing development. So I wish we had more liquidity. I wish folks will be more active and trading it. But we are going to focus on the things we have control on, Bud.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ed Fleming with Colliers. Your line is now open.

[Ed Fleming:]

Chad, congratulations on a great 2017. You’ve clearly been kind of working hard the past few years, to really reposition both sides of the balance sheet. From my view, it looks like it’s really starting to flow to the bottom line. I see the recurring CAD really moving up, as the asset size moves up for the fund. Is that correct? And what do you see sort of CAD looking like going forward?

[Chad Daffer:]

That’s a good question. We started a few years back in kind of restructuring the asset allocation in the balance sheet, knowing that we’ve had great demand for our core products in the multifamily space. We started selling some of our positions in the alternative bucket. We follow through from 2016 into 2017 with additional sales in the alternative bucket. If you lost money in multifamily in the last six years, you tried awfully hard. I shared with our Board where the benefit of very, very strong markets in multifamily housing. And so we decided to take the premium out of the marketplace based on our valuation of these assets. We evaluate these assets on an ongoing basis. When someone presents us an opportunity to take a premium out of the marketplace, way above what we think our fair value is, we’ve done that. And we can’t take credit for that other than just identifying where you are at in the cycle and taking the premium out of it. So that’s – I think some of the performance in the financials that you’ve seen in 2017 has a lot to do with moving, restructuring the balance sheet, moving out a one position, going to cash with looking towards development – deployment into our core asset class. Those will start flowing through. If you look on the balance sheet, we have approximately $100 million worth of either cash or unlevered assets. So as we continue to redeploy that cash into our core discipline, lever it up, you’ll see those benefits come through on 2018. Still have a couple of assets in our alternative bucket. We still have a couple of assets in our real estate bucket. We currently have one of those assets, Jade Park, Lake Forest is in the market. We’ve seen incredible levels from folks on the buy side. If they come to fruition, we would anticipate a possible close in the second quarter this year. The other two assets for sale in 50/50, the sale asset we continue to try and improve the operation side of that asset. It’s incredible dirt. It is incredible improvements. We just got to fix some of the things that we inherited and then we’ll take it back to market and see what the market will tell us. But current performance has to do with repositioning assets, future performance. We’ve historically not given any type of earnings estimates or earning guidance. That said, I would encourage you to take a look at the balance sheet, identify the cash and unlevered assets, make some assumptions on redeployment, leverage spreads and then you can come with an idea of what you think the CAD would look like at the end of 2018 and 2019. To complete the repositioning and redeployment leverage, we’re going to need some good things to happen with the yield curve. And we’re going to need to have our partners execute with this on the leverage side. But we probably have another 18 months to two years to really complete what we started a couple of years ago. Thank goodness, we are doing it in really, really strong multifamily housing environment with some good partners in the Street.

[Ed Fleming:]

That sounds great. Thank you, Chad.

[Operator:]

Thank you. And that concludes our question-and-answer session for today’s call. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.