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America First Tax Exempt Investors (ATAX) Q1 2019 Earnings Call Transcript

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America First Tax Exempt Investors (NASDAQ: ATAX)
Q1 2019 Earnings Call
May. 06, 2019, 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.'s, NASDAQ ticker symbol, ATAX, first-quarter 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 first 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 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 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/or 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. 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, operator. Good afternoon, and welcome to the first-quarter 2019 ATAX earnings call. This afternoon, I'd like to share a few of my thoughts on the first-quarter results, the economy, interest rates and the notable transaction. Then Craig Allen, ATAX CFO, will present the first-quarter partnership financial results, and then we look forward to taking your questions.

In the first quarter, the partnership reported a 7.3% increase in total revenue to $17.7 million compared to the first quarter of 2018, with a 9% decrease in general and administrative expenses or earning $0.11 cash available for distribution per BUC. Economic debt balance remains strong at the start 2019, with first-quarter gross domestic product exceeding expectations at 3.2%, unemployment falling to 3.8% with average hourly earnings increasing moderately by 1.37%. With inflation muted a near target of 2%, all numbers are supported with strong fundamental credits moving forward in Multifamily. In January, the Federal Open Market Committee left Fed funds unchanged from the previous rate hike in December of 2018 at 2.25% to 2.5%, with the yield curve continue to flatten with 2-year and 10-year treasury spreads narrowing to 14 basis points, providing continued challenge and sourcing new bond investments with acceptable leverage yields facilitating growth for the Partnership in mortgage revenue bond segment.

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In the first quarter, the partnership recognized approximately $3 million of contingent interest income with the sale of Vantage at Brooks located in San Antonio, Texas, this being the fourth Vantage asset sale in the past two quarters. At this time, the partnership has currently invested in 10 Vantage assets. These assets are in some phase of construction, stabilizations or evaluation for sale. At this time, I'll turn the call over to Craig Allen, ATAX CFO, to present the partnership financial results.

Craig Allen -- Chief Financial Officer

Thanks, Chad. What I'd like to do is walk you through some notable transactions on the balance sheet, talk to you a little bit about the income statement, and then end up with some discussion on book value. Total assets as of March 31, 2019, increased by about $11 million to $993 million versus the $983 million at December 31 of last year. Looking at our mortgage revenue bond portfolio, right now, we own mortgage revenue bonds in 13 states throughout the United States, approximating about $739 million, that represents 79 mortgage revenue bonds, and also represents about 10,800 units under management.

Every quarter, we talk about the percentage of mortgage revenue bonds to total assets. At the end of March of '19, mortgage revenue bonds approximated 74% of total assets. Again, if we go all the way back to when we started these efforts of increasing ownership in mortgage revenue bonds back to December 31, 2012, about 35% of our total assets were comprised of mortgage revenue bonds. During the first quarter of this year, we acquired two mortgage revenue bonds for about $6.1 million in total value.

Also, we had one bond redeemed in the first quarter for about $5.6 million, and then in the first week in April of 2019, we had a subsequent event where one additional mortgage revenue bond was redeemed for about $6.2 million, and that's in Note 24 in the Q1 10-Q. Another aspect of our total assets is MF Properties or the properties that we own. Those -- we own two MF Property positions in two different states, one in California, one in Nebraska. Both are student loan properties making up about 859 units, and the value of those is about $64 million.

Chad talked a little bit about our investment in Vantage products. It's found on the balance sheet, and it's called investment in unconsolidated entities. At March 31 of this year, we had about $85 million invested as equity investments in the unconsolidated entities. Though the $85 million was located in nine states, three in Texas, two in Nebraska, two in Tennessee, one in South Carolina and one in Florida.

The $85 million represents about 2,598 units under management as well. Last quarter, we talked a little bit about our total equity dollars invested in the Vantage projects since we started investing in 2016. In the first quarter of 2019, we invested about $6.7 million of equity investments in the Vantage projects. And since inception, we've invested about $84.2 million in these assets.

We had a subsequent event that happened in April, in the first week in April of 2019. We acquired another Vantage project or we invested in another Vantage project, the Vantage at Conroe, a 288-unit multifamily project, located just north of Houston, Texas. It's kind of surrounded by the Sam Houston National Forest. Our total equity commitment is about $9.1 million.

When we consider the Vantage at Conroe investment, we have a total of about -- just shy of 2,900 units of Vantage project -- units under management, approximating about 21.1% of the total units that we are invested in between Vantage and the mortgage revenue bonds. Chad spoke a little bit about a transaction that we did in the first quarter, and that was a sale of Vantage at Brooks. It was a 288-unit multifamily project located in San Antonio, Texas. We invested in the Vantage at Brooks through a loan in October of 2015.

We recognized about $3 million of contingent interest in Q1 of this year, and that $3 million of contingent interest would be considered to be taxable income in 2019. And much like the other sale events that have transpired at ATAX, again, that would be considered to be a taxable event. Based upon this taxable event of $3 million, in April, we paid approximately $753,000 in Tier 2 income to our general partner. Every quarter, we look at the percentage of fixed versus variable rate debt as well, too.

And really, since 2015, we've had a concerted effort as we fine-tuned the balance sheet to shift our mix from variable to more fixed. Back in 2015, we had about 68% of our debt that was variable. Today, we have about 37% that's variable, and about 60% -- just shy of 63%, so say 63% fixed, 37% variable. Again, we -- this has been a consorted effort to gradually take more of our debt financing portfolio and convert it from variable to fixed rate, and we think that up to this point, we have been fairly successful achieving that.

The other thing we look at every quarter is interest rate sensitivity. And interest rate sensitivity is on Page 48 of the March 10-Q. What we do in the interest rate sensitivity table is we shock, if you will, our portfolio, and we measure what that shock looks like all the way to a 200-basis-point increase in interest rates. So this measures, if interest rates go up, all at once, 200 basis points, and for 12 months, we had ATAX do nothing to counteract the increase that we just felt.

Again, slightly hypothetical, but it's very similar to the shock treatment that banks do as well, too. So for Q1, the -- on a -- if we were to realize a 200-basis point-increase in rates, our CAD or cash available for distribution would decrease about $1.4 million, $1.5 million or about $0.024 to $0.025 of CAD. So again, well within the parameters that we as management consider to be acceptable, and it's something that we actively manage. And again, where rates to increase of that magnitude, clearly, we would take action to counteract that in some fashion.

Total revenue for the quarter was $17.7 million, an increase over the previous quarter in 2018, which was $16.5 million. The net income per unit, both basic and diluted, we reported $0.08 per BUC in Q1 of 2019 versus $0.09 in Q1 of 2018. The cash available for distribution is something that we look at, and we utilize internally, and then we communicate to you each quarter and then on an annual basis. For Q1 2019, the -- we reported $0.11 per BUC compared to $0.10 per BUC for the same quarter in 2018, so an increase of $0.01 per BUC.

And then finally, each quarter, we present to you the book value and the underlying value of our equity. At December -- excuse me, March 31, 2019, our book value was $5.13 per unit, an increase of $0.10 from December 31, 2018, when we reported $5.03 per BUC. At this time, we'd be happy to take your questions and answer them as you ask them.

Questions & Answers:


Operator

Thank you. [Operator instructions] And our first question comes from the line of John [Inaudible] with America First [Inaudible]. Your line is now open.

Unknown speaker

Hi, guys. How are you doing today?

Chad Daffer -- Chief Executive Officer

Good, John. How are you?

Unknown speaker

Good, good. Couple of -- I guess, the first question is kind of housekeeping. I've been with you guys for about five years right now, and I noticed on this year's K1 that roughly about 25% of my distributions consisted of taxable interest income, and there were no ordinary or qualified dividends in contradistinction to 2017 and '16. Is there any reason why the interest income component was so large relative to dividends and qualified dividends in prior years?

Craig Allen -- Chief Financial Officer

Sure. This is Craig. Yeah, in 2018, we -- there was a sale of Vantage at New Braunfels. And the sale of Vantage at New Braunfels was considered to be contingent interest.

And much the same as the Vantage at Brook sale that we just talked about in January of this year, that would be considered to be taxable income on the -- think of contingent interest as a gain on sale but yet not truly considered to be a gain.

Unknown speaker

For me, do you happen to calculate this year's relative interest? Would that be able to take the contingent interest allocable to the limited partners and divide by what the number of BUCs outstanding and multiply by my amount of units? Would that give you an approximation, at least, as to what the interest would be relative to this contingent interest transaction?

Craig Allen -- Chief Financial Officer

Yeah. I mean, that would be a rough way to calculate. For example, we've reported the contingent interest for the Vantage at Brook sale in January. And you could -- what would be allocable and for ease of calculation, it would be divided by total units and then times your position, yes.

Unknown speaker

That's fair enough.

Chad Daffer -- Chief Executive Officer

You call us direct off-line, and then we'd be happy to try more --

Unknown speaker

Sure. I don't want to occupy too much longer in it, but see one other question, you got in -- it's kind of, broader range, right here. And I, kind of, asked this in prior quarters. You've got to perform as tran per BUC in your FX fact sheet, and that's a nice chart right there to, kind of, look back like four, five years, and do cumulative income and CAD, etc.

And my quick calculation to your -- look like you got roughly, if we go back to December 2014, you've got $0.25 of cumulative CAD in excess of the distributions right there. You guys kind of -- does that go into a bank, so to speak, in terms of where you stand, as you look forward on this? Or, I guess, as I'm -- unless you have a unusual transaction where you've got a sale of property or something else, your CAD tends to runs maybe $0.01 or $0.02 in excess -- distributions in excess of a CAD. So how do I invest or, kind of, crank that handle into these transactions that boost up CAD, but are not -- what you might normally consider to be operating activity? I know, it's kind of a broad question, but I've been trying to zero in on that, and I'd let you take a shot at it.

Chad Daffer -- Chief Executive Officer

Yeah. I think, John, I'll try to answer a number of questions there. But I think, since 2015, you can see that where CAD is, it exceeded our payment of our distribution by CAD on a year-over-year basis. And talking with investors and the direction of our board and the management team, we've paid out the $0.50 and continue to reinvest anything over and above that for the benefit of the unitholders long term.

And that will be continue to be the plan, as it's -- as we are executing currently. And I really don't foresee that changing anytime in the near future.

Unknown speaker

OK. And then finally, if I take a look at the revenue side, and I mean, if we exclude contingent interest income this year, you probably would have fallen short on the -- net income would have dropped. And I guess CAD would have dropped a little bit there, too. I tried to ask this before, but are property sales -- what property sales are considered to be normalized, so to speak? And what property sales would be outside the computation of CAD?

Chad Daffer -- Chief Executive Officer

Well, I think, since 2015, we've asked the voters to allow us to invest equity into -- direct equity into projects. I think any sale of those projects would be considered normalized in that point forward. It's tough for us to predict sometimes with our asset class. Earnings can be a little bit lumpy.

I don't know if that's a scientific term or not. But as we continue to invest in ATAX and in Vantage-like assets, and we have the ability to stabilize -- construct -- stabilize and then evaluate them for sale, the quarter about which those units will be sold will be recognized. And so sometimes, it moves a little quicker than others. And as you know, we have not given any kind of future guidance on if and when those assets would be up for sale or close.

So we understand that it's a little bit tough to predict on an ongoing basis, not knowing which bond -- which assets or bonds in the portfolio may or may not be sold to recognize the gain or loss of each quarter.

Unknown speaker

With the interest rate arbitrage, do you guys ever foresee a time when CAD from -- without any other real estate operations, CAD would equal the $0.125 per quarter? I mean, is that your game plan to kind of get there? Or what would it take for CAD to equal the $0.125 per quarter, just on your interest rate-sensitive products and lending and borrowing?

Chad Daffer -- Chief Executive Officer

I think we don't try and differentiate between the two. Our goal is $0.125 a quarter and $0.50 annually, John.

Unknown speaker

OK. All right. Fair enough. Good quarter, guys.

Appreciate it. Good work. Talk to you later. Bye-bye.

Chad Daffer -- Chief Executive Officer

Thank you.

Craig Allen -- Chief Financial Officer

Thanks, John.

Duration: 22 minutes

Call participants:

Chad Daffer -- Chief Executive Officer

Craig Allen -- Chief Financial Officer

Unknown speaker

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