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Edited Transcript of ATAX earnings conference call or presentation 28-Feb-19 9:30pm GMT

Q4 2018 America First Multifamily Investors LP Earnings Call

Omaha Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of America First Multifamily Investors LP earnings conference call or presentation Thursday, February 28, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad L. Daffer

America First Multifamily Investors, L.P. - CEO

* Craig S. Allen

America First Multifamily Investors, L.P. - CFO

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Conference Call Participants

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* David Matthew Walrod

JonesTrading Institutional Services, LLC - MD & Head of Financial Services Research for New York Office

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Presentation

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Operator [1]

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I would like to welcome everyone to America First Multifamily Investors L.P.'s NASDAQ ticker symbol ATAX Fourth Quarter of 2018 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 2018 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 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 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.

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for your participation and interest in ATAX.

I would now like to turn the call over to Chad Daffer, Chief Executive Officer of ATAX.

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [2]

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Thank you, and good afternoon, and welcome to the ATAX Fourth Quarter 2018 Earnings Call. This afternoon, I'd like to share with you a few of my thoughts on the fourth quarter, the economy, interest rates and a few notable transactions for the quarter. Then Craig Allen, ATAX CFO, will present the partnership financial results. And then we're looking forward to taking your questions.

I'm very pleased to report strong fourth quarter closing a great year for the partnership in 2018 earning $0.73 per unit of cash available for distribution for investors. More details will follow with Craig in just a minute.

In the fourth quarter, economic data remained strong with gross domestic product above forecast at 2.6%, unemployment at historical low levels below 4% and improving wage growth. This prompting the FMOC -- excuse me, Federal Open Market Committee, to increase fed fund rates for the fourth time in 2018, increasing short-term rates, resulting in higher cost of borrowing for the partnership. FOMC then has since stated they will be patient in determining future rate hikes pending changes and economic data. Given this change in policy and with the FOMC on hold, this enhances the possibilities of continued economic expansion and stable lending markets into 2019, both playing important roles in the strategic growth for the partnership.

A few notable transactions occurred in December of 2018 with the sale of 3 Vantage properties by the ATAX development partner. ATAX loans and equity investments were repaid at closing from sale proceeds. The properties were Vantage at Judson, Vantage at Corpus Christi and Vantage at New Braunfels. These investments date back to 2014 with the strategic decision by management to create new revenue streams for the partnership while staying true to our core credit discipline of multifamily housing.

This started with conceptual discussions with our partner in 2014, consent of our investors in 2015, execution of design, build and finance of projects in 2016, lease-up and stabilization in 2017, with the ultimate sale and proof of concept in 2018.

I'm proud of our ATAX team. Very thankful for our partners and pleased for our investors.

At this time, I'll turn it over to Craig Allen, CFO, to present the Partnership financial results.

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Craig S. Allen, America First Multifamily Investors, L.P. - CFO [3]

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Thanks, Chad. What I'd like to do is just walk you through some notable items on the balance sheet and the income statement and expand a little bit on what Chad had talked about regarding our CAD for the year and a little bit more on our Vantage transactions as well too. Over the past 7 to 8 quarters, we've been able to be -- to realize net total assets of approximately $1 billion. We ended the year, December 31, at about $983 million in total assets.

Mortgage revenue bonds. We continue to invest in mortgage revenue bonds, which make up a vast majority of our balance sheet. At 12/31/2018, about 74.5% of our total assets were comprised of mortgage revenue bonds. And again, we keep referring back to when we began this growth trend or growth pattern back in 2012, 12/31/2012. 35% of our assets were comprised of mortgage revenue bonds. So in that span of about 6 years, we've more than doubled the percentage of mortgage revenue bonds in our portfolio.

At the present time, we have about 77 mortgage revenue bond positions, totaling about $732 million. We are geographically dispersed from Washington in the Northwest to Florida in the Southeast, Maryland on the East Coast to California and Texas. We spend a reasonable amount of time taking a look at the geographic dispersion of our portfolio. And again, we are centered predominantly in California, in Texas, Florida and then we're filling in as we get into the Mid-Atlantic states and in the upper Northwest as well too.

For the year, we transacted 4 mortgage revenue bonds and acquired those with principle value of about $42 million on a year-to-date basis, and that's reflected in that 75% of assets that we talked about just a little bit ago. We have mortgage revenue bond redemptions that happened throughout the year as well too. For the year ended 12/31/2018, approximately $79 million of mortgage revenue bonds redeemed. There are about 14 bonds in total that were redeemed in the normal course of business.

Our MF Properties portfolio, and that's a multifamily real estate that ATAX owns in its portfolio, is approximately $64.6 million at December 31 of this year. We have MF Properties that are located one in California, which is a student housing multifamily project, as well as Nebraska, and that is also a student housing asset.

Moving on to some transactions in the fourth quarter. We had transactions, rather substantial transactions, and as Chad said, they were proof of concept transactions that began in late 2014 and early 2015. And each quarter thereafter, we've reported to you that we were beginning a diversification of our assets and our portfolio as we entered into the Vantage projects. Those were prototypical 288-unit multifamily market rate projects. We were fortunate in working with our partner, Vantage, to realize 3 sales. One was a loan product for ATAX, and that was Vantage at New Braunfels, a 288-unit project. The next was an equity investment that ATAX made in the first quarter of 2016, Vantage at Corpus Christi. And then another was a mortgage revenue bond that was redeemed, and that was the Judson mortgage revenue bond. So those were the 3 significant transactions that occurred in the fourth quarter of 2018.

A little bit more color on the investment in what we call investment in unconsolidated entities or what we also refer to as Vantage. On December 31, 2018, we had 9 projects. Those 9 projects were approximately -- they represented approximately 2,600 units of multifamily units. Those 9 projects are: 3 were located in Texas, 2 were located in Nebraska, 2 were located in Tennessee, 1 in South Carolina and 1 in Florida.

Just as some background and some history. On December 31, 2016, we had invested in 3 projects and all 3 of those projects were in Texas. Fast forward to 2017. At the end of the year in 2017, we had 3 projects in Texas, one in South Carolina and one in Florida, and then again in 2018, we had 9 projects. At the height, we've had 10 projects prior to the sale of Corpus Christi.

To give you an idea of how we've invested in these projects. To date, we've invested approximately $78 million of equity in the Vantage projects, ranging from about $19 million of investment in 2016 to incrementally investing about $42 million in 2018. During that time period, we also invested in 2 Vantage projects in the form of loans. And this would be prior to making equity investments, that would be New Braunfels and Vantage at Brooks. And we've contributed about $15.9 million, and both of those projects have sold, New Braunfels have sold in Q4 of 2018. And in our 10-K, in footnote #25, we disclose a subsequent event in which Vantage at Brooks successfully sold in January of 2019.

Each call -- each earnings call, we talk about our strategy of trying to move closer to 100% fixed in our debt financing, knowing that we probably will never get to the point that we are 100% fixed rate and 0% variable. But what I thought I would do is just real briefly tell you where we started in 2015 and where we are today. So in 2015, 68% of our debt was in variable rate product, and 32% was in fixed rate product. Fast-forward to 12/31/2018, and our fixed rate is comprised of -- is 62% of debt, and our variable rate is 38% of debt. So we've almost completely switched those around. Again, 68% variable and 15 -- 38% variable today. So again, the strategy was becoming more fixed rate and helping to control our interest rate sensitivity as well too.

That takes us into the results of our interest rate sensitivity analysis. We measure the interest rate sensitivity all the way up to a 200-basis point increase in rates as if that was done all at one time, and in a 12-month period, we did nothing to react to that increase. Going back to September 30, 2017. The impact to the fund based upon a rate increase of 200 points would result in a decrease in CAD of about $1.6 million or about $0.027. Again, fast-forward to December 31, 2018, the most recent quarter we just closed, and our interest rate sensitivity has decreased from negative $1.6 million down to only a negative $968,000 or a CAD impact of minus $0.016. So we have been able to realize the strategy that we implemented and that we continue to try to improve upon of reducing that interest rate sensitivity by reducing that from a minus $0.027 down to a $0.016.

On the revenue front. For the fourth quarter, we reported revenue of $23.1 million compared to $21.9 million in the fourth quarter of 2017 and on a year-to-date basis, $81.4 million versus $70.4 million in 2017. That's a revenue increase of about 16% year-over-year. Net income basic and diluted $0.22 for the quarter versus $0.23, so virtually no change quarter-over-quarter 2018 versus 2017. And on a year-to-date basis 2018, we reported $0.60 per buck compared to $0.44 per buck for 2017.

Moving to CAD. Chad alluded to the very good year that we had related to cash available for distribution. On a quarterly basis, we were flat year-over-year because of strong transactional activity in Q4 of 2018 versus 2017. We reported $0.25 of CAD in Q4 of 2018. On a year-to-date basis, $0.73 per buck in 2018 versus $0.60 in 2017. So a very good year, year-over-year $0.73 versus $0.60. Each call, we like to end by telling you what the net book value and underlying value of ATAX is and was. And again, just as a reminder that book value does have some lumpiness, what we call lumpiness in it. And that lumpiness can be the result of mark-to-markets that may occur. It can be a little bit lumpy due to the number of units outstanding at the time, can be a little bit lumpy due to some transactional activity as well too.

At September 30, 2018, we reported a net book value of about $4.81. That's increased as of December 31 of this year to $5.03 per buck. So again, another positive trend that we have to report really due to the outstanding year that we had on a net income per share and as well as a buck per unit basis as well too.

With that, we'd like to turn it over to you for questions, and we'd be happy to answer those that you may have at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from David Walrod with JonesTrading.

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David Matthew Walrod, JonesTrading Institutional Services, LLC - MD & Head of Financial Services Research for New York Office [2]

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Of your projects remaining with the Vantage program, how should we think about the pace of sales in 2019? Going forward, it looks like according to your K that handful have been completed. Others are still in the process of being constructed, so how should we think about that?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [3]

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David, the strategy that we try to implement from the start in working with our partner was, we thought that we had the capacity to expand and drive this part of our business. Where we'd have 4 properties under construction, we'd have 4 properties in stabilization, we'd have 4 properties being teed up for sale and 4 properties -- 4 or more properties in the pipeline. With the activity in the fourth quarter of '18, kind of -- we proof of concept in the first -- that we have 4 properties that we put in the marketplace. Our partner sold 3 of those assets in the fourth quarter. One leaked into the first quarter of 2019. But I think as long as the market stays strong, interest rates stayed low, and we can continue to stabilize these assets within a reasonable time frame, and the markets are strong, I'm optimistic that our partner ourselves will come to the table and allow us to continue to take the premium out of the market when it presents itself. And so that's kind of the global strategy and -- that we're kind of proofing that out here as this effort evolves.

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David Matthew Walrod, JonesTrading Institutional Services, LLC - MD & Head of Financial Services Research for New York Office [4]

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Okay, that's helpful. And then in the multifamily, can you talk about, I guess, just how that's going and any potential asset sales in that -- from that bucket?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [5]

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No. We only have a couple left. Right now, we're continuing to evaluate the options out on our student housing property out in San Diego, California, suites on for sale. Right now, I think we continue to improve on the operations of the property. And we will probably evaluate that as for a potential sale sometime after stabilization going into the fall semester. The other property is a long-term hold with really no interest in our part in moving out of that position.

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David Matthew Walrod, JonesTrading Institutional Services, LLC - MD & Head of Financial Services Research for New York Office [6]

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Okay. And then my last question is just on the dividend. You guys have been very consistent, but obviously, been out earning it. Can you just give us some updated thoughts on maybe how the board's thinking about the dividend?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [7]

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At this time, David, we've had no discussions about increasing or decreasing the dividend at this time. This is the fourth year in a row since Craig and I and the new management team has taken over the platform. And we're optimistic about '19 with no discussions from the board on either increasing or decreasing that distribution.

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Operator [8]

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And our next question comes from [David Rothschild] with -- he is a private investor.

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Unidentified Participant, [9]

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Yes, my question sort of reference the same on the dividend. I guess the other thing I would just ask is, you did the $0.73 in CAD, do you think that's going to be consistent now going forward a little bit? Or what's your outlook for 2019?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [10]

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David, the asset class that we deal in is obviously cyclical. We have -- we're at the late stages of an economic expansion. We will continue to try and take premiums out of the positions in our Vantage product and our MF product and grow our mortgage back book. This was an outstanding year for me to tell you that, that will be a consistent year going forward, I think would be a stretch. But we're optimistic about being able to continue to meet the dividend year-over-year.

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Unidentified Participant, [11]

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Okay. Well, I guess, as an investor, I'd encourage you to at least look at maybe increasing dividend by a small amount because it's been flat for a lot of years. But thanks for the good work.

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Operator [12]

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And our next question is from [Ed Fleming]. He is also a private investor.

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Unidentified Participant, [13]

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It really looks to me like your multiyear focus on the mortgage revenue bond acquisitions as well as your Vantage developments are really going quite well. From my perspective, unless I'm mistaken, it looks to me like ATAX is probably the best positioned that it's been in I don't know how many years in terms of your ability to consistently generate CAD going forward. What are your thoughts on that?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [14]

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We've -- this was the fourth year. We're confident about '19. Our business has transitioned since 2015, when we took an effort on to kind of reposition the balance sheet with the efforts with our Vantage partners and diversifying our income streams. We feel better about where we're at than we have in a long time on our part of -- total business. Our mortgage book business, obviously, right now is under a little bit of pressure as you look at our originations being down year-over-year. As we shared with our investors over the years, that we will continue to underwrite and evaluate opportunities. But in the event that the marketplace does not give us opportunities that meet our credit profile or our leverage yield targets, that we will back away from and not deploy capital. So we will continue to look and try and diversify revenue streams to meet or exceed that 50% dividend target. And I think we're in a good place. I think the market share is strong. The economy continues to give us opportunities. We're optimistic about, hopefully, the yield curve will shift a little bit and give us a little bit of steepness and the opportunity to get back in and really drive the mortgage book growth. But I think overall, I'm in agreement with you that we're in a good place as far as our performance, our access to capital and our asset class has been very strong, obviously.

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Operator [15]

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(Operator Instructions) Our next question is from [Thomas London] with Oppenheimer.

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Unidentified Analyst, [16]

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Could you shed some light on the ATM program? I see you began it in August last year, terminated it. Are there any plans to reestablish it? And could you kind of expand on exactly what that is?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [17]

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No. I'd be glad to. Thank you. The ATM program we implemented was obviously just to access capital on a lower cost basis than a common follow-on offering. We've had great relationship with our friends at JonesTrading and implementing this program and testing the market. As you've seen and heard of us discuss our CRA preferred over the last couple of years, there's certain rules and regulations that prohibit having 2 offerings in the marketplace at the same time on a private basis. Therefore, as you can imagine, we're probably going to pursue the opportunities in the preferred market here in the months to come. In order to do that, we need to -- terminate's a strong word, put the ATM on hold during that -- during what was we -- as we pursue the CRA preferred equity that we placed in the past. I think to date, we're about $94.5 million in the preferred. Based on the current market value, we have another $25 million to $30 million that can possibly be placed. We just can't be in the market at the same time based on SEC regulations. So that's the reasons why we've been in and out. It's a great program. It gives us an opportunity to raise common on a much lower cost basis. We just can't be in the market for both products at the same time.

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Unidentified Analyst, [18]

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Okay. And another question, given the change, I guess, in the mix of your portfolio. Over the years, you had tax-exempt dividends. Is there any negative effect because of the change in the mix of the portfolio?

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Chad L. Daffer, America First Multifamily Investors, L.P. - CEO [19]

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You would think -- on the surface, you would say, yes. I think for 2018, we're about 93% tax exempt, about 7% taxable. As -- remember that the investment in our Vantage products is only about 10% of our balance sheet. Therefore, it doesn't move the needle as great as you would think, quarter-over-quarter, year-over-year. I don't think that we're going to try -- I mean, as we talked with investors, and when we did the proxy back in 2015 allowing us to deploy capital into the Vantage like products, they were very confident. And as long as we stayed in our core credit discipline, didn't drift into other type of asset classes, that some type -- somewhere between 80% and 85% would be some type of an acceptable level for us on a taxable basis -- I mean, a tax-exempt basis, and the balance of it, 15% to 20% being taxable. So that's the guidance that we received from our -- some of our investors. I'd be interested in hearing your thoughts offline at some point in the future if that would be acceptable to you, sir.

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Unidentified Analyst, [20]

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Sure. And then one last question, something small here. I noticed the impaired securities was up a good bit for 2018. Can you shed a little light on that? I think it was up about...

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Craig S. Allen, America First Multifamily Investors, L.P. - CFO [21]

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Yes. This is Craig. We own some -- we own an investment called PHC investments. And the PHCs, we had to write those down on a permanent basis, took a small impairment charge during the year. We've had -- not credit related, we've had no interruption of cash flows from those investments. But it was just an adjustment due to noncredit-related events in the marketplace.

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Operator [22]

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Since I'm not showing any further questions, this does conclude today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.