Greystone Housing Impact Investors LP (NYSE:GHI) Q4 2023 Earnings Call Transcript

Greystone Housing Impact Investors LP (NYSE:GHI) Q4 2023 Earnings Call Transcript February 22, 2024

Greystone Housing Impact Investors LP misses on earnings expectations. Reported EPS is $0.24 EPS, expectations were $0.8. Greystone Housing Impact Investors LP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greeting and welcome to Greystone Housing Impact Investors Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Jesse Coury. Thank you. You may begin.

Jesse Coury: I would like to welcome everyone to the Greystone Housing Impact Investors LP, NYSE ticker symbol GHI, fourth quarter of 2023 earnings conference call. During the presentation, all participants will be in a listen-only mode. After management presents its overview of Q4 2023, 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 GHI 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 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 us with the Securities and Exchange Commission. Internal projections and beliefs upon which we base our expectations may change but if they do, you will not necessarily be informed.

An engineer carrying a housing panel for a modular building across a construction site.

Today's discussion will include non-GAAP measures and will be explained during this call. We want to make you aware that GHI 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 Greystone Housing Impact Investors LP. I will now turn the call over to our Chief Executive Officer, Ken Rogozinski.

Kenneth Rogozinski: Good afternoon, everyone. Welcome to Greystone Housing Impact Investors LP's fourth quarter 2023 investor call. Thank you for joining. I will start with an overview of the quarter, the year and our portfolio. Jesse Coury, our Chief Financial Officer, will then present the partnership's financial results. I will wrap up with an overview of the market and our investment pipeline. Following that, we look forward to taking your questions. For the fourth quarter of 2023, the partnership reported net income of $0.24 per unit and $0.27 of cash available for distribution, or CAD, per unit. For 2023, the partnership reported net income of $2.07 per unit and $1.93 of CAD per unit. Our fourth quarter reported net income of $0.24 per unit includes a $10 million noncash loss that reflects the mark-to-market associated with our interest rate swap portfolio for the quarter.

That translates to $0.44 per unit in noncash loss which is not reflected in CAD. We also recognized in net income for the fourth quarter $10.4 million, or $0.45 per BUC, in gain on sale for the Suites on Paseo multifamily property. However, this gain is not reflected in CAD, as it is due to the recovery of previous depreciation expense. For 2023, we recognized a noncash mark-to-market loss on our interest rate swap portfolio of approximately $3.2 million, or $0.14 per unit, within net income. That is not reflected in our reported CAD per unit for the year. We are currently a net receiver on substantially all of our interest rate swaps, as we receive compounded SOFR which is now 5.33% and pay a weighted-average fixed rate of 3.13% on our approximately $333 million in swap notional amounts as of December 31, 2023.

Assuming that the compounded SOFR level stays constant over the next 6 months, that 220-basis point spread would result in us receiving approximately $3.2 million in cash payments from our swap counterparties which would not be reflected in our net income but would be reflected as an additional $0.14 per unit in CAD. We also reported a book value of $15.17 per unit on $1.51 billion of assets and a leverage ratio as defined by the partnership of 72%. On December 13, we announced a regular quarterly cash distribution of $0.37 per unit and a supplemental distribution of $0.07 per unit in the form of additional units, both of which were paid on January 31, 2024. In terms of the partnership's investment portfolio, we currently hold $1.27 billion of affordable multifamily investments in the form of mortgage revenue bonds, governmental issuer loans and property loans and $137 million in joint venture equity investments.

As far as the performance of the investment portfolio is concerned, we have had no forbearance requests for multifamily mortgage revenue bonds and all such borrowers are current on their principal and interest payments. Physical occupancy on the underlying properties was at 92.2% for the stabilized mortgage revenue bond portfolio as of December 31, 2023. Our Vantage joint venture equity investments consist of interest in 7 properties: 4 where construction is complete; with the remaining 3 properties either under construction or in the planning stage. For the 4 properties where construction is complete, we continue to see good leasing activity. We continue to see no material supply chain or labor disruptions on the Vantage projects under construction.

As we have experienced in the past, the Vantage Group, as the managing member of each project owning entity, will position a property for sale upon stabilization. As previously announced, the Vantage for Tomball property has been listed for sale. We have 4 joint venture equity investments with the Freestone Development Group; 1 for a project in Colorado and 3 projects in Texas. Site work has commenced on the Colorado project and construction has commenced on 1 of the projects in Texas. Our joint venture equity investment in Valage Senior Living Carson Valley, a 102-bed seniors housing project located in Minden, Nevada, has begun vertical construction. Our joint venture equity investment in The Jessam at Hays Farm, a new-construction 318-unit market-rate multifamily property located in Huntsville, Alabama, has commenced construction as well.

As previously announced, in December 2023, we sold our final multifamily property investment, the Suites on Paseo student housing project, for gross proceeds of approximately $40.7 million. The partnership no longer owns any operating real estate property investments. Net proceeds from the sale will be deployed into our core multifamily investment strategies. With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the fourth quarter of 2023.

Jesse Coury: Thank you, Ken. Earlier today, we reported earnings for our fourth quarter ended December 31. We reported GAAP net income of $6.2 million and $0.24 per unit, basic and diluted and we reported cash available for distribution, or CAD, of $6.2 million and $0.27 per unit. As Ken mentioned, our reported fourth quarter GAAP net income includes a $10 million noncash unrealized loss on our interest rate swaps during the quarter. Changes in the fair value of our interest rate swap portfolio will cause variability in our reported net income in periods of interest rate volatility which we have seen throughout 2023. Such noncash fair value adjustments are excluded in our calculation of CAD. I would like to note for listeners that starting in the fourth quarter of 2023, we reclassified gains and losses from our derivative instruments to a new line on our income statement, titled Net Results From Derivative Transactions, as well as providing additional detail on derivative gains and losses in Footnote 18 of our consolidated financial statements.

These items were applied retroactively to our 2022 financial statements as well. We believe these changes will provide useful information for readers regarding the volume and impact such derivatives have on our reported results, particularly on our reported net income. For 2023, we reported net income of $54 million and $2.07 per unit, basic and diluted and CAD of $44.1 million and $1.93 per unit. These full year results include 3 JV equity investment sales from Q1 and Q2 of 2023 which, when combined, contributed approximately $0.95 per unit to our full year net income and CAD after related expenses and Tier 2 income allocable to our general partners. Our book value per unit as of December 31 was, on a diluted basis, $15.17 which is an increase of $2.20 from September 30.

The increase is primarily a result of an increase in the fair value of our mortgage revenue bond portfolio during the quarter due to falling market yields. As a reminder, we use third-party service providers to estimate the fair value of our mortgage revenue bond investments. The third-party valuation models predominantly use MMD tax-exempt multifamily yield curves to estimate mortgage revenue bond fair values. Rates declined approximately 109 basis points, on average, across the curve from September 30 to December 31 which resulted in a corresponding increase in the fair value of our mortgage revenue bond portfolio. I will note that our mortgage revenue bond investments have predominantly fixed interest rates. So the changes in fair value do not directly impact the interest income we receive from our positions.

In addition, we are and expect we will continue to be long-term holders of our mortgage revenue bond investments until redemption or maturity. As such, we expect this change in fair value will have little to no direct impact on our operating cash flows, net income or CAD. As of market close yesterday, February 21, our closing unit price on the New York Stock Exchange was $16.40 which is an 8% premium over our net book value per unit as of December 31. We regularly monitor our liquidity to both take advantage of accretive investment opportunities and to protect against potential debt deleveraging events if there are significant declines in asset values. As of December 31, we reported unrestricted cash and cash equivalents of $37.9 million and we also had $55.7 million of availability on our secured lines of credit.

At these levels, we believe that we are well positioned to fund our current financing commitments which I will discuss later. We regularly monitor our overall exposure to potential increases in interest rates through an interest rate sensitivity analysis which we report quarterly and is included on Page 74 of our Form 10-K. The interest rate sensitivity table shows the impact to our net interest income given various scenarios of changes in market interest rates and other various management assumptions. 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 as of December 31, that is sustained for a 12-month period, will result in a decrease of approximately $870,000 in our net interest income and CAD, or approximately $0.038 per unit.

Now, I'd like to share current information on our debt investments portfolio, consisting of mortgage revenue bonds, governmental issuer loans and property loans. These assets totaled $1.27 billion which is up $44 million from September 30. The increase is primarily a result of an increase in fair value of our mortgage revenue bond investment portfolio, as previously noted. These investments represent 84% of our total reported assets. We currently own 85 mortgage revenue bonds that provide permanent financing for affordable multifamily properties across 15 states. Of these mortgage revenue bonds, 32% of our portfolio value relates to properties in Texas, 25% in California and 21% in South Carolina. We currently own 10 governmental issuer loans that finance the construction or rehabilitation of affordable multifamily properties across 5 states.

Alongside our governmental issuer loan, we also commit to fund an additional property loan that shares the first mortgage lien. Our property loans typically fund after construction advances under the governmental issuer loans are completed. During the fourth quarter, we advanced funds totaling $25 million for our governmental issuer loan, taxable governmental issuer loan and property loan commitments. During the fourth quarter, we completed one conversion of our governmental issuer loan investment to permanent financing by Freddie Mac. The governmental issuer loan investment was purchased at par by Freddie Mac pursuant to its forward purchase commitment. In addition, our related property loan was repaid by the borrower at par. Redemption proceeds from the governmental issuer loan and property loan totaled $53 million, of which $48 million was used to pay off our related TOB debt financing.

In addition, another governmental issuer loan investment converted to Freddie Mac perm financing in January 2024, with redemption proceeds totaling $34 million, of which $30 million was used to pay off our related TOB financing. In total, our mortgage revenue bond governmental issuer loan and related debt investments have outstanding future funding commitments of approximately $308 million as of December 31. These commitments will be funded over approximately 24 months and will add to our income-producing asset base. We also expect to receive redemption proceeds from our existing construction financing investments that are nearing maturity. That capital will be redeployed into our remaining funding commitments. As a reminder, we adopted Accounting Standards Update 2016-13, or the CECL standard, effective January 1, 2023 which materially impacted our reserve methodology for our governmental issuer loans, property loans and related investment funding commitments.

We reported a negative provision for credit loss of $466,000 for the fourth quarter, largely driven by recent governmental issuer loan and property loan redemptions and a reduction in the weighted-average life of our remaining investment portfolio. We remove the impact of the provision for credit losses in calculating CAD, consistent with our historical treatment of loss allowances. Our joint venture and equity investments portfolio consisted of 12 properties as of December 31, with a reported carrying value of approximately $137 million, exclusive of 1 investment that is reported on a consolidated basis. We advanced additional equity under our current funding commitments totaling $16.1 million during the fourth quarter. This amount includes equity contributed to our 2 new investments, Freestone Greenville and Freestone Ladera, both of which are in the planning phase.

Our debt financing facilities used to leverage our investments had an outstanding principal balance totaling $1.02 billion as of December 31. This is down from $1.08 billion as of September 30, primarily due to the redemption of our previous secured notes and the maturity of our M24 TEBS financing in the fourth quarter. We manage and report our debt financing in 4 main categories on Page 65 of our Form 10-K. 3 of the 4 categories, fixed-rate assets with fixed-rate debt, variable-rate assets with variable-rate debt and fixed-rate assets with variable-debt that is hedged with interest rate swaps, are designed such that our net return is generally insulated from changes in short-term interest rates. These categories account for $982 million, or 96.5%, of our total debt financing.

The fourth category is variable-rate debt associated with fixed-rate assets with no designated hedging which is where we are most exposed to interest rate risk in the near term. This category only represents $36 million, or 3.5%, of our total debt financing. This category is down from 11.8% of debt financing as of September 30 due to closing of our fixed-rate TEBS residual financing in November 2023 that replaced our previous variable-rate secured notes. We regularly monitor our interest rate risk exposure for this category and may implement hedges in the future, if considered appropriate. I will now provide an update on our preferred unit activity. We redeemed $10 million of Series A Preferred Units in October 2023 that was funded with cash on hand.

We executed 2 issuances of our Series B Preferred Units in early 2024. The first issuance was $17.5 million of Series B Preferred Units that were issued in exchange for $17.5 million of previously issued Series A Preferred Units. So this was a recycle of existing capital. The second issuance was a sale of $5 million of Series B Preferred Units to a new investor for $5 million of gross proceeds. The earliest redemption date for these newly issued Series B Preferred Units is early 2023 [ph] with certain limited exceptions. These issuances provide non-dilutive fixed-rate and low-cost institutional capital for executing our strategy. We continue to pursue issuing additional preferred units under our active offerings for our Series A1 and Series B Preferred Units.

I'll now turn the call over to Ken for his update on market conditions and our investment pipeline.

Kenneth Rogozinski: Thanks, Jesse. The fourth quarter of 2023 was a much improved quarter for the fixed income markets and municipal bonds were no exception. A strong performance overcame the softness earlier in the year. The Bloomberg Municipal Index posted a total return of positive 6.4% for 2023. The Bloomberg High-Yield Municipal Index generated a total return of 9.2% for the year. From a market technicals perspective, while fund flows were still negative on the year at minus $15 billion, the pace slowed significantly from 2022's record $122 billion in outflows. 2023 ended with $376 billion of muni bond issuance, 4% lower than the previous year. As of yesterday's close, 10-year MMD is at 2.48% and 30-year MMD is at 3.62%, roughly 70 basis points lower in yield, respectively, than at the time of last quarter's call.

With the inversion in the yield curve, 5-year MMD is actually the low point of the current muni yield curve. The 10-year muni-to-Treasury ratio was approximately 60%, a significant move lower from last quarter's 73% ratio level, demonstrating the recent strength of munis. Continued volatility in rates, the magnitude of the interest rate increases over the past 18 months, particularly in the short end of the curve and cost inflation have presented challenges to our developer clients on new transactions. The interest cost of a new-construction financing at 30-day SOFR plus 350 basis points is approaching 9%. Our affordable developer clients are needing to rely more and more on governmental subsidies and other sources of soft money to make their transactions financially feasible.

We will continue to work with our clients to deliver the most cost-effective capital possible, especially through the use of the Freddie Mac tax-exempt loan forward commitment, in association with our construction lending. We will continue to look for other opportunities to deploy capital in our JV equity strategies on a selective basis. We believe that getting new projects underway now, while other sponsors face significant challenges, will put us in a better position for success with our exits 3 to 5 years down the road when new supply may be limited. We believe that our new JV equity investments completed year-to-date are reflective of that approach. With that, Jesse and I are happy to take your questions.

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