Greystone Housing Impact Investors LP (NYSE:GHI) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: I would like to welcome everyone to the Greystone Housing Impact Investors LP, NYSE ticker symbol GHI, First Quarter of 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference 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 pursuing 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 on our 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 GHI is operating under the SEC Regulation FD and encourage you to take the full advantage of the question-and-answer session. Thank you for your participation and interest in Greystone Housing Impact Investor LP. I would like to turn the call over to Ken Rogozinski, Chief Executive Officer.

Ken Rogozinski: Good afternoon, everyone. Welcome to Greystone Housing Impact Investors LP’s First Quarter 2023 Investor Call. Thank you for joining. I will start with an overview of the quarter in 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 first quarter of 2023, the partnership reported net income of $0.60 per unit and $0.81 of cash available for distribution or CAD per unit. Our reported net income of $0.60 per unit includes a $3.4 million noncash expense that reflects the quarter-over-quarter mark-to-market associated with our interest rate swap portfolio.

That translates to $0.15 per unit in noncash expense, which largely accounts for the difference between our net income per unit and CAD per unit metrics. We are currently a net receiver on all of our interest rate swaps as we receive 1-month CME term SOFR, which is now 5.04% after yesterday’s Federal Reserve action and pay a weighted average fixed rate of 2.59% based on our approximately $220 million in swap notional amounts as of March 31. Assuming the SOFR level stays constant over the next 12 months, we estimate that this 245 basis point spread would result in us receiving approximately $5 million in cash payments from our swap counterparties. These cash payments may not necessarily be reflected in our future net income. However, the cash payments will generally be reflected in our reported CAD.

We also reported a book value of $15.12 per unit on $1.63 billion of assets and a leverage ratio as defined by the partnership of 73%. On March 15, we announced a regular quarterly cash distribution of $0.37 per unit that was paid on April 28. In terms of the partnership’s investment portfolio, we currently hold $1.35 billion of affordable multifamily investments in the form of mortgage revenue bonds, governmental issuer loans and property loans, $111 million in joint venture equity investments and $36 million in direct real estate investments. As far as the performance of the investment portfolio is concerned, we have had no forbearance request for multifamily mortgage revenue bonds, and all such borrowers are current on their principal and interest payments.

Physical occupancy on the underlying projects was 94.5% for the mortgage revenue bond portfolio as of March 31, 2023. Two Vantage properties were sold in January 2023, and we recognized $244,000 of preferred return and $15.4 million in capital gains this quarter. Excluding the 2 Vantage properties sold in 2023, our remaining Vantage joint venture equity investments consist of interest in 8 properties, 3 where construction is 100% complete with the remaining 5 properties either under construction or in the planning stage. For the 3 properties where construction is 100% complete, we continue to see good leasing activity and one property has been listed for sale. 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 we mentioned during last quarter’s call, we have executed 2 commitments with the Freestone Development group, 1 for a project in Colorado and 1 for a project in Texas. Construction has commenced on the project in Texas. We also executed an $8.2 million commitment to fund the construction of Valage Senior Living Carson Valley, a 102-bed seniors housing property located in Mid-Nevada. Site work has commenced there as well. Our single remaining student housing property at San Diego State continues to have a strong occupancy level and pre-leasing for the 2023, 2024 academic year has begun.

With that, I will turn things over to Jesse Coury, our CFO, to discuss the financial data for the first quarter of 2023.

Jesse Coury: Thank you, Ken. Earlier today, we reported earnings for our first quarter ended March 31. We reported GAAP net income of $16.8 million and $0.60 per unit basic and diluted, and we reported cash available for distribution, or CAD, of $18.2 million and $0.81 per unit. As Ken mentioned previously, our reported GAAP net income includes $3.4 million of noncash expense related to declines in the fair value of our interest rate swaps. This noncash expense is added back to GAAP net income when calculating our CAD performance metric and is the main difference between our GAAP net income of $0.60 per unit and CAD of $0.81 per unit. Our interest rate swaps are performing as expected, and we are a net receiver on our interest rate swap portfolio, which generated net cash receipts of $829,000 during the first quarter.

Our book value per unit as of March 31, 2023, was on a diluted basis, $15.12, which is an increase of $0.81 from December 31, 2022. The increase is a result of current period net income in excess of our declared distribution and an increase in the fair value of our mortgage revenue bond portfolio caused by the modest stabilization of the municipal bond market during the quarter. As a reminder, we marked our mortgage revenue bonds to market or fair value quarterly. However, such gains or losses do not impact our cash flows or reported net income, except in the case of impairments, if any. As of market close yesterday, May 3, our closing unit price on the New York Stock Exchange was $16.50, which is a 9% premium over our net book value per unit as of March 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 March 31, we reported unrestricted cash and cash equivalents of $52.1 million, none of which were held at Silicon Valley Bank, Signature Bank or First Republic Bank. We also had $83.5 million of additional 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 87 of our recently filed 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 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 March 31 that is sustained for a 12-month period will result in a decrease of approximately $823,000 in our net interest income and cash available for distribution, which is approximately $0.37 per unit. The projected decrease in net income and CAD from this analysis is significantly improved from the $0.10 per unit result under the same scenario as of March 31, 2022.

This decline is primarily due to our execution of interest rate swaps during 2022 and 2023. And we believe this level of exposure is very low in comparison to our reported net income of $0.60 per unit for the first quarter of 2023 and $2.62 per unit for calendar 2022. I’d now like to share some current information on our debt investment portfolio consisting of mortgage revenue bonds, governmental issuer loans and property loans. These assets totaled $1.35 billion, which is an increase of approximately 6% from December 31, 2022. Such investments represent 82% of our total reported assets. We currently own 78 mortgage revenue bonds that provide permanent financing for affordable multifamily properties across 12 states. The fair value of our mortgage revenue bond portfolio increased by $68 million from December 31, 2022, due to approximately $47 million of net principal advances during the quarter with the remaining increase due to increased unrealized gains.

We currently own 13 governmental issuer loans that finance the construction or rehabilitation of affordable multifamily properties across 6 states. Alongside a governmental issuer loan, we will also commit to fund additional property loan that shares first mortgage lean. Our property loans typically fund after funding of the governmental issuer loans is completed. During the first quarter, we advanced funds totaling $28 million under our governmental issuer loan, taxable governmental issuer loan and property loan commitments. And we received redemption proceeds associated with our property loans of $18.3 million. In total, our mortgage revenue bonds, governmental issuer loan and related debt investments have outstanding future funding commitments of approximately $357 million as of March 31.

These commitments will be funded over approximately 2 years 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, and the return of our net capital from those maturities will be redeployed into our remaining funding commitments. In the first quarter, we adopted Accounting Standards Update number 2016-13 or commonly referred to as the CECL standard, effective January 1, 2023, for our debt investments and related funding commitments. Adoption of this CECL standard did not have a material impact on the reserve methodology for our mortgage revenue bond investments, which are accounted for as available-for-sale debt securities and are reported at fair value.

The adoption of the CECL standard did have a material impact on the reserve methodology for our governmental issuer loans, property loans and related investment funding commitments, which totaled approximately $686 million as of March 31. For these assets and funding commitments, the CECL standards require a transition from the previous incurred loss model to the current expected credit loss model. This transition to CECL has resulted in a higher credit loss reserve than our previous GAAP accounting. We estimate expected credit losses using a loss rate model that utilizes publicly available data sources, current conditions, and qualitative forecasts that are reasonable and supportable as inputs. Our overall allowance for credit losses upon adoption was $6.4 million.

Of this amount, $5.9 million was recorded as a direct reduction to partners capital as of January 1, 2023. The remaining $0.5 million of the initial reserve relates to the Live 929 property loan that carried over from 2022. Our overall reserve is approximately 85 basis points of our total gross assets and funding commitments. In addition to executing our credit loss model, we benchmarked our initial credit loss reserve as a percentage of total exposure upon adoption to peer company reserves, specifically mortgage REITs that primarily lend to multifamily-related borrowers, and we found that our reserves were generally in line with those peer companies. We reported the change in the allowance for credit losses during the first quarter as a provision for credit losses on the face of our statement of operations and a component of net income.

Provision for credit losses for the first quarter was a recovery of $545,000, largely driven by the shortening weighted average life of our investment portfolio during the quarter. We have adjusted back the impact of the provision for credit losses in calculation of CAD, consistent with our previous treatment for credit loss allowances. Additional disclosures related to our adoption of the CECL standard are included in Note 2 and Note 13 of our Form 10-Q. Turning to our joint venture equity portfolio. The portfolio consisted of 11 properties as of March 31, one of which is reported on a consolidated basis. The carrying value of our joint venture equity investments totaled approximately $111 million as of March 31, exclusive of the one investment that is reported on a consolidated basis.

We advanced additional equity under our current funding commitments totaling $5.7 million during the first quarter. Two of the Vantage properties were sold in January 2023 at significant gains, which continues the trend of significant returns on Vantage Property sales. Upon sale, $12.3 million of our initial capital was returned to us, which we will deploy into other investments in the near term. On the debt side of our balance sheet, our debt financing facilities are used to leverage our investments and had an outstanding principal balance totaling $1.14 billion as of March 31. This is up from $1.06 billion as of December 31, 2022, as a result of leverage on funding of our existing investment commitments and new MRV investments during the first quarter.

We manage and report our debt financings in 4 major categories on Page 80 of our Form 10-Q. The first category is fixed-rate debt associated with fixed-rate assets and represents $262 million or 23% of our total debt financing. As both the asset and debt rates are fixed rate, our net return is not generally impacted by changes in either short-term or long-term market interest rates. The second category is variable rate debt associated with variable rate assets and represents $409 million or 36% of our total debt financing. Variable rate indices and floors will vary, but we have effectively protected ourselves against rising interest rates through this matched funding approach without the need for separate hedging instruments. The third category is variable rate debt associated with fixed-rate assets that have been hedged via SOFR-denominated interest rate swaps.

These interest rate swaps limit our exposure to increased funding costs resulting from rising short-term interest rates. This category accounts for $315 million or 27% of our total debt financing, and we received net cash payments on our interest rate swaps totaling $829,000 during the first quarter. The final 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 $160 million or 14% of our total debt financing. We regularly monitor our interest rate risk exposure for this category and may implement hedges in the future, if considered appropriate. We entered into 3 additional interest rate swap transactions in the first quarter.

We will continue to evaluate hedging positions to take advantage of the inversion in the yield curve and to synthetically fix our interest costs for new debt investments. I will note for the audience that interest rate swaps are marked to fair value quarterly with such noncash changes reported as interest expense on our statements of operations. This will cause variability in our reported net income in periods of interest rate volatility. Continue to prefer exchanges of our existing Series A preferred units to newly issued Series A1 preferred units to maintain our access to nondilutive fixed rate and low-cost institutional capital. To date, we have successfully exchanged $37 million of our original $94.5 million of Series A preferred units.

For $37 million of new Series A1 preferred units to date. This has extended the earliest optional redemption dates on those exchanged units to 2028 and 2029. To date, we have received redemption notices for $30 million of existing Series A preferred units to be redeemed in the second half of 2022. And we are pursuing exchanges for the remaining $27.5 million of Series A preferred units that are nearing their optional redemption dates. In February 2023, we issued $8 million of additional Series A1 preferred units to an existing investor under a separate offering. We continue to pursue additional preferred unit investments under our active offerings for both our Series A1 and Series B preferred units. I will now turn the call over to Ken for his update on market conditions and our investment pipeline.

Ken Rogozinski: Thanks, Jesse. Following up on my comments in February, conditions in the muni market for the first quarter of 2023 were much improved versus 2022. The Bloomberg municipal index posted a total return of 2.8% in the first quarter. The high-yield municipal index generated a similar total return of 2.7% for the quarter. From a market technical perspective, while fund flows were still negative for the quarter, the pace has slowed significantly from 2022. As of yesterday’s close, 10-year MMD is at 2.36% and 30-year MMD is at 3.4%, roughly 25 and 20 basis points lower in yield, respectively, than at the time of last quarter’s call. With the inversion of the yield curve, 10-year MMD is actually the low point of the current muni yield curve.

The 10-year muni-to-treasury ratio was approximately 69% at the lower end of its historic range. Continued volatility in rates with the magnitude of the interest rate increases in the past 12 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 construction financing at 30-day SOFR plus 350 basis points now exceeds 8% after the latest Fed hike announced earlier this week. Our affordable housing 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 the use of Freddie Mac Tax-Exempt loan forward commitments in association with our construction lending.

Given the multiple of invested capital returns we have realized on the 5 manage sales that have closed over the last 14 months, we will continue to look for other opportunities to deploy capital in this strategy. 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 or 5 years down the road when new supply may be limited. We are evaluating opportunities to expand beyond our traditional investment footprint in Texas, seeking out other experienced JV partners with track records in other markets where we see opportunities. Our expansion into a new asset class, as demonstrated by our first senior housing investment this quarter will also help us achieve more scale in the joint venture equity investment segment of our portfolio.

With that, Jesse and I are happy to take your questions.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matthew Erdner with JonesTrading.

Operator: Next question comes from Chris Muller with JMP Securities.

Operator: [Operator Instructions] Our next question comes from Jade Rahmani with KBW.

Operator: [Operator Instructions] Our next question comes from John Bon [ph] Private Investor.

Operator: [Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to Ken Rogozinski, CEO, for closing comments.

Ken Rogozinski: Thank you very much, everyone, for joining us today. We look forward to speaking with you again next quarter.

Operator: This concludes today’s teleconference call. You may disconnect your lines at this time, and thank you for your participation.