In May of this year, America First Multifamily Investors, LP (NASDAQ:ATAX) was much better alternative to Mortgage REITs and Municipal Bond ETFs.Stock didn’t fit In terms of the exact characteristics of both comparisons, there were many similarities, such as their commitment to real estate loans and the nature of the majority of their income being tax-free. It’s an amazing success story.
ATAX was less ruthless with the municipal bond funds we suggested would lose. Nevertheless, four comparisons in that field, Nuveen AMT-Free Quality Muni Income (Nair), Nuveen Quality Muni Income (NAD), Nuveen AMT-Free Muni Credit Income (NVGs) and the credit income of Nuveen Municipality (NZF), underperforming enough to attract the attention of investors.
What went well?
The biggest advantage ATAX has had over its mortgage REIT peers is its relative lack of leverage. Less leverage means less volatility during stressful times. Less leverage means less decline in tangible book value, a metric that every investor should care about. Over the last three years, ATAX’s low leverage has helped a lot in this area.
After reviewing Q3 2022 results, we’ll explain why ATAX outperformed municipal bond funds.
A recent press release from ATAX has a lot of good news for the bulls. ATAX made its second special delivery this year.
America First Multifamily Investors, LP (“Partnership” or “ATAX”) announces that the board of directors of Greystone AF Manager LLC (“Greystone Manager”) has declared a distribution of $0.57 to the Partnership Unitholders Unit (“BUC”) holders announced that it had per BUC. This distribution will consist of a regular quarterly cash distribution of $0.37 per BUC and an additional distribution paid in the form of an additional his BUC equivalent to $0.20 per BUC. Additional Distributions will be paid at the rate of 0.01044 BUC for each outstanding and unpaid BUC of him as of the Record Date.
sauce: ATAX press release
These special distributions were made because ATAX sold many properties at favorable prices.Look at the 10-Qwe can see that the gains on sale totaled $10.6 million in the quarter and $39.7 million in the first nine months.
These are huge amounts compared to the company, with only 22.2 million units outstanding (or BUC as they are called). Another way to look at the impact is to look at the cash available for distribution or CAD per unit. ATAX starts with net profit to get this CAD figure. Note that we do not deduct the sale proceeds when arriving at CAD.
This paints a more problematic situation for the company. After deducting the gain on the sale, ATAX’s Q3 2022 CAD is about flat ($11.7 million minus his $10.6 million). Year-to-date CAD, excluding the gain on sale, is approximately $11 million. There are 22 million units outstanding and we are looking at about 50 cents in CAD. This will have a significant impact on future inventory and distribution.
At ATAX, normalized (excluding all gains from sales) CAD fell significantly. The question is whether we can continue to sell real estate assets and make a profit while income on the mortgage side remains weak. The bigger question is whether they want to. One of ATAX’s advantages over municipal bond funds was the actual physical real estate they owned. The value of these apartments was positively correlated with inflation. This provided a natural hedge that allowed it to outperform municipal bond funds. We believe these sales will decline, which could lead to a significant decline in CAD and distribution over the next year.
ATAX is also interest rate sensitive on both the balance sheet and income statement. On the income statement side, further rate hikes would exacerbate the already tight normalized CAD.
This sensitivity is despite ATAX adding significant hedging.
On the balance sheet side, total capital has consistently declined despite being boosted by large gains on property sales.
This decline has now shifted the capital-to-assets ratio into an unfavorable zone.
The better performance than mortgage REITs and municipal bond funds is due to lower leverage and possibly the crystallization of real estate’s physical value. We believe both of these benefits are coming to an end.
ATAX’s leverage has risen and the rate hike cycle has hit its stock value as well.
Investors who took note of the significant price hike pushed ATAX to a significant premium over tangible equities.
The chart above does not incorporate the book value of Q3 2022 results, which pushes the ratio to 1.35x. If interest rates rise further over time, the value of ATAX’s mortgage income bonds will decline further. This may be offset to some extent by spread compression, but the risk remains high at these levels. Looking at the bilateral calls here, we can see that municipal bond funds are also currently trading at a significant discount to NAV. This is another driving force behind ATAX’s outperformance.
Therefore, we believe ATAX should no longer impose demands to outperform mortgage REITs and municipal bond funds. In fact, given the very large premium and significantly lower CAD over the next year, we lower ATAX’s valuation to a sell rating. Consider shifting perhaps 15-20% lower to neutral.
Please note that this is not financial advice. It may sound like it, but surprisingly, it’s not. Investors are expected to conduct their own due diligence and consult professionals who know their objectives and constraints.