America First Multifamily: Interest Rate Change to Impact 22 (NASDAQ: ATAX)

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America First Multifamily Investors LP (ATAX) is a limited partnership that occupies a rather unique field. We’ve compared it to a low-leverage mortgage REIT before, and it also has some characteristics of an equity REIT. To give you a little more color on this, we can look at what he has. ATAX has approximately $1.3 billion in total assets, which include the following investments:

ATAX Asset Profile

ATAX asset base (additional ATAX)

Mortgage revenue bonds and loans to functionally equivalent government issuers account for almost 71% of the total according to the latest update. These generate non-taxable income. These are non-recourse bonds issued by public housing bodies to finance low-income apartments. They back onto the multi-family apartment buildings and, in the event of default, ATAX would take possession of the underlying apartment complex. ATAX also has properties that it owns directly, including affordable apartments, student residences, and a few others under development.

The story so far

We had played ATAX on the long side using a defensive covered call strategy and it paid off as the LP increased its distribution, twice. Two aspects of his fundamentals quickly improved. The first is that ATAX has started to collect its debts in a timely manner and provisions for credit losses have decreased. On the owned real estate side, of course, the huge increase in rents and asset values ​​has reassured investors of the overall underlying value of this company. While both have merit, we want to focus on something else today. Interest rate risk.

Q3-2021

ATAX had a strong Q3-2021 with cash available for distribution, or CAD, at 22 cents.

ATAX CAD

ATAX CAD (ATAX 10-Q)

You can see this in the difference between the 9 month and 3 month run rates. We expect Q4-2021 to continue to show strength and the reported special cast is testament to that.

On December 14, 2021, America First Multifamily Investors, LP (the “Partnership” or “ATAX”) announced that the Board of Directors of Greystone AF Manager LLC (“Greystone Manager”) had declared a cash distribution to the certificate of Partnership Beneficial Unit (“BUC” holders of $0.19 per BUC. The distribution consists of a quarterly distribution of $0.11 per BUC plus a one-time special distribution of $0.08 per BUC. The distribution is payable on the 31 January 2022 to BUC holders of record at the close of business on December 31, 2021. BUCs will trade ex-distribution from December 30, 2021.

Source: ATAX

After Q1-2022

As interest rates are set to rise, note the impact this will have on the company’s cash flow.

ATAX CAD Changes

ATAX CAD Modifications (ATAX 10-Q)

We’ve highlighted the 150 and 200 basis point changes and they represent modestly large moves to total cash flow for the year. These changes also include the company’s hedges in place and the impact they would have. In other words, the longer term impact (after 12 months) is likely to be greater. One difficult aspect to visualize is how this will all play out in reality. The calculations above assume a parallel change in interest rates, but we all know the reality is very different. Short-term and long-term interest rates move differently, which will also affect results.

Beyond cash flows, we would draw attention to asset values. As noted above, 71% of assets are in low yield bonds.

Returns on ATAX assets

ATAX Asset Returns (ATAX 10-Q)

There is significant duration risk here and some credit risk, as mortgage rates have recently shown wider spreads over Treasuries.

Evaluation and verdict

Despite the depreciation of its real estate assets, ATAX’s price relative to tangible book value is an excellent valuation measure. This is because physical real estate is a very small part of the total and revenue bonds are fair valued quarterly. In other words, the fair value of equity on the balance sheet is surprisingly close to the company’s liquidation value. At 1.12 times tangible book value, ATAX remains in the middle of the range of what we’ve seen.

ATAX price at tangible book value
Data by Y-Charts

This is of course the Q3-2021 numbers and a real-time measurement is likely to bring that number closer to 1.20X to 1.25X as revenue bonds are revised lower. This puts ATAX on a slightly more expensive base relative to where we think investors should buy this stock. Also of note here is the strong outperformance of ATAX against some similar high yield stocks over the past 6 months.

ATAX vs peers in percentage change in LP price
Data by Y-Charts

In addition to those featured, many preferred stocks, exchange-traded funds, and high-yield-focused closed-end funds were crushed. ATAX still has room to drop and catch up with these as investors factor in real changes in earnings and book values. At 1.20X-1.25X our estimated price to tangible book value, this falls very close to our sell zone. We consider it neutral for the moment.

Please note that this is not financial advice. It may seem, seem, but surprisingly, it is not. Investors are required to do their own due diligence and consult a professional who knows their objectives and constraints.


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