America First Multifamily Q3: Demolishes Mortgage REITs And Muni Bond Funds (ATAX)

Municipal Bond Dollars

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In May of this year, America First Multifamily Investors, LP (NASDAQ:ATAX) is a good alternative to mortgage REITs and municipal bond ETFs. Although the stock does not match Relatively accurate properties, it has a lot of similarities, including the play on real estate loans and the tax-sheltered nature of most of its income. It is an amazing success story.

ATAX outperformed mortgage REITs by a wide margin and Annaly Capital Management Inc. ( NLY ), AGNC Investment Corp. ( AGNC ) and Dynex Capital ( DX ) lost more than 30%.

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Data via YCharts

ATAX was less brutal on the muni bond funds we suggested would lose. Nevertheless, our 4 benchmarks in that space, Nuveen AMT-Free Quality Muni Yield (NEA), Nuveen Quality Muni Yield (NAD), Nuveen AMT-Muni Muni Credit Yield (NVG) and Nuveen Municipal Credit Yield (NJF), fared quite poorly. did Make investors take notice.

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Data via YCharts

What worked?

One of the biggest advantages ATAX has against its mortgage REIT peers is its relative lack of leverage. Low leverage means less volatility in times of stress. Low leverage means less decline in tangible book value, a metric every investor should care about. Over the past 3 years, ATAX’s low leverage has helped this sector somewhat.

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Data via YCharts

After we look at Q3-2022 results, we will get why ATAX is better than muni bond funds.

Q3-2022

Recent press releases from ATAX have brought plenty of good news for the bulls. ATAX has delivered its second special issue this year.

America First Multifamily Investors, LP (the “Partnership” or “ATAX”) announced that the Board of Managers of Greystone AF Manager LLC (“Greystone Manager”) has announced the distribution to holders of Partnership Profitable Unit Certificates (“BUC”) of $0.57. Each BUC. The distribution consists of a regular quarterly cash distribution of $0.37 per BUC and a supplemental distribution payable in the form of additional BUCs equal to $0.20 per BUC. Supplementary Distribution will be paid at the rate of 0.01044 BUCs for each issued and outstanding BUC as of the record date.

Source: ATAX press release

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These special deliveries come as ATAX has sold a lot of its real estate at favorable prices. Looking at the 10-Q, we can see a profit on sales of $10.6 million this quarter and $39.7 million in the first 9 months.

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ATAX Q3-2022 10-Q

These are huge amounts for the company, with only 22.2 million units (or BUCs as they like to call them) outstanding. Another way to examine impact is cash available for distribution or CAD per unit. ATAX starts with net income in deriving this CAD figure. You will notice that they do not deduct the sales profit in arriving at the CAD.

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ATAX Q3-2022 10-Q

This paints a more problematic picture for the company. If you take out sales volume leverage, ATAX will have virtually flat CAD ($11.7 million minus $10.6 million) in Q3-2022. CAD to date will be approximately $11 million excluding gains on sales. With 22 million units outstanding, we are looking at around 50 cents in CAD. This has big implications for stock and distribution in the year ahead.

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overview

ATAX is seeing a steep decline in normalized (excluding all gains in sales) CAD. The question is whether they can continue to sell real estate assets at a profit while their mortgage bond-side returns are weak. The big question is whether they want to. One advantage ATAX has over muni bond funds is the actual physical real estate they own. These apartment values ​​were and still are positively correlated with inflation. It provided a natural hedge, a hedge that allowed it to outperform muni bond funds. We expect these sales to decrease and this will allow for lower CAD and delivery over the next year.

ATAX is interest rate sensitive on both its balance sheet and income statements. On its income statement side, further rate hikes will erode its already tight normalized CAD.

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ATAX Q3-2022 10-Q

This sensitivity is despite ATAX adding significant hedges.

On the balance sheet side, total equity has been steadily declining, albeit boosted by large gains on real estate sales.

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ATAX Q3-2022 10-Q

This decline is now shifting the equity and asset ratio into unfavorable territory.

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judgment

Outperformance against mortgage REITs and muni bond funds is driven by lower leverage and perhaps the crystallization of its physical real estate values. We think both these advantages are coming to an end.

ATAX’s leverage is increasing as the rate hike cycle is also taking a toll on its equity values.

Investors focused on large upsides have pushed ATAX to a large premium to tangible equity.

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Data via YCharts

The chart above excludes book values ​​from Q3-2022 results, pushing the ratio to 1.35X. Further increases in interest rates over the long term will further erode the value of ATAX’s mortgage income bonds. This can be offset to some extent by spread compression, but the risks are high at these levels. A look at our related call here tells us that muni bond funds are now trading at a wide discount to NAV. This is ATAX’s best performance driver.

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Data via YCharts

Therefore, we think it is time to press ATAX’s call to outperform mortgage REITs or muni bond funds. In fact, in light of very low CAD and huge premium in the coming year, we are downgrading ATAX to sell rating on valuation. We’ll look to shift maybe 15-20% lower to neutral.

Please note that this is not financial advice. It may look like it, it may sound like it, but surprisingly, it is not. Investors do their own due diligence and consult with professionals who know their objectives and constraints.

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