ATAX America First Multifamily Investors

Chad Daffer Chief Executive Officer
Ken Rogozinski Chief Investment Officer
Jesse Coury Chief Financial Officer
Jason Stewart JonesTrading
Patrick Marsh Alex Brown
John Barn Private Investor
Ron Lane ValueForum
Lawrence Dobrin Oppenheimer
Jim Merritt Private Investor
Call transcript

Hello, everyone. My name is Jeff and I will be your conference operator today. At this time, I would like to welcome everyone to America First Multifamily Investors L.P.'s, NASDAQ ticker symbol ATAX, First Quarter of 2020 Earnings Conference Call.

During the presentation, all participants will be in listen-only mode. After management presents its overview of Q1 2020, you will be invited to participate in a question-and-answer session.

As a remainder, this conference call is being recoded. On behalf of ATAX and its management team, thank you and welcome to ATAX' First Quarter of 2020 Earnings Conference Call.

During this conference call, comments made regarding ATAX 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, including the impact of the COVID-19 pandemic could cause ATAX' 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 ATAX' business, please review the periodic reports and other documents filed from time to time by ATAX with the Securities and Exchange Commission. External projections and beliefs upon which ATAX bases its 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 ATAX 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 ATAX.

I would now like to turn the call over to Chad Daffer, Chief Executive Officer of ATAX.

Chad Daffer

Thank you, Jeff. Thank you all for joining the first quarter ATAX earnings call. Today on the call with me is Ken Rogozinski, ATAX' Chief Investment Officer. Ken will share his views on the market and Jesse Coury, ATAX' Chief Financial Officer will report on the first quarter financial results, then we'll look forward to taking your questions at the end of the call.

In March of 2020 COVID-19 manifested into a financial crisis, with sheltering in place orders shutting down the US economy overnight, putting over 30 million Americans out of work and finally for unemployment benefits, fracturing the debt markets while causing historical volatility in the equity markets, with the depth and duration of the pandemic and its damage to our economy still unknown. At this time of uncertainty, I'd like to share with you a few things that I do know.

Our team is healthy, safe and thriving while working from home.

Our partners are open for business. ATAX has access to capital markets for both debt and equity as needed.

As of 3/31, all mortgage revenue bonds are current on debt service. The partnership has no requests at this time for forbearance. All new construction sites are open with no supply chain disruptions for building materials.

Our team is committed to navigating the uncertain times in the best interest of our unit holders.

At this time, I'd like to turn it over to Ken Rogozinski, ATAX' Chief Investment Officer.

Ken Rogozinski

Thank you, Chad. I'm pleased to be participating today albeit from my dining room here at home.

The first quarter of 2020 was a tale of two markets for municipal bonds. January and February continued the positive momentum from 2019, with fund and inflows remaining positive and interest rates staying near historic lows.

As the economic impact of the COVID-19 pandemic started to hit the US in March the broader financial markets began to turn. Municipal bonds were included in that turn.

For the two weeks ended March 26 of 2020, investors withdrew almost $26 billion from municipal bond mutual funds according to Refinitiv Lipper data, an unprecedented level of redemption activity. There was large scale mutual fund redemption request from shareholders triggered a short-term liquidity crunch in the municipal bond market. Mutual fund sponsors sold what they could largely variable rate demand bonds supported by liquidity facilities, which caused a spike in short-term muni bond rates to levels not seen since the financial crisis in 2008.

In addition, the lack of buyers for longer term bonds in the face of this wave of mutual fund selling caused high grade municipal bond yields to gap almost 200 basis points during a nine trading day period.

While we saw significant daily price volatility in our longer duration investments, due to this unprecedented move higher run rates, we were able to meet all obligations related to our leverage facilities.

The new programs rolled out by the Federal Reserve Bank restored a level of liquidity to the muni bond marketplace, and by the beginning of April, a sense of equilibrium had returned to the marketplace with both short-term and longer term interest rates reverting to more normalized levels, with approximately 75% of that gap higher and long-term high grade bond yields being retraced. That level of normalization was evidenced by our successful closing of the new bond financing facility with Mizuho Capital Markets at the end of April.

Going forward, we'll continue to monitor our existing investment portfolio for the potential impact of changes in the economy caused by the COVID-19 pandemic.

While we have not received any forbearance requests today from our MRB borrowers, we are developing plans for ways to potentially assist sponsors who are experiencing hardship at their projects.

We will also look to strategically work with our strongest sponsors on new investment opportunities where traditional sources of capital may not currently be available.

With that, I'll turn things over to Jesse Coury, our CFO to discuss the financial data for the first quarter of 2020.

Jesse Coury

Thank you, Ken. I'll start by highlighting some key metrics from ATAX' balance sheet.

As of March 31, 2020, ATAX reported approximately 978 million in total assets, which is down slightly from approximately 1.03 billion as of December 31, 2019, but consistent with total assets reported as of December 31, 2018.

As of March 31, 2020, ATAX' mortgage revenue bonds totaled approximately 774 million or 78% of total assets. This percentage is up from approximately 75% as of December 31, 2019. ATAX currently own 75 mortgage revenue bonds across 13 states ranging from California and Washington on the west coast to North Carolina and South Carolina on the East Coast.

It holds significant amounts of mortgage revenue bonds related to properties located in Texas, California and South Carolina. On a fair value basis, approximately 44% of our mortgage revenue bonds are related to properties in Texas, California and South Carolina representing approximately 18% and 17% respectively.

ATAX works primarily with developers to acquire mortgage revenue bonds and the current portfolio consists of transactions with 18 different developers.

As Chad mentioned previously, as of March 31, 2020, all of ATAX' mortgage revenue bonds were current on contractual debt service payments.

At March 31, we own two MF properties, consisting of 859 rental units, and a total net carrying value of approximately $61 million. Both MF properties serve primarily college students, the Suite on Paseo in San Diego, California being adjacent to San Diego State University and the 50-50 in Lincoln, Nebraska being adjacent to the University of Nebraska, Lincoln.

As of March 31, we had investments and unconsolidated entities, commonly referred to as our Vantage equity investments related to 10 multifamily market rate projects. ATAX' carrying value of these investments was approximately $98.6 million at March 31. These projects represent in the aggregate approximately 2,900 rental units.

Of the 10 projects five are located in Texas, two in Nebraska, two in Tennessee and one in South Carolina. This list includes ATAX' newest investment that closed in January 2020 for the construction of Vantage at West Over Hills, a 288 unit project in San Antonio, Texas. This project represents ATAX' fifteenth Vantage investment since 2015.

During the first quarter of 2020, ATAX made direct equity investments in three Vantage projects totaling approximately $10.3 million.

For each Vantage project ATAX commits to fund a certain amount of equity during the construction phase.

As of March 31, 2020, ATAX had remaining equity funding commitments totaling approximately $2.5 million.

As a reminder, to date, five of ATAX' Vantage investments have been sold or redeemed, resulting in total gains on sale and contingent interest of approximately $27 million, providing the proof of concept of the Vantage investment strategy initiated in 2015.

In January 2020, ATAX sold three Public Housing Capital Fund Trusts' Certificates, commonly referred to as PHC Certificates in our filings. The PHC Certificates were rated tax exempt investments acquired by ATAX in 2012. The PHC Certificates were sold for a par value, which approximated $43.3 million. Upon sale, the debt financing facilities associated with the PHC Certificate were collapsed and paid in full.

Switching to the liability side of ATAX' balance sheet, ATAX' debt financing associated with its mortgage revenue bonds totaled of approximately $503 million as of March 31. Of this amount, approximately 71% have fixed interest rates and 29% have variable interest rates.

For comparison, as of December 31, 2015, ATAX' debt financing was only 32% fixed versus 68% variable, so the ratio has almost flipped, insulating ATAX from potentially rising interest rates.

There are few subsequent events I would like to point out related to debt financing facilities. In April 2020, ATAX terminated all its debt financing arrangements with Deutsche Bank, totaling approximately $51.8 million. These debt financing had fixed interest rates ranging from 4% to 4.5%. In conjunction with this termination ATAX terminated its master trust agreement with Deutsche Bank and is no longer subject to the related financial and non-financial covenants, giving ATAX more flexibility in managing its liquidity and overall debt portfolio.

Concurrently with the Deutsche Bank terminations, and as Ken previously mentioned, ATAX entered into five new Tender Option Bond or TOB trust financing arrangements with Mizuho Capital Markets. These TOB trusts have initial principal totaling $55.4 million and variable interest rates that at closing were approximately 2.1% or approximately 190 to 240 basis points lower than the previous Deutsche Bank debt financings.

These replacement TOB trust provided some additional liquidity to ATAX and offer a lower cost of leverage. The ability of ATAX to close these transactions in the face of current market uncertainty due to COVID-19 is a strong indicator of ATAX' ability to access capital markets.

During the first quarter of 2020, ATAX refinanced both of its mortgages associated with the 50-50 MF property, with principal totaling approximately $26.7 million. The mortgage loan which has the majority of the balance had its maturity date extended for seven years to 2027 and the interest rate was lowered from a variable rate of 4.75% to a fixed rate of 4.35%.

The TEBS loan maturity was extended five years to 2025, and the fixed interest rate was reduced from 4.65% to 4.4%. Both refinancing are positive events for ATAX, and that they provide long-term fixed rate financing at a lower cost of debt than in past periods.

We regularly monitor our exposure to potential increases in interest rates through our interest rate sensitivity analysis, which we report quarterly and is included on Page 53 of our Q1 2020 Form 10-Q. The interest rate sensitivity table shows the impact to ATAX' net interest income, given various scenarios of changes in market interest rates. These scenarios assume that there is an immediate rise in interest rates and that ATAX does nothing in response for 12 months.

The analysis shows that an immediate 200 basis point increase in rates that is sustained for a 12 month period will result in a decrease of approximately $3.1 million in ATAX' net interest income, and cash available for distribution, commonly referred to as CAD. This decrease is approximately $0.51 per beneficial unit certificate or BUC.

For the first quarter of 2020, ATAX reported total revenues of approximately $13.7 million, net income per beneficial unit certificate or BUC, basic and diluted, of $0.04 per BUC and cash available for distribution of $0.05 per BUC.

Lastly, we regularly provide our net book value per beneficial unit certificate, which as of March 31, was $5.38 per BUC.

This is down approximately 4% from our net book value per BUC of $5.61 at December 31, 2019 are $5.38 net book value per BUC as of March 31, was slightly above the closing market price of our BUCs on the NASDAQ on March 31, which was $5.24 per BUC.

With that, Chad, Ken and I are happy to take questions from the audience.

A -Chad Daffer

Operator, do we have any questions from the callers at this time?


As of the moment we don't have any questions. [Operator Instructions] We have one question from the line of Jason Stewart.

Your line is now open.

Jason Stewart

Great, thank you. And thanks for taking the question. Glad to hear everybody's doing well and nice job managing through a difficult environment. My question really is big picture refers to the fact that there's not a lot of historical comparison for what we're going through today. But if you could propose some color or benchmark for us to follow in the evolution of credit in the space knowing that we're at the beginning of what could be a very short or long cycle and perhaps nobody knows.

Chad Daffer

No, Jason, thank you for joining us.

I think you're accurate in your statement that there really is nothing that we've experienced in our – this career managing the portfolios and the partnership.

I think we were pretty much in line with what other folks have seen in the commercial real estate market for the first quarter.

I think our press release here the other day evidenced 94% collections.

I think if you would look at the other types of commercial mortgage real estate filings under our REIT the affordable sector is outperforming, I think for the most part, other commercial real estate sectors.

I think as I mentioned early on the depth and duration of the effects of COVID are still to be determined. And I think the uncertainty has created the volatility in the marketplace. And our job here is to monitor the effects of the portfolio, share that with the investors, so we're totally transparent before we disclose and then give guidance on how we're going to manage the partnership going forward.

I know of no other comp historically of this type of magnitude to try and figure out what if any of our losses and collections over the next two, three, four or five months are going to happen? I think we all know and can see what the unemployment numbers are, but the thing that you can't define yet is the collateral damages to the small businesses and job losses.

I think that will really start to be evidenced here at the end of July when some of the PPP money runs out and people start making hard decisions about returning to work and opening up these businesses.

So I wish I could give you better guidance if I had it and I would do that, but at this time, I think it's to be determined.

Jason Stewart

I appreciate that.

I think that's fair. And then on the mortgage revenue bond business, I think it's been fairly well documented. There's been some pretty substantial asset yield compression. I'm wondering if as we went through the market disruption in March, if it's changed that and if you could give us sort of an update on what pro forma ROEs look like there, asset yields have followed, funding costs down or if there's been a little bit of that benefit there.

Chad Daffer

We've had a steepening of the curve, obviously, which gives us a little bit of advantage to capture the net spread. But the agency market and the CRA market has not really expanded, credit spreads have not expanded to that amount where it's noticeable. We had a disruption in the second week of March, but things kind of came back with the infusion of capital from the Fed, the markets kind of stabilized and came back quicker than I think a lot of people would have anticipated that were participating in the marketplace.

So right now, I think the market on some form of non-rated private placement is plus or minus to a four to four and a quarter.

I think on agency financing you would see execution somewhere in the high threes. And CRA execution and the affordable housing space is on a project-by-project basis on how bad that bank needs to put the position on.

So we kind of snapped out, but I think we're kind of back to pre-COVID type of early March type of levels Jason. That's the read on the market from my chair.

Jason Stewart

Okay, that's helpful. I appreciate that. And then one more for me on the Vantage business, has this turmoil changed your view of putting shovels into the ground, extended timelines, lease ups, exits, strategies, anything more than the – anymore color you could provide there on the Vantage projects?

Chad Daffer

No, it definitely has. We've been fortunate enough to have a great partner and Vantage team. They understand that it's tough in these environments for us to really underwrite. We can underwrite everything, but time and the time that these folks will come back to the marketplace will have recovery of the consumer, stabilization of these new assets and/or lease up for the ones that we currently are in lease up is an unknown in order for us to add the risk to the portfolio with additional positions. We need to make sure that we have a clear understanding of what we have today and then look forward to adding it to it at some point in the near future.

So through the first and second quarter we've put a pause button on new Vantage originations after we closed on West Over Hills here in January. The pipeline is strong, the businesses fundamentals has not changed.

As I shared with you, we've had no supply chain disruptions or any type of closing down of sites, so we're ready to get back to work and pursue some of the opportunities that are on the table. But I think until anybody can really have a clear picture of velocity of lease up and rental growth and being able to target and have reasonable assumptions on our yield expectations, the Vantage business is on a near term hold. We stand ready to go here with a great pipeline soon as we get some clarity in the marketplace.

Jason Stewart

Okay. Thank you for taking the questions. I appreciate you guys time. Thanks.

Chad Daffer

Jason, thank you.


Thank you. And next question is from the line of Patrick Marsh. Sir, your line is now open.

Patrick Marsh

Thanks. Hey, Chad. How are you doing?

Chad Daffer

Patrick how are you today.

Patrick Marsh

Good, good. Hey, one question I had is, I mean, I joined a little bit late because a lot of people were trying to join, did you touch on any of your – the Freddie Mac and sort of the exposure levels and in general, sort of how the partnership looks at it sort of risks and the lows of some of the credit paper you have.

Chad Daffer

No, that's a great question Patrick. Ken, you did mention a little bit about forbearance? Do you want to answer Patrick's question please?

Ken Rogozinski

Sure, happy to do that. Patrick, nice to hear from you again, on the forbearance front with particular regard to Freddie Mac and just to give everyone the context here, out of our MRB portfolio, roughly about 72% of them are financed through the Freddie Mac TEBS facilities. We got direction from Freddie Mac last week that from their perspective, they believe that any MRBs that are securitized in TEBS transactions are subject to the forbearance guidelines that they've been given by their regulator the FHFA. And what those guidelines are, is that a project sponsor can contact Freddie Mac and their mortgage servicer and through the demonstration of hardship request forbearance on their underlying loan.

And the way that that forbearance program works is that project sponsors are open to receiving three months’ worth of forbearance on the principal interest due on their loan, which would then need to be repaid in full over a 12 month time horizon after the end of that forbearance period.

So that's the framework that Freddie has accepted with the FHFA or MRBs that are in the Freddie type structures are subject to that.

And so we'll be working with our servicer on that portfolio in order to monitor and evaluate that process.

As Chad had mentioned earlier, to date, both we or our servicer have not received any forbearance requests from any MRB sponsor. We can't project that into the future. But at least as of where we sit today there have been no requests of that type.

Patrick Marsh

Thanks Ken.


Next question is from the line of John Barn. Sir, your line is now open.

John Barn

Thank you.

As a long-term unit holder I appreciate you guys navigating through this difficult period. I guess my question is right now, we see about a $0.07 fall off from distributions declared compared to the CAD per BUC right now. It appears that we need a couple of – for lack of a better expression, easily use nomenclature property sales to generate the so called excess add to generate the necessary CAD to cover the $0.50 distribution.

As we're looking right now and as we forecast forward, is there any way to ascertain in 2020, as we stand right now, if the CAD per BUC is going to be adequate to cover the distribution of $0.125 per quarter.

Chad Daffer

John, thank you, for your support over the years.

I think if you look back at each one of our quarters over the past five to 10 years, there's been quarters by which we didn't – paid out $0.125 and didn't earn it. In 2015, you and the rest of the investors approved ATAX to invest hard equity in the new construction and new developments. Obviously, that asset class we construct stabilize and exit.

Sometimes they take a little bit longer than other projects for a number of different reasons. But you're exactly right in order for ATAX to pay its 50 – to not to pay, I misspoke, I apologize, to earn its $0.50 distribution and this is true for the last couple years, we will need to have a few asset sales in order to work in cooperation with our mortgage revenue book earnings in order to do that.

If you take a look in our 2010 – excuse me, 2020 10-K, you'll see that the Vantage positions are all called out there, the date that they are originated at a very high level it takes about three years from the time we originate the position and the Vantage book, construct stabilize and exit.

Now that changes plus or minus months for whatever reason, but you can see that some of the assets are being – there's 10 assets that are currently in the portfolio with the addition of West Over Hills in January. Of those 10, there's a couple that are held for sale, a couple of – few are in stabilization and a couple are in under construction.

And so as the time comes where it's – the opportunity for us to exit those position, capture some gain on sale and pat our earnings with those sales, we're going to move in that direction. Obviously, with COVID and buyers having challenges with accessing debt and equity to be determined on when those dates will happen. But that has been our plan in the past and will continue to be our plan going forward.

John Barn

One of the nice features you have in your supplemental financial disclosures is kind of a running total of the accumulated CAD compared to what is actually paid out. And I've always struggled to ascertain on an operational basis strictly from your financing and your mortgage revenue bonds. How CAD per BUC compares distributions and it appears that it does have to be supplemented by, and I'm going to call it for lack of a better expression, property sales to supplement that.

So I guess the question, it looks like if I go back to the prior exhibit, I may have to some carryover, so to speak, so as we go to 2020 in this especially difficult times and I appreciate how hard you guys are working. To what extent that we look at a carryover if you would from that, or is it all afresh right now? And I mean, the board's got to come up rather, in a difficult position, I guess in June, for the next declaration of the dividend to which you guys are justifiably proud. I mean, how much of that goes into the mix in the declaration of the dividends going forward. I understand this is kind of a hard question to answer, but it needs time. I appreciate it. Go ahead.

Chad Daffer

No, I think that you have two questions there.

I think, sir.

One of them is how can we talk and we have a better picture of when the Vantage deals will be made available for sale. We've not given guidance in the past. And we're not going to do that today. But I think you can take – you can make your own assumptions and reviewing the financial data that's in our 10-Q. The greater question that I think everyone is waiting for? The answer to is and we appreciate it is, as we've discussed in the past our distributions to our BUC holders are made – determined by the ATAX general partner based on the cash available for the distribution. The general bar in working with the manager will evaluate the factors that go in to the BUC holder distributions. That is consistent with our long-term interest of the BUC holders surely [ph]. Right now we're evaluating the effects of COVID on your investment portfolios and how – the negative impact to our liquidity and cash.

And sometime in the next weeks, we're going to give guidance to the marketplace on what we're going to do with the distributions for 2000 – for Q2 2020 and beyond.

John Barn

Fair enough, I think you guys talked about 94% effective occupancy and you're on the apartments or rather units that were occupied. Has there been any variance that you've had since that? The information was given to us regarding 94%, is that still holding relatively where it is right now or?

Chad Daffer

We made that information available to our investors on Monday. That 94% was collections for the month of April. We're currently monitoring the month of May. And that'll be a big part of our decisions going forward on the effects of how we manage the cash for the partnership. It's a little premature for us to give guidance on where May is going to come in.

John Barn

Fair enough. These are extraordinary times to be sure.

You guys are derivative, but obviously, if occupancy falls off there's issues to be discussed, and we appreciate your hard work and keep at it.

So we will get through this collectively. Maybe some more pain too indoor, but maybe as Churchill said this is the end of the beginning, so good luck and as a long-term unit holder appreciate all your hard work. Thank you.

Chad Daffer

Thank you so much, sir. Please call anytime with any additional questions you might have.


[Operator Instructions] Next question is from the line of Ron Lane. Sir, your line is now open.

Ron Lane

Hey, Chad and everyone else. We're also long-term holders about seven years. I appreciate all the hard work you're doing. And you've already addressed most of the questions we have.

You're not scheduled to go ex-dividend until I believe the end of June to the end of July payment.

Chad Daffer

I think our declaration date is the second or third week in June and we'll hopefully have some guidance to the marketplace prior to that Ron.

Ron Lane

Okay, fair enough. I know in some past years, not recently, but I think three or four years ago, there's been some return of capital included – embedded in the distribution. But going from $0.05 to $0.125 is a real stretch. But would you be inclined to add some return of capital into the distribution for July payment?

Chad Daffer

The July payment, as I shared with you, that decision is yet to be determined. And we'll give guidance here before we declare our second quarter distribution in June. Historically, our quarters have been lumpy. Since 2015 we have earned our distribution.

And so the state that – I just want to make sure that we're clear about that, but there hasn't been no annual return of capital since 2015, Ron, but your question is the right one. And we're looking forward to giving you guidance here in the weeks to come.

Ron Lane

Okay, keep up the good work. One question, Chad.

Chad Daffer

Yes, Sir.

Ron Lane

North Carolina's real well, we used to live in Charlotte, where is your property in there? I saw your old properties one time in Gainesville in Daytona Beach.

You've been back in '14 or '15. Where is your property in South Carolina?

Chad Daffer

Right now we have two projects in what I call the Atlantic coast area, and that's in Murfreesboro, Tennessee, and in Powdersville, South Carolina. They're currently – just completing construction or lease up and both are excellent sites.

We have pretty high expectations for both of those assets given the strength of that market.

Ron Lane

I know Murfreesboro. That's the home of a Middle Tennessee State.

Okay, we'll take a look at that. Thanks. Keep up the good work. Appreciate it.

Chad Daffer

Thank you for your support Ron.

Ron Lane

My pleasure.


Thank you.

Next question is from the line of Lawrence Dobrin. Sir, your line is now open.

Lawrence Dobrin

Thank you. Hi, Chad.

Chad Daffer

Good morning, Lawrence.

Lawrence Dobrin

My name is Lawrence from Oppenheimer.

Chad Daffer

Yes, sir.

Lawrence Dobrin

Just one question I look – I was eagerly waiting your report on Monday, looked at the numbers and looking at where the fall off came. I saw one line item that said contingent interest income. Can you – which caught my eye was 3 million and one to 12 sales. Can you tell me what that is? And if that's a one off or is that a recurring item?

Chad Daffer

I'm going to let Jesse, our CFO answer that question for you, Lawrence.

Jesse Coury

Hi, Lawrence. Yeah.

On the income statement, the $3 million of contingent interest for the three months ended March 31 of 2019 is related to a transactional event. It was the redemption of a property loan that we had with Vantage at Brooks, a Texas property that we had loaned money to, and we receive some excess proceeds on the redemption of that loan.

So that's very similar in nature to the gains on sale that would be recognized on the redemption of our equity investments in other Vantage projects.

Lawrence Dobrin

So that was a one off event or maybe it happens.

Jesse Coury

It was a transactional event.

Lawrence Dobrin

Okay. That does lead me to one other question. There were – there was a mention of a – I guess it was a – either reverse – I know reversal of a capital gain realized in 2019 and that was reversed for this year. Could you speak to that, please?

Jesse Coury


So our long standing policy regarding our cash available for distributions is that in our CAD number we do not recognize impairments of securities. In 2017 and 2018, we recorded for GAAP purposes impairments to our PHC Certificates, a profit of approximately $1.9 million. But we did not recognize those in CAD as we take the time for the investment to really run its course to potentially recover the value before ultimate sale.

As I mentioned previously, we sold the PHCs Certificates in Q1 of 2020 and recognized for GAAP purposes a gain of $1.4 million.

So we recovered 1.4 million of the previous 1.9 million in impairments.

So on a net impact to CAD it's approximately negative $500,000 adjustment.

Lawrence Dobrin

Makes sense, if I'm asking – if that was a question that was covered at the beginning, I was also caught online trying to get on. That's all I have. I also want to thank you for all your hard work and look forward to speaking with you many, many more times. Thanks.

Chad Daffer

You as well, sir, thank you.


[Operator Instructions] We have another question from Jim Merritt.

Your line is now open.

Jim Merritt

Hi, guys. I got a question. I'm a – I'm here locally here in Omaha and a long-term shareholder. And how come we don't have annual meetings and send out annual reports?

Chad Daffer

The short answer is that under the partnership structure that we've historically not done that. That said, if you're local here and have an opportunity to come meet with the management team and ask questions directly, we would embrace the opportunity to meet you and have a chance to come see us.

Jim Merritt

Okay, I appreciate that. I look forward to doing that once this virus passes.

Chad Daffer

Understood, understood. Thank you.


We have another question from the line of John Barn. Sir, your line is open.

John Barn

Thank you. Hi, guys. I'm in long-term Berkshire Hathaway shareholders.

So next time I'm in Omaha, I'll stop by. I know there was no shareholder meeting this year. But I understand the strictures. I hammered you on the downside.

Let's talk about the upside.

Let's assume that we have a vaccine here for COVID pretty soon and things start to turn back in our favor pretty rapidly. If interest rates start to rise are you guys in a good shape to capture the rise in interest rates relative to your mortgage revenue bonds in as much as you pretty much fixed your long-term cost of capital? How about that?

Chad Daffer

No, I think the question, I just want to make sure that I understand the question sir.

I think you were asking about a rising interest rate environment. What we'll do that to our leverage returns in our MRB book, and what would that do that to returns in our in our Vantage book, is that the accurate question?

John Barn

Yeah, fair enough. I'm trying to figure out you seem to fix your cost of capital right now on the lower side and I want to know if they if the economy start – overall, the economy starts to return back to normalcy and you see a gradual uptrend in interest rate, how late affect your book of business and maybe CAD and what's of interest to us as unit holders? Go ahead.

Chad Daffer

I'm going to take the first question on the mortgage book first.

Our mortgage book is nothing more than a net spread business.

And so as interest rates rise or decrease, we achieve for a leverage return on a net spread basis.

And so, historically, the last couple of three years with the flat yield curve, that's been a challenge. What positive thing if anything has come out of the yield curve here in the last 30 days is some steepening in the yield curve while keeping the short end of the curve very low.

So in the mortgage book and the opportunity to originate new positions at a greater mix spread, I would I would embrace a little bit higher rates on the long end.

I think our – in this rate environment our deals would still support slightly higher debt costs. And we would hope we have an opportunity to achieve greater net spread.

On our Vantage book, the Vantage book the rates are so low, I'm not sure that our cost of capital on our construction loans would be negatively impacted hundred basis points plus or minus. The one thing that I would be concerned about is in the higher interest rate environment the equity requirement and the all-in returns from the buy side when we look to exit the position, higher interest rate cost will erode the returns in the event that we can't achieve the highest and best price available at the time of exit.

So it's kind of a little bit of a mix bag, but I personally think we're going to see a long [indiscernible] environment for quite some time.

If you look at the other sovereign debt around the world, most all of it's for 10 years and then has negative returns. And until those types of things correct themselves, I don't see the United States having any type of real inflationary interest rate environment for the many months, quarters, years to come. That's my own opinion. But I hope – like to answer the question sir, I'm not sure I clearly understood. I want to make sure I answered your question.

John Barn

It's kind of a hazy matter, if I would editorialize a little bit. The fact that the US can finance one year's worth of debt at 1% or less is extraordinary. And the fact that foreigners hold 50% of our debt is also extraordinary. I guess they would say that monetary theory works pretty well, until it doesn't. And we never quite know when things turn around interest rate wise, but we are extraordinary times. I'd agree with you in short-term rates are going to stay rather low. But we've got about 25 trillion to 30 trillion in debt to refinance. And at some point, somebody somewhere is going to wake up, but in the meantime, my advice would be just to secure your short-term rates, your cost of capital, and then let's let long-term interest rates gravitate where they are.

You guys have done extraordinary work.

As a unit holder we really can't know, in your 85 various mortgage revenue bonds, what's going on? So we rely upon you to monitor it day to day, but the fact you're able to maintain the dividend distribution, if it's caught, so it's caught, let's make it work on a long-term basis and we stay your long-term shareholders.

So thank you very much.

Chad Daffer

Sir, I appreciate that guidance and I look forward to having a more detailed discussion with you on that topic offline at some point in the future.


[Operator Instructions] We don't have any question from the phone. Please continue.

Chad Daffer

Well, thank you very much, folks for joining the call.

As we've mentioned, our world has changed and we will turn towards that. The partnership has been in existence for over 30 years. And we look forward to the next 30 with your support.

If you have any questions, please feel free to call us direct. In these times, over communicating and being transparent, so you folks understand the direction of the partnership is paramount to the management team. Thank you for your time and your support.


Thank you. And that concludes today's conference. Thank you everyone for participating.

You may now disconnect.