GHI - Greystone Housing Impact: Mostly Good For Stable Income

2023-12-29 09:32:28 ET

Summary

• Greystone Housing Impact Investors LP purchases and holds mortgage revenue bonds (MRBs) and government issuer loans (GILs) to generate tax-exempt income.
• GHI uses leverage to boost income and dividend distributions, but this can result in sharp declines during market downturns.
• GHI's dividend distributions are sustainable, with a high payout ratio, and the company's earnings are stable despite changes in interest rates.
• This is a decent income play but don't expect much growth from it since the company distributes virtually all of its gains in the long run.

Greystone Housing Impact Investors LP ( GHI ) is a loan company that purchases and holds a basket of MRBs (mortgage revenue bonds) and GILs (government issuer loans) in order to generate income. Due to the special situation of these bond instruments it holds, the company's earnings and distributions are exempt from federal taxation for the most part.

So what exactly are MRBs and GILs? Local governments (whether it be a state government or a country) will often look at supplies of different types of buildings in their areas and examine to see if there is a need for additional construction of a certain type. For example, a local government might decide that their region needs more apartments, senior housing or commercial buildings such as shopping centers. Since the government can't build these things itself (at least in the US), they have to create these loans with attractive conditions and give them to construction companies in order to incentivize and encourage them to build the necessary types of construction in their area. This is also why these loans are typically exempted from federal taxes because they are meant to fill infrastructural gaps. The company also invests into real estate assets and trades them from time to time, but this is not their "main" business and should be seen more as a side business.

To make things clear, GHI doesn't issue these loans. They are issued by a variety of government agencies. GHI buys them in the market and holds them to generate income for its investors. The company typically pays a dividend distribution yield around 7-10% and its total annual returns also reflect that. The stock's total return since inception is 420% almost all of which came from dividend distributions. Share price has been more or less flat during this period. This is bad if you are looking for share appreciation but good if you are looking for a stable stock that generates a decent amount of sustainable income every year, so it all depends on what you are looking for.

One thing to note about this company is that it uses leverage in order to boost its income as well as dividend distributions. The company's current leverage ratio is 73% and this ratio has been more or less stable in the last few years. This could result in some sharp declines when things are not going great, and investors should be aware of this. One such example is 2020 when this stock was down by almost 50% due to the effects of the COVID pandemic. A lot of mortgage bonds may be backed by the government, but it doesn't make them risk-free, especially when one is leveraged because they can still lose a significant amount of value during black swan events or when interest rates rise too fast.

To be fair, the stock mostly recovered since then (especially in total returns) but it recovered at a slower rate than it dropped (partly due to its usage of leverage) so you must be comfortable with that kind of price action.

When we look at their holdings as of last quarter, 56% of the company's holdings are in mortgage revenue bonds, followed by another 16% in government issuer bonds. Basically, these two are not that much different since they originate from the same place and serve the same goal. The only difference is that governmental issuer bonds tend to be more about multifamily developments, whereas mortgage revenue bonds could be about a variety of different building types. The company owns another 9% in MRBs and GILs which are "taxable" so this portion of the company's portfolio is not exempt from federal taxes. Finally, there are some investments in real estate assets and cash. Keep in mind that this is the distribution of the company's total invested assets, not its net assets. Since the company is leveraged by about 173%, its net assets would total up to 173% which might be confusing to grasp.

Last quarter, the company's book value took a dive because they had an unrealized loss in some of their assets. The net book value dropped from $15.06 per unit (share) to $12.97 as a result of the company's unrealized loss of $2.07 per share. In the long run, the company's book value remains about flattish because it distributes almost all of its income, which gets deducted from its book value. Think of it like a fund that makes distributions out of its NAV.

Currently, the company is trading at a price to book value ratio of 1.30 indicating a 30% premium against its book value. This is slightly above the company's long term average of 1.20 or 20% premium. In 2020 at one point the company traded at 0.60 times its book value but it didn't last for long. Keep in mind that if it wasn't for a recent drop in the company's book value due to unrealized losses, its price to book value would be closer to its long term average of 1.2.

One question that comes to mind is whether the company's dividend distributions are sustainable. GHI dividend payout ratio is close to 100% which may make you think that the dividends are not sustainable but keep in mind that this is by design. The company is acting similar to a fund that distributes virtually all of its gains, so it's not an accident that its payout ratio is so high. Last quarter, the company earned about 39 cents per share and distributed 44 cents per share. The quarter before, it made 85 cents per share and distributed 44 cents per share. All in all, it made $1.89 per share year to date and distributed $1.25 per share, so its distributions seem to be sustainable for the time being even though it might distribute more than it makes during some quarters.

Moving forward, one thing to keep in mind is interest rates. Many people believe that the Fed is done with hiking rates, and we will see lower rates in the future. The company's own interest rate sensitivity analysis shows that its earnings have mostly stabilized and won't suffer much from changes in interest rates. For example, a possible 100 bps increase in interest rates will only cause a 3.8 cent impact on the company's earnings and a 200 bps increase will cause a 7.6 cent impact. This works both ways, though, which means a sharp drop in interest rates will have a small impact on earnings growth. This is good from a predictability and stability perspective, but don't expect too much in terms of earnings growth even if the Fed cuts rates next year.

If you had bought $10k worth of GHI 20 years ago and held until now while reinvesting dividends you would have increased your annual income from $772 (a yield of 7.72%) to $2,894 (a yield of 28.94%) which shows nice income growth even though the company doesn't increase distributions very often. While you wouldn't have beat overall market returns, you'd have grown your income significantly if you are an income oriented investor. Keep in mind that there may be also tax advantages to holding this stock due to the nature of its business, I mentioned above.

Is GHI a buy? I think it's buy for specific type of investors. If you are an income investor looking for stable and predictable income, this stock is definitely a buy. If you are looking for beating overall market returns or dividend growth (without reinvesting) this is probably not the correct stock for you. Whether this stock is a buy or not totally depends on your investment goals, risk tolerance and tax situation.

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