Summary
- Greystone Housing Impact had a fantastic 2022.
- Cash available for distributions increased tremendously and were the highest in the company's history.
- That will change in 2023.
Everyone loves a big distribution. Even the most philanthropic amongst us hates paying taxes. So it's no surprise that Greystone Housing Impact ( GHI ) is very popular. The combination of a massive distribution and the nature of that distribution being predominantly tax exempt (60%-80% on average) has created an unmatched appeal.
As good as that sounds GHI did one better. Well more than just "one" better. They declared several special distributions. They did an extra one for 2021 . There was the one in September 2022 . The most recent one in December 2022 . So the message here has been "here take these extra dollars which are burning a hole in the corporations' pockets." Who wouldn't love that?
While the base story has been excellent, we're here to bring attention to the fact that all is not exactly what it seems. We will do this by going over the most recent earnings report .
Q4-2022 Results and Our Outlook
On first glance, the annual numbers looked fantastic. Net income was up over 75% and net income per BUC (Beneficial Unit Certificates) was up over 70%.
There was a limited amount of dilution that accounted for the difference in the percentage gain between the two numbers. Notably here, the $2.62 per BUC covered the distributions (including special distributions) paid in the year, by a huge margin. The total payout ratio was under 70%. That's a rare treat from what was essentially a 9.6% yield when you go off the current price.
But that's the brochure. The numbers we want to look at is what the base business produces. The base business here for GHI is very similar to that of a mortgage REIT. It borrows short and lends long. Most of these assets are tax exempt bonds and a very small percentage comes from physical real estate ownership (11% below). You can find these in two highlighted portions.
Two caveats here. The first is that this is one quarter old (we did not see the most recent report on the site yet). But the numbers are very close to what you can calculate off the balance sheet today (we have a picture lower down in the article). The second is that this is based on GAAP. Under GAAP physical real estate is the only thing on GHI's balance sheet that's understated, thanks to depreciation. But even accounting for that, it's clear that this segment is a very small part of the overall assets. Now this small part does not produce a lot of revenues or earnings. GHI though, was able to tap this for some nice gains by selling a few of these.
Those are huge numbers in context of the total income. If you exclude those gain amounts, net income for GHI drops to a shade under $23 million for 2022. That works out to under $1.00 a BUC. This is well below even the regular distribution run-rate. So you can start to see how that might become a problem in the medium term.
But those are not all of GHI's issues going into 2023. While the annual numbers were close to a $1.00 per BUC, those don't give the full impact of what is the current run-rate is. For that you have to zoom into the Q4-2022 results. Q4-2022, which was devoid of any asset sale gains produced just $0.09 of cash available for distribution. A reminder here that the regular quarterly distribution is more than 4X that.
Why the big drop? Well it comes from two sides. The first from liquidating physical real estate, you produce less revenues and less income.
The second and bigger mover is the change in interest rates. Interest expense has more than doubled year over year.
This more than offset the higher interest income from variable loans.
Based on all the information we have and knowing the lag with which this moves up relative to Federal Reserve changes, we think this number will definitely go higher in 2023. GHI does have some good hedges in place but they're only designed to blunt the impact, not negate it completely. They have had them in place since the middle of 2022 and you can see that it did not stop cash available for distribution from collapsing.
As we move into 2023, the first quarter will look decent. The reason is that there were some more asset sales in January 2023.
That will create another nice gain.
In January 2023, Vantage at Stone Creek and Vantage at Coventry, at the direction of the respective managing members, sold substantially all their assets to an unrelated third party and ceased operations. The Partnership received net cash of approximately $27.7 million, inclusive of the return of its contributed equity. The Partnership will recognize a gain on sale of approximately $15.2 million , before settlement of final proceeds and expenses, in the first quarter of 2023.
Source: GHI 2022-10-K (emphasis ours)
This is a good gain and works out to about 67 cents a BUC. So don't look for any fireworks in the first quarter on payout news. Instead, you have to recognize that a distribution cut will come at some point. These liquidations can only support the payout for so long. Another problem for the company is that it is now using far more leverage than it did previously. Total assets to equity ratio is at 4.84 in the 2022 10-K, versus 3.72 at year end December 31, 2021.
This is after some impressive liquidations during the year. We don't think they can push this much more. Especially since their baseline income generation outside of asset sales is going flat.
Verdict
We would watch the cash available for distribution metric excluding asset gains in Q1-2023. This will give a hint as to where things are headed. Could GHI power through one whole year of distributions via asset sales alone? Yes that's possible. That level of liquidations (followed by payouts) would put a lot of stress on the balance sheet, but it could be done. The question is to what end. If the base business is not going to produce a solid income, why does GHI need to pay such high distributions? With borrowing rates still rising, GHI will have some complex work to do in 2023 and perhaps beyond. 2022, unlike 2021, had no provisions for credit losses. We think those will make a reappearance in a recession. In this environment, we don't think it's at all unrealistic for this to trade at a tangible book value per share.
In fact it has done so in the past when interest rates were far lower and it was generating a solid spread income. We reiterate our sell rating here and think that it trades 25% lower in 2023.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
Greystone Housing: A Look At The Distribution Coverage For 2023