2023-05-15 17:52:49 ET
Summary
- In our last article for Greystone Housing, we felt the stock was overvalued relative to its prospects.
- We showed that the base business was producing very little CAD thanks to interest rate margin compression.
- We look at how the price has evolved and then examine the Q1-2023 results to see if our thesis was headed in the right direction.
On our last coverage for Greystone Housing Impact Investors LP. ( GHI ) we felt the stock was overvalued relative to its prospects.
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.
Source: A Look At The Distribution Coverage For 2023
The stock has moved in the general direction we were expecting, but there were no real fireworks.
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We look at the Q1-2023 results to see how that poor distribution coverage we were talking about is shaping up.
Q1-2023
Greystone reported a strong number for net income, which came in at 60 cents per beneficial unit certificate (BUC). The cash available for distribution, or CAD, left this in the dust and delivered 81 cents per BUC.
Greystone Q1-2023 Press Release
Of course, none of this was unanticipated. We had said the Q1-2023 results would be strong on the headline front.
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. This is a good gain and works out to about 67 cents a BUC.
Source: A Look At The Distribution Coverage For 2023
It is what is happening outside these sales is what investors need to focus on. In the income statement, you can see the relatively tiny difference between the gain on sale and the total income.
Greystone Q1-2023 Press Release
That works out to about 3 cents per BUC. Looking at the CAD number for the quarter, we can see a similar trend. That real estate asset sale gains pretty much powers most of the final figure.
Greystone Q1-2023 Press Release
So, CAD excluding the gain was about $2.8 million. The baseline run rate for CAD was about 13 cents for this quarter. This compares with the distribution of 37 cents a quarter.
Outlook
The good news for Greystone investors is that the base business is beginning to stabilize. The company was a bit slow off the mark as interest rates began to rise, but then worked hard to get hedges in place. From Q4-2022 to Q1-2023, interest expense rose another $6.0 million. But interest revenue and the hedges in place neutralized this impact. As a result, excluding the gains on real estate, Greystone produced 13 cents per BUC, which is a bit higher than the 9 cents per BUC produced in Q4-2022. To us, this is about the same level as there are a lot of adjustments and quarterly variability which make the path bumpy. But it is indeed good news that the base business is stabilizing despite additional rate hikes. Even if the Federal Reserve does go higher and further, Greystone should not be impacted. As can be seen below, further hikes will only have a modest annualized impact.
Greystone Q1-2023 10-Q
So that was the good news. The bad news is that the CAD per BUC without asset sales is nowhere close to enough for the distribution of 37 cents a quarter. We will likely see an 11-14 cent run rate for the foreseeable future. How Greystone handles this remains to be seen.
Verdict
With the 81 cents of CAD locked in and taking into account the base run rate, it would be pretty surprising if Greystone did not maintain the distribution for Q2-2023 and Q3-2023. Beyond that, things get more complicated. We will likely have to see more asset sales to continue, and those old gains may be harder to come by in this environment. We are also likely to see more credit losses here as we are expected to move into a recession. Investors have likely forgotten about this line item, but it was front and center during the brief 2020 recession.
Balance sheet leverage is currently maintained at the upper end of the leverage, and moving to a lower leverage will likely reduce that CAD run-rate even lower.
At present, GHI's price has moved lower and the price to tangible book value is settling closer to our designated 1.00X level.
So, at this point, with the number within sight, we are upgrading this to a hold. Keep in mind that there are severe risks to the downside if the distribution is realigned with CAD in the future. If this is coupled with balance sheet leverage reduction (which will mean an even lower CAD), watch out below. Previously, we had considered going long near the $15.00 mark, but we have decided against it at this point.
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: Upgrading Despite Risks