Greystone Housing Stock: 9.6% Tax Advantaged Yield, Where We Would Buy (NYSE:GHI)

It has been some time since we updated the views on Greystone Housing Impact Investors LP. (NYSE:GHI). In November 2022, we took a negative stance on the company in light of the increasing risks to fund the distribution. We maintained that into February 2023, but the large price decline after that allowed an upgrade.

Greystone lost ground (even on a total return basis) between the Sell and the Hold ratings, but has since then delivered an average performance.

We look at the recently released Q4-2023 results and tell you where you want to buy this highly tax-advantaged yield.

A Brief Overview

The company owns Mortgage revenue bonds and similar investments which make the bulk of its asset base.

The company also owns physical real estate and that has been the asset that has rescued its distributable income as we shall see below. Previous articles have covered the company asset base in more detail.

Q4-2023

For income investors, it is sometimes hard to look past the amount that is being paid. If the dividend or distribution is coming in, they are indifferent to price declines. They also seem impervious to fundamentals declining. One reason is that they assume everything must be fine if the payment is coming in. The other one is that there is a lag often, between the fundamentals going out the window and the distribution following suite. Let’s see how this is playing out for GHI.

For all of 2023, we have seen the distribution funded by selling real estate assets.

Q4-2023 was no different. You can see that to some extent even without deeper prying as the total revenues are less than total expenses, even if you exclude depreciation.

The picture is a bit clouded though, by the net result from “derivative transactions”. You can see above that it adds $7.16 million to expenses and hence subtracts the same from net income. Over time (not necessarily in this quarter) the derivative transaction impact should fade. We actually see that when we visualize the whole year 2023. Derivative transactions had a much smaller impact in percentage terms and actually reduced expenses (enhanced income) by $7.3 million.

The current base line run rate, excluding depreciation, derivative changes and provision for credit losses, is about $3 million a quarter. So that is $12 million a year. Now if a company had a net income (also cash available for distribution) run-rate of $12 million and a market capitalization of $350 million, what would you expect its dividend yield to be?

3.42%, correct? But we have a 9.66% dividend yield just listed above that. So the straight way to tell you this is that if you are not really paying attention at this point, you will likely get “gifts” like the one Ares Commercial Real Estate Corporation (ACRE) just dropped in your lap a few months back.

Where Is The Money Coming From?

GHI’s spread income business is not producing much at all. Selling the physical real estate assets though, was a fantastic income source.

At the bottom, you can see the remaining operating properties. You can also see the change in the real estate assets from December 31, 2022 to December 31, 2023.

So this part of the sale activity has to come to a crawl in 2024, as there is not much there to support it. But GHI still has another area where some sales might happen. These are the investments in unconsolidated entities.

At the top half of this table, we can see the construction completed date and more than half are still under construction. But asset sales here are still probable in 2024 with some support to cash available for distribution.

Outlook & Verdict

The base business for GHI is not doing that great. These mortgage revenue bonds are long-term bonds and while some do adjust upwards with interest rate changes, their spread income has been crushed as the Fed hiked. Currently, as we showed above, this segment (plus the directly owned real estate) is producing just about $3 million net in interest income, every quarter. So $1.2 billion of assets are producing just $12 million in net investment income a year.

The question becomes whether real estate sales, can fund the distribution. We think that is highly unlikely over the medium term. The 2023 asset sales created a gain as those were completed a few years back. Recent completions are likely underwater or at best likely to create marginal gains. If we stay in a higher for longer environment, the distribution is likely to be pressured eventually.

So why not put a Sell on it?

In our framework, while the distributions are important, valuation goes a long way into making the buy, hold or sell rating. We did not just make that criteria up. In fact, when we put a “Sell” on it in 2022, this was the conclusion.

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.

Source: A Look At The Distribution Coverage For 2023

Where are we today? Would you believe it is exactly at tangible book value per share?

So it is hard to get extremely bearish here even though we see the distribution as completely unsustainable outside of a big rate cut cycle. Since we don’t think that is happening, the distribution will realign at some point. It is also hard to get extremely bullish here as the bonds portfolio is very sensitive to interest rate changes and also to some extent, credit spreads. We have refused to buy closed end muni funds trading at big discounts to NAV, simply because they used a lot of leverage. For example, BNY Mellon Municipal Bond Infrastructure Fund, Inc. (DMB)’s assets to equity ratio is about 1.54X.

GHI’s relative leverage is far, far higher.

That 4.33X is also understating things today as bonds have taken a hit since December 31, 2023. So in the face of this leverage, an unsustainable base distribution, we rather stay out until a material discount shows up. We rate the stock a “hold” and might enter if we see a sub $13 price or a distribution cut.

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.