Greystone Housing Impact Investors LP (GHI), the New York Stock Exchange-listed partnership focused on affordable housing investments, has consistently presented itself as a stalwart of the tax-exempt bond market. Their core portfolio, anchored by mortgage revenue bonds (MRBs), speaks to their dedication to serving the affordable housing sector. However, a closer examination of their Q1 2024 earnings transcript reveals a subtle yet potentially significant shift in their strategy: a quiet embrace of taxable bonds.

This pivot, seemingly overlooked by analysts, is not a radical departure from their core business. It's a nuanced adaptation to the increasingly challenging landscape of the affordable housing market. While Greystone continues to champion the utilization of Freddie Mac tax-exempt loan forward commitments, they're also acknowledging the constraints of the current market. As Ken Rogozinski, GHI's CEO, poignantly stated, "Our affordable housing developer clients continue to rely on more and more governmental subsidies and other sources of soft money to make their transactions financially feasible."

The pressure on developers is palpable. Soaring interest rates, coupled with cost inflation and the diminishing returns from Low-Income Housing Tax Credits (LIHTCs) due to higher yields demanded by investors, are squeezing developers' margins. This squeeze has led to a reliance on deferred developer fees, pushing the boundaries of what state housing finance agencies deem acceptable.

This is where Greystone's subtle shift comes into play. Their commitment to providing "the most cost-effective capital possible" appears to be leading them beyond the traditional realm of tax-exempt bonds. While not explicitly stated, their reference to the potential reduction of tax-exempt governmental issuer loan financing on transactions in volume cap-challenged states from 50-55% to a leaner 30-35% signifies a willingness to explore the taxable bond market.

The rationale behind this shift is multifaceted. By embracing taxable bonds, Greystone can cater to projects in states grappling with limited volume cap availability. This enables them to expand their reach and partner with a broader spectrum of developers. Furthermore, taxable bonds, while potentially offering a lower yield than their tax-exempt counterparts, can provide a more reliable source of funding for projects facing an uphill battle for tax credit equity.

The numbers, while preliminary, support this hypothesis. GHI's debt investments portfolio, comprised of MRBs, governmental issuer loans and property loans, witnessed a $74 million decrease from December 31 to March 31, 2024. This reduction was primarily attributed to prepayments of property loans, often associated with taxable bonds, prior to property completion. While GHI still holds governmental issuer loan investments related to these properties, the trend towards prepayment suggests a growing preference for taxable bonds amongst borrowers.

Debt Portfolio Composition

Reference: Greystone Housing Impact Investors LP (GHI) Q1 2024 Earnings Call Transcript

Decline in Property Loans

It's worth noting that this shift aligns with potential changes in the LIHTC program. The proposed legislation, passed by the House and currently under consideration in the Senate, aims to lower the 50% test to 30%. This would further incentivize the use of taxable bonds in states facing volume cap limitations, providing Greystone with a legislative tailwind for their strategic adaptation.

GHI's commitment to its current dividend level, as highlighted by Rogozinski, underscores the prudence of this shift. By diversifying their portfolio and venturing into the taxable bond market, Greystone can potentially mitigate the risk of diminishing returns from LIHTCs and ensure the sustainability of their distributions.

This quiet embrace of taxable bonds speaks volumes about Greystone's adaptability and commitment to serving the affordable housing sector. While they remain a prominent player in the tax-exempt bond market, their willingness to embrace taxable bonds signals a strategic evolution that could well redefine their future.

"Fun Fact: Greystone's name change in December 2022 from America First Multifamily Investors to Greystone Housing Impact Investors reflects not just a rebranding but a deeper commitment to ESG principles, further solidifying their role as a responsible investor in the affordable housing space."