Equity Market Still in Apparent Transition, Amid Continued Price Pressures and Flat Yields
By Caitlin Jones & A. J. Johnson
7 min read
Tax Credit Advisor July, 2006: The low-income housing tax credit equity market continues to be in apparent transition, with the future trend unclear.
Syndicators say they are still enjoying strong sales of corporate housing tax credit funds. But yields to investors remain flat and credit prices to developers remain under upward pressure, with little let-up.
Meanwhile, corporate investors appear increasingly to be investing in alternative investments or exploring such investments, including in energy credits. One syndicator, in fact, has established a new unit that will soon be marketing investments in solar energy tax credits to corporate investors.
“Right now is a very difficult time in the market,” said syndicator Steve Smith, of The Richman Group, “because the expectations and the expectations of developers are not matching.” Developers are expecting higher prices, “and many syndicators are giving it to them,” he noted, adding his firm has lost a number of deals as a result. Smith, one of a number of syndicators and others recently interviewed by the Tax Credit Advisor, said Richman’s average price for deals purchased for its latest $235 million corporate fund was “just under” 98 cents per dollar of credit, similar to its previous fund.
Robust Sales Continue
Despite general acknowledgement that yields on new corporate housing credit funds are relatively low, syndicators said they are still seeing strong demand for their funds from the investors left in the market.
Ryan Sfreddo, of CharterMac Capital, said while there are now fewer corporate investors than before still investing in housing credits, those left are making larger investments in each fund.
Sfreddo said CharterMac on June 16 completed a $268 million national corporate fund, over-subscribed, that had seven institutional investors and will fund 25 properties. A new national fund of $250-$300 million should be rolled out by the end of June, he added.
Smith anticipated Richman will launch a new national fund of $200-$250 million within a month, while Boston Capital, which closed a $118 million national fund recently, is already on the street with a new national fund likely to finish around $270 million, said Boston Capital executive Jeff Goldstein.
WNC & Associates, Inc. closed a $70 million national fund in the first quarter, will launch a $75 million national fund this quarter, has closed a $70 million New York fund (the firm’s seventh), and should close a $50 million California corporate fund within 30 days, said WNC’s Will Cooper, Jr.
All the preceding mentioned funds non-guaranteed, multi-investor corporate funds. The sponsors also operate proprietary funds set up for individual corporate investors, and a few market “retail” funds targeted to individual investors. There are also limited offerings of funds with guaranteed yields.
Sfreddo, in fact, estimated $300 million of the roughly $1.2 billion in total housing credit equity CharterMac expects to raise by year-end to come from sales of guaranteed product, up from $270 million in 2005. According to Sfreddo, CharterMac closed a $60 million guaranteed fund for a single investor in the first quarter.
Prices Still Under Pressure
Respondents generally said there continues to be strong upward pressure on credit pricing to developers for new allocations, despite low yields to investors on new funds. Smith alone felt prices “are going down, maybe a little.”
“Large 9 percent deals with good sponsors in good markets are still receiving premium pricing,” exceeding $1 per dollar of credit, said Sfreddo. Goldstein and others said pricing is also very aggressive in states like California, New York, and Florida targeted by numerous “CRA” investors – banks motivated to invest in housing credits because of the federal Community Reinvestment Act.
Sfreddo, Goldstein, and others noted there is a wide price range for housing credit projects. For other than the most sought-after or CRA-attractive projects, deals are generally attracting prices in the low- to mid-90s, most said.
Some evidence of rising prices is found in the most recent survey responses to Ernst & Young’s Corporate Tax Credit Fund Watch, carried in TCA. (See p. 8). Apollo Housing Capital, one of the participating syndicators, reported a rise to 95 cents – from 93 cents in the May chart – in the average price paid for projects acquired for its current national corporate fund. Average prices for Boston Capital and CharterMac were unchanged.
Yields to Investors
None of the interview respondents felt yields to corporate investors are still declining. Cooper, Sfreddo, and direct investor Cynthia Lacasse, president of John Hancock Realty Advisors, Inc., said they think yields have stabilized.
Yet Lacasse, Fred Copeman of Ernst & Young LLP, and several syndicators noted a number of investors aren’t happy about the current level of yields, and some have turned to the sidelines and/or started to look more seriously at alternative investments. “At these yields we are definitely opportunistic investors,” said Lacasse. She noted her firm is looking for “good returns,” but these are “hard to find.” As a result, she said Hancock is “walking away” from “lots” of deals where it feels the yields are too low.
Copeman said the current average after-tax yield for traditional corporate tax credit funds is about 4.30 percent. “That’s as low as it’s been – ever,” he said, adding everybody is now asking whether this is the bottom or if yields will drop further. “I don’t know,” he says.
“Corporate investors,” Copeman noted, “are feeling bloodied at the moment, and hope that the downward trend in yields will finally stop.”
Copeman suggested as a “reasonable” possibility some kind of “retrenchment” – or uptick – in yields in the not-too-distant future, pointing out this occurred around 2001 after a period of falling yields.
Goldstein said he feels yields are already rising, in response to “inching up” of yields on alternative investments. Goldstein said Boston Capital’s new national fund will probably have projected yields ranging from 4.50 to 4.60 percent – the latter for corporations investing $10 million or more.
Smith anticipated a slightly higher yield on Richman’s forthcoming national fund.
But Cooper cautioned against a rush to judgment about where yields and prices will be headed in the future based on what is happening now. He explained the market is currently in a lull because of relatively few new credit allocations by states. A better guide, he indicated, should be around September, when state allocations pick up.
Goldstein said states have awarded about 35-40 percent of their 2006 housing credits to date.
Alternative Investments
A continuing rise in interest rates – the 10-year Treasury yield hit 5.21 percent on June 22, from 4.7 percent in late March – is fueling a rise in yields on alternative investments that Copeman, Lacasse, and others suggested is drawing increased attention from corporate investors.
Lacasse said “pretty much” all corporate housing credit investors are looking at other possible investments, and said have actually invested in alternatives. While noting that none of these alternative markets are huge, she said the growing look-around by institutional investors “is an indication of people saying, “˜I just can’t sit here and keep investing at these yields.’”
Copeman said one telling sign was a draw of 5,000 people, including some syndicators, at the American Wind Energy Association’s early June conference in Pittsburgh. A tax incentive for wind energy equipment investment is one of several federal energy tax credits now available.
Another is solar energy tax credits, which are about to be marketed by a new affiliate of MMA Financial, the Boston-based housing credit syndicator that is a unit of MuniMae. On May 16, MuniMae announced its acquisition of Renewable Energy Ventures LLC, a third-party financier and operator of renewable energy generation facilities.
Renamed as MMA Renewable Ventures, the entity just closed a solar energy tax credit fund that will soon be marketed to prospective corporate investors, MuniMae executive vice president Jenny Netzer, who oversees the new unit, told TCA. According to Netzer, some housing credit investors already “are investing in renewable energy.”
Cooper said WNC, in addition to housing credits, is having success marketing new markets tax credits to corporate investors. A Community Development Entity formed by WNC & Associates recently got its second allocation of NMTCs, totaling $40 million. Cooper said funds will be available for projects nationwide, with the focus to continue to be on retail commercial real estate projects located in “highly distressed” communities.
