Greystone Housing Impact Investors LP quarterly report, Q3 FY2022

Business context and reporting period

America First Multifamily Investors, L.P. (Nasdaq: ATAX) filed this unaudited Form 10-Q for the quarter ended September 30, 2022. The Partnership invests mainly in mortgage revenue bonds (MRBs), governmental issuer loans (GILs), property loans, affordable housing properties, and equity interests in market-rate multifamily developments. The filing identifies the registrant as America First Multifamily Investors, L.P.; Greystone is affiliated with its management.

Financial performance and position

• Profit growth reflected higher investment income and, especially, gains from selling unconsolidated property investments: $10.6 million in Q3 and $39.7 million for the nine months, versus $7.0 million and $15.2 million, respectively, in 2021. Nine-month net income therefore includes substantial sale gains and should not be viewed as solely recurring earnings.
• Q3 interest expense rose 41.9% to $8.0 million; nine-month interest expense rose 15.4% to $18.8 million. Higher borrowing costs and greater debt balances were partly offset by favorable derivative fair-value changes.
• Comprehensive loss was $4.3 million for Q3 and $29.0 million for the nine months, despite positive net income, reflecting unrealized securities losses of $22.7 million and $90.3 million, respectively. Management attributed bond valuation pressure principally to rising market interest rates.
• At September 30, total assets were $1.450 billion, total liabilities $1.044 billion, and partners’ capital $311.2 million. Debt financing was $962.6 million, secured lines of credit $30.9 million, and mortgages and other secured financing $26.2 million. Redeemable preferred units had a $94.5 million redemption value.
• Cash and cash equivalents were $103.2 million, with another $45.9 million restricted. Operating cash flow was $19.7 million for the nine months, compared with $23.3 million in 2021; investing activities used $110.4 million and financing activities provided $87.8 million. Cash, cash equivalents and restricted cash together declined $2.9 million to $149.1 million.
• The Partnership reported a 70% leverage ratio, calculated using its stated non-GAAP methodology. Unfunded investment commitments totaled $375.7 million. Contractual debt financing maturities include $230.7 million in 2023 and $269.6 million in 2024.

Material changes versus the prior comparable period

• Nine-month net income more than doubled, driven substantially by larger gains on joint-venture property sales; CAD per BUC also increased year over year, but fell in Q3 despite higher GAAP net income.
• Investment income benefited from larger GIL and property-loan balances, higher average yields, and cash interest. Certain repayments also generated interest income from previously nonaccrual loans.
• Variable-rate funding costs increased as short-term rates rose. The filing reports that approximately 73% of leverage bore short-term variable rates at quarter end; interest-rate swaps and caps mitigate, but do not eliminate, exposure.
• Fair value of MRBs held in trust declined to $675.9 million from $750.9 million at year-end 2021; direct MRBs declined to $19.2 million from $42.6 million. This reflected market valuation changes and portfolio activity, including redemptions and paydowns.

Outlook, risks, contingencies and unusual items

• Management said available cash and expected cash sources should be sufficient to meet liquidity needs over the next 12 months. Planned sources include cash on hand, investment and property operating cash flows, asset sales or redemptions, and debt financing; management may also consider issuing equity or preferred units.
• The Federal Reserve had raised short-term rates by 375 basis points through November 2, 2022, with further increases anticipated. The Partnership’s modeled sensitivity estimates a $1.23 million reduction in net interest income over the next 12 months for an immediate 100-basis-point rate increase, assuming the stated model assumptions and no portfolio response.
• Key risks include rising funding costs, inflation and property operating expenses, recession and market volatility, refinancing and collateral requirements, construction or lease-up delays, borrower defaults, and geographic concentration. Texas, California and South Carolina represented 42%, 26% and 9% of MRB principal, respectively.
• Management reported that multifamily properties securing MRBs were current on contractual debt service and that it had received no forbearance requests as of September 30, except the Provision Center 2014-1 MRB, whose borrower was in bankruptcy. The underlying property sold in July 2022; final liquidation proceeds remained subject to the bankruptcy process.
• Unusual items include the Live 929 Apartments debt restructuring; the Cross Creek property-loan recovery and MRB redemption; $39.7 million of nine-month joint-venture sale gains; and the $90.3 million nine-month unrealized securities loss. Management reported no pending legal proceedings expected to have a material effect and no material changes to previously disclosed risk factors other than expanded macroeconomic, geopolitical, inflation and interest-rate risks.
• After quarter end, the Partnership completed a supplemental distribution in additional BUCs equivalent to $0.20 per BUC, exchanged 1.0 million Series A Preferred Units for Series A-1 units, arranged new Poppy Grove financing, and committed $16.0 million to a new market-rate development.
• The Partnership’s Series A Preferred Units carry potential redemption rights, with remaining holders’ next optional redemption dates ranging from March through December 2023. No redemption notices had been received as of September 30, 2022.

Important facts for investors to verify

1. How much of reported earnings and CAD is repeatable after excluding property-sale gains, loan recoveries, discount accretion and other unusual items.
2. Whether higher rates, refinancing needs and upcoming maturities can be managed without materially reducing net interest income, liquidity or distributions.
3. The pace and funding of the $375.7 million remaining investment commitments, including construction progress, lease-up, and the availability of related leverage.
4. Current performance and collateral coverage of the Provision Center bankruptcy investment and other investments with unrealized losses or prior nonaccrual status.
5. The effect of possible Series A Preferred Unit redemptions, future distributions, and market valuation changes on cash resources and leverage.