Greystone Housing Impact Investors LP quarterly report, Q1 FY2013

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Business Context and Reporting Period

America First Tax Exempt Investors, L.P. (the registrant identified in this 2013 filing; now associated with Greystone Housing Impact Investors LP) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Its core business is investing in tax-exempt mortgage revenue bonds financing multifamily housing, alongside investments in public-housing certificates and mortgage-backed securities, property interests, and related borrowings.

Financial Results and Key Metrics

  • Revenue: $12.94 million, up from $5.37 million in Q1 2012. Property revenue was $3.73 million; investment income $7.72 million; other interest income $1.24 million; and other income $0.25 million.
  • Profit: Income from continuing operations was $6.56 million versus $0.53 million. Net income was $8.49 million, including $1.93 million from discontinued operations; $8.32 million was attributable to the Partnership. Unitholder basic and diluted earnings were $0.19 per unit versus $0.03.
  • Expenses and margins: Total expenses were $6.38 million versus $4.84 million, including $1.54 million of interest expense. A comparable operating-margin measure is not provided; reported results include significant deferred Ohio interest and sale-related items.
  • Cash flow: Operating activities provided $3.05 million; investing activities used $37.90 million; financing activities provided $17.91 million. Cash and cash equivalents at March 31 were $13.34 million, with restricted cash of $4.60 million.
  • Balance sheet and debt: Total assets were $442.05 million; total liabilities $251.79 million; and total capital $190.26 million. Debt financing was $194.27 million and mortgages payable $46.56 million, or approximately $240.83 million combined. The filing reports total leverage of 54% of total assets.
  • Investments and valuation: Tax-exempt mortgage revenue bonds had a reported fair value of approximately $206.86 million; public housing capital fund certificates $64.61 million; and mortgage-backed securities $34.12 million. Bond and certificate valuations rely substantially on management estimates and unobservable inputs.
  • Distributions and CAD: Cash Available for Distribution (CAD), a non-GAAP measure, was $4.97 million, or $0.12 per unit, versus $2.63 million, or $0.09 per unit. The quarterly distribution was $0.125 per unit.

Material Changes Versus Q1 2012

  • Net income attributable to the Partnership rose to $8.32 million from $0.63 million. The increase was driven in large part by recognition of the Ohio Properties sale and previously deferred interest, as well as income from investments added since 2012.
  • Ohio-related recognition included an approximately $1.78 million gain, approximately $3.9 million of tax-exempt bond interest, approximately $1.1 million of taxable note interest, and a $250,000 guarantee fee. These items make the quarter’s earnings less indicative of recurring performance.
  • New bond, public-housing certificate, and MBS investments increased investment income. Property revenue also grew with new and expanded property activity, including Maples on 97th, Weatherford, and DeCordova.
  • Expenses increased, including real estate operating costs, depreciation and amortization, interest, and general and administrative expenses. Average borrowing cost declined to approximately 2.4% from 2.6%, but higher average debt increased interest expense.
  • Cash and cash equivalents decreased from $30.17 million at year-end 2012 to $13.34 million. Bond and other investment purchases drove substantial investing outflows; new borrowing and the Ohio sale proceeds partly offset them.

Outlook, Management Commentary, Risks, and Unusual Items

  • Management expected to renew maturing 2013 tender-option bond (TOB) facilities and extend mortgage maturities as they came due. It reported compliance with financing covenants at March 31; the filing does not guarantee renewals or extensions.
  • The General Partner expected that completing planned investments and financing would support the current annual distribution of $0.50 per unit without using unrestricted cash. Management cautioned that distributions could be reduced if CAD fell short. In 2012, approximately $5.8 million of unrestricted cash had supplemented distributions.
  • Economic occupancy was approximately 84% for properties securing the Partnership’s bond portfolio, down from 85%; MF Properties occupancy was approximately 80%, unchanged. Property performance, occupancy, operating costs, and access to financing remain important uncertainties.
  • Woodland Park was in foreclosure, its bond was on non-accrual, and the Partnership had reserved against accrued interest. After quarter-end, the Partnership won the property at foreclosure and was assessing whether to retain rent restrictions or pursue market-rate operations and new financing.
  • After quarter-end, the Partnership also arranged financing for a University of Nebraska–Lincoln student-housing development estimated to cost $34 million. Construction and financing execution, occupancy, and eventual restructuring into a bond investment carry project and funding risk.
  • Other risks include floating-rate borrowing, refinancing and liquidity needs, apartment-market and property-level credit risk, and fair-value uncertainty. A 10% adverse change in key valuation assumptions was estimated to produce additional unrealized losses of approximately $15.5 million on tax-exempt bonds, $2.9 million on public-housing certificates, and $2.6 million on MBS; these are hypothetical sensitivities.
  • The filing describes contingent guarantees associated with Ohio and Greens property transactions, TOB/TEBS financings, and tax-credit recapture. Management reported no accrual for certain guarantees because it considered payment unlikely; maximum exposure under the specified Ohio and Greens repurchase guarantees was approximately $4.9 million and $0.72 million, respectively.

Important Facts for Investors to Verify

  1. How much of Q1 earnings and CAD is recurring after separating Ohio-related deferred interest, the gain on sale, taxable loan interest, and the guarantee fee.
  2. Whether short-term TOB and mortgage facilities were renewed or extended, and the resulting liquidity, refinancing, covenant, and borrowing-cost position.
  3. Whether CAD can sustainably cover the $0.125 quarterly distribution per unit without relying on unrestricted cash.
  4. Current performance and credit status of weaker collateral, particularly Woodland Park, and the adequacy of loan-loss reserves and bond fair values.
  5. Progress, cost, financing, completion, and lease-up of the Nebraska student-housing project and other planned investments.
  6. The exposure represented by guarantees and other contingent obligations, and the sensitivity of Level 3 investment valuations to changes in assumptions.