Business context and reporting period
America First Tax Exempt Investors, L.P. (the registrant named in this filing) filed this unaudited Form 10-Q for the quarter ended September 30, 2011. Its business centers on federally tax-exempt mortgage revenue bonds financing multifamily housing, alongside taxable property loans and multifamily properties acquired or foreclosed on with a view to later restructuring. Consolidated results include three variable-interest entities (VIEs), although the Partnership has no equity ownership in them; their results are not allocated to unitholders.
Financial results and position
| Metric | Q3 2011 / Sept. 30, 2011 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $7.14 million for Q3; $20.31 million for the first nine months | Q3 2010: $5.82 million; nine months 2010: $16.74 million |
| Net income attributable to Partnership | $132,000 for Q3; $1.08 million for nine months | Q3 2010: loss of $2.21 million; nine months 2010: loss of $1.29 million |
| Net income per unit | $0.01 Q3; $0.06 nine months | Q3 2010: loss of $0.04; nine months 2010: $0.04 |
| Cash from operations | $7.07 million for nine months | 2010 nine months: cash used of $424,000 |
| Cash and restricted cash | $10.41 million cash; $16.85 million restricted cash | Dec. 31, 2010: $13.28 million cash; $25.25 million restricted cash |
| Total assets / total capital | $297.41 million / $137.23 million | Dec. 31, 2010: $241.61 million / $128.02 million |
| Debt financing / mortgages payable | $109.19 million / $43.67 million | Dec. 31, 2010: $95.61 million / $10.65 million |
| Cash Available for Distribution (CAD) | $2.71 million Q3; $7.68 million nine months | Q3 2010: $2.62 million; nine months 2010: $8.00 million |
Revenue growth reflected a larger bond portfolio and additional properties. Q3 expenses fell from the prior-year quarter, principally because the 2010 period included a $2.72 million Weatherford impairment; interest expense rose to $2.14 million from $1.18 million. For the first nine months, interest expense was $4.65 million, including $1.96 million of non-cash derivative fair-value losses. No explicit operating-margin figure is provided.
Investing activities used $36.07 million in the first nine months, chiefly for bond purchases, property acquisitions and capital expenditures. Financing activities provided $26.13 million; cash declined by $2.87 million. The Partnership reported total debt financing and property mortgages of about $152.9 million, or approximately 51% of total assets. Debt financing borrowing costs were variable-rate and approximately 2.0%–2.1% for the TEBS and TOB facilities at quarter-end; mortgages had stated rates ranging from 2.6% to 6.0%.
Material changes versus prior comparable periods
- Nine-month Partnership-attributable results improved to $1.08 million income from a $1.29 million loss. The prior-year period included the Weatherford impairment; 2011 also included increased bond and property revenues, partly offset by higher interest and derivative expense and a $725,000 receivables-loss provision.
- Bond fair value increased to $139.09 million from $100.57 million at year-end 2010. The portfolio is valued using Level 3, management-based discounted cash flow estimates, and the filing cautions that estimates may not equal realizable sale prices.
- Mortgage debt rose substantially following property acquisitions and financing. The Partnership acquired Arboretum and Eagle Village, acquired new Memphis bonds, and foreclosed on DeCordova and Weatherford; Iona Lakes was deconsolidated in May.
- Cash distributions were $0.125 per unit for Q3 and $0.375 per unit for nine months, unchanged per unit from the comparable periods. Nine-month distributions paid or accrued totaled $11.47 million, exceeding CAD of $7.68 million.
Outlook, risks and unusual items
- Management continued the annualized $0.50-per-unit distribution, stating it believed the level sustainable, but acknowledged recent CAD did not fully fund distributions and that a reduction may be needed if CAD remains below distributions. CAD is a non-GAAP measure and is not comparable necessarily across companies.
- Woodland Park remains in bond-payment default after missing a 2010 debt-service payment. Foreclosure is ongoing; quarter-end occupancy was 92%, but the property had not achieved stabilization. The Partnership reserved approximately $725,000 against receivables related to Woodland Park and reported additional Q3 provision of about $14,500.
- Interest-rate changes can affect variable-rate debt and financing costs. Derivative fair-value changes are recorded in earnings rather than hedge accounting; the filing reports $1.96 million of such expense for the first nine months. Bond valuations are Level 3 and a hypothetical adverse 10% change in the key valuation assumption could produce approximately $11 million of additional unrealized losses.
- Three Ohio properties remain consolidated despite a stated sale because the buyers initially lacked sufficient equity; no sale gain is recognized. In October 2011, a new investor contributed approximately $336,000, still below the stated threshold for sale accounting.
- Subsequent to quarter-end, the Briarwood Manor bond was called for approximately $4.9 million plus accrued interest, producing an expected gain of about $400,000 in Q4; proceeds were intended to repay the $4.0 million Omaha State Bank term credit. Weatherford construction was expected to finish in February 2012. Management cited ongoing economic, credit-market, property occupancy, borrower-default, short-term-rate, financing-access and regulatory risks.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts investors should verify
- Whether property-level cash generation and bond collections can sustainably cover the $0.50 annual distribution, given the CAD shortfall and use of cash reserves.
- Current status and recovery prospects for Woodland Park default, foreclosure, occupancy and receivable reserves.
- Liquidity, refinancing and covenant exposure across $109.2 million of debt financing and $43.7 million of property mortgages, including maturities concentrated in 2012–2014.
- Reasonableness and sensitivity of Level 3 bond valuations, especially the $11 million hypothetical adverse valuation impact.
- Completion, leasing and financing outcomes for Weatherford, Arboretum and Eagle Village, and whether the Ohio transaction will ultimately qualify for sale accounting.
- Reconciliation of CAD to GAAP cash flow and distributions, including the filing’s disclosed non-GAAP adjustments.