Greystone Housing Impact Investors LP quarterly report, Q2 FY2013

Business context and reporting period

America First Tax Exempt Investors, L.P. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Its principal business is investing in tax-exempt mortgage revenue bonds financing multifamily housing, alongside public-housing certificates, mortgage-backed securities, and selected apartment properties.

Financial performance and position

For the six months, investing activities used $55.66 million and financing activities provided $43.42 million; cash and cash equivalents decreased by $6.34 million. Total assets were $466.13 million at June 30, versus $413.15 million at year-end 2012. Debt financing was $225.45 million and mortgages payable were $46.49 million, for combined borrowings of $271.93 million. Management reported a 56% ratio of these borrowings to total assets.

Q2 comprehensive loss attributable to the partnership was $4.17 million, despite positive net income, reflecting an $8.28 million unrealized securities loss. For the first half, comprehensive income was $7.12 million, including a $5.48 million unrealized securities loss. Many investments are valued using Level 3 inputs and management estimates, not active-market quotations.

Material changes versus prior comparable periods

• Revenue and earnings rose substantially, reflecting new bond and securities investments, expanded property activity, and nonrecurring income recognized in 2013.
• Q2 included $6.50 million of contingent tax-exempt interest from the Iona Lakes bond redemption and a $4.56 million realized loss on the associated taxable property loan. Management described the net effect as approximately $1.9 million of income.
• First-half results included the recognition of the Ohio Properties sale, including a $1.78 million gain and previously deferred interest and other income. These accounting-recognition items are not necessarily recurring.
• Property revenue increased, while property operating costs and depreciation also rose with acquisitions, completed construction, and additional units. Bond-backed property economic occupancy declined to about 84% in the first half from 88%; MF Property economic occupancy improved to about 81% from 76%.
• Debt financing increased from $177.95 million at year-end to $225.45 million, and mortgages payable increased from $39.12 million to $46.49 million. The unit count was 42.77 million, compared with a weighted-average 31.91 million for the first half of 2012, following the 2012 unit offering.

Outlook, risks, contingencies, and unusual items

Management said it expects to renew maturing TOB facilities at its discretion and believes that completing planned investments and financing could support the current annual distribution of $0.50 per unit without using unrestricted cash. It cautioned that there is no assurance CAD will cover that level and distributions may be reduced. CAD, a non-GAAP measure, was $5.69 million ($0.13 per unit) in Q2 and $10.67 million ($0.25 per unit) for six months; distributions were $0.125 and $0.25 per unit, respectively. The filing identifies nonrecurring items in 2013 CAD, and says unrestricted cash supplemented distributions in 2012.

Debt and liquidity risks include variable-rate TOB and other borrowings, collateral requirements, and refinancing exposure. Debt financing contractual maturities include $32.75 million in 2013 and $100.80 million in 2014; mortgages include $30.83 million due in 2014. The Partnership reported compliance with its TOB covenants at June 30. It also reported leverage at 60% of par value for its tax-exempt bond portfolio and 77% for PHC and MBS investments, relative to stated policy ranges.

Other notable exposures include possible additional unrealized losses under hypothetical adverse valuation assumptions: approximately $13.3 million for tax-exempt mortgage bonds, $2.9 million for public housing certificates, and $2.7 million for MBS. These are sensitivities, not forecasts. PHC loan payments depend on HUD Capital Fund Program appropriations; the filing says those obligations are not debts of or guaranteed by the U.S. government. The Partnership disclosed guarantees with maximum stated exposures of about $721,000 for Greens and $4.9 million for the Ohio Properties, as well as guarantees associated with TOB/TEBS financing and an Albuquerque construction project. A $35.14 million bond purchase commitment was listed in contractual obligations. The Lincoln student-housing development was estimated to cost $34.0 million; its construction financing facilities had not been drawn at quarter-end.

Management cited opportunities to acquire bonds and properties but warned that economic weakness, lower occupancy, interest-rate changes, property performance, credit-market conditions, and access to financing could adversely affect results. It reported no material change in previously disclosed risk factors and no material change in internal control over financial reporting.

Important facts for investors to verify

• How much of reported 2013 earnings and CAD is repeatable after excluding Iona Lakes and Ohio Properties recognition items.
• Whether property-level occupancy, debt service, and taxable loan recoveries support the valuation and performance of the bond portfolio.
• How near-term debt maturities will be refinanced, and the effect of variable rates, collateral calls, and covenant requirements on liquidity.
• Whether fair values based substantially on management assumptions remain supportable; assess the disclosed sensitivities alongside actual market and property developments.
• Whether planned investments, construction, and financing produce enough recurring CAD to sustain the $0.50 annual distribution without drawing unrestricted cash.
• The status and potential exposure of disclosed guarantees, purchase commitments, and the Greens and Albuquerque transactions.