Greystone Housing Impact Investors LP annual report, FY2012

Business context and reporting period

This is the Form 10-K for the fiscal year ended December 31, 2012, filed March 8, 2013. The filing identifies the registrant as America First Tax Exempt Investors, L.P.; the request metadata names Greystone Housing Impact Investors LP, so the entity-name relationship should be verified. The partnership invests primarily in federally tax-exempt multifamily housing bonds, alongside public-housing certificates, mortgage-backed securities and selected apartment properties.

At year-end, it held 22 tax-exempt mortgage revenue bonds with approximately $198.6 million of principal, financing 20 apartment properties with 3,880 units. It also held PHC Certificates with $65.3 million principal and MBS with $31.6 million principal.

Key financial metrics

Debt was approximately 51% of total assets. The filing reports distributions of $0.50 per BUC despite CAD of $0.33 per BUC; management says unrestricted cash supplemented the shortfall by approximately $5.8 million in 2012. Reported net income included $2.2 million from discontinued operations, including gains on property sales. The filing does not provide a single comparable operating-margin measure.

Material changes versus 2011

• Revenue increased about 16%, and income attributable to the partnership recovered from a loss to a profit. Results benefited from higher investment income, bond-sale gains and the absence of the 2011 $4.2 million taxable-loan impairment; 2012 also included a $453,000 provision against Woodland Park accrued interest.
• Assets expanded substantially, supported in part by a May 2012 offering of 12.65 million BUCs that generated approximately $60.0 million net proceeds. The partnership also added PHC Certificates, MBS, bonds and apartment-property investments. Debt financing rose from $112.7 million to $177.9 million.
• Operating cash flow declined approximately $2.7 million, while investing outflows rose with acquisitions. Bond-property economic occupancy improved to approximately 86% from 85%; MF Property occupancy remained about 76%.
• Unrealized gains on securities contributed $7.1 million to comprehensive income. Bond and PHC fair values rely substantially on management estimates; the filing estimates a hypothetical $10.3 million additional bond loss under an adverse yield assumption.

Outlook, risks and unusual items

• Management expected apartment operations, rental rates and occupancy to improve in 2013 and 2014, and identified a pipeline of bond investments. It expected these investments, financed partly with leverage, to support the current $0.50 annual distribution without drawing on unrestricted cash. This is an expectation, not a guarantee; management warns distributions may be reduced if cash generation falls short.
• Approximately $85.0 million of debt financing and $13.3 million of mortgage payments were scheduled within one year. Management planned to refinance maturing mortgage and TOB debt during the first half of 2013; TOB facilities were expected to be renewed. The filing notes that refinancing access and cost are uncertain.
• Woodland Park was in payment default, with foreclosure proceedings underway. The bond had a reported fair value of $11.4 million against approximately $15.7 million principal outstanding; the related taxable loan was fully reserved. A court ruling in February 2013 supported foreclosure but was subject to appeal.
• The Vantage at Judson property was under construction, with completion anticipated in spring 2014. The partnership had a conditional forward purchase commitment for senior bonds of at least $20.6 million, potentially up to $26.7 million, subject to construction, occupancy and other conversion conditions; it could terminate if conditions were unmet by January 1, 2015.
• Other material exposures include variable-rate securitization debt, reliance on annual federal appropriations for PHC Certificates, illiquid investments and valuation uncertainty, apartment-property credit and occupancy risks, tax-exempt status risks, and related-party fees and services. A contingent guarantee tied to the Greens LIHTC transaction had maximum stated exposure of approximately $721,000; management had accrued no amount, assessing a triggering event as remote.
• Subsequent to year-end, the partnership reported the transfer of Maples on 97th to its ownership, new bond acquisitions and financing, and recognition of the deferred Ohio-property gain after capital contributions. Deloitte issued an unqualified opinion on the financial statements and internal controls.

Most important facts for investors to verify

1. Whether recurring cash generation can cover the $0.50 annual distribution, given CAD of $0.33 per BUC and use of unrestricted cash to meet the 2012 shortfall.
2. How the scheduled 2013 debt maturities were refinanced or renewed, and the resulting interest costs, collateral requirements and covenant headroom.
3. Progress and recoveries from Woodland Park foreclosure, including the bond’s carrying value, accrued-interest reserve and loan-loss reserve.
4. Whether Vantage at Judson meets its construction and occupancy conditions and the final size and funding of the forward bond purchase.
5. Support for management’s estimated fair values of illiquid bonds and PHC Certificates, and the effect of adverse yield or property-performance changes.
6. Whether apartment operations and the expected investment pipeline improve CAD, and whether HUD appropriations and tax-exempt qualification remain intact.