Greystone Housing Impact Investors LP annual report, FY2011

Business context and reporting period

America First Tax Exempt Investors, L.P. (ATAX) filed this Form 10-K for the fiscal year ended December 31, 2011. The Partnership primarily invests in federally tax-exempt mortgage revenue bonds secured by multifamily housing; it also held interests in multifamily properties. The filing’s consolidated results include certain property-owning entities and variable interest entities (VIEs), so consolidated results do not represent only assets and income economically attributable to unitholders.

Key financial metrics

Revenue increased about 23%, primarily from higher bond investment income and acquisitions of multifamily properties. The Partnership reported a loss despite higher revenue, including substantial loan-loss provisions and derivative fair-value expense. No conventional operating-margin measure is presented in the filing; consolidated property revenues and expenses include VIEs.

Material changes versus the prior comparable period

• Bond investment income rose to $9.5 million from $6.9 million, reflecting a larger bond portfolio and the deconsolidation of Iona Lakes; the Clarkson College bond retirement also generated about $308,000 of contingent interest.
• Property revenue rose to $16.9 million from $14.7 million, chiefly following the Arboretum and Eagle Village acquisitions and improved occupancy at some existing properties.
• Provision for loan losses increased to $4.2 million from $562,000, principally from an allowance on the Iona Lakes taxable loan. A further $953,000 provision was recorded against Woodland Park interest receivable.
• Interest expense increased to $5.8 million from $2.5 million. Management attributed about $2.7 million of the increase to derivative mark-to-market changes; the reported change is non-cash. Average borrowing costs declined, but average debt rose.
• Cash from operations improved to $10.2 million. Investing used $31.8 million, mainly for property and bond acquisitions and capital expenditures; financing provided $28.5 million.
• The Partnership acquired Arboretum and the remaining interest in Eagle Village, foreclosed on DeCordova and Weatherford, and added two Deutsche Bank tender-option-bond facilities. It retired the Briarwood Manor bond and used proceeds to repay a $4.0 million term loan.

Outlook, risks, contingencies and unusual items

• Distribution coverage: Annual distributions remained $0.50 per BUC, above reported CAD of $0.35 per unit. The Partnership supplemented the shortfall with about $3.9 million of unrestricted cash in 2011. Management expected planned investments to support the current distribution without further cash supplementation, but gave no assurance; it warned the distribution could be reduced.
• Operations outlook: Management cited economic occupancy of approximately 85% at bond-financed properties, up from 81% in 2010, and 83% at MF Properties, up from 80%. It expected operating results, rents and occupancy to improve in 2012 and 2013.
• Debt and liquidity: Debt financing was $112.7 million, alongside $46.2 million of property mortgages. Management reported leverage of about 57% against bond portfolio par value and restricted cash, and total debt-to-assets of 53%. Contractual maturities included $18.7 million of debt financing and $4.5 million of mortgages within one year; the filing says it planned to refinance or retire a mortgage maturing in 2012. Unrestricted cash was $20.2 million and restricted cash $13.9 million.
• Interest-rate exposure: Borrowing is substantially floating-rate while bond base interest is fixed. Management estimated that a 100-basis-point increase in SIFMA and LIBOR would increase annual interest expense by approximately $950,000, $177,000 and $463,000, respectively, for the TEBS, TOB and property mortgage debt. Interest-rate caps mitigate but do not eliminate this exposure.
• Credit and property risks: Bonds are non-recourse obligations supported by property cash flow and collateral, not government guarantees. Woodland Park remained in payment default; foreclosure was ongoing, and recovery depended on property performance and potential LIHTC resyndication. Iona Lakes had a $4.2 million taxable-loan loss provision. Construction and lease-up at Weatherford and DeCordova, and low occupancy at Eagle Village, also create execution risks.
• Valuation and contingencies: Bond fair values are Level 3 estimates based on management’s discounted cash-flow and yield analyses, not observable market prices. The filing’s sensitivity analysis indicated that a hypothetical adverse 10% change in a key assumption could produce about $10.7 million of additional unrealized losses. A contingent guarantee tied to the Ohio properties’ Boston Capital transaction was not accrued because management considered a repurchase event remote; approximately $6.7 million of partner equity contributions remained conditional on debt-service coverage requirements.
• Unusual items: Briarwood’s October redemption generated about $445,000 of gain; Clarkson’s May redemption included about $308,000 of contingent interest. The 2011 derivative fair-value charge was about $2.1 million. The 2010 Weatherford impairment charge did not recur in 2011.

Important facts for investors to verify

• Whether CAD and cash generation can sustainably cover the $0.50 annual distribution, given the 2011 $0.35 CAD per unit and use of unrestricted cash.
• Woodland Park foreclosure progress, recovery of bond interest receivable, and any further impairment or loan-loss provisions.
• Performance and repayment prospects for the Iona Lakes taxable loan, following the $4.2 million provision.
• Refinancing or repayment plans for 2012 maturities, and the availability and cost of replacement financing.
• Progress on Weatherford completion, DeCordova expansion, Eagle Village stabilization and the Ohio properties’ required debt-service coverage and equity funding.
• Assumptions underlying Level 3 bond valuations and the effect of interest-rate changes on borrowing costs, derivative values and collateral requirements.