Business context and reporting period
America First Multifamily Investors, L.P. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. Its primary business is investing in mortgage revenue bonds financing multifamily housing; it also holds public-housing trust certificates, mortgage-backed securities and interests in apartment properties. The Partnership expects most bond interest to be federally tax-exempt.
Financial results and liquidity
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $13.20 million | $12.94 million in Q1 2013 |
| Net income attributable to the Partnership | $6.05 million; $0.10 per unit | $8.32 million; $0.19 per unit in Q1 2013 |
| Comprehensive income | $27.58 million | $11.29 million in Q1 2013 |
| Cash provided by operating activities | $1.89 million | $3.05 million in Q1 2013 |
| Cash and restricted cash | $46.70 million and $4.13 million | $11.32 million and $6.85 million at December 31, 2013 |
| Total assets / liabilities | $610.88 million / $338.85 million | $534.23 million / $331.11 million at December 31, 2013 |
| Debt financing / mortgages payable | $257.51 million / $64.95 million | $257.27 million / $57.09 million at December 31, 2013 |
| Distribution declared | $0.125 per unit | $0.125 per unit in Q1 2013 |
Revenue included $3.95 million of property revenue, $6.21 million of investment income and a $2.84 million gain on the Lost Creek bond redemption. Interest expense was $2.17 million, up from $1.54 million; the filing attributes the increase mainly to higher average debt outstanding and derivative mark-to-market expense. The filing reports CAD, a non-GAAP measure, of $7.07 million, or approximately $0.125 per unit; about $2.1 million of CAD came from the Lost Creek redemption. The $51.37 million net proceeds from BUC sales in January and February helped fund investment activity. Total debt financing plus mortgages was approximately $322.5 million, or 53% of total assets.
Material changes versus Q1 2013
- Revenue rose modestly, but net income attributable to the Partnership declined. The comparison is affected by the nonrecurrence of approximately $3.5 million of previously deferred Ohio-property interest, a $250,000 guarantee fee and $1.78 million gain on sale recognized in Q1 2013.
- The Lost Creek bond was redeemed in January 2014 for approximately $18.7 million, producing a $2.84 million gain. New bond acquisitions included Harden Ranch and Decatur-Angle.
- Unrealized gains on securities and bond purchase commitments boosted Q1 2014 comprehensive income; these fair-value gains are not equivalent to realized earnings or cash flow.
- Economic occupancy was approximately 84% for bond-financed properties, down from 86% a year earlier; MF Property occupancy improved to 86% from 81%.
- The Partnership issued 9.2 million BUCs for approximately $51.4 million net proceeds. Weighted-average units outstanding rose to 56.9 million from 42.8 million.
Outlook, risks and unusual items
Management expected modest improvement in property operations and said it believed current investment and financing plans could support the existing annual distribution of $0.50 per unit without using unrestricted cash. This is conditional: management warned that if CAD falls short, distributions may need to be reduced. CAD in Q1 included a nonrecurring Lost Creek gain, and distributions exceeded CAD in some prior years, requiring use of unrestricted cash.
Refinancing is a key liquidity risk. The filing lists substantial 2014 debt maturities and says the Partnership expects to renew its TOB facilities; it also planned to extend or refinance mortgages on Eagle Village and Woodland Park. In March, it obtained two undrawn $5 million revolving credit lines. Variable-rate borrowing creates interest-rate exposure; rate caps mitigate some exposure but derivatives are not hedge-accounted. The Partnership reported compliance with financing covenants at quarter-end.
Mortgage revenue bonds and several other investments rely on Level 3 valuation inputs and management estimates; there is no active trading market for the mortgage bonds. A hypothetical 10% adverse change in the key bond valuation assumption would produce approximately $23.8 million of additional unrealized losses. Taxable property loans had $13.52 million of loan-loss reserves against $21.62 million outstanding, and the Partnership recorded reserves for accrued interest deemed not reasonably assured. Other risks include property-level occupancy and operating performance, construction execution, HUD program or regulatory changes, and the ability to access financing. Bond purchase commitments totaled approximately $48.86 million. The Lincoln student-housing development carried an estimated $34 million construction cost and potential delay damages; completion was expected before August 1, 2014. Management reported no material changes to previously disclosed risk factors and considered disclosure controls effective.
Subsequent to quarter-end, the Autumn Pines bond was sold in April for approximately $13.1 million, with a reported gain of approximately $900,000 after financing fees, and its related TOB financing was repaid. The approximately $1.85 million Glynn Place mortgage was also repaid.
Important facts for investors to verify
- Whether TOB and other debt maturities are renewed or refinanced as planned, particularly the 2014 maturities, and whether collateral or covenant requirements change.
- How much recurring CAD is generated excluding the Lost Creek redemption gain, and whether recurring cash generation covers the $0.50 annual distribution.
- Actual fair values and downside sensitivity of Level 3 bond investments, PHC certificates and purchase commitments.
- Property occupancy, debt-service performance and recoverability of taxable property loans, including the adequacy of the $13.52 million loan-loss reserve.
- Progress, final costs and financing of the Lincoln development and other committed bond purchases, including potential construction delays and guarantee exposure.