Greystone Housing Impact Investors LP(GHI) - 2019 Q2 - Quarterly Report

FORM 10-Q Filing Information Filing Details This Form 10-Q Quarterly Report for America First Multifamily Investors, L.P. covers the period ended June 30, 2019 - The registrant is America First Multifamily Investors, L.P. (ATAX), a Delaware limited partnership[2] - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2019[2] Filer Status | Filer Status | Value | | :------------- | :---- | | Accelerated filer | ☒ | | Smaller reporting company | ☒ | - As of June 30, 2019, there were 60,426,177 Beneficial Unit Certificates (BUCs) outstanding[4] Forward-Looking Statements Disclaimer and Risks The report contains forward-looking statements based on current expectations and projections, which are subject to various risks and uncertainties - Forward-looking statements are based on current expectations and projections about future events and financial trends[8] - Key risks and uncertainties include financing arrangements, mortgage loan defaults, competitive environment, interest rate changes, and regulatory shifts[9][11] - The Partnership is not obligated to publicly update or revise any forward-looking statements[9] PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets Total assets increased to $1.0 billion, driven by growth in mortgage revenue bonds held in trust and investments in unconsolidated entities | Metric | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Total Assets | $1,000,679,805 | $982,713,246 | | Total Liabilities | $585,565,311 | $583,897,129 | | Total Partners' Capital | $320,746,093 | $304,465,741 | | Cash and cash equivalents | $13,821,980 | $32,001,925 | | Mortgage revenue bonds held in trust, at fair value | $700,955,326 | $645,258,873 | | Investments in unconsolidated entities | $96,825,273 | $76,534,306 | | Debt financing, net | $519,348,651 | $505,663,565 | Condensed Consolidated Statements of Operations Net income available to Partners for the six-month period increased to $8.9 million, driven by contingent interest income | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenues | $14,346,334 | $15,785,165 | $32,010,932 | $32,243,199 | | Total expenses | $10,442,793 | $12,434,044 | $21,613,930 | $22,894,774 | | Net income | $3,886,190 | $3,338,121 | $10,338,003 | $9,342,425 | | Net income available to Partners | $3,168,427 | $2,620,359 | $8,902,477 | $7,906,900 | | BUC holders' interest in net income per BUC, basic and diluted | $0.05 | $0.04 | $0.13 | $0.13 | - Contingent interest income significantly increased for the six months ended June 30, 2019, reaching $3,042,102, compared to zero in the prior year[17] Condensed Consolidated Statements of Comprehensive Income (Loss) Six-month comprehensive income improved to $33.4 million from a loss of $9.5 million, driven by significant unrealized gains on securities | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $3,886,190 | $3,338,121 | $10,338,003 | $9,342,425 | | Unrealized gain (loss) on securities | $14,920,081 | $4,065,221 | $23,064,008 | $(17,353,309) | | Comprehensive income (loss) | $18,806,271 | $7,352,346 | $33,402,011 | $(9,493,293) | Condensed Consolidated Statements of Partners' Capital Total Partners' Capital increased to $320.8 million, primarily due to net income and unrealized gains on securities | Metric | As of June 30, 2019 | As of December 31, 2018 | | :------------------------------------- | :------------------ | :---------------------- | | Total Partners' Capital | $320,746,093 | $304,465,741 | | Accumulated Other Comprehensive Income (Loss) | $82,042,050 | $58,978,042 | | Net income allocable to Partners (6 months) | $5,734,050 | $5,286,541 | | Distributions paid or accrued (6 months) | $(8,393,271) | $(7,632,945) | | Unrealized gain on securities (6 months) | $23,064,008 | $(21,874,876) | Condensed Consolidated Statements of Cash Flows Net cash from operations decreased slightly, while cash used in investing and financing activities was significantly reduced | Metric | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $7,122,028 | $7,917,192 | | Net cash used in investing activities | $(8,051,556) | $(14,995,196) | | Net cash used in financing activities | $(17,192,504) | $(36,683,533) | | Net decrease in cash, cash equivalents and restricted cash | $(18,122,032) | $(43,761,537) | | Cash, cash equivalents and restricted cash at end of period | $15,146,579 | $27,821,792 | Notes to Condensed Consolidated Financial Statements Note 1. Basis of Presentation The Partnership invests in mortgage revenue bonds for affordable multifamily and student housing and is managed by its General Partner - The Partnership was formed on April 2, 1998, to acquire, hold, sell, and deal with a portfolio of mortgage revenue bonds (MRBs) for affordable multifamily and student housing residential properties and commercial properties[26] - The General Partner is America First Capital Associates Limited Partnership Two (AFCA 2), whose general partner is Burlington Capital LLC[27] - The Partnership issues Beneficial Unit Certificates (BUCs) and non-cumulative, non-voting, non-convertible Series A Preferred Units[27] Note 2. Summary of Significant Accounting Policies This note outlines key accounting policies, including consolidation, the adoption of new lease guidance, and reclassifications - The Partnership consolidates its wholly-owned subsidiaries and variable interest entities (VIEs) for which it is the primary beneficiary[28] - Effective January 1, 2019, the Partnership adopted ASC 842 for lease accounting, recognizing operating lease right-of-use (ROU) assets of $1.7 million and operating lease liabilities of $2.2 million, with an immaterial cumulative adjustment to partners' capital[29][30] - Amortization of deferred financing costs is now reported within interest expense in the condensed consolidated statements of operations, a reclassification applied retrospectively to prior periods[35] - The Partnership is evaluating the impact of ASU 2016-13, 'Financial Instruments – Credit Losses (Topic 326),' effective for periods beginning after December 15, 2019, on property loans, receivables, financial guarantees, and available-for-sale debt securities[38] Note 3. Partnership Income, Expenses and Cash Distributions This note details the allocation and distribution of income and proceeds among Unitholders based on established tiers - Distributions of Net Interest Income and Net Residual Proceeds are made quarterly to Unitholders of record[39] - Holders of Series A Preferred Units receive distributions at a fixed rate of 3.0% per annum prior to other Unitholders[40] - Net Interest Income (Tier 1) is allocated 99% to limited partners/BUC holders and 1% to the General Partner, while Tier 2 income is allocated 75% and 25%, respectively[41] Note 4. Net income per BUC The Partnership reports basic and diluted net income per BUC, with no dilutive BUCs for the periods presented - Basic and diluted net income per BUC is disclosed on the condensed consolidated statements of operations[42] - Unvested Restricted Unit Awards (RUAs) are considered participating securities[42] - There were no dilutive BUCs for the three and six months ended June 30, 2019 and 2018[42] Note 5. Variable Interest Entities The Partnership consolidates certain VIEs where it is the primary beneficiary and discloses its exposure to non-consolidated VIEs - The Partnership consolidates TOB, Term TOB, Term A/B, and TEBS Financings as VIEs, being the primary beneficiary with the power to control activities impacting financial performance[43][44] - The Partnership held variable interests in 16 non-consolidated VIEs as of June 30, 2019, and 17 as of December 31, 2018[46] Maximum Exposure to Loss in Non-Consolidated VIEs | Variable Interest Type | June 30, 2019 | December 31, 2018 | | :----------------------- | :------------ | :---------------- | | Mortgage revenue bonds | $30,520,000 | $51,791,000 | | Property loans | $- | $8,367,635 | | Investment in unconsolidated entities | $96,825,273 | $76,534,306 | | Total Maximum Exposure to Loss | $127,345,273 | $136,692,941 | Note 6. Investments in Mortgage Revenue Bonds The Partnership's MRB portfolio fair value was $759.5 million as of June 30, 2019, with notable acquisition and restructuring activity - MRBs provide construction and/or permanent financing for Residential Properties and a commercial property, held directly or in trusts[48] MRB Portfolio Fair Value | MRB Category | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :--------------------------- | :------------------------- | :------------------------- | | MRBs held in trust | $700,955,326 | $645,258,873 | | MRBs held by the Partnership | $58,571,381 | $86,894,562 | - In the first six months of 2019, the Partnership acquired $19.25 million in MRBs, redeemed $11.80 million, and restructured $13.96 million by collapsing Series B into Series A MRBs[56][57][58] - Cumulative unrealized losses on certain MRBs are considered temporary due to rehabilitation, market interest rate fluctuations, or operational results[55] Note 7. Public Housing Capital Fund Trust ("PHC") Certificates The fair value of PHC Certificates was $46.5 million as of June 30, 2019, with an impairment charge recognized in the prior year - PHC Certificates are Residual Participation Receipts (LIFERs) in three TOB Trusts, backed by loans to public housing authorities payable from HUD Capital Fund Program appropriations[61] PHC Certificate Fair Value | Metric | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :--------------------------- | :------------------------- | :------------------------- | | PHC Certificate Trust I | $24,930,501 | $24,894,527 | | PHC Certificate Trust II | $6,687,536 | $9,116,553 | | PHC Certificate Trust III | $14,898,117 | $14,661,006 | | Total PHC Certificates | $46,516,154 | $48,672,086 | - An impairment charge of approximately $831,000 was recognized on PHC Certificates during the three and six months ended June 30, 2018[63] Note 8. Real Estate Assets Net real estate assets totaled $63.0 million at June 30, 2019, with certain land parcels held for development listed for sale Real Estate Asset Breakdown | Metric | June 30, 2019 | December 31, 2018 | | :--------------------------- | :------------ | :---------------- | | Net real estate assets | $63,017,643 | $64,596,348 | | Land and improvements | $4,971,665 | $4,971,665 | | Buildings and improvements | $71,952,872 | $71,897,070 | | Accumulated depreciation | $(13,906,894) | $(12,272,387) | - As of June 30, 2019, land held for development in Omaha, NE, and Gardner, KS, was listed for sale[66] Note 9. Investments in Unconsolidated Entities The carrying value of equity investments in unconsolidated multifamily properties increased to $96.8 million, with a new commitment made in April 2019 - ATAX Vantage Holdings, LLC, a wholly-owned subsidiary, makes equity investments in unconsolidated entities, with the carrying value representing the maximum exposure to loss[68] Unconsolidated Entity Investment Value | Metric | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Carrying Value of Investments in Unconsolidated Entities | $96,825,273 | $76,534,306 | | Maximum Remaining Equity Commitment (June 30, 2019) | $9,475,723 | N/A | - In April 2019, the Partnership executed a $9.0 million equity commitment for the Vantage at Conroe multifamily property[70] Unconsolidated Entity Performance | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Property Revenues | $3,103,876 | $1,769,385 | $5,821,144 | $2,863,195 | | Net loss | $(571,382) | $(1,181,224) | $(688,445) | $(2,335,918) | Note 10. Property Loans, Net of Loan Loss Allowances Net property loans decreased to $7.6 million following the sale of the Vantage at Brooks property, which generated significant contingent interest income Property Loan Balances | Metric | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Property Loan Principal, net of allowance | $7,593,377 | $15,961,012 | | Outstanding Balance | $14,987,191 | $23,354,826 | | Loan Loss Allowance | $(7,393,814) | $(7,393,814) | - In January 2019, the Partnership received all outstanding principal and accrued interest on the Vantage at Brooks, LLC property loan, plus approximately $3.0 million in contingent interest, upon the property's sale[74] - Interest on the Cross Creek property loans and approximately $983,000 of Ohio Properties' property loans was in nonaccrual status due to unlikelihood of collection[73] Note 11. Income Tax Provision Income tax expense, incurred by a wholly-owned subsidiary, increased to $58,999 for the six months ended June 30, 2019 - Income tax expense is recognized for federal, state, and local income taxes incurred by Greens Hold Co, a wholly-owned subsidiary[75] Income Tax Expense Breakdown | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Current income tax expense (benefit) | $32,823 | $13,000 | $115,163 | $(28,000) | | Deferred income tax expense (benefit) | $(15,472) | $- | $(56,164) | $34,000 | | Total income tax expense | $17,351 | $13,000 | $58,999 | $6,000 | - No valuation allowance was recorded against deferred income tax assets as of June 30, 2019, and December 31, 2018[75] Note 12. Other Assets Total other assets increased to $4.8 million, primarily due to the recognition of operating lease right-of-use assets upon adopting ASC 842 Other Asset Balances | Metric | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Total other assets | $4,834,247 | $4,515,609 | | Deferred financing costs, net | $297,334 | $397,823 | | Fair value of derivative instruments | $118,279 | $626,633 | | Taxable mortgage revenue bonds, at fair value | $1,441,316 | $1,409,895 | | Operating lease right-of-use assets, net | $1,689,247 | $- | - Operating lease right-of-use assets, net, were recorded due to the adoption of ASC 842 effective January 1, 2019[76] Note 13. Accounts Payable, Accrued Expenses and Other Liabilities Total other liabilities increased to $8.2 million, mainly due to the recognition of operating lease liabilities following the adoption of ASC 842 Other Liability Balances | Metric | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Total accounts payable, accrued expenses and other liabilities | $8,226,042 | $7,543,822 | | Accounts payable | $81,452 | $230,631 | | Accrued expenses | $2,060,278 | $2,956,368 | | Accrued interest expense | $2,454,184 | $2,270,348 | | Operating lease liabilities | $2,147,421 | $- | - Operating lease liabilities were recognized due to the adoption of ASC 842 effective January 1, 2019[78] - The 50/50 MF Property has a ground lease expiring in March 2038, with an option to extend for five years; future contractual payments total $5,294,058[79][80] Note 14. Unsecured Lines of Credit The Partnership maintains two unsecured lines of credit totaling $60.0 million, with an outstanding balance of $23.2 million as of June 30, 2019 Unsecured Line of Credit Details | Line of Credit | June 30, 2019 Outstanding | December 31, 2018 Outstanding | Total Commitment | Maturity | Period End Rate (June 30, 2019) | | :--------------------------- | :------------------------ | :-------------------------- | :--------------- | :------- | :------------------------------ | | Bankers Trust non-operating | $13,200,000 | $35,659,200 | $50,000,000 | June 2020 | 4.93% | | Bankers Trust operating | $10,000,000 | $- | $10,000,000 | June 2020 | 5.68% | | Total unsecured lines of credit | $23,200,000 | $35,659,200 | $60,000,000 | | | - The Partnership was in compliance with all covenants in the Credit Agreement as of June 30, 2019[83] - The Partnership is required to reduce the operating LOC to zero for fifteen consecutive days each quarter and fulfilled this obligation for all periods presented, including repaying the balance in full in July 2019[84] Note 15. Debt Financing Total net debt financings increased to $519.4 million, with new Term A/B and Term TOB Trusts entered into during the first half of 2019 Debt Financing Balances | Metric | June 30, 2019 Outstanding Debt | December 31, 2018 Outstanding Debt | | :------------------------------------- | :----------------------------- | :----------------------------- | | Total Debt Financings, net | $519,348,651 | $505,663,565 | | Fixed TEBS financing (M45) | $218,450,958 | $219,250,387 | | Variable TEBS financing (M24, M31, M33) | $152,418,717 | $153,146,544 | | TOB & Term A/B Trusts Securitization | $130,383,376 | $133,261,634 | - In February 2019, the Partnership entered into two Term A/B Trusts financings with Deutsche Bank totaling $5.26 million[96] - In May 2019, the Partnership entered into a Term TOB Trust financing with Morgan Stanley secured by an MRB for $13.17 million[96] - The Partnership was in compliance with all covenants for Deutsche Bank and Morgan Stanley financing arrangements as of June 30, 2019[93][94] Debt Maturity Schedule | Future Maturity Period | Amount | | :--------------------- | :------------- | | Remainder of 2019 | $173,686,691 | | 2020 | $79,902,131 | | 2021 | $2,663,694 | | 2022 | $15,666,828 | | 2023 | $2,881,189 | | Thereafter | $247,272,124 | | Total | $522,072,657 | Note 16. Mortgages Payable and Other Secured Financing Net mortgages payable and other secured financing totaled $27.1 million, primarily for The 50/50 MF Property, with near-term maturities Mortgages Payable Balances | Metric | June 30, 2019 Outstanding | December 31, 2018 Outstanding | | :------------------------------------- | :------------------------ | :-------------------------- | | Total Mortgages Payable and Other Secured Financing, net | $27,127,554 | $27,454,375 | | The 50/50 MF Property--TIF Loan | $2,980,942 | $3,118,478 | | The 50/50 MF Property--Mortgage | $24,146,612 | $24,335,897 | | Weighted Average Period End Rate | 4.96% | 4.96% | Mortgages Payable Maturity Schedule | Future Maturity Period | Amount | | :--------------------- | :------------- | | Remainder of 2019 | $3,234,033 | | 2020 | $23,944,872 | | Total | $27,178,905 | Note 17. Interest Rate Derivative Agreements The Partnership uses non-designated interest rate cap agreements to mitigate interest rate risk, with their fair value recognized in current earnings - The Partnership uses interest rate cap agreements to set an upper limit on the base rate of interest paid on variable-rate debt financings[106] Derivative Instrument Details | Metric | June 30, 2019 Fair Value | December 31, 2018 Fair Value | | :--------------------------- | :------------------------- | :------------------------- | | Fair Value of Derivative Instruments | $118,279 | $626,633 | | Total Notional Amount (June 30, 2019) | $373,913,430 | N/A | - Interest rate derivatives are not designated as hedging instruments; changes in fair value are included in current period earnings as interest expense[106] - Two interest rate swaps with Deutsche Bank, previously used to mitigate risk for TOB Trusts, were terminated in September and October 2018[105] Note 18. Commitments and Contingencies The Partnership has contingent liabilities from construction loan and other guarantees, for which no amounts have been accrued - The Partnership is subject to various legal proceedings and claims in the ordinary course of business, with outcomes not expected to have a material effect on financial statements[107] Guarantee Exposure | Guarantee Type | Maximum Exposure as of June 30, 2019 | | :--------------------------- | :----------------------------------- | | Construction Loan Guarantees | $27,401,925 | | Other Guarantees (LIHTCs) | $6,142,094 | - No amounts have been accrued for these contingent liabilities as the likelihood of guarantee claims or repurchase events is remote[108][110] Note 19. Redeemable Series A Preferred Units The Partnership has issued 9.45 million Series A Preferred Units with a fixed 3.0% distribution rate and a total purchase price of $94.5 million - The Partnership has issued 9,450,000 non-cumulative, non-voting, non-convertible Series A Preferred Units via private placements[111] Series A Preferred Unit Details | Metric | Value | | :--------------------------- | :------------ | | Units outstanding (June 30, 2019) | 9,450,000 | | Total Purchase Price | $94,500,000 | | Distribution Rate | 3.00% | | Redemption Price per Unit | $10.00 | | Earliest Redemption Date Range | March 2022 - October 2023 | Note 20. Restricted Unit Awards ("RUAs") Compensation expense for RUAs decreased in 2019, with $532,000 of unrecognized expense remaining as of June 30, 2019 - The Plan permits the grant of RUAs to employees and board members, with vesting conditions typically ranging from three months to three years[112] RUA Compensation Expense | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | RUA compensation expense | $186,230 | $543,521 | $370,414 | $750,157 | - As of June 30, 2019, there was approximately $532,000 of total unrecognized compensation expense related to nonvested RUAs, expected to be recognized over a weighted-average period of 0.8 years[114] Note 21. Transactions with Related Parties The Partnership incurs administrative and property management fees from its General Partner and affiliates, totaling $1.9 million for the first half of 2019 Fees Paid to Related Parties | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Partnership administrative fees paid to AFCA 2 | $902,000 | $927,000 | $1,800,000 | $1,849,000 | | Property management fees paid to an affiliate | $38,000 | $48,000 | $73,000 | $98,000 | | Reimbursable franchise margin taxes | $16,000 | $- | $32,000 | $- | Fees Received by General Partner from Third Parties | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Non-Partnership property administrative fees received by AFCA 2 | $9,000 | $18,000 | $18,000 | $43,000 | | Investment/mortgage placement fees received by AFCA 2 | $731,000 | $530,000 | $822,000 | $1,598,000 | - Receivables due from unconsolidated entities and affiliates totaled approximately $102,000 as of June 30, 2019, and outstanding liabilities due to related parties totaled approximately $316,000[121] Note 22. Fair Value of Financial Instruments Most of the Partnership's financial instruments are categorized as Level 3, with total assets measured at fair value reaching $807.6 million - Fair value measurements are categorized into a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[123] - Investments in MRBs, PHC Certificates, Taxable MRBs, and Interest Rate Derivatives are categorized as Level 3 inputs, relying on discounted cash flow and yield to maturity or call analysis with unobservable inputs[125][127][129][131] Assets at Fair Value | Asset Type | Fair Value as of June 30, 2019 | | :------------------------------------- | :----------------------------- | | Mortgage revenue bonds, held in trust | $700,955,326 | | Mortgage revenue bonds | $58,571,381 | | PHC Certificates | $46,516,154 | | Taxable mortgage revenue bonds | $1,441,316 | | Derivative instruments | $118,279 | | Total Assets at Fair Value, net | $807,602,456 | Liabilities at Fair Value | Liability Type | Carrying Amount (June 30, 2019) | Fair Value (June 30, 2019) | | :------------------------------------- | :------------------------------ | :------------------------- | | Debt financing and LOCs | $542,548,651 | $563,262,963 | | Mortgages payable and other secured financing | $27,127,554 | $27,178,905 | Note 23. Segments The Partnership operates through four reportable segments, with the Mortgage Revenue Bond Investments segment being the largest by total assets - The Partnership has four reportable segments: Mortgage Revenue Bond Investments, MF Properties, Public Housing Capital Fund Trusts, and Other Investments[141] - The Mortgage Revenue Bond Investments segment is the primary purpose, holding MRBs for residential and commercial properties[143] Segment Total Assets | Segment | Total Assets (June 30, 2019) | Total Assets (December 31, 2018) | | :------------------------------------- | :--------------------------- | :--------------------------- | | Mortgage Revenue Bond Investments | $885,527,565 | $864,311,647 | | MF Properties | $71,414,856 | $71,120,280 | | Public Housing Capital Fund Trusts | $46,774,490 | $48,942,334 | | Other Investments | $96,883,703 | $85,048,514 | Segment Net Income (Loss) | Segment | 6 Months Ended June 30, 2019 Net Income (Loss) | 6 Months Ended June 30, 2018 Net Income (Loss) | | :------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Mortgage Revenue Bond Investments | $4,328,839 | $6,607,885 | | MF Properties | $(512,131) | $(458,155) | | Public Housing Capital Fund Trusts | $457,290 | $192,425 | | Other Investments | $6,064,005 | $3,000,270 | Note 24. Subsequent Events Subsequent to quarter-end, the Partnership entered into new financings, refinanced existing debt to fixed rates, and extended its lines of credit - In July 2019, the Partnership entered into two variable rate TOB Trust financings with Mizuho Capital Markets, LLC totaling $25.75 million[149] - The M24 TEBS Financing was refinanced to a fixed interest rate of 3.05% with a maturity extended to May 2027[150] - The M33 TEBS Financing was refinanced to a fixed interest rate of 3.24% with a maturity extended to September 2030[151] - The unsecured operating and non-operating lines of credit were extended to June 2021[152] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Critical accounting policies are consistent with the 2018 Annual Report and involve management estimates and assumptions - Critical accounting policies are consistent with those described in the Annual Report on Form 10-K for the year ended December 31, 2018[155] - Financial statements require management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses[155] Executive Summary The Partnership's primary objective is to acquire and hold mortgage revenue bonds, operating through four reportable segments - The Partnership's primary purpose is to acquire a portfolio of MRBs for affordable multifamily and student housing, and commercial properties[156] - The Partnership includes assets, liabilities, and results of operations of its wholly-owned subsidiaries and consolidated VIEs[157] - As of June 30, 2019, the Partnership has four reportable segments: Mortgage Revenue Bond Investments, Public Housing Capital Fund Trusts, MF Properties, and Other Investments[158] Recent Investment Activity Investment activity in the first half of 2019 included MRB acquisitions, redemptions, and restructurings, alongside investments in unconsolidated entities | Investment Activity | Q2 2019 (in 000's) | Q1 2019 (in 000's) | Q2 2018 (in 000's) | Q1 2018 (in 000's) | | :------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Mortgage revenue bond acquisitions | $13,200 | $6,050 | $19,540 | $- | | Mortgage revenue bond redemptions | $6,228 | $5,574 | $11,000 | $10,447 | | Mortgage revenue bond restructured | $13,960 | $- | $- | $- | | Investments in unconsolidated entities | $10,692 | $6,594 | $6,764 | $12,323 | | Property loan redemptions | $- | $8,368 | $500 | $- | | Tier 2 income distributable to General Partner | N/A | $753 | N/A | N/A | Recent Financing Activity Financing activities in the first half of 2019 included net repayments on lines of credit and proceeds from new Term TOB and Term A/B financings | Financing Activity | Q2 2019 (in 000's) | Q1 2019 (in 000's) | Q2 2018 (in 000's) | Q1 2018 (in 000's) | | :------------------------------------- | :----------------- | :----------------- | :----------------- | :----------------- | | Net repayment on unsecured LOCs | $12,459 | $- | $460 | $- | | Proceeds from new Term TOB Financings with Morgan Stanley | $13,167 | $- | $- | $- | | Proceeds from new Term A/B Financings with Deutsche Bank | $- | $5,264 | $- | $- | | Proceeds on issuance of BUCs, net of issuance costs | $- | $- | $- | $192 | Mortgage Revenue Bond Investments Segment Segment net income decreased by 34.5% for the six-month period, primarily due to lower revenues and higher interest expense from derivative adjustments | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenues | $10,247,000 | $11,098,000 | $20,691,000 | $23,169,000 | | Interest expense | $5,457,000 | $5,669,000 | $11,105,000 | $10,625,000 | | Segment net income | $2,285,000 | $2,308,000 | $4,329,000 | $6,608,000 | - The decrease in total revenues for the six months ended June 30, 2019, was primarily due to a decrease in MRB volume and interest rates[169] - The net increase in interest expense for the six months was predominantly due to changes in the Partnership's derivative fair value adjustments[173] Public Housing Capital Fund Trusts Segment Segment net income increased significantly due to the non-recurrence of an $831,000 impairment charge recognized in the prior year | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenues | $586,000 | $623,000 | $1,224,000 | $1,243,000 | | Interest expense | $385,000 | $246,000 | $766,000 | $220,000 | | Segment net income (loss) | $201,000 | $(454,000) | $457,000 | $192,000 | - The increase in segment net income for both periods was primarily due to the non-recurrence of an approximately $831,000 impairment charge recognized in the second quarter of 2018[178][180] - Interest expense increased due to fair value adjustments to interest rate swaps, with a net increase of approximately $147,000 for the three months and $540,000 for the six months[177][179] MF Properties Segment The segment's net loss for the six-month period increased, driven by a decrease in total revenues following the sale of the Jade Park MF Property | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenues | $2,035,000 | $2,477,000 | $4,028,000 | $4,814,000 | | Interest expense | $366,000 | $435,000 | $730,000 | $852,000 | | Segment net loss | $(75,000) | $(95,000) | $(512,000) | $(458,000) | - The decrease in total revenues and interest expense for both periods was primarily due to the sale of the Jade Park MF Property in September 2018[183][184][186][187] - Real estate operating expenses decreased by approximately $198,000 for the three months and $388,000 for the six months due to the Jade Park sale[185][188] Other Investments Segment Six-month segment net income more than doubled to $6.1 million, primarily driven by $3.0 million in contingent interest from a property loan redemption | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenues | $1,479,000 | $1,587,000 | $6,068,000 | $3,017,000 | | Segment net income | $1,475,000 | $1,579,000 | $6,064,000 | $3,000,000 | - The increase in total revenues and segment net income for the six months ended June 30, 2019, was primarily due to approximately $3.0 million of contingent interest income recognized from the Vantage at Brooks, LLC property loan redemption[192] - For the three months, total revenues decreased due to redemptions of Vantage at New Braunfels, LLC and Vantage at Brooks, LLC property loans, partially offset by additional investments in unconsolidated entities[191] Discussion of the Residential Properties Securing our Mortgage Revenue Bonds and MF Properties Non-Consolidated Properties - Stabilized Occupancy rates for non-consolidated stabilized properties remained consistent, and debt service on the Partnership's bonds was current - Physical and economic occupancy for non-consolidated stabilized properties were relatively consistent for the six months ended June 30, 2019, compared to the same period in 2018[196] - Debt service on the Partnership's bonds for these properties was current as of June 30, 2019[194] Occupancy Rates | Metric | June 30, 2019 | June 30, 2018 | | :--------------------------- | :------------ | :------------ | | Average Physical Occupancy | 96% | 95% | | Average Economic Occupancy | 91% | 90% | Non-Consolidated Properties - Not Stabilized Physical occupancy for non-stabilized properties increased, driven by new investments and properties nearing rehabilitation completion - Physical occupancy for non-stabilized Residential Properties increased for the six months ended June 30, 2019, due to new investments with high occupancies and increased occupancy at properties nearing rehabilitation completion[202] - Economic occupancy for non-stabilized Residential Properties increased slightly, with expectations for further increases as properties complete rehabilitation and lease-up[203] Occupancy Rates | Metric | June 30, 2019 | June 30, 2018 | | :--------------------------- | :------------ | :------------ | | Average Physical Occupancy | 93% | 74% | | Average Economic Occupancy | 82% | 81% | MF Properties Occupancy for the two consolidated MF Properties increased slightly due to improved operations at The 50/50 MF Property - As of June 30, 2019, the Partnership owned two consolidated MF Properties (Suites on Paseo and The 50/50 MF Property) with a total of 859 rental units[205][206] - Both MF Properties met the stabilization criteria for the six months ended June 30, 2019[205] - Physical and economic occupancy increased slightly due to improving operations at The 50/50 MF Property from a strong fall 2018 lease-up[209] Occupancy Rates | Metric | June 30, 2019 | June 30, 2018 | | :--------------------------- | :------------ | :------------ | | Average Physical Occupancy | 94% | 92% | | Average Economic Occupancy | 88% | 87% | Results of Operations Revenues and Other Income Total revenues decreased slightly for the six-month period, as lower property and other interest income were offset by significant contingent interest income | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Property revenues | $2,035,000 | $2,403,000 | $4,028,000 | $4,740,000 | | Investment income | $12,074,000 | $12,249,000 | $24,483,000 | $25,627,000 | | Contingent interest income | $30,000 | $- | $3,042,000 | $- | | Other interest income | $207,000 | $1,059,000 | $429,000 | $1,802,000 | | Other income | $- | $74,000 | $29,000 | $74,000 | | Total Revenues and Other Income | $14,346,000 | $15,785,000 | $32,011,000 | $32,243,000 | - Property revenues decreased primarily due to the sale of the Jade Park MF Property in September 2018[211][215] - Contingent interest income for the six months ended June 30, 2019, was predominantly realized from the redemption of the Vantage at Brooks, LLC property loan in January 2019[215] - Other interest income decreased due to property loan redemptions and non-recurring interest income recognized in 2018[213][216] Expenses Total expenses decreased for both three and six-month periods, driven by the non-recurrence of an impairment charge and lower operating costs | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Real estate operating | $919,000 | $1,290,000 | $2,096,000 | $2,687,000 | | Impairment of securities | $- | $831,000 | $- | $831,000 | | Depreciation and amortization | $820,000 | $922,000 | $1,641,000 | $1,828,000 | | Interest expense | $6,207,000 | $6,350,000 | $12,602,000 | $11,696,000 | | General and administrative | $2,497,000 | $3,041,000 | $5,275,000 | $5,853,000 | | Total Expenses | $10,443,000 | $12,434,000 | $21,614,000 | $22,895,000 | - Real estate operating expenses decreased due to the sale of the Jade Park MF Property and lower general operating expenses at Suites on Paseo[220][224] - No impairment of securities was recognized in 2019, compared to $831,000 in 2018[221][225] - Interest expense for the six months increased due to higher effective interest rates on variable-rate financings and fair value adjustments to interest rate derivatives, partially offset by lower average principal outstanding[227] Income Tax Expense Income tax expense was minimal as the Partnership's taxable subsidiary generated minimal taxable income - The Greens Hold Co, a wholly-owned subsidiary subject to federal and state income tax, generated minimal taxable income for the three and six months ended June 30, 2019 and 2018[228] Liquidity and Capital Resources Sources of Liquidity Primary liquidity sources include operating cash flows, unsecured lines of credit, debt financing, and equity issuances - Principal sources of liquidity include operating cash flows from investments (MRBs, PHCs, property loans, unconsolidated entities) and MF Properties[232][233][234] - The Partnership maintains unsecured operating ($10.0 million commitment) and non-operating ($50.0 million commitment) lines of credit, which were extended to June 2021 in July 2019[235][236] - Other sources include proceeds from increasing leverage of debt financings, issuances of BUCs (with $222.0 million available under the current registration statement), Series A Preferred Units, and asset sales[237][238][239][240] Uses of Liquidity Liquidity is primarily used for operating expenses, distributions, new investments, and debt service - Principal uses of liquidity include general, administrative, and operating expenses, and distributions to holders of Series A Preferred Units (3.0% fixed annual rate) and BUCs ($0.125 per BUC quarterly)[241][242][243] - Liquidity is also used for investments in additional MRBs, tax-exempt investments, other investments, and unconsolidated entities[244] - Debt service on debt financings and mortgages payable is a key use, with the Partnership diversifying lending relationships and converting variable-rate TEBS Financings to fixed rates to reduce interest rate exposure[245][246][247] Leverage Ratio The Partnership utilizes leverage to enhance returns, maintaining an overall leverage ratio of approximately 61% as of June 30, 2019 - The Partnership uses leverage to enhance Unitholder returns, managed by target ratios and an overall constraint set by the Board of Managers[251] - The leverage ratio is defined as total outstanding debt divided by total assets using the carrying value of MRBs, PHC Certificates, property loans, taxable MRBs, initial finance costs, and MF Properties at cost[251] - As of June 30, 2019, the overall leverage ratio was approximately 61%[251] Cash Flows The Partnership experienced a net cash outflow of $18.1 million for the six-month period, with financing activities being the largest use of cash - For the six months ended June 30, 2019, the Partnership used cash of $18.1 million[252] Cash Flow Summary | Cash Flow Activity (6 Months Ended June 30, 2019) | Amount | | :------------------------------------------------ | :------------- | | Provided by operating activities | $7.1 million | | Used in investing activities | $8.1 million | | Used in financing activities | $17.2 million | - The change in cash used in financing activities was predominantly due to an increase in net proceeds from debt financing of $30.1 million, offset by a decrease in net proceeds from unsecured lines of credit of $12.0 million[254] Cash Available for Distribution Cash Available for Distribution, a non-GAAP measure, was $0.19 per BUC for the six-month period, compared to distributions declared of $0.25 per BUC - Cash Available for Distribution (CAD) is a non-GAAP measure used to provide relevant information about the Partnership's operations[257] CAD Reconciliation | Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $3,886,190 | $3,338,121 | $10,338,003 | $9,342,425 | | Total CAD | $4,610,421 | $5,337,251 | $11,184,690 | $11,241,422 | | Total CAD per BUC, basic | $0.08 | $0.09 | $0.19 | $0.19 | | Distributions declared, per BUC | $0.125 | $0.125 | $0.250 | $0.250 | - CAD calculation adjusts net income by adding back non-cash expenses and deducting Series A Preferred Unit distributions and Tier 2 income distributable to the General Partner[257][259] Off Balance Sheet Arrangements The Partnership holds MRBs collateralized by properties of non-controlled entities and has various guarantees but does not engage in non-exchange traded contracts - The Partnership holds MRBs collateralized by residential and commercial properties owned by non-controlled entities, in which it has no equity interest or guarantee obligations[263] - The Partnership has various commitments and guarantees, as discussed in Note 18, but does not anticipate significant cash payments from these obligations[264] - The Partnership does not engage in trading activities involving non-exchange traded contracts, limiting exposure to financing, liquidity, market, or credit risk[264] Contractual Obligations Contractual obligations are consistent with the 2018 Annual Report, with a strategic objective to match asset and liability durations - Contractual obligations, including debt obligations maturing in 2019, have only changed pursuant to executed contracts during the six months ended June 30, 2019[267] - The strategic objective is to leverage the MRB portfolio using long-term securitization financings to match asset and liability durations and manage spreads[266] Recently Issued Accounting Pronouncements Information regarding recently issued accounting pronouncements is discussed in Note 2 to the condensed consolidated financial statements - For a discussion of recently issued accounting pronouncements, refer to Note 2 to the Partnership's condensed consolidated financial statements[268] Item 3. Quantitative and Qualitative Disclosures About Market Risk Mortgage Revenue Bonds and PHC Certificate Sensitivity Analysis A 10% adverse shift in effective yields would result in estimated unrealized losses of $23.1 million for MRBs and $1.2 million for PHC Certificates - Fair values of MRBs and PHC Certificates are determined by a third-party pricing service using discounted cash flow and yield to maturity/call analysis, incorporating unobservable inputs[270][271] Fair Value Sensitivity | Description | Estimated Fair Value (in 000's) | Range of Effective Yields used in Valuation | Range of Effective Yields if 10% Adverse Applied | Additional Unrealized Losses with 10% Adverse Change (in 000's) | | :--------------------------- | :------------------------------ | :------------------------------------------ | :----------------------------------------------- | :------------------------------------------------------------- | | Mortgage Revenue Bonds | $759,527 | 2.9%-8.9% | 3.2%-9.8% | $23,082 | | PHC Certificates | $46,516 | 4.7%-5.5% | 5.2%-6.1% | $1,239 | Geographic Risk The MRB portfolio has significant geographic concentrations in Texas, California, and South Carolina, though no adverse risk is perceived - Properties securing MRBs are geographically dispersed, with significant concentrations in Texas, California, and South Carolina[274] Geographic Concentration | State | June 30, 2019 | December 31, 2018 | | :---------- | :------------ | :---------------- | | Texas | 43% | 43% | | California | 18% | 18% | | South Carolina | 17% | 17% | - The Partnership does not believe it is exposed to adverse risk in these concentrated markets after reviewing economic performance[274] Summary of Interest Rates on Borrowings and Interest Rate Cap Agreements Borrowing costs vary by investment type, and the Partnership uses interest rate cap agreements to mitigate exposure to variable-rate financing - Unsecured LOCs have variable interest rates ranging between 4.9% and 5.7%[275] - TEBS facilities have variable interest rates between 3.1% and 3.9% (M24, M31, M33) and a fixed rate of 3.82% (M45)[275] - Mortgages payable have fixed and variable interest rates ranging between 4.7% and 5.0%[275] - The Partnership uses interest rate cap agreements to mitigate exposure to interest rate fluctuations on variable-rate financing facilities, with a total fair value of $118,279 as of June 30, 2019[275] Interest Rate Risk – Change in Net Interest Income A sensitivity analysis indicates that a 200 basis point increase in interest rates would decrease net interest income by an estimated $1.7 million - A sensitivity analysis shows the impact on net interest income assuming an immediate parallel shift in the LIBOR and SIFMA yield curves[276] Net Interest Income Sensitivity | Interest Rate Change | Change in Net Interest Income (in 000's) | | :------------------- | :--------------------------------------- | | - 25 basis points | $285,114 | | + 50 basis points | $(583,555) | | + 100 basis points | $(982,454) | | + 150 basis points | $(1,350,340) | | + 200 basis points | $(1,718,683) | - The analysis assumes no action by the Partnership to change its sensitivity to interest rate movements and may not be indicative of actual changes[277] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The CEO and CFO concluded that the Partnership's disclosure controls and procedures were effective as of June 30, 2019[279] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[280] PART II – OTHER INFORMATION Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Partnership's 2018 Annual Report on Form 10-K - No material changes to risk factors from the Annual Report on Form 10-K for the year ended December 31, 2018, for the three and six months ended June 30, 2019[283] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO/CFO certifications and XBRL formatted financial statements - Exhibits include certifications of CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[284] - The condensed consolidated financial statements and notes for the period ended June 30, 2019, are filed in XBRL format[284] SIGNATURES The report was duly signed on August 2, 2019, by the Chief Executive Officer and Chief Financial Officer - The report was signed on August 2, 2019, by Chad L. Daffer, Chief Executive Officer, and Craig S. Allen, Chief Financial Officer[287]