UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-24843
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
(Exact name of registrant as specified in its charter)
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Delaware
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47-0810385 |
(State or other jurisdiction
|
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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1004 Farnam Street, Suite 400 Omaha, Nebraska
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68102 |
(Address of principal executive offices)
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(Zip Code) |
(402) 444-1630
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or non-accelerated filer. See definition of accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non- accelerated filer þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
INDEX
Forward-Looking Statements
This report (including, but not limited to, the information contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations) contains forward-looking statements
that reflect managements current beliefs and estimates of future economic circumstances, industry
conditions, the Companys performance and financial results. All statements, trend analysis and
other information concerning possible or assumed future results of operations of the Company and
the investments it has made constitute forward-looking statements. Beneficial Unit Certificate
(BUC) holders and others should understand that these forward-looking statements are subject to
numerous risks and uncertainties and a number of factors could affect the future results of the
Company and could cause those results to differ materially from those expressed in the
forward-looking statements contained herein. These factors include general economic and business
conditions such as the availability and credit worthiness of prospective tenants, lease rents,
operating expenses, the terms and availability of financing for properties financed by the
tax-exempt mortgage revenue bonds owned by the Partnership, adverse changes in the real estate
markets from governmental or legislative forces, lack of availability and credit worthiness of
counterparties to finance future acquisitions and interest rate fluctuations and other items
discussed under Risk Factors in Item 1A of the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 and in Item 1A of Part II of this report.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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September 30, |
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December 31, |
|
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|
2006 |
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|
2005 |
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,791,931 |
|
|
$ |
3,298,605 |
|
Restricted cash |
|
|
3,651,408 |
|
|
|
3,116,340 |
|
Interest receivable |
|
|
318,634 |
|
|
|
142,816 |
|
Tax-exempt mortgage revenue bonds |
|
|
23,674,416 |
|
|
|
17,033,964 |
|
Other tax-exempt bond |
|
|
4,800,000 |
|
|
|
12,000,000 |
|
Real estate assets: |
|
|
|
|
|
|
|
|
Land |
|
|
7,280,555 |
|
|
|
7,280,555 |
|
Buildings and improvements |
|
|
75,567,081 |
|
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|
75,215,802 |
|
|
|
|
|
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|
|
Real estate assets before accumulated depreciation |
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|
82,847,636 |
|
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|
82,496,357 |
|
Accumulated depreciation |
|
|
(27,668,139 |
) |
|
|
(25,903,267 |
) |
|
|
|
|
|
|
|
Net real estate assets |
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|
55,179,497 |
|
|
|
56,593,090 |
|
Other assets |
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|
1,139,824 |
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|
1,858,374 |
|
Assets of discontinued operations |
|
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|
|
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|
17,530,935 |
|
|
|
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|
|
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Total Assets |
|
$ |
102,555,710 |
|
|
$ |
111,574,124 |
|
|
|
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|
|
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Liabilities and Partners Capital |
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Liabilities |
|
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|
|
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Accounts payable, accrued expenses and other liabilities |
|
$ |
6,990,739 |
|
|
$ |
5,917,600 |
|
Distribution payable |
|
|
1,341,535 |
|
|
|
1,341,534 |
|
Debt financing |
|
|
45,900,000 |
|
|
|
45,990,000 |
|
Liabilities of discontinued operations |
|
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|
18,685,000 |
|
|
|
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Total Liabilities |
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54,232,274 |
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|
71,934,134 |
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Commitments and Contingencies |
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Partners Capital |
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|
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General Partner |
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|
211,546 |
|
|
|
178,058 |
|
Beneficial Unit Certificate (BUC) holders |
|
|
92,142,590 |
|
|
|
88,827,326 |
|
Unallocated deficit of variable interest entities |
|
|
(44,030,700 |
) |
|
|
(49,365,394 |
) |
|
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|
|
|
|
|
Total Partners Capital |
|
|
48,323,436 |
|
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|
39,639,990 |
|
|
|
|
|
|
|
|
Total Liabilities and Partners Capital |
|
$ |
102,555,710 |
|
|
$ |
111,574,124 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the
condensed consolidated financial statements.
1
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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For the Three Months Ended, |
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For the Nine Months Ended, |
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September 30, 2006 |
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|
September 30, 2005 |
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September 30, 2006 |
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|
September 30, 2005 |
|
Income: |
|
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|
|
|
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|
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|
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|
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Rental revenues |
|
$ |
3,419,475 |
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|
$ |
3,274,608 |
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|
$ |
10,277,627 |
|
|
$ |
9,837,001 |
|
Mortgage revenue bond investment income |
|
|
369,300 |
|
|
|
267,060 |
|
|
|
995,668 |
|
|
|
801,313 |
|
Other interest income |
|
|
51,803 |
|
|
|
18,114 |
|
|
|
269,067 |
|
|
|
99,926 |
|
Gain on sale of assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,578 |
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|
3,559,782 |
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|
|
11,542,362 |
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|
10,864,990 |
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Expenses: |
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|
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Real estate operating (exclusive of items shown below) |
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|
2,212,319 |
|
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|
2,446,672 |
|
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|
6,534,454 |
|
|
|
6,276,470 |
|
Depreciation and amortization |
|
|
582,319 |
|
|
|
662,482 |
|
|
|
1,761,225 |
|
|
|
2,006,400 |
|
Interest |
|
|
710,078 |
|
|
|
222,265 |
|
|
|
1,491,020 |
|
|
|
951,937 |
|
General and administrative |
|
|
386,869 |
|
|
|
774,808 |
|
|
|
1,106,495 |
|
|
|
1,630,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,891,585 |
|
|
|
4,106,227 |
|
|
|
10,893,194 |
|
|
|
10,865,156 |
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) from continuing operations |
|
|
(51,007 |
) |
|
|
(546,445 |
) |
|
|
649,168 |
|
|
|
(166 |
) |
Income (loss) from discontinued operations (Including gain
on sale of $11,667,246 in 2006) |
|
|
11,783,237 |
|
|
|
(81,597 |
) |
|
|
12,188,431 |
|
|
|
200,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,732,230 |
|
|
$ |
(628,042 |
) |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
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|
Net income allocated to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Partner |
|
$ |
50,815 |
|
|
$ |
8,562 |
|
|
$ |
75,029 |
|
|
$ |
33,687 |
|
BUC holders |
|
|
5,030,653 |
|
|
|
847,569 |
|
|
|
7,427,875 |
|
|
|
3,334,986 |
|
Unallocated income (loss) of variable interest entities |
|
|
6,650,762 |
|
|
|
(1,484,173 |
) |
|
|
5,334,695 |
|
|
|
(3,168,423 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,732,230 |
|
|
$ |
(628,042 |
) |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
BUC holders interest in net income per unit (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.51 |
|
|
$ |
0.09 |
|
|
$ |
0.76 |
|
|
$ |
0.34 |
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, basic and diluted, per unit |
|
$ |
0.51 |
|
|
$ |
0.09 |
|
|
$ |
0.76 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units
outstanding, basic and diluted |
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the condensed
consolidated financial statements.
2
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS CAPITAL AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(UNAUDITED)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
Beneficial Unit |
|
|
deficit of |
|
|
|
|
|
|
Other |
|
|
|
General |
|
|
Certificate holders |
|
|
variable interest |
|
|
|
|
|
|
Comprehensive |
|
|
|
Partner |
|
|
# of Units |
|
|
Amount |
|
|
entities |
|
|
Total |
|
|
Loss |
|
Balance at January 1, 2005 |
|
$ |
75,358 |
|
|
|
9,837,928 |
|
|
$ |
78,659,842 |
|
|
$ |
(50,808,914 |
) |
|
$ |
27,926,286 |
|
|
$ |
(1,657,167 |
) |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
1,021,216 |
|
|
|
|
|
|
|
17,100,407 |
|
|
|
1,443,519 |
|
|
|
19,565,142 |
|
|
|
|
|
Unrealized gain on securities |
|
|
10,145 |
|
|
|
|
|
|
|
1,004,319 |
|
|
|
|
|
|
|
1,014,464 |
|
|
|
1,014,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,579,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid or accrued |
|
|
(9,28,661 |
) |
|
|
|
|
|
|
(7,937,241 |
) |
|
|
|
|
|
|
(8,865,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
178,058 |
|
|
|
9,837,928 |
|
|
$ |
88,827,327 |
|
|
$ |
(49,365,395 |
) |
|
$ |
39,639,990 |
|
|
$ |
(642,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
75,029 |
|
|
|
|
|
|
|
7,427,875 |
|
|
|
5,334,695 |
|
|
|
12,837,599 |
|
|
|
|
|
Unrealized loss on securities |
|
|
(1,295 |
) |
|
|
|
|
|
|
(128,253 |
) |
|
|
|
|
|
|
(129,548 |
) |
|
|
(129,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,708,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid or accrued |
|
|
(40,246 |
) |
|
|
|
|
|
|
(3,984,359 |
) |
|
|
|
|
|
|
(4,024,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
$ |
211,546 |
|
|
|
9,837,928 |
|
|
$ |
92,142,590 |
|
|
$ |
(44,030,700 |
) |
|
$ |
48,323,436 |
|
|
$ |
(772,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed
consolidated financial statement.
3
AMERICA FIRST TAX EXEMPT INVESTORS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,896,061 |
|
|
|
2,487,986 |
|
Gain on sale of assets |
|
|
(11,667,246 |
) |
|
|
(126,750 |
) |
(Increase)
decrease in interest receivable |
|
|
(175,818 |
) |
|
|
87,354 |
|
Decrease in other assets |
|
|
769,149 |
|
|
|
323,894 |
|
Increase in accounts payable, accrued expenses and other liabilities |
|
|
538,072 |
|
|
|
84,913 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,197,817 |
|
|
|
3,057,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Acquisition of tax-exempt revenue bonds |
|
|
(18,800,000 |
) |
|
|
|
|
Proceeds from the sale of other tax-exempt bonds |
|
|
19,200,000 |
|
|
|
4,026,750 |
|
Proceeds from the sale of assets |
|
|
10,443,223 |
|
|
|
|
|
Increase in restricted cash |
|
|
(535,068 |
) |
|
|
(2,310,088 |
) |
Capital expenditures |
|
|
(338,109 |
) |
|
|
(461,760 |
) |
Principal payments received on tax-exempt revenue bonds |
|
|
30,000 |
|
|
|
15,000 |
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
10,000,046 |
|
|
|
1,269,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Distributions paid |
|
|
(4,024,605 |
) |
|
|
(4,024,608 |
) |
Principal payments on debt financing and note payable |
|
|
(215,000 |
) |
|
|
(385,833 |
) |
Increase in liabilities related to restricted cash |
|
|
535,068 |
|
|
|
1,710,088 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(3,704,537 |
) |
|
|
(2,700,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
10,493,326 |
|
|
|
1,627,196 |
|
Cash and cash equivalents at beginning of period |
|
|
3,298,605 |
|
|
|
2,317,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
13,791,931 |
|
|
$ |
3,944,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
1,609,988 |
|
|
$ |
1,151,310 |
|
Distributions declared but not paid |
|
$ |
1,341,535 |
|
|
$ |
1,341,536 |
|
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
1. Basis of Presentation
America First Tax Exempt Investors, L.P. (the Partnership) was formed on April 2, 1998 under the
Delaware Revised Uniform Limited Partnership Act for the purpose of acquiring, holding, selling and
otherwise dealing with a portfolio of federally tax-exempt mortgage revenue bonds which have been
issued to provide construction and/or permanent financing of multifamily residential apartments.
The Partnership will terminate on December 31, 2050 unless terminated earlier under the provisions
of its Limited Partnership Agreement. The general partner of the Partnership is America First
Capital Associates Limited Partnership Two (the General Partner or AFCA 2).
The consolidated financial statements include the accounts of the Partnership and of the variable
interest entities (VIEs) in which the Partnership has been determined to be the primary
beneficiary. In this Form 10-Q, the Partnership refers to America First Tax Exempt Investors,
L.P. as a stand-alone entity and the Company refers to the Partnership and the VIEs on a
consolidated basis. All transactions and accounts between the Partnership and the VIEs
have been eliminated in consolidation. The Partnership does not presently believe that the
consolidation of VIEs for reporting under accounting principles generally accepted in the United
States of America (GAAP) will impact the Partnerships tax status, amounts reported to BUC
holders on IRS Form K-1, the Partnerships ability to distribute tax-exempt income to BUC holders,
the current level of quarterly distributions or the tax-exempt status of the underlying mortgage
revenue bonds.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. The accompanying interim unaudited consolidated financial statements have been
prepared according to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with GAAP have been condensed or omitted according to such rules and regulations,
although management believes that the disclosures are adequate to make the information presented
not misleading. The consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2005. In the opinion of management, all normal and recurring adjustments
necessary to present fairly the financial position as of September 30, 2006, and the results of
operations for all periods presented have been made. The results of operations for the interim
periods are not necessarily indicative of the results to be expected for the full year.
2. Partnership Income, Expenses and Cash Distributions
The Agreement of Limited Partnership of the Partnership contains provisions for the distribution of
Net Interest Income, Net Residual Proceeds and Liquidation Proceeds, for the allocation of income
or loss from operations and for the allocation of income and loss arising from a repayment, sale or
liquidation of investments. Income and losses will be allocated to each BUC holder on a periodic
basis, as determined by the General Partner, based on the number of BUCs held by each BUC holder as
of the last day of the period for which such allocation is to be made. Distributions of Net
Interest Income and Net Residual Proceeds will be made to each
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
BUC holder of record on the last day of each distribution period based on the number of BUCs held
by each BUC holder as of such date.
The unallocated deficit of the VIEs is primarily comprised of the accumulated historical net losses
of the VIEs as of January 1, 2004 and the VIEs net losses since the implementation of FIN 46R
Accounting for Variable Interest Entities as of January 1, 2004. The cumulative effect of the
change in accounting principle, excluding the reversal of the allowance for loan losses related to
losses recorded on the Partnerships balance sheet prior to the adoption of FIN 46R, as well as the
losses recognized by the VIEs, are not allocated to the General Partner and BUC holders as such
activity is not contemplated by, or addressed in, the Agreement of Limited Partnership.
Cash distributions are currently made on a quarterly basis but may be made on a monthly or
semiannual basis at the election of AFCA 2.
3. Investments in Tax-Exempt Bonds
The Company had the following investments in tax-exempt mortgage revenue bonds as of date shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
Description of Tax-Exempt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Revenue Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chandler Creek Apartments |
|
$ |
11,500,000 |
|
|
$ |
|
|
|
$ |
(126,500 |
) |
|
$ |
11,373,500 |
|
Clarkson College |
|
|
6,146,667 |
|
|
|
|
|
|
|
(645,751 |
) |
|
|
5,500,916 |
|
Bella Vista |
|
|
6,800,000 |
|
|
|
|
|
|
|
|
|
|
|
6,800,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,446,667 |
|
|
$ |
|
|
|
$ |
(772,251 |
) |
|
$ |
23,674,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Fair Value |
|
Description of Tax-Exempt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Revenue Bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chandler Creek Apartments |
|
$ |
11,500,000 |
|
|
$ |
|
|
|
$ |
(141,450 |
) |
|
$ |
11,358,550 |
|
Clarkson College |
|
|
6,176,667 |
|
|
|
|
|
|
|
(501,253 |
) |
|
|
5,675,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,676,667 |
|
|
$ |
|
|
|
$ |
(642,703 |
) |
|
$ |
17,033,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains or losses on these tax-exempt bonds are recorded to reflect quarterly changes
in their estimated fair values resulting from market conditions and fluctuations in the present
value of the expected cash flows from the underlying properties. The Chandler Creek bonds are in
technical default and interest is being paid on these bonds at a rate below the stated rate. In
April 2006, the Company terminated a forbearance agreement with the borrower. The termination of
the forbearance agreement allows the Company to seek additional remedies including the ultimate
foreclosure of the property, if necessary. The Company does not currently intend to exercise its
right to foreclose on the property as the property continues to pursue alternatives to
ultimately satisfy its obligations to its creditors. The current unrealized losses on the bonds
are not considered to be other-than-temporary because the Company has the intent and ability to
hold these securities until their value recovers or until maturity, if necessary. The unrealized
loss will continue to fluctuate each reporting period based on the market conditions and present
value of the expected cash flow.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
In April 2006, the Company acquired the Bella Vista bonds at par value of $6.8 million, which
represented 100% of the bond issuance. The bonds earn interest at an annual rate of 6.15% with
semi-annual interest payments and a stated maturity date of April 1, 2046. The bonds were issued
in order to construct a 144 unit multi-family apartment complex in Gainesville, Texas. The
apartment complex is currently under construction with an estimated completion date of April 2007.
The bonds are secured by a construction performance guarantee during the construction period by a
third party guarantor. Therefore, during the construction process, the Company has determined that
the fair value of the bonds is equal to their par value. Because these bonds are 100% owned by the
Company and no active market exists for such bonds, future determinations of the bonds fair value,
upon completion of construction, will be primarily dependant on the Companys internal valuation
techniques including discounted cash flow models. Upon the completion of construction, the fair
value of the Bella Vista bonds will be subject to traditional bond risks including the general
interest rate environment along with the performance of the underlying property that services the
principal and interest payments on the bonds. The Company has determined that the underlying
entity that supports the bonds does not meet the definition of a VIE and will not be required to be
consolidated into the Companys consolidated financial statements under FIN 46R.
4. Debt Financing and Note Payable
The Companys debt financing of $45,900,000 bears interest at a weekly floating bond rate plus
remarketing, credit enhancement, liquidity and trustee fees which averaged 4.0% and 3.1% in the
aggregate for the nine months ended September 30, 2006 and 2005, respectively and 4.1% and 3.3% in
the aggregate for the three months ended September 30, 2006 and 2005, respectively.
5. Related Party Transactions
The General Partner is entitled to receive an administrative fee from the Company of up to 0.45% of
the outstanding principal balance of any tax-exempt mortgage revenue bond or other mortgage
investment, unless another third party is required to pay such administrative fee. For the three
and nine months ended September 30, 2006, the Companys administrative fees to the General Partner
were $537,888 and $734,282, respectively. For the three and nine months ended September 30, 2005,
the Companys administrative fees to the General Partner were $73,180 and $271,710, respectively.
Included in the amounts for the three and nine months ended September 30, 2006 was approximately
$432,000 of past due administrative fees that were paid from the proceeds of the Northwoods Lake
Apartments transaction (See Note 8).
An affiliate of the General Partner was retained to provide property management services for Ashley
Pointe, Ashley Square, Bent Tree Apartments, Chandler Creek Apartments, Clarkson Student Housing,
Fairmont Oaks Apartments, Iona Lakes Apartments, Lake Forest Apartments, and Northwoods Lake
Apartments. The management fees paid by the property owners to the affiliate of the General Partner
amounted to $116,474 for the three months ended September 30, 2006, and $195,219 for the three
months ended September 30, 2005. The management fees paid by the property owners to the affiliate
of the General Partner amounted to $479,372 for the nine months ended September 30, 2006, and
$558,248 for the nine months ended September 30, 2005. These property management fees are paid by
the respective properties prior to the payment of any interest on the tax-exempt mortgage revenue
bonds and taxable loans held by the Partnership on these properties.
6. Interest Rate Cap Agreements
The Company has three interest rate cap agreements with a combined notional amount of $35,000,000
in order
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
to mitigate its exposure to increases in interest rates on its variable-rate debt
financing. The terms of the cap agreements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Effective Date |
|
Expiration Date |
|
Cap
Rate (1) |
|
Premium Paid |
$10,000,000
|
|
November 1, 2002
|
|
November 1, 2007
|
|
|
3.0 |
% |
|
$ |
250,000 |
|
$15,000,000
|
|
February 1, 2003
|
|
January 1, 2010
|
|
|
3.5 |
% |
|
$ |
608,000 |
|
$10,000,000
|
|
July 1, 2006
|
|
July 1, 2011
|
|
|
4.0 |
% |
|
$ |
159,700 |
|
|
|
|
(1) |
|
The cap rate does not reflect remarketing, credit enhancement, liquidity
and trustee fees which aggregate to approximately 70 basis points. |
These interest rate caps do not qualify for hedge accounting; accordingly, they are carried at fair
value, with changes in fair value included in current period earnings within interest expense. The
change in the fair value of derivative contracts resulted in an increase in interest expense of
approximately $116,431 for the nine months ended September 30, 2006, and a decrease in interest
expense of $101,589 for the nine months ended September 30, 2005. The change in fair value of
derivative contracts resulted in an increase of interest expense of approximately $239,567 for the
three months ended September 30, 2006 and a decrease of interest expense of $153,773 for the three
months ended September 30, 2005.
During the third quarter of 2006, an interest rate cap with a notional amount of $20,000,000
expired. A new interest rate cap was executed with a notional amount of $10,000,000 and a cap rate
of 4.0%. The expiration date of the new interest rate cap is July 1, 2011. The Company paid
$159,700 for the interest rate cap and did not qualify for hedge accounting under the terms of the
agreement. Therefore, the interest rate cap will be carried at fair value, with changes in fair
value included in the current period earnings within interest expense.
7. Segment Reporting
The Company has two reportable segments, the Partnership and the VIEs. In addition to the two
reportable segments, the Company also separately reports its consolidating and eliminating entries
since it does not allocate certain items to the segments.
The Partnership Segment
The Partnership operates for the purpose of acquiring, holding, selling and otherwise dealing with
a portfolio of federally tax-exempt mortgage revenue bonds which have been issued to provide
construction and/or permanent financing of multifamily residential apartments.
The VIE Segment
As a result of the effect of FIN 46R, management more closely monitors and evaluates the financial
reporting associated with and the operations of the VIEs. Management performs such evaluation
separately from the operations of the Partnership through interaction with the property management
company which manages the VIEs multifamily apartment properties. Management effectively manages
the Partnership and the VIEs as separate and distinct businesses.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
The VIEs primary operating strategy focuses on multifamily apartment properties as long-term
investments. The VIEs operating goal is to generate increasing amounts of net rental income from
these properties. In order to achieve this goal, management of these multifamily apartment
properties is focused on: (i) maintaining high economic occupancy and increasing rental rates
through effective leasing, reduced turnover rates and providing quality maintenance and services to
maximize resident satisfaction; (ii) managing operating expenses and achieving cost reductions
through operating efficiencies and economies of scale generally inherent in the management of a
portfolio of multiple properties; and (iii) emphasizing regular programs of repairs, maintenance
and property improvements to enhance the competitive advantage and value of its properties in their
respective market areas. As of September 30, 2006, the Company reported the assets and financial
results of eight VIE multifamily apartment properties containing a total of 1,764 rental units. The
VIEs multifamily apartment properties are located in the states of Iowa, Indiana, Florida,
Kentucky and South Carolina.
The following table details certain key financial information for the Companys reportable segments
for the periods ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septmeber 30, |
|
|
Nine Months Ended Septmber 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnersip |
|
$ |
6,181,979 |
|
|
$ |
2,108,154 |
|
|
$ |
10,111,111 |
|
|
$ |
6,465,725 |
|
VIEs |
|
|
3,419,475 |
|
|
|
3,274,608 |
|
|
|
10,277,627 |
|
|
$ |
9,837,001 |
|
Consolidation/eliminations |
|
|
(5,760,876 |
) |
|
|
(1,822,980 |
) |
|
|
(8,846,376 |
) |
|
|
(5,437,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
3,840,578 |
|
|
$ |
3,559,782 |
|
|
$ |
11,542,362 |
|
|
$ |
10,864,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income(loss) from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership |
|
$ |
5,081,468 |
|
|
$ |
856,131 |
|
|
$ |
7,502,904 |
|
|
$ |
3,368,673 |
|
VIEs |
|
|
(1,782,402 |
) |
|
|
(1,967,891 |
) |
|
|
(5,049,701 |
) |
|
|
(5,745,888 |
) |
Consolidation/eliminations |
|
|
(3,350,073 |
) |
|
|
565,315 |
|
|
|
(1,804,035 |
) |
|
|
2,377,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
(51,007 |
) |
|
$ |
(546,445 |
) |
|
$ |
649,168 |
|
|
$ |
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnersip |
|
$ |
5,081,468 |
|
|
$ |
856,131 |
|
|
$ |
7,502,904 |
|
|
$ |
3,368,673 |
|
VIEs |
|
|
10,000,835 |
|
|
|
(2,049,488 |
) |
|
|
7,138,730 |
|
|
|
(5,545,472 |
) |
Consolidation/eliminations |
|
|
(3,350,073 |
) |
|
|
565,315 |
|
|
|
(1,804,035 |
) |
|
|
2,377,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,732,230 |
|
|
$ |
(628,042 |
) |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Total assets |
|
|
|
|
|
|
|
|
Partnership |
|
$ |
134,058,282 |
|
|
$ |
128,782,494 |
|
VIEs |
|
|
69,770,268 |
|
|
|
88,088,358 |
|
Consolidation/eliminations |
|
|
(101,272,840 |
) |
|
|
(105,296,728 |
) |
|
|
|
|
|
|
|
Total assets |
|
$ |
102,555,710 |
|
|
$ |
111,574,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total partners capital |
|
|
|
|
|
|
|
|
Partnership |
|
|
85,767,356 |
|
|
$ |
80,970,212 |
|
VIEs |
|
|
(59,419,043 |
) |
|
|
(66,557,422 |
) |
Consolidation/eliminations |
|
|
21,975,123 |
|
|
|
25,227,200 |
|
|
|
|
|
|
|
|
Total Partners capital |
|
$ |
48,323,436 |
|
|
$ |
39,639,990 |
|
|
|
|
|
|
|
|
8. Discontinued Operations and Assets Held for Sale
During 2005, the Partnership sold a 316-unit multi-family housing project located in West Palm
Beach, Florida known as Clear Lake Colony Apartments (Clear Lake). Prior to the sale of Clear
Lake, the property met the criteria under Statement of Financial Accounting Standards No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) as a discontinued
operation. Therefore, the operations of Clear Lake are classified as a discontinued operation in
the consolidated results of operations for the periods ended September 30, 2005.
During 2006, Northwoods Lake Apartments in Duluth, Georgia met the criteria as a discontinued
operation under SFAS No. 144 and it is classified as such in the consolidated results of operations
for the periods ended September 30, 2006 and September 30, 2005. During the third quarter of 2006,
the property owner, a consolidated VIE, sold the property. In conjunction with the property sale,
the Partnership sold its investment in the Northwoods Lake Apartments bonds. The Company owned
$6.15 million in bonds and under FIN 46R, the Company was required to consolidate the property. In
order to properly reflect the transaction under FIN 46R, the Company recorded the sale of the
property as though it was owned by the Company. As such, the Company recorded a gain on the sale
of the property of $11.7 million. The equity in the property owner was held by individuals
associated with the general partner of AFCA2. All net proceeds received by the property owner as a result of
the transaction and any assets remaining with the property owner were used to settle obligations to
the
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
(UNAUDITED)
Partnership. The sale of the bonds did not result in a taxable gain to the Partnership. The
following table presents a balance sheet for the assets and liabilities of the discontinued
operations as of September 30, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
Dec. 31, 2005 |
|
Land |
|
$ |
|
|
|
$ |
3,787,500 |
|
Buildings and improvements |
|
|
|
|
|
|
21,720,420 |
|
|
|
|
|
|
|
|
Real estate assets before
accumulated depreciation |
|
|
|
|
|
|
25,507,920 |
|
Accumulated depreciation |
|
|
|
|
|
|
(7,976,985 |
) |
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
17,530,935 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
18,685,000 |
|
|
|
|
|
|
|
|
Net liabilities |
|
$ |
|
|
|
$ |
1,154,065 |
|
|
|
|
|
|
|
|
The following table presents the revenues and net income for the discontinued operations for
the nine months ended September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Rental Revenues |
|
$ |
562,717 |
|
|
$ |
1,642,807 |
|
|
$ |
2,581,146 |
|
|
$ |
4,860,317 |
|
Expenses |
|
|
446,726 |
|
|
|
1,724,404 |
|
|
|
2,059,961 |
|
|
|
4,659,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
115,991 |
|
|
$ |
(81,597 |
) |
|
$ |
521,185 |
|
|
$ |
200,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Recently Issued Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109. The interpretation clarifies the accounting for
uncertainty in tax positions. The interpretation is effective for us beginning in the first
quarter of 2007. The Company does not believe the standard will have a material impact on the
consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (SFAS No. 157). This
statement does not require new fair value measurements, however, it provides guidance on applying
fair value and expands required disclosures. SFAS No. 157 is effective beginning in the first
quarter of 2008. We are currently assessing the impact SFAS No. 157 may have on our consolidated
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of
prior-year uncorrected misstatements should be considered when quantifying misstatements in the
current year financial statements. SAB 108 requires registrants to quantify misstatements using
both an income statement and balance sheet approach and then evaluate whether either approach
results in a misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective at the end of 2006, although the Company does not
expect the adoption of SAB 108 will have a material impact on our consolidated financial
statements.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
In this Managements Discussion and Analysis, the Partnership refers to America First Tax Exempt
Investors, L.P. as a stand-alone entity and the Company refers to the consolidated financial
information of the Partnership and certain entities that own multifamily apartment projects
financed with mortgage revenue bonds held by the Partnership that are treated as variable interest
entities (VIEs) because the Partnership has been determined to be the primary beneficiary.
Critical Accounting Policies
The Companys critical accounting policies are the same as those described in the Companys Annual
Report on Form 10-K for the year ended December 31, 2005.
Results of Operations
Consolidated Results of Operations
The consolidated financial statements include the accounts of the Partnership and VIEs. All
significant transactions and accounts between the Partnership and the VIEs have been eliminated in
consolidation. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The following discussion of the Companys results of operations for the three and nine months ended
September 30, 2006 and 2005 should be read in conjunction with the consolidated financial
statements and notes thereto included in Item 1 of this report as well as the Companys Annual
Report on Form 10-K for the year ended December 31, 2005.
11
Three
Months Ended September 30, 2006 compared to Three Months Ended September 30, 2005 (Consolidated)
Change in Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Dollar |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
Change |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
3,419,475 |
|
|
$ |
3,274,608 |
|
|
$ |
144,867 |
|
Mortgage revenue bond investment income |
|
|
369,300 |
|
|
|
267,060 |
|
|
|
102,240 |
|
Other interest income |
|
|
51,803 |
|
|
|
18,114 |
|
|
|
33,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,840,578 |
|
|
|
3,559,782 |
|
|
|
280,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating (exclusive of items shown below) |
|
|
2,212,319 |
|
|
|
2,446,672 |
|
|
|
(234,353 |
) |
Depreciation and amortization |
|
|
582,319 |
|
|
|
662,482 |
|
|
|
(80,163 |
) |
Interest |
|
|
710,078 |
|
|
|
222,265 |
|
|
|
487,813 |
|
General and administrative |
|
|
386,869 |
|
|
|
774,808 |
|
|
|
(387,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,891,585 |
|
|
|
4,106,227 |
|
|
|
(214,642 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
(51,007 |
) |
|
|
(546,445 |
) |
|
|
495,438 |
|
Income from discontinued operations |
|
|
11,783,237 |
|
|
|
(81,597 |
) |
|
|
11,864,834 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,732,230 |
|
|
$ |
(628,042 |
) |
|
$ |
12,360,272 |
|
|
|
|
|
|
|
|
|
|
|
Rental revenues. Rental revenues increased by 4% for the three months ended September 30,
2006 compared to the same period of 2005 or approximately $27 per rental unit per month. Increased
rental revenues were realized at all properties with the exception of Ashley Square. Revenues at
Ashley Square decreased approximately $34,000 in the third quarter of 2006 compared to the same
quarter of 2005. The decrease is primarily related to certain units that were unable to be leased
due to ongoing property improvement projects.
Mortgage revenue bond investment income. Mortgage revenue bond investment income increased
during the third quarter of 2006 compared to the third quarter of 2005 due to the acquisition of
$6.8 million of Bella Vista tax-exempt mortgage revenue bonds. The Bella Vista bonds earn
tax-exempt interest at a stated rate of 6.15% with semi-annual interest payments. All interest
payments due on the mortgage revenue bonds were paid current during this period.
Other interest income. The increase in other interest income is attributable to an increase
in temporary investments in liquid securities. The proceeds from the sale of Clear Lake Colonies
that occurred in fourth quarter of 2005 created additional cash that was invested in short term
liquid securities while the Company explored longer term options for the funds. A portion of those
funds were invested in the Bella Vista bonds previously discussed.
Real estate operating expenses. Real estate operating expenses are comprised principally of
real estate taxes, property insurance, utilities, property management fees, repairs and
maintenance, and salaries and related
employee expenses of on-site employees. A portion of real estate operating expenses are fixed
in nature, thus a decrease in physical and economic occupancy would result in a reduction in
operating margins. Conversely, as physical and economic occupancy increase, the fixed nature of
these expenses will increase operating margins as these real estate operating expenses would not
increase at the same rate as rental revenues. Real estate expenses decreased in the third quarter
of 2006 compared to the same period of 2005. The decrease in real estate operating expenses is
reflective of decreased expenses related to repairs and maintenance. Offsetting these decreases
were increased salaries and benefits costs at certain properties.
12
Depreciation and amortization expense. Depreciation and amortization consist primarily of
depreciation associated with the apartment properties of the consolidated VIEs. The decrease in
depreciation expense is primarily attributable to certain assets becoming fully depreciated at two
of the Companys properties during the second quarter of 2006.
Interest expense. Interest expense increased approximately $488,000 in the three month period
ended September 30, 2006 compared to September 30, 2005. The increase is primarily attributable to
the change in fair value of interest rate caps and higher interest rates compared to the same
period of 2005. Variable rate debt accounted for all of the Companys total outstanding debt as of
September 30, 2006. A total of $35.0 million of the variable rate debt outstanding was protected
with interest rate cap agreements. The change in fair value of the interest rate caps resulted in
an increased interest expense of approximately $393,000 compared to the three months ended
September 2005. The remaining increase in interest expense was due to a higher average interest
rate on the Companys borrowings.
The Company manages its interest rate risk on its debt financing by entering into interest rate cap
agreements that cap the amount of interest expense it pays on its floating rate debt financing.
The Companys interest rate cap agreements do not qualify for hedge accounting, therefore, any
changes in the fair value of the caps are recognized in current period earnings. The fair value
adjustments are classified as interest expense in the consolidated statements of operations. The
fair value adjustment through earnings can cause a significant fluctuation in reported net income
although it has no impact on the Companys cash flows.
General and administrative expenses. The decrease in general and administrative expenses that
occurred in the third quarter of 2006 is largely attributed to the $359,000 of past due
administrative fees that were paid to the general partner in the prior year as a result of the
Clear Lake transaction.
Discontinued Operations. During the period ended September 30, 2006, Northwoods Lake
Apartments was considered a discontinued operation and accordingly, the results of operations for
the periods presented have been reclassified to discontinued operations and disclosed as a single
line item on the statements of operations. In August 2006, the sale of Northwoods Lake Apartments
closed and the Company recognized a gain on the sale of approximately $11.7 million. In addition
to this gain, income from discontinued operations includes the income of Northwoods Lake Apartments
through the sale date.
During 2005, the Company divested Clear Lake Colony Apartments. As a result, that property is also
classified as discontinued operations for the three months ended September 30, 2005. Income from
discontinued operations increased during the three months ended September 30, 2006 compared to the
same period of 2005 primarily due to the sale of Northwoods Lake Apartments and the requirements of
generally accepted accounting principles to cease asset depreciation at the time an asset is
determined to be held for sale. Because Northwoods met the criteria as an asset held for sale at
the end of the first quarter of 2006, there was no depreciation recorded during the second and
third quarters of 2006. The amount of depreciation that was not recorded during the third quarter
of 2006 was approximately $90,000. Offsetting this increase in income from discontinued operations
was a decrease related to the absence of Clear Lakes income from discontinued operations in 2005
compared to 2006 due to the sale of Clear Lake in fourth quarter of 2005.
13
Nine
months Ended September 30, 2006 compared to Nine Months Ended September 30, 2005 (Consolidated)
Change in Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine |
|
|
For the nine |
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Dollar |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
Change |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenues |
|
$ |
10,277,627 |
|
|
$ |
9,837,001 |
|
|
$ |
440,626 |
|
Mortgage revenue bond investment income |
|
|
995,668 |
|
|
|
801,313 |
|
|
|
194,355 |
|
Other interest income |
|
|
269,067 |
|
|
|
99,926 |
|
|
|
169,141 |
|
Gain on sale of assets |
|
|
|
|
|
|
126,750 |
|
|
|
(126,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
11,542,362 |
|
|
|
10,864,990 |
|
|
|
677,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operating (exclusive of items shown below) |
|
|
6,534,454 |
|
|
|
6,276,470 |
|
|
|
257,984 |
|
Depreciation and amortization |
|
|
1,761,225 |
|
|
|
2,006,400 |
|
|
|
(245,175 |
) |
Interest |
|
|
1,491,020 |
|
|
|
951,937 |
|
|
|
539,083 |
|
General and administrative |
|
|
1,106,495 |
|
|
|
1,630,349 |
|
|
|
(523,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,893,194 |
|
|
|
10,865,156 |
|
|
|
28,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
649,168 |
|
|
|
(166 |
) |
|
|
649,334 |
|
Income from discontinued operations |
|
|
12,188,431 |
|
|
|
200,416 |
|
|
|
11,988,015 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
|
$ |
12,637,349 |
|
|
|
|
|
|
|
|
|
|
|
Rental revenues. Rental revenues increased for the nine months ended September 30, 2006
compared to the same period of 2005. Rental revenues increased by approximately $28 per rental
unit per month during the nine months of 2006 compared to the same period of 2005. Increased
rental revenues were realized at all properties with the exception of Ashley Square. Revenues at
Ashley Square decreased approximately $86,000 during the nine months ended 2006 compared to the
same period of 2005. The decrease is primarily related to certain units that were unable to be
leased due to ongoing property improvement projects.
Mortgage revenue bond investment income. Mortgage revenue bond investment income increased
during the first nine months of 2006 compared to the first nine months of 2005 due to the
acquisition of $6.8 million of Bella Vista Tax-Exempt Mortgage Revenue Bonds in the second quarter
of 2006. The Bella Vista bonds earn tax-exempt interest at a stated rate of 6.15% with semi-annual
interest payments. All interest payments on the mortgage revenue bonds were current during this
period.
Other interest income. The increase in other interest income is attributable to an increase
in temporary investments in liquid securities. The sale of Clear Lake Colonies that occurred in
the fourth quarter of 2005 created additional cash that was invested in short term liquid
securities while the Company explored longer term options for the funds. A portion of those funds
were invested in the Bella Vista bonds previously discussed and therefore are reflected in mortgage
revenue bond investment income. Offsetting the increase in other interest income was the decrease
in income from the Museum Towers bonds. During the first quarter of 2005, the Company sold its
investment in the Museum Tower tax-exempt bonds.
Gain on sale of assts. The Company sold its entire interest in the Museum Tower bonds during
the first quarter of 2005. The carrying cost of the investment was $3,900,000 and the net proceeds
from the sale were $4,026,750 resulting in a gain on the sale of $126,750.
14
Real estate operating expenses. Real estate operating expenses are comprised principally
of real estate taxes, property insurance, utilities, property management fees, repairs and
maintenance, and salaries and related employee expenses of on-site employees. A portion of real
estate operating expenses are fixed in nature, thus a decrease in physical and economic occupancy
would result in a reduction in operating margins. Conversely, as physical and economic occupancy
increase, the fixed nature of these expenses will increase operating margins as these real estate
operating expenses would not increase at the same rate as rental revenue. Real estate expenses
increased during the nine months ended 2006 compared to the same period of 2005. The increase in
real estate operating expenses is reflective of the effort, during the end of 2005 and the first
six months of 2006, by the management of the properties to increase spending on repairs and
maintenance in order to make the properties more attractive to current and potential tenants.
Certain properties also realized increased utility costs and increase salaries and benefits costs.
Depreciation and amortization expense. Depreciation and amortization consist primarily of
depreciation associated with the apartment properties of the consolidated VIEs. The decrease in
depreciation expense is primarily attributable to certain assets becoming fully depreciated during
the nine months ended September 30, 2006.
Interest expense. Interest expense increased approximately $539,000 in the nine month period
ended September 30, 2006 compared to the nine month period ended September 30, 2005. The increase
in interest expense is primarily attributable to the change in fair value of interest rate cap
agreements and increasing interest rates on the Companys variable rate debt financing. The change
in fair value of interest rate cap agreements accounted for approximately $218,000 of increase in
interest expense for the nine months ended September 30, 2006 compared to same period of 2005. For
the nine months ended September 30, 2006, the interest rate cap agreements increased interest
expense by approximately $116,000. For the nine months ended September 30, 2005, the interest rate
cap agreements decreased interest expense by approximately $102,000.
The Company manages its interest rate risk on its debt financing by entering into interest rate cap
agreements that cap the amount of interest expense it pays on its variable rate debt financing.
The Companys interest rate cap agreements do not qualify for hedge accounting, therefore, any
changes in the fair value of the caps are recognized in current period earnings. The fair value
adjustments are classified as interest expense in the consolidated statements of operations. The
fair value adjustment through earnings can cause a significant fluctuation in reported net income
although it has no impact on the Companys cash flows.
General and administrative expenses. General and administrative expenses were significantly
lower during the first nine months of 2006 compared to the same period of 2005. The decrease is
primarily attributable to $359,000 of past due administrative fees that were paid in the prior year
as a result of the Clear Lake transaction. Also contributing to the decrease is lower professional
fees compared to the first nine months of 2005.
Discontinued Operations. During the period ended September 30, 2006, Northwoods Lake
Apartments was considered a discontinued operation and accordingly, the results of operations for
the periods presented have been reclassified to discontinued operations and disclosed as a single
line item on the statements of operations. In August 2006, the sale of Northwoods Lake Apartments
closed and the Company recognized a gain on the sale of approximately $11.7 million. In addition
to this gain, income from discontinued operations includes the income of Northwoods Lake Apartments
through the sale date.
During 2005, the Company divested Clear Lake Colony Apartments. As a result, that property is
also classified as discontinued operations for the nine months ended September 30, 2005. Income
from discontinued operations increased during the first nine months of 2006 compared to 2005
primarily due to the sale of Northwoods Lake Apartments and the requirements of generally accepted
accounting principles to cease asset
15
depreciation at the time an asset is determined to be held for sale. Because Northwoods met
the criteria as an asset held for sale at the end of the first quarter of 2006, there was no
depreciation recorded during second and third quarters of 2006. The amount of depreciation that
was not recorded in second and third quarters of 2006 was approximately $224,000.
Partnership Only Results of Operations
The Partnerships business objectives are to (i) preserve and protect its capital and (ii) provide
regular and increasing cash distributions to BUC holders which are substantially exempt from
federal income tax. The Partnership seeks to meet these objectives by primarily investing in a
portfolio of tax-exempt mortgage revenue bonds that are issued to finance, and are secured by first
mortgages on, multifamily apartment properties, including student housing. Certain of these bonds
may be structured to provide a potential for an enhanced federally tax-exempt yield through the
payment of contingent interest which is payable out of net cash flow from operations and net
capital appreciation of the financed apartment properties.
The Partnership is pursuing a business strategy of acquiring additional tax-exempt mortgage revenue
bonds on a leveraged basis in order to (i) increase the amount of tax-exempt interest available for
distribution to BUC holders; (ii) reduce risk through asset diversification and interest rate
hedging; and (iii) achieve economies of scale. The Partnership is pursuing this growth strategy by
investing in additional tax-exempt mortgage revenue bonds and related investments, taking advantage
of attractive financing structures available in the tax-exempt securities market and entering into
interest rate risk management instruments. The Partnership may finance the acquisition of
additional tax-exempt mortgage revenue bonds through the reinvestment of cash flow, the issuance of
additional BUCs, and securitization financing using its existing portfolio of tax-exempt mortgage
revenue bonds. As further explained in its report on Form 10-K for the year ended December 31,
2005, the Partnership is also assessing opportunities to reposition its existing portfolio of
tax-exempt mortgage revenue bonds in connection with its growth strategy,. The principal objective
of this repositioning initiative is to improve the quality and performance of the Partnerships
revenue bond portfolio and, ultimately, increase the amount of cash available for distribution to
its BUC holders.
The Partnerships primary assets are its tax-exempt mortgage revenue bonds, which provide permanent
financing for eleven multifamily housing properties and one student housing property. Because Bella
Vista is currently under construction, no operational information regarding the property currently
exists. The construction of the property is currently on schedule to be completed in April 2007.
A description of the properties, excluding Bella Vista Apartments, collateralizing the tax-exempt
mortgage revenue bonds owned by the Partnership as of September 30, 2006 is as follows:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Occupancy |
|
|
|
|
|
|
|
|
Physical occupancy |
|
for the nine months ended |
|
|
|
|
Number |
|
as of September 30, |
|
September 30,
(1) |
Property Name |
|
Location |
|
of Units |
|
2006 |
|
2005 |
|
2006 |
2005 |
Multifamily Housing Consolidated Properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashley Pointe at Eagle Crest
|
|
Evansville, IN
|
|
|
150 |
|
|
|
97 |
% |
|
|
89 |
% |
|
|
88 |
% |
|
|
88 |
% |
Ashley Square
|
|
Des Moines, IA
|
|
|
144 |
|
|
|
85 |
% |
|
|
94 |
% |
|
|
83 |
% |
|
|
89 |
% |
Bent Tree Apartments
|
|
Columbia, SC
|
|
|
232 |
|
|
|
90 |
% |
|
|
88 |
% |
|
|
83 |
% |
|
|
73 |
% |
Fairmont Oaks Apartments
|
|
Gainsville, FL
|
|
|
178 |
|
|
|
95 |
% |
|
|
97 |
% |
|
|
88 |
% |
|
|
84 |
% |
Iona Lakes Apartments
|
|
Ft. Myers, FL
|
|
|
350 |
|
|
|
91 |
% |
|
|
97 |
% |
|
|
92 |
% |
|
|
90 |
% |
Lake Forest Apartments
|
|
Daytona Beach, FL
|
|
|
240 |
|
|
|
99 |
% |
|
|
99 |
% |
|
|
95 |
% |
|
|
94 |
% |
Woodbridge Apts. of Bloomington III
|
|
Bloomington, IN
|
|
|
280 |
|
|
|
98 |
% |
|
|
95 |
% |
|
|
91 |
% |
|
|
84 |
% |
Woodbridge Apts. of Louisville II
|
|
Louisville, KY
|
|
|
190 |
|
|
|
94 |
% |
|
|
95 |
% |
|
|
91 |
% |
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
1,764 |
|
|
|
94 |
% |
|
|
95 |
% |
|
|
90 |
% |
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multifamily Housing Nonconsolidated Properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chandler Creek Apartments
|
|
Round Rock, TX
|
|
|
216 |
|
|
|
98 |
% |
|
|
95 |
% |
|
|
69 |
% |
|
|
69 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Housing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clarkson College
|
|
Omaha, NE
|
|
|
142 |
|
|
|
89 |
% |
|
|
75 |
% |
|
|
91 |
% |
|
|
54 |
% |
|
|
|
|
|
|
|
|
(1) |
|
Economic occupancy is presented for the nine months ended September 30, 2006 and
2005, and is defined as the net rental income received divided by the maximum amount of rental
income to be derived from each property. This statistic is reflective of rental
concessions, delinquent rents and non-revenue units such as model units and employee units. |
The following discussion of the Partnerships results of operations for the three and nine
months ended September 30, 2006 and 2005 reflects the operations of the Partnership without the
consolidation of the VIEs, which was required with the implementation of FIN 46R effective January
1, 2004. This information is used by management to analyze the Partnerships operations and is
reflective of the segment data discussed in Note 7 to the Consolidated Financial Statements. Items
previously discussed in connection with the Companys results of operations are not repeated.
Three Months Ended September 30, 2006 compared to Three Months Ended September 30, 2005
(Partnership Only)
Changes in Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Dollar |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
Change |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bond investment income |
|
$ |
1,856,040 |
|
|
$ |
2,063,749 |
|
|
$ |
(207,709 |
) |
Other interest income |
|
|
4,325,939 |
|
|
|
44,405 |
|
|
|
4,281,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,181,979 |
|
|
|
2,108,154 |
|
|
|
4,073,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
707,609 |
|
|
|
471,183 |
|
|
|
236,426 |
|
Amortization expense |
|
|
6,032 |
|
|
|
6,032 |
|
|
|
|
|
General and administrative |
|
|
386,869 |
|
|
|
774,808 |
|
|
|
(387,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,100,510 |
|
|
|
1,252,023 |
|
|
|
(151,513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
5,081,469 |
|
|
$ |
856,131 |
|
|
$ |
4,225,338 |
|
|
|
|
|
|
|
|
|
|
|
17
Mortgage revenue bond investment income. Mortgage revenue bond investment income
decreased for the three months ended September 30, 2006 compared to the three months ended
September 30, 2005 due to the repayment of the Partnerships mortgage revenue bonds in connection
with the sale of Clear Lake Apartments during the fourth quarter of 2005 and the sale of the
Partnerships mortgage revenue bonds on the Northwoods Lake Apartments in August 2006. Offsetting
this reduction in mortgage revenue bond investment income was income related to interest earned on
the Bella Vista bonds acquired in April 2006 for a principal investment of $6.8 million. The Bella
Vista bonds bear interest at a fixed rate of 6.15% per annum.
Other interest income. Other interest income was significantly higher for the three months
ended September 30, 2006 compared to the same period in 2005 due to the realization of
approximately $4.3 million of contingent interest received upon the sale of the Northwoods Lake
Apartments bonds. The contingent interest was realized as a result of the sale of the Northwoods
Lake Apartments bonds and the concurrent sale of the Northwoods Lake Apartments by its owners.
Under the terms of the Partnerships mortgage revenue bonds, a portion of the net proceeds from the
sale of the property became due to the Partnership as additional tax-exempt contingent interest.
Interest expense. Interest expense increased by approximately $236,000 during the three
months ended September 30, 2006 compared to the same period of 2005. The increase in interest
expense is primarily attributable to the change in fair value of interest rate cap agreements. The
increase in interest expense from the change in fair value of interest rate cap agreements
increased expense by approximately $393,000 in the third quarter of 2006 compared to the third
quarter of 2005. The interest rate cap agreements are recorded at fair value at the end of each
period with the change in fair value reflected in current period earnings. Partially offsetting
the increase in interest expense for the quarter was the decrease in interest expense due to the
reduction in debt of approximately $16 million that was achieved through the use of proceeds from
the sale of the Clear Lake Colony Apartments during fourth quarter of 2005.
Nine months Ended September 30, 2006 compared to Nine months Ended September 30, 2005
(Partnership Only)
Changes in Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine |
|
|
For the nine |
|
|
|
|
|
|
Months Ended |
|
|
Months Ended |
|
|
Dollar |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
Change |
|
Income |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bond investment income |
|
$ |
5,520,782 |
|
|
$ |
6,172,215 |
|
|
$ |
(651,433 |
) |
Other interest income |
|
|
4,590,329 |
|
|
|
166,760 |
|
|
|
4,423,569 |
|
Gain on sale of assets |
|
|
|
|
|
|
126,750 |
|
|
|
(126,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10,111,111 |
|
|
|
6,465,725 |
|
|
|
3,645,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,483,614 |
|
|
|
1,448,268 |
|
|
|
35,346 |
|
Amortization expense |
|
|
18,098 |
|
|
|
18,435 |
|
|
|
(337 |
) |
General and administrative |
|
|
1,106,495 |
|
|
|
1,630,349 |
|
|
|
(523,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,608,207 |
|
|
|
3,097,052 |
|
|
|
(488,845 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
7,502,904 |
|
|
$ |
3,368,673 |
|
|
$ |
4,134,231 |
|
|
|
|
|
|
|
|
|
|
|
Mortgage revenue bond investment income. Mortgage revenue bond investment income decreased
for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005
due to the Clear Lake sale during the fourth quarter of 2005 and the sale of the Northwoods Lake
Apartment bonds in
18
August 2006. Partially offsetting this reduction in mortgage revenue bond
investment income was income related to interest earned on the newly acquired Bella Vista bonds.
Other interest income. Other interest income was significantly higher for the nine months
ended September 30, 2006 compared to the same period in 2005 due to the realization of
approximately $4.3 million of contingent interest income related to the Northwoods Lake Apartments
bonds. The contingent interest was realized as a result of the sale of the Northwoods Lake
Apartments bonds and the concurrent sale of the Northwoods Lake Apartments by its owners. Under
the terms of the Partnerships mortgage revenue bonds, a portion of the net proceeds from the sale
of the property became due to the Partnership as additional tax-exempt contingent interest.
Interest expense. Interest expense increased by approximately $35,000 during the nine months
ended September 30, 2006 compared to the same period of 2005. The increase in interest expense is
attributable to higher interest rates on the Companys variable rate debt and the change in fair value of
interest rate cap agreements for the nine months ended September 30, 2006 compared to the same
period of 2005. These increases were partially offset by the reduction of interest expense
achieved through lower debt levels achieved through the use of cash received from certain
transactions, previously described.
Liquidity and Capital Resources
Tax-exempt interest earned on the mortgage revenue bonds represents the Partnerships principal
source of cash flow. Tax-exempt interest is primarily comprised of base interest on certain of the
mortgage revenue bonds. The Partnership will also receive from time to time contingent interest on
the mortgage revenue bonds. Contingent interest is only paid when the underlying properties
generate excess cash flow, therefore, cash in-flows are fairly fixed in nature and increase when
the underlying properties have strong economic performances and when the Partnership acquires
additional tax-exempt mortgage revenue bonds or other investments.
The Partnerships principal uses of cash are the payment of distributions to BUC holders, interest
on debt financing and general and administrative expenses. The Partnership also uses cash to
acquire additional investments. Distributions to BUC holders may increase or decrease at the
determination of the General Partner. The Partnership is currently paying distributions at the rate
of $0.54 per BUC per year. The General Partner determines the amount of the distributions based
upon the projected future cash flows of the Partnership. Future distributions to BUC holders will
depend upon the amount of base and contingent interest received on the tax-exempt mortgage revenue
bonds and other investments, the effective interest rate on the Partnerships variable-rate debt
financing, and the amount of the Partnerships undistributed cash.
Currently, recurring interest income earned on the Partnerships investments is not sufficient to
fund all disbursements including the payment of expenses, interest and distributions to BUC holders
without utilizing cash reserves to supplement the deficit. The Partnership is currently taking
action to address this deficit. The Partnership believes that cash provided by net interest income
from its tax-exempt mortgage revenue bonds and other investments will be adequate to meet its
projected long-term liquidity requirements including distributions to BUC holders. See discussion
below and in the Companys Annual Report on Form 10-K for the year ended December 31, 2005
regarding Historical and Current Business Strategy.
The VIEs primary source of cash is net rental revenues generated by their real estate investments.
Net rental revenues from a multifamily apartment property depend on the rental and occupancy rates
of the property and on the level of operating expenses. Occupancy rates and rents are directly
affected by the supply of, and demand for, apartments in the market area in which a property is
located. This, in turn, is affected by several factors such as local or national economic
conditions, the amount of new apartment construction and the affordability of single-family homes.
In addition, factors such as government regulation (such as zoning laws), inflation, real
19
estate and other taxes, labor problems and natural disasters can affect the economic operations of an
apartment property.
The VIEs primary uses of cash are: (i) the payment of operating expenses; and (ii) the payment of
debt service on the VIEs bonds and mortgage notes payable which are held by the Partnership.
On a consolidated basis, cash provided by operating activities for the nine months ended September
30, 2006 increased $1,140,170 compared to the same period a year earlier mainly due to changes in
working capital and higher net income. Cash from investing activities increased $8,730,144 for the
nine months ended September 30, 2006 compared to the same period in 2005 primarily due to the sale
of Nortwoods Lake Apartments that generated net proceeds of $10.4 million in 2006 compared to 2005.
Cash used in financing activities increased $1,004,184 for the nine months ended September 30,
2006 compared to the same period in 2005 primarily due to the lower increase in liabilities
associated with restricted cash. This increase was partially offset by lower principal debt
payments in 2006 compared to 2005.
Cash Available for Distribution (CAD)
To calculate CAD, amortization expense related to debt financing costs and bond issuance costs,
change in fair value of derivative contracts, provision for loan losses, realized losses on
investments and net income (loss) from VIEs are added back to the Companys net income as computed
in accordance with GAAP. There is no generally accepted methodology for computing CAD, and the
Companys computation of CAD may not be comparable to CAD reported by other companies.
The Company uses CAD as a supplemental measurement of its economic performance and, ultimately, its
ability to pay cash distributions to BUC holders. The Company believes CAD is a useful measurement
as it eliminates such non-cash items as amortization expense and the change in fair value of
derivatives and interest rate cap amortization. It also eliminates the income or loss of the
consolidated VIEs. A primary component of the VIEs losses is depreciation expense, which is a
non-cash expense. Although the Company considers CAD to be a useful measure of its operating
performance, CAD should not be considered as an alternative to net income or net cash flows from
operating activities which are calculated in accordance with GAAP.
The following sets forth a reconciliation of the Companys net income as determined in accordance
with GAAP and its CAD for the periods set forth.
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
For the three |
|
|
For the nine |
|
|
For the nine |
|
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
months ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
Net income (loss) |
|
$ |
11,732,230 |
|
|
$ |
(628,042 |
) |
|
$ |
12,837,599 |
|
|
$ |
200,250 |
|
Net (income) loss from VIEs |
|
|
(10,000,835 |
) |
|
|
2,049,488 |
|
|
|
(7,138,730 |
) |
|
|
5,545,472 |
|
Eliminations due to VIE consolidation |
|
|
3,350,073 |
|
|
|
(565,315 |
) |
|
|
1,804,035 |
|
|
|
(2,377,049 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before impact of VIE consolidation |
|
|
5,081,468 |
|
|
|
856,131 |
|
|
|
7,502,904 |
|
|
|
3,368,673 |
|
Change in fair value of derivatives |
|
|
239,568 |
|
|
|
(153,772 |
) |
|
|
116,432 |
|
|
|
(101,589 |
) |
Accrued expense related to past administrative fees |
|
|
|
|
|
|
359,000 |
|
|
|
|
|
|
|
359,000 |
|
Tier 2 Income (25% to GP) (1) |
|
|
(1,062,500 |
) |
|
|
|
|
|
|
(1,062,500 |
) |
|
|
|
|
Amortization expense (Partnership only) |
|
|
6,032 |
|
|
|
6,032 |
|
|
|
18,098 |
|
|
|
18,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAD |
|
$ |
4,264,568 |
|
|
$ |
1,067,391 |
|
|
$ |
6,574,934 |
|
|
$ |
3,644,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of units
outstanding, basic and diluted |
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
9,837,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As described in Note 3 to the consolidated financial statements in the December 31, 2005
Annual Report on Form 10-K, Net Interest Income representing contingent interest and Net
Residual Proceeds representing contingent interest (Tier 2 Income) will be distributed 75% to
the BUC holders and 25% to the General Partner. The Northwoods Lake Apartments sale provided
for $4.25 million of Tier 2 Income. At this time, the General Partner has made the
determination to reinvest the proceeds, in accordance with our current business strategy, from
the contingent interest and not distribute the proceeds to the BUC holders and the General
Partner. When the Tier 2 Income is ultimately distributed, 25% or $1,062,500 will be
distributed to the General Partner and therefore it is not included in the calculation of CAD. |
The amount of distributions to the BUC holders
was approximately $4,025,000 for the nine months ended September 30, 2006 and 2005. Although CAD exceeded distributions by
approximately $2.5 million the nine months ended
September 30, 2006, approximately $3.2 million of
CAD was generated through contingent interest received from the Northwoods Lake Apartments
transaction. Therefore, without the benefit of contingent interest on this transaction,
distributions exceeded CAD for the first nine months of 2006. While the Partnership has sufficient
cash reserves to support distributions in excess of CAD in the short-term, continued distributions
in excess of CAD are not sustainable over the long-term. The Partnership believes that
cash provided by net interest income from its tax-exempt mortgage revenue bonds and other
investments will be adequate to meet its projected long-term liquidity requirements including
distributions to BUC holders. See discussion in the Companys Annual Report on Form 10-K
for the year ended December 31, 2005 regarding Historical and Current Business Strategy.
Contractual Obligations
There were no significant changes to the Companys contractual obligations as of September 30, 2006
from the December 31, 2005 information presented in the Companys Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109 (FIN 48). The interpretation clarifies the accounting
for uncertainty in tax positions. The interpretation is effective for us beginning in the first
quarter of 2007. The Company does not believe the standard will have a material impact on the
consolidated financial statements.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (SFAS No. 157). This
statement does not require new fair value measurements, however, it provides guidance on applying
fair value
21
and expands required disclosures. SFAS No. 157 is effective beginning in the first
quarter of 2008. We are currently assessing the impact SFAS No. 157 may have on our consolidated
financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of
prior-year uncorrected misstatements should be considered when quantifying misstatements in the
current year financial statements. SAB 108 requires registrants to quantify misstatements using
both an income statement and balance sheet approach and then evaluate whether either approach
results in a misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective at the end of 2006, although the Company does not
expect the adoption of SAB 108 will have a material impact on our consolidated financial
statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in market risk from the information provided under
Quantitative and Qualitative Disclosures about Market Risk in Item 7A of the Companys 2005
Annual Report on Form 10-K.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. The Partnerships Chief Executive Officer
and Chief Financial Officer have reviewed and evaluated the effectiveness of the Partnerships
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer
and the Chief Financial Officer have concluded that the Partnerships current disclosure controls
and procedures are effective, providing them with material information relating to the Partnership
as required to be disclosed in the reports the Partnership files or submits under the Exchange Act
on a timely basis.
(b) Changes in internal controls over financial reporting. There were no changes in the
Partnerships internal control over financial reporting during the Partnerships most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the
Partnerships internal control over financial reporting.
22
PART II OTHER INFORMATION
Item 1A. Risk Factors.
The risk factors affecting the Company are described in 1A Risk Factors of the Companys 2005
Annual Report on Form 10-K. Additional risks include the following:
The properties financed by the Partnerships tax-exempt bonds are not completely insured against
damages from hurricanes and other major storms.
Three of the multifamily housing properties financed by tax-exempt bonds held by the Partnership
are located in Florida in areas that are prone to damage from hurricanes and other major storms.
Due to the significant losses incurred by insurance companies on policies written on properties in
Florida damaged by hurricanes, property and casualty insurers in Florida have modified their
approach to underwriting policies. As a result, the owners of these Florida properties now assume
the risk of first loss on a larger percentage of their propertys value. If any of these
properties were damaged in a hurricane or other major storm, the losses incurred could be
significant and would reduce the cash flow available to pay base or contingent interest on the
Partnerships tax-exempt bonds collateralized by these properties. In general, the current
insurance policies on these three properties carry a 3% deductible on the insurable value of the
properties. The current insurable value of the Florida properties is approximately $51.4 million.
The properties securing the Partnerships revenue bonds may be subject to liability for
environmental contamination and thereby increase the risk of default on such bonds.
The owner or operator of real property may become liable for the costs of removal or remediation of
hazardous substances released on its property. Various federal, state and local laws often impose
such liability without regard to whether the owner or operator knew of, or was responsible for, the
release of such hazardous substances. The properties securing the
Partnerships revenue bonds, or any additional revenue bonds it
may acquire in the future, may
be contaminated. The costs associated with the remediation of any such contamination may be
significant and may exceed the value of a property, causing the property owner to default on the
revenue bond secured by the property.
The Partnership is not registered under the Investment Partnership Act.
The
Partnership has not registered as an investment company under the Investment Partnership
Act of 1940, as amended (the Investment Partnership Act), and operates under an exemption there
from. As a result, none of the protections of the Investment Partnership Act (disinterested
directors, custody requirements for securities, and regulation of the relationship between a fund
and its advisor) will be applicable to the Partnership.
The Partnership engages in transactions with related parties.
Each of the executive officers of The Burlington Capital Group LLC (Burlington) and four of the
managers of Burlington hold equity positions in Burlington. A subsidiary of Burlington acts as the
Partnerships general partner and manages its investments and performs administrative services for
the Partnership and earns certain fees that are either paid by the Partnership or by the owner of
properties financed by the Partnerships tax-exempt mortgage revenue bonds. Another subsidiary of
Burlington provides on-site management for many of the multifamily apartment properties that
underlie the Partnerships tax-exempt bonds and earns fees from the property owners based on the
gross revenues of these properties. The shareholders of the limited-purpose
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corporations which own
five of the apartment properties financed with tax-exempt bonds and taxable loans held
by the Partnership are employees of Burlington who are not involved in the operation or management
of the Partnership and who are not executive officers or managers of Burlington. Because of these
relationships, agreements between the Partnership and Burlington and its subsidiaries are
related-party transactions. By their nature, related-party transactions may not be considered to
have been negotiated at arms-length. These relationships may also cause a conflict of interest in
other situations where the Partnership is negotiating with Burlington.
Not all of the interest income of the Partnership is exempt from taxation.
The Partnership has made, and may make in the future, taxable mortgage loans to the owners of
properties which are secured by tax-exempt mortgage revenue bonds that the Partnership holds. BUC
holders will be taxed on their allocable share of this taxable interest income. In any case that
interest earned by the Partnership is taxable, a BUC holders allocable share of this taxable
interest income will be taxable to the BUC holder regardless of whether an amount of cash equal to
such allocable share is actually distributed to the BUC holder.
If the Partnership was determined not to be a partnership for tax purposes, it will have
adverse economic consequences for the Partnership and its BUC holder.
The Partnership is a Delaware limited partnership and has chosen to operate as a partnership for
federal income tax purposes. As a partnership, to the extent the Partnership generates taxable
income, BUC holders will be individually liable for income tax on their proportionate share of this
taxable income, whether or not the Partnership makes cash distributions. The ability of BUC
holders to deduct their proportionate share of the losses and expenses the Partnership generates
will be limited in certain cases, and certain transactions may result in the triggering of the
Alternative Minimum Tax for BUC holders who are individuals.
The Partnership has not received, and does not intend to seek, a ruling from the Internal Revenue
Service regarding its status as a partnership for tax purposes. If the Partnership is classified
as an association taxable as a corporation rather than as a partnership, it will be taxed on its
taxable income, if any, and all distributions made by it to BUC holders would constitute ordinary
dividend income taxable to such BUC holders to the extent of the Partnerships earnings and
profits, which would include tax-exempt income, as well as any taxable income it might have, and
the payment of these dividends would not be deductible by the Partnership. The listing of the BUCs
for trading on the NASDAQ Global Market causes the Partnership to be treated as a publicly traded
partnership under Section 7704 of the Code. A publicly traded partnership is generally taxable as
a corporation unless 90% or more of its gross income is qualifying income. Qualifying income
includes interest, dividends, real property rents, gain from the sale or other disposition of real
property, gain from the sale or other disposition of capital assets held for the production of
interest or dividends and certain other items. If for any reason less than 90% of the
Partnerships gross income constituted qualifying income, the Partnership would be taxable as a
corporation rather than a partnership for federal income tax purposes.
Item 6. Exhibits.
The following exhibits are filed as required by Item 6 of this report. Exhibit numbers refer to the
paragraph numbers under Item 601 of Regulation S-K:
3. Articles of Incorporation and Bylaws of America First Fiduciary Corporation Number
Five (incorporated herein by reference to Registration Statement on Form S-11 (No.
2-99997) filed by America First Tax Exempt Mortgage Fund Limited Partnership on August
30, 1985).
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4(a) Form of Certificate of Beneficial Unit Certificate (incorporated herein by
reference to Exhibit 4.1 to Registration Statement on Form S-4 (No. 333-50513) filed
by the Company on April 17, 1998).
4(b) Agreement of Limited Partnership of the Partnership (incorporated herein by
reference to the Amended Annual Report on Form 10-K (No. 000-24843) filed by the
Company on June 28, 1999).
4(c) Amended Agreement of Merger, dated June 12, 1998, between the Partnership and
America First Tax Exempt Mortgage Fund Limited Partnership (incorporated herein by
reference to Exhibit 4.3 to Amendment No. 3 to Registration Statement on Form S-4 (No.
333-50513) filed by the Company on September 14, 1998).
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AMERICA FIRST TAX EXEMPT INVESTORS, L.P. |
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By
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America First Capital |
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Associates Limited |
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Partnership Two, General |
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Partner of the Partnership |
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By
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Burlington Capital Group LLC, |
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General Partner of |
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America First Capital |
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Associates Limited |
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Partnership Two |
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Date: November 14, 2006
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/s/ Lisa Y. Roskens |
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Lisa Y. Roskens
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Chief Executive Officer |
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Burlington Capital Group LLC,
acting in its capacity as general partner of the |
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General Partner of America First Tax Exempt Investors, L.P. |
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