Description

ATAX, or America First Multifamily Investors, L.P., owns a portfolio of mortgage revenue bonds issued by state and local housing authorities to finance multifamily residential properties that provide affordable housing. While we are not advocating a long term position in ATAX, we think that a high teens/20s IRRs can be had from a 2 to 3 month trading position.

ATAX recently completed two equity financings that resulted in in the LP units trading down from $7 per unit to the current $6 area. The distribution of $0.50 per unit has not been changed and the current yield on the units is some 8.4%. Because of the nature of the company’s assets, the distribution is tax exempt for federal income tax. Given the retail orientation of the public units, we think the units should return to pre-financing trading levels. At $7 per unit the yield would be 7.1%. This level is still higher than the vast majority of closed end municipal bond funds (and many REITs). In the past, ATAX has often traded poorly into equity offering offerings only to recover in the following months. While it’s obviously not a certainty this happens again, ATAX’s market capitalization is higher, as is liquidity in the LP units, and awareness of the ATAX story is more meaningful than after prior offerings so we think the chances of a bounce back are higher than in the past. On the downside, the main risk is that management smacks the stock again by announcing another equity deal. We think this unlikely given the recent transactions.

Business

ATAX owned some $500 million of real estate assets at year end 2013. These can be broken down into:

1. Mortgage Revenue Bonds valued at about $285 million representing 33 apartment properties,
2. three Public Housing Capital Fund Trusts valued at about $62 million,
3. MBS of about $38 million, and
4. Direct interests in multifamily apartment properties valued at about $90 million.

The directly owned multifamily properties are typically acquired so that ATAX can refinance or restructure the property in a manner that allows ATAX to acquire a mortgage revenue bond associated with the property. Note that certain of the company’s debt investments are characterized as “Variable Interest Entities” or “VIEs”. This categorization results when ATAX’s debt investment has equity like risk. The investment will then be categorized as an investment in real estate and included in consolidated results ($13 million as of December 31, 2013).

ATAX finances itself with various debt instruments, mortgages, and partnership capital. Total debt financing plus mortgage loans to total partnership assets was 58% as of December 31, 2013.

The company’s 10-K gives a lot of detail on its assets and financing structures although making comparisons with REITs or closed end mutual funds is tricky given ATAX’s mix of debt assets and real property. However, one additional issue is worth noting. Although ATAX has maintained a distribution of $0.50 per partnership unit over the last two year, cash available for distribution (CAD) was only $0.33 per unit in 2012 and $0.42 per unit in 2013. The shortfall was made up from unrestricted cash and reflected a return of capital. Management has stated that it expects its activities in 2014 to produce enough CAD to make the $0.50 distribution. However, if that turns out to not be the case, and continues into the future, the ATAX business proposition holds less appeal. Note that CAD is used in the VIC form space instead of EPS for this write-up.

Equity Financings of Partnership Units

Prior to the two most recent equity offerings, each of which caused the LP units to trade materially lower, ATAX has completed 4 equity offerings since the start of 2009. The following summarizes the date of the offering, its price, the price 3 months later with the return from the offering price (excluding distributions), and similar data for 4 months after the offering:

Offering Date  Price                3mo Price (Return)     4mo Price (Return)

5.21.09            $5.00               $5.63 (12.6%)              $6.23 (24.6%)

10.07.09          $5.05               $5.79 (14.8%)              $5.82 (15.3%)

4.21.10            $5.37               $5.39 (0.4%)                $5.48 (2.1%)

5.30.12            $5.06               $5.81 (14.8%)              $6.01 (18.7%)

The average 3 month return is 10.7% and the average 4 month return is 15.2% with the ATAX units returning more or less to their pre-offering levels other than in the third transaction. In each case, the LP units dropped considerably before the offering. Note that for each offering, ATAX’s LP units were somewhat illiquid, exacerbating the impact of the offering. While that was still the case for the two most recent deals (although less so given higher liquidity from more float), we think that management pursuing two deals in quick succession has caused some investors, especially short term deal flippers in what is essentially a retail stock, to sell the units resulting in an opportunity for a short term trading position. With the most recent transaction already 2 months ago, we think it takes another 2 to 3 months for the units to recover given the double whammy of two recent deals.

Catalyst