Income Opportunity Realty Investors, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Dollar amounts are in millions unless stated otherwise.
Business context
IOR is an externally advised real estate investment company with no employees. It reported no real estate holdings at June 30, 2019; its primary income source was interest on approximately $95.4 million of receivables from related parties. TCI owned approximately 81.25% of IOR. Pillar Income Asset Management is IOR’s advisor and cash manager, and also serves TCI and ARL.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income from related parties | $1.677 | $1.081 | $3.319 | $2.123 |
| Other income | $0.147 | — | $0.147 | — |
| Operating expenses | $0.448 | $0.374 | $0.862 | $0.714 |
| Income before taxes | $1.376 | $0.707 | $2.604 | $1.409 |
| Income tax expense | $0.289 | — | $0.547 | — |
| Net income | $1.087 | $0.707 | $2.057 | $1.409 |
| Basic and diluted EPS | $0.26 | $0.17 | $0.49 | $0.34 |
At June 30, total assets were $98.185 million, including $84.163 million in receivables from related parties, $14.015 million in notes and interest receivable, and $7,000 in cash. Total liabilities were $31,000; shareholders’ equity was $98.154 million. IOR reported no outstanding debt. For the six months, operating cash flow was $2.077 million and investing cash outflow was $2.074 million; cash ended at $7,000. The company paid no quarterly dividends during the first half of 2019.
Material changes and unusual items
- Six-month net income rose to $2.057 million from $1.409 million year over year, as related-party interest income increased by $1.196 million. Management attributed the increase to a larger amount receivable from its advisor and other related parties.
- Q2 operating expenses increased $74,000 year over year; six-month expenses increased $148,000. Increases included advisory fees and the advisor’s net income fee, which is 7.5% of net income.
- Q2 and first-half 2019 other income included a $147,000 tax-increment reimbursement from the City of Farmers Branch, Texas, for prior infrastructure development.
- IOR recorded income tax expense in 2019, unlike the comparable 2018 periods. It reported $547,000 of first-half tax expense and stated it had standalone taxable income; it participates in the MRHI consolidated federal tax group under a tax-sharing agreement.
Outlook, risks and contingencies
The filing provides no specific earnings or investment guidance. Management described liquidity needs as recurring expenses and potential property acquisitions, with cash sources primarily from collections of mortgage notes and related-party receivables. The filing cautions that forward-looking statements are subject to risks, including real estate market and financing conditions, property demand, development and construction, interest rates, and environmental exposure; management reported no change to the risks in the 2018 Form 10-K.
Related-party balances and transactions are material. The filing notes such transactions may not be on arm’s-length terms or always favorable to IOR. IOR’s notes receivable include $13.126 million of principal and $889,000 of accrued interest from UHF, secured by junior mortgages, generally bearing 12% interest and repayable from surplus cash flow, sale, or refinancing. A shareholder lawsuit filed in February 2019 alleges breaches of fiduciary duty related to historical transactions among IOR and affiliated parties. Defendants deny the allegations and intend to defend; motions to dismiss were pending. Management said ordinary-course litigation was not expected to materially affect financial condition, operations, or liquidity.
Important facts for investors to verify
- Collectability and repayment timing of the $95.4 million in related-party receivables, including UHF notes and accrued interest.
- Terms, oversight, and potential conflicts in transactions and fees involving TCI, Pillar, ARL, and other affiliates.
- Progress and potential financial impact of the Berger litigation and any other contingencies.
- Basis and ongoing implications of the 2019 tax expense and tax-sharing arrangements.
- How IOR intends to fund future acquisitions given its minimal cash balance and dependence on related-party collections.