Business context and reporting period
Income Opportunity Realty Investors, Inc. (IOR) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. IOR is externally advised by Pillar Income Asset Management and has no employees. TCI owns approximately 81.1% of IOR’s common stock.
IOR’s portfolio includes 131.1 acres of developable land in Farmers Branch, Texas, held under a sales contract, and mortgage notes receivable from related parties. Its principal source of income is interest on related-party receivables.
Financial results and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Property revenue | $0 in 2017 and 2016 | $0 in 2017 and 2016 |
| Interest income from related parties | $1.119 million in 2017; $1.085 million in 2016 | $2.208 million in 2017; $2.293 million in 2016 |
| Other income | $250,000 in 2017; $0 in 2016 | $250,000 in 2017; $3,000 in 2016 |
| Net income | $1.009 million in 2017; $743,000 in 2016 | $1.746 million in 2017; $1.636 million in 2016 |
| Basic and diluted earnings per share | $0.24 in 2017; $0.18 in 2016 | $0.42 in 2017; $0.39 in 2016 |
| Operating expenses | $360,000 in 2017; $342,000 in 2016 | $712,000 in 2017; $660,000 in 2016 |
At June 30, 2017, total assets were $88.135 million, including $22.717 million of land, $15.061 million of notes and interest receivable net of allowance, and $48.308 million receivable from related parties. The gross notes and interest receivable balance was $16.887 million, with a $1.826 million allowance. Shareholders’ equity was $88.125 million. Total liabilities were $10,000; the company reported no outstanding debt.
For the first six months, operating cash flow was $3.394 million and investing cash flow was negative $3.395 million. Financing cash flow was zero, and cash declined by $1,000 to zero. No quarterly dividends were paid in 2017 or 2016. Margins are not meaningful because property revenue was zero.
Material changes versus the prior comparable period
- Six-month net income increased $110,000, while related-party interest income declined $85,000. The increase in net income included $250,000 of other income, versus $3,000 in the prior-year period; the filing does not clearly identify the source of the 2017 other income.
- Second-quarter net income rose to $1.009 million from $743,000, including the same $250,000 of other income in 2017 versus none in 2016.
- Six-month general and administrative expense rose $28,000, primarily due to higher professional fees. Advisory fees rose $13,000; the related-party net income fee rose $11,000.
- IOR received $7.145 million from payoff of two notes receivable during the second quarter. Its ending cash nevertheless remained zero, with significant funds held as related-party receivables.
Outlook, risks, contingencies and unusual items
- The 2015 land sale contract covers IOR’s developable land along with land owned by related parties, for total consideration of $75 million. Allocation of proceeds among the parties remains undetermined and depends on final land use, development commitments and collection of the note. TCI holds the buyer’s $50 million subordinated note. Because of the limited down payment and seller financing, IOR uses deposit-method accounting: it has recognized no sale revenue and continues to carry the land at cost.
- Management identifies collections on receivables, asset sales and refinancing as cash sources. It cautions that additional property sales, refinancing or borrowing may be needed if cash from operations and refinancing is insufficient. No specific earnings or financial guidance is provided.
- IOR’s notes receivable are all due from UHF, are secured by junior mortgages, and are repayable from surplus cash flow, sale or refinancing of underlying properties. Related-party transactions may not be on arm’s-length terms. IOR also reported $48.308 million due from related parties, primarily TCI.
- Management said ordinary-course litigation is not expected to materially affect financial condition, results or liquidity, and reported no known environmental liability expected to have a material adverse effect. The company reported no changes to the risk factors in its 2016 Form 10-K.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the buyer makes required payments and whether the land transaction’s sale-recognition criteria will be met; verify the eventual proceeds allocation and development commitments.
- Collectability and timing of the $48.308 million related-party receivable and the UHF mortgage notes, including the adequacy of collateral and the existing allowance.
- The source and sustainability of the $250,000 of 2017 other income, which materially contributed to year-over-year earnings growth.
- IOR’s liquidity arrangements given zero cash at quarter-end and its reliance on related-party receivables, collections and asset transactions.