Transcontinental Realty Investors, Inc. — FY2022 Form 10-K
Reporting period: Year ended December 31, 2022. Unless stated otherwise, financial amounts below are in millions of dollars; the filing reports most amounts in thousands. This is an annual report, not a standalone fourth-quarter filing.
Business context
TCI is an externally managed real estate company focused on multifamily and commercial properties, mortgage notes, and land in the southern United States. At year-end, its portfolio included 14 multifamily properties with 2,328 units, four office buildings totaling approximately 1.06 million square feet, and about 1,858 acres of land. TCI has no employees; Pillar Income Asset Management manages its operations. ARL and affiliates control more than 80% of TCI’s common stock.
A major 2022 event was the sale by joint venture VAA of 45 properties for $1.81 billion. TCI received cash distributions and, in November, control of the remaining seven VAA properties, which it consolidated.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $36.7 | $40.8 |
| Net operating loss | $(9.3) | $(16.2) |
| Net income attributable to TCI | $468.3 | $9.4 |
| EPS, basic and diluted | $54.20 | $1.09 |
| Adjusted FFO | $32.0 | $33.8 |
| Cash from operating activities | $(45.4) | $(11.0) |
| Cash from investing activities | $307.4 | $100.3 |
| Cash from financing activities | $(112.4) | $(103.6) |
Multifamily segment profit increased to $8.3 million from $6.3 million, while commercial segment profit declined to $7.4 million from $10.6 million. Commercial rental revenue fell substantially alongside property dispositions. Net income was dominated by nonrecurring VAA-related gains: TCI recorded $468.1 million of equity income from its joint venture, including its share of the VAA portfolio sale, and a $73.2 million gain from remeasuring the seven-property holdback portfolio. The $89.2 million total gain on sales, remeasurement, or write-downs also included property and land gains. Income tax expense was $103.2 million. Adjusted FFO fell despite the reported net-income surge.
At December 31, assets were $1.218 billion and equity was $840.6 million. Cash and cash equivalents were $113.4 million, restricted cash $108.9 million, and short-term investments $119.8 million. Notes receivable totaled $129.3 million; receivables from related parties were $147.1 million. Mortgages and other notes payable were $184.5 million and bonds payable $129.2 million, or approximately $313.7 million combined. TCI paid no common dividends in 2022, 2021, or 2020.
Changes, outlook, and material risks
- Revenue declined about 10% year over year, while the net operating loss narrowed. Reported net income rose sharply principally because of the VAA sale and remeasurement gains, not a comparable increase in property operations.
- Operating cash flow was negative, in part because of taxes paid related to the VAA sale. Investing cash flow benefited from large joint-venture distributions; it also included purchases and redemptions of short-term investments.
- Management said year-end cash, cash equivalents, short-term investments, and expected 2023 collections should be sufficient for cash requirements. It also stated that excess property cash flow might not cover all obligations as they come due, and plans to sell assets, refinance debt, or obtain additional property-secured borrowings. The filing provides no quantified earnings or revenue guidance.
- The $66.5 million Series C bonds were repaid on January 31, 2023. At year-end, other debt included Series A bonds of $29.0 million due July 2023 and Series B bonds of $35.8 million due July 2025. The company disclosed a minimum debt-service-coverage covenant breach on 770 South Post Oak; surplus property cash must be held in a lender-controlled account until compliance is restored. It was otherwise in compliance with its loan and bond covenants.
- Liquidity and refinancing are significant risks: substantially all real estate is pledged, debt payments generally remain due even if property income falls, and financing covenants restrict cash distributions from SPC. The auditor highlighted liquidity in its report.
- Other key exposures include commercial occupancy—55.2% at 770 South Post Oak, 71.7% at Browning Place, and 61.6% at Stanford Center—and a large lease-expiration concentration: 36% of leased commercial square footage was scheduled to expire in 2023. Landing Bayou multifamily occupancy was 46.2%.
- Related-party arrangements merit attention. TCI reported $147.1 million receivable from Pillar and $66.6 million of related-party notes receivable, principally involving UHF. Note collectability and real estate impairment were identified as critical audit matters. Management reported no known environmental liability expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings and equity value depends on the VAA transaction and other nonrecurring gains, compared with recurring property income and adjusted FFO.
- Current unrestricted liquidity, availability of SPC-held cash, and the status of planned asset sales or refinancing; distinguish restricted cash from funds available for general use.
- Repayment or extension of debt maturities and resolution of the 770 South Post Oak debt-service covenant breach and cash lockup.
- Collection, collateral support, and maturity extensions for notes receivable—especially related-party/UHF balances—and repayment of the Pillar receivable.
- Commercial lease renewals and occupancy trends, including the 2023 expiration schedule, and recovery of occupancy at Landing Bayou.
- Any subsequent developments in the Nixdorf litigation: the March 2023 jury returned a defense verdict, but the filing noted a possible appeal.