Business context and reporting period
Transcontinental Realty Investors, Inc. (NYSE: TCI) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The company owns and develops multifamily and commercial real estate, land, and a 50% interest in the VAA multifamily joint venture. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $10.8 | $13.4 | $22.6 | $26.2 |
| Net income (loss) attributable to TCI | ($30.7) | ($4.2) | ($8.1) | $0.5 |
| Basic and diluted EPS | ($3.56) | ($0.48) | ($0.94) | $0.05 |
| Operating cash flow | Not presented quarterly | $0.4 | ($9.4) |
- Q2 rental revenue was $10.2 million, down from $11.6 million; other income was $0.6 million, versus $1.9 million. For the first half, rental revenue fell to $20.6 million from $23.0 million.
- Segment profit was $5.1 million in Q2 versus $5.8 million, and $9.7 million for the first half versus $10.9 million. Multifamily segment revenue was relatively steady for the half; commercial segment revenue declined by $2.6 million.
- Cash from investing activities was $29.0 million for the first half, including $24.4 million from asset sales. Financing used $48.5 million, primarily for debt payments. Cash and cash equivalents were $46.0 million and restricted cash $22.0 million at June 30, totaling $68.0 million, down from $87.0 million at year-end.
- At June 30, total assets were $825.2 million and total liabilities $471.4 million. Mortgages and notes payable were $204.7 million; bonds payable were $203.6 million, for total reported debt of $408.3 million. Debt declined from $474.0 million at December 31, 2020. Six-month cash interest paid was $14.8 million.
- Notes receivable were $133.5 million, including $70.2 million from related parties; receivables from related parties were $139.8 million.
Material changes and unusual items
- Q2 included a $29.6 million charge from remeasurement of the VAA earn-out obligation. Following an adverse arbitration result on July 13, 2021, TCI said it must pay Macquarie approximately $39.6 million. Management expects to fund payment from future VAA distributions.
- First-half results included $11.1 million of gains on land sales and $10.1 million of gains related to residential property sales, including recognition of previously deferred gains. These gains partly offset the earn-out charge.
- Related-party advisory fees rose to $6.9 million for the first half from $4.3 million a year earlier; Q2 fees were $4.7 million versus $2.2 million. TCI is externally managed by Pillar, an affiliate connected to its controlling shareholder. The filing cautions that related-party transactions may not be on arm’s-length terms.
- TCI repaid $48.4 million of mortgages, notes and bonds in the first half, including a $10.0 million prepayment of Series C bonds. No new debt proceeds were reported for the period. Management reported compliance with loan covenants at June 30.
Outlook, risks and contingencies
Management said cash on hand and expected remaining-2021 cash from notes and interest receivable should be sufficient for cash requirements, and plans to use selective asset sales, refinancing or extensions, and additional property-secured borrowings to meet liquidity needs. The filing also cautions that excess cash from property operations may not be sufficient to discharge all obligations as they come due. No quantified earnings or revenue guidance was provided.
Commercial properties experienced lower occupancy amid COVID-19. Management believed the decline was temporary and did not expect a significant decrease in rental revenue, but said the pandemic’s effects remained uncertain. Other stated risks include tenant and market demand, access to financing, development delays and cost overruns, interest-rate and economic changes, and the timing and results of asset sales. A shareholder lawsuit alleging improper property transactions with IOR is scheduled for trial in November 2022; TCI intends to defend it.
Important facts for investors to verify
- Timing and funding of the approximately $39.6 million VAA earn-out payment, including expected distributions and any liquidity impact.
- Debt maturities and refinancing needs, particularly the 2022 maturities identified in the debt disclosures, and the availability and terms of new financing.
- Whether commercial occupancy stabilizes and whether rental revenue and property cash generation recover.
- The basis and ongoing terms of substantial related-party fees, receivables, and other transactions.
- Potential developments in the IOR-related lawsuit and any resulting financial exposure.