Transcontinental Realty Investors, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless noted.
Business context
TCI acquires, develops and operates apartment, commercial and land properties. At year-end it directly owned nine apartment communities with 1,489 units and seven commercial properties totaling about 1.7 million square feet, and held about 2,405 acres of land for development. It also retained an equity-method investment in Victory Abode Apartments, LLC (VAA), a joint venture with Macquarie holding 49 apartment communities and 9,192 units. TCI has 50% of VAA’s voting rights and 49% of its profit participation rights; the CEO holds the remaining 2% profit interest and manages the venture.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Rental and other property revenue | $121.0 million | $125.2 million |
| Operating income | $16.1 million | $20.1 million |
| Net income (loss) | $183.0 million | ($15.3 million) |
| Net income (loss) applicable to common shares | $180.6 million; $20.71 per share | ($16.7 million); ($1.92) per share |
| Operating cash flow | ($181.2 million) | ($25.1 million) |
| Investing cash flow | $147.6 million | ($98.3 million) |
| Financing cash flow | $51.8 million | $156.0 million |
| Cash and restricted cash | $106.6 million | $88.3 million |
| Total assets | $862.4 million | $1,313.4 million |
| Shareholders’ equity | $380.4 million | $208.3 million |
Operating margin was approximately 13.3%, down from 16.1%. Year-end cash included $36.4 million of cash and equivalents and $70.2 million of restricted cash. The filing reports approximately $449.4 million of total indebtedness in its risk discussion; balance-sheet carrying amounts were $277.2 million of notes payable and $158.6 million of bonds payable. The different debt figures use different disclosed bases. Notes payable included about $41.9 million of variable-rate debt; the overall weighted average interest rate was 7.1%, versus 5.5% in 2017. Contractual debt and interest payments totaled $604.4 million, including $83.9 million scheduled for 2019.
Material changes and unusual items
- In November 2018, TCI and its subsidiary contributed 49 apartment communities and three development projects to VAA, received approximately $236.8 million in cash, and recognized a $154.1 million gain. VAA assumed the contributed properties’ liabilities, including HUD mortgage debt. This transaction substantially reduced reported real estate and helped drive the year’s reported profit.
- Common-share income also included $17.4 million of land-sale gains, $28.2 million of other income and a $12.4 million foreign-currency transaction gain. Other income included insurance proceeds related to Mahogany Run Golf Course. The reported $183.0 million net income therefore does not represent recurring property earnings.
- Revenue fell $4.3 million year over year, mainly because of the VAA contribution late in the year. Operating expenses declined slightly, but general and administrative expense rose $5.1 million to $11.4 million, including costs related to the venture formation and increased advisor, legal and professional fees.
- Operating cash flow was negative $181.2 million despite reported net income; cash-flow reconciliation includes substantial movements in other assets and liabilities and removes noncash gains. Investing cash flow was positive largely due to VAA proceeds. Cash and restricted cash increased $18.2 million overall.
- TCI redeemed all 100,000 Series D preferred shares in the fourth quarter for $17.2 million, including $7.2 million of accrued unpaid dividends. No preferred shares remained outstanding at year-end. No common dividends were declared for 2016–2018.
Outlook, liquidity and risks
Management expected cash on hand and anticipated 2019 receipts from notes and interest receivable to help meet cash needs, and planned selective property sales, refinancing or extensions, and additional real-estate-secured borrowing. However, the filing also states that anticipated excess cash from property operations would not be sufficient to discharge all obligations as they come due. The auditor’s report includes an emphasis of liquidity referring to management’s planned asset sales and refinancing; the financial statements received an unqualified opinion.
- Near-term maturities and refinancing are important risks. Management disclosed land mortgages being modified or extended and noted that debt covenants may permit acceleration. The filing warns that refinancing may be unavailable or less favorable.
- TCI is exposed to interest-rate changes; management estimated that a 100-basis-point increase in variable rates would reduce annual net income by about $0.4 million. Bonds issued in Israeli shekels also create currency exposure.
- Related-party balances and transactions are significant: TCI reported $133.6 million receivable from related parties, including $118.9 million from ARL, and $49.0 million of notes receivable from UHF. The company is the primary guarantor of a $39.1 million UHF mezzanine loan. Management disclosed conflicts and cautioned related-party transactions may not be on arm’s-length terms.
- About 86 acres sold to related parties remained recorded as subject to sales contracts, with gains deferred. Mercer Crossing sales recognition and reacquisition of unsold land also affected 2018 results.
- A shareholder filed a lawsuit in February 2019 alleging fiduciary-duty breaches involving transactions with IOR; defendants deny the allegations and intend to defend the case. TCI is also pursuing collection of a prior $19.5 million judgment in the Dynex matter; collection is uncertain.
- Other risks include tenant vacancies or defaults, regional real-estate weakness, development delays and cost overruns, illiquid properties, natural disasters and competition. TCI reported no impairment charges for 2018.
Important facts for investors to verify
- How much of FY2018’s earnings is nonrecurring, especially the VAA gain, land-sale gains and foreign-currency gain, and what ongoing cash distributions TCI will receive from VAA.
- The company’s debt balances and maturity schedule, covenant headroom, refinancing progress and access to cash—particularly the distinction between unrestricted and restricted cash.
- Collectability and timing of the large related-party receivables, including ARL and UHF, and the terms and exposure of the UHF loan guarantee.
- The status and accounting treatment of deferred or related-party property sales, Mercer Crossing transactions, and the final VAA cash and expense true-up.
- Whether property operations can generate sufficient recurring cash to fund obligations and development, given negative operating cash flow and management’s stated need for asset sales and refinancing.