Transcontinental Realty Investors, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Dollar figures below are in millions unless stated otherwise. TCI is an externally advised real estate owner and lender, with 53 income-producing properties, 3,401 acres of land, and 14 apartment projects in development. Subsidiaries of American Realty Investors own approximately 77.68% of TCI’s common stock.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Rental and other property revenue | $31.1 | $31.5 |
| Property operating expenses | $14.5 | $15.9 |
| Property revenue less property operating expenses | $16.6 | $15.6 |
| Net operating income, as reported | $5.2 | $5.2 |
| Net loss from continuing operations | $(0.1) | $(5.0) |
| Net loss applicable to common shares | $(0.5) | $(5.4) |
| Loss per diluted share | $(0.05) | $(0.61) |
| Cash provided by (used in) operating activities | $1.7 | $(9.2) |
| Cash used in investing activities | $(24.1) | $(14.8) |
| Cash provided by financing activities | $30.3 | $54.5 |
Property revenue less property operating expenses was approximately 53.5% of property revenue, versus 49.6% a year earlier. This is a simple calculation, not a separately reported company margin. Cash, cash equivalents and restricted cash totaled $96.3 million at March 31, 2018, including $40.9 million unrestricted cash. Total assets were $1.331 billion and shareholders’ equity was $207.9 million.
Debt, liquidity and investment
- The balance sheet reports $885.8 million of notes and interest payable and $146.9 million of bond and bond interest payable; it also lists $0.4 million of notes tied to real estate held for sale and $0.3 million tied to real estate subject to sales contracts. The separate debt schedule reports $886.6 million of notes payable and accrued interest, net of deferred borrowing costs. These presentations have differing scopes and should not be added without reconciliation.
- TCI issued approximately $39.2 million of Series B bonds in February. Series B carries a 6.8% stated rate and a 7.99% effective rate; Series A carries a 7.3% stated rate and a 9.17% effective rate. Both are NIS-denominated obligations, creating currency exposure. Q1 included a noncash $1.8 million foreign-currency translation gain.
- Of approximately $886.6 million of notes payable in the market-risk disclosure, $65.2 million was variable-rate debt. Management estimates a 100-basis-point rate increase would raise annual interest cost by approximately $0.65 million and reduce EPS by $0.07. Cash interest paid in Q1 was $13.3 million.
- Investing outflows included $20.1 million for construction and development and $8.1 million in advances on notes receivable. The company capitalized $0.9 million of development interest. It reported $115.7 million receivable from related parties and $83.3 million of notes and interest receivable, including substantial related-party exposure.
Changes and unusual items
- Revenue decreased $0.4 million year over year: apartment revenue increased $0.9 million, while commercial revenue decreased $1.3 million. Property operating expenses fell $1.4 million.
- The net loss applicable to common shares narrowed by about $4.9 million. Contributing items included $1.5 million of debt forgiveness, a $1.8 million foreign-currency gain, lower mortgage and loan interest expense, and a $1.3 million land-sale gain, compared with $0.4 million in Q1 2017.
- TCI sold 62 acres of land for approximately $3.0 million, recognizing a $1.3 million gain. It also sold six income-producing properties to a related party for $8.5 million: $2.1 million cash and $6.4 million in seller-financed notes, with no gain or loss recorded.
- Q1 operating cash flow improved from a $9.2 million use to $1.7 million provided. Investing cash use increased, principally reflecting development spending and note advances.
Outlook, risks and contingencies
- Management expects excess cash from property operations in 2018 but states it will not be sufficient to meet all obligations as they become due. Planned liquidity sources include asset sales, refinancing or extending debt, and additional real-estate-secured borrowing; these plans are not assured.
- Some land mortgages are in modification or extension discussions. Properties transferred to a related party and reported as subject to sales contracts have mortgages for which the borrower is in default, primarily for nonpayment; discussions with lenders are ongoing. The filing says impairment was recorded where management judged property value below carrying basis.
- TCI is pursuing collection of a 2015 court judgment against Dynex Commercial, including a $19.5 million award to TCI plus post-judgment interest. Collection is uncertain; the company is also exploring possible additional claims. Management says ordinary-course litigation is not expected to materially harm financial condition, results or liquidity.
- TCI is the primary guarantor of a $39.1 million mezzanine loan to Unified Housing Foundation; the borrower was reported compliant with covenants at quarter-end.
- Key risks include refinancing and debt maturities, interest and currency-rate changes, property demand and occupancy, development delays or cost overruns, asset-sale timing, environmental exposure, and related-party dealings. Management notes related-party transactions may not be on arm’s-length terms. No changes to the risks listed in the 2017 Form 10-K were reported.
- No specific earnings or revenue guidance was provided. Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported debt balances and review maturities, refinancing needs, lender modifications, and the defaulted mortgages tied to properties subject to sales contracts.
- Assess whether operating cash, planned asset sales and refinancing can cover obligations, development commitments and debt service.
- Review collectability and terms of the $115.7 million related-party receivable, related-party notes, and the $6.4 million seller note from the property sales.
- Confirm the sustainability of improved results, separating recurring property operations from debt forgiveness, land gains and foreign-currency translation.
- Monitor NIS exchange-rate exposure, variable-rate debt sensitivity, and progress in collecting the Dynex judgment.