Transcontinental Realty Investors, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Unaudited results. TCI is an externally advised real estate company with apartment, commercial, land and mortgage-note investments. At quarter-end it reported 58 income-producing properties, including 50 apartment communities with 8,226 units, seven commercial properties, a golf course, 3,517 acres of land, and five apartment projects in development.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Rental and other property revenue | $31.5 million | $28.9 million |
| Property operating expenses | $15.9 million | $15.0 million |
| Net operating income, as reported | $5.2 million | $4.1 million |
| Net loss from continuing operations | $5.0 million | $3.6 million |
| Net loss applicable to common shares | $5.4 million | $3.8 million |
| Basic and diluted loss per share | $0.61 | $0.43 |
| Net cash used in operating activities | $2.0 million | $6.3 million |
| Net cash used in investing activities | $14.8 million | $2.1 million |
| Net cash provided by financing activities | $54.5 million | $3.5 million |
Property-level operating margin, calculated as reported net operating income divided by property revenue, was approximately 16.5%, compared with 14.1% in Q1 2016. It does not reflect interest, corporate costs or other items. Interest income was $3.4 million versus $3.8 million; mortgage and loan interest expense rose to $15.2 million from $13.2 million. Other income was $1.1 million, including approximately $1.0 million of debt forgiveness and $0.4 million of flood-insurance proceeds, partly offset by a $0.3 million foreign-currency loss. Land-sale gain was $0.4 million versus $1.7 million a year earlier.
Financial position, debt and liquidity
- Total assets were $1.228 billion, including net real estate of $901.9 million, notes and interest receivable of $76.9 million, cash of $55.3 million and restricted cash of $31.0 million. Total shareholders’ equity was $219.2 million.
- At March 31, the balance sheet reported notes and interest payable of $822.9 million and Series A bond and interest payable of $72.0 million. The detailed debt note reports $827.5 million of notes payable and accrued interest after unamortized borrowing costs; the filing’s figures differ by presentation. The Series A bond liability is separate.
- Cash increased by $37.8 million from year-end, principally reflecting financing. Financing cash flow included $76.0 million of Series A bond proceeds, offset in part by $59.4 million of maturing-note payments, $3.4 million of scheduled principal amortization and bond issuance costs. Investing included $6.4 million for two land parcels and $8.4 million for apartment construction and development.
- Management said expected 2017 excess cash from property operations would not be sufficient to meet all obligations as due. It plans to sell land and income-producing properties, refinance or extend debt, and seek additional real-estate-secured borrowing. Cash paid for interest was $12.2 million.
Changes versus the prior-year quarter
- Revenue increased $2.6 million, attributed mainly to $1.2 million of revenue from two apartment communities acquired at year-end 2016 and increased occupancy at three commercial properties. Expenses also increased: property operating costs by $0.9 million and depreciation and amortization by $0.5 million.
- Common-share loss worsened by $1.6 million. Higher interest expense and lower land-sale gains outweighed higher property revenue and the reported increase in other income.
- Operating cash use improved by $4.3 million, while investing cash use increased by $12.7 million, principally reflecting land purchases. Financing cash provided increased by $51.1 million, largely due to the bond issuance.
Outlook, risks and unusual items
- In February 2017, indirect subsidiary Southern Properties Capital issued Series A bonds in an offering that generated approximately $76.0 million. The bonds are unsecured, bear stated interest of 7.3% and have an effective yield of 9.09%; principal payments are scheduled from 2019 through 2023. A further approximately $28.3 million offering was completed on May 8, 2017, after quarter-end.
- TCI refinanced two loans with a combined principal balance of $35.6 million, extending maturities and lowering rates, and drew $7.3 million on construction loans. Management also disclosed land mortgages undergoing modification or extension discussions.
- Mortgages on certain properties previously sold to related parties but still reported as subject to sales contracts are in default, primarily for nonpayment. The company said it is negotiating with lenders; the assets may or may not be transferred back after resolution.
- TCI is the primary guarantor on a $60.4 million mezzanine loan to Unified Housing Foundation; the borrower was reported in compliance with loan covenants at quarter-end. Notes and interest receivable included $65.3 million from related parties before allowance, and the company reported a $99.7 million receivable from related parties.
- In April 2017, plaintiffs filed a new $50 million lawsuit against Dynex Capital and Dynex Commercial alleging, among other things, fraudulent transfer and alter ego. The filing also describes earlier court judgments awarding amounts to TCI and affiliates; collection or outcome of the new litigation is uncertain.
- Of $827.5 million in notes payable reported in the market-risk discussion, $34.9 million was variable-rate debt. Management estimated a 100-basis-point rate increase would raise annual interest costs by $0.35 million and reduce EPS by $0.03. TCI reported a $57.1 million deferred tax asset fully offset by a valuation allowance.
- Management identified real-estate market, leasing, financing, development, interest-rate, property-sale, environmental and other risks; it said risk factors had not changed from the 2016 Form 10-K. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Near-term debt maturities, extensions and lender negotiations, including the status of defaulted mortgages tied to properties subject to sales contracts.
- Liquidity assumptions and the company’s ability to raise cash through property sales, refinancing or additional secured borrowing, given management’s statement that operating cash will not cover all obligations.
- Series A bond terms, foreign-currency exposure and the effect of the subsequent May 2017 offering on debt service and liquidity.
- Collectability and related-party exposure in the $99.7 million related-party receivable and the substantial related-party mortgage-note portfolio.
- Progress, financing needs and completion risks for development projects, as well as the status and potential financial effect of the Dynex litigation.