Business context and reporting period
Transcontinental Realty Investors, Inc. (TCI) filed this Form 10-K for the fiscal year ended December 31, 2017; it reports full-year results, not a standalone fourth quarter. TCI acquires, develops, owns, and sells income-producing real estate and land. Its portfolio included 51 apartment communities with 8,427 units, seven commercial properties totaling about 1.7 million square feet, a non-operating golf course, and approximately 3,466 acres of land. TCI is externally advised by Pillar and has no employees; American Realty Investors and affiliates own more than 80% of its common stock.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Rental and other property revenue | $125.2 million | $118.5 million |
| Operating income | $20.1 million | $17.6 million |
| Net income (loss) applicable to common shares | $(16.7) million; $(1.92) per share | $(0.9) million; $(0.10) per share |
| Net cash from operating activities | $(32.5) million | $8.0 million |
| Net cash used in investing activities | $(98.3) million | $(66.9) million |
| Net cash from financing activities | $156.0 million | $61.2 million |
| Cash and cash equivalents at year-end | $42.7 million | $17.5 million |
| Total assets / shareholders’ equity | $1,313.4 million / $208.3 million | $1,185.9 million / $224.5 million |
Operating income was about 16.1% of property revenue. Property operating expenses were $63.1 million; depreciation and amortization were $25.6 million; advisory fees were $10.0 million; and mortgage and loan interest expense was $59.9 million. The filing reports no common dividends for 2015–2017. Apartment occupancy was 95.18% at year-end; commercial lease information indicates approximately 82% of rentable space was subject to leases.
Debt, liquidity, and investment
At year-end, contractual mortgage and other note principal was $910.2 million, including $110.2 million of mezzanine financing. TCI also had $115.3 million of Series A bonds issued by its subsidiary Southern Properties Capital, making total stated debt approximately $1.03 billion before applicable accounting adjustments. The debt portfolio was reported as approximately $844.9 million fixed-rate and $63.3 million variable-rate, with a 5.5% weighted-average rate; the filing presents these figures separately from the bonds. Notes payable principal maturities include $79.8 million in 2018 and $101.1 million in 2019, with $604.9 million thereafter. The company pledged substantially all assets to secure debt.
Cash from operations was negative despite higher property revenue, while investment outflows included $37.0 million for an apartment acquisition, $64.4 million for property improvements, and $12.9 million for construction and development. Financing inflows included $115.3 million from Series A bonds and $135.1 million from notes payable. Restricted cash was an additional $45.6 million, but is not equivalent to unrestricted liquidity. The auditor highlighted liquidity: management expects property operations to generate excess cash in 2018, but says it will not be sufficient to discharge all obligations as due. Management plans to sell assets, refinance or extend debt, and seek additional real-estate-secured borrowing.
Changes, outlook, risks, and unusual items
- Revenue rose $6.8 million, primarily from apartment growth and acquisitions. Operating income improved, but the common-share loss widened substantially as interest expense increased and the company recorded a $4.5 million unrealized foreign-currency loss related to Israeli bonds.
- The 2017 common-share loss included $9.8 million of recognized previously deferred gains on income-producing property sales and $4.9 million of land-sale gains. These gains did not prevent a net loss.
- TCI issued approximately $115 million of Series A bonds in 2017, denominated and repayable in Israeli shekels; stated interest is 7.3% and the effective rate was 9.17%. A further Series B issuance of about $39.4 million occurred in February 2018.
- TCI reported 14 apartment projects in development, planned for 3,228 units, with $89.1 million of costs to date and projected total costs of $495.8 million. It spent $69.8 million on construction or predevelopment in 2017. Completion, cost, lease-up, and financing outcomes remain uncertain; the filing gives no quantified earnings or occupancy guidance.
- Related-party exposure is significant: year-end receivables included $111.7 million from ARL, and $45.1 million of mortgage notes were due from related entities. TCI is primary guarantor on a $39.1 million UHF mezzanine loan. The filing also describes 66.7 acres sold to related parties for which sale recognition was deferred. Related-party transactions and management overlap create potential conflicts of interest.
- The company disclosed that the golf course in the U.S. Virgin Islands suffered extensive hurricane damage and is no longer operating. There was no real-estate impairment provision in 2017 or 2016; a $5.3 million impairment had been recorded in 2015.
- A long-running lawsuit resulted in a 2015 judgment awarding TCI $19.5 million plus post-judgment interest, but the company was still working to identify assets and collect. Management said ordinary-course litigation was not expected to materially affect the company.
- Key risks include refinancing and balloon-payment exposure, interest-rate increases, covenant defaults, limited real-estate liquidity, construction overruns or delays, tenant and market weakness, geographic concentration, and potential losses on related-party receivables or guarantees. The auditor issued an unqualified opinion on the financial statements, with a specific emphasis on liquidity.
Important facts for investors to verify
- Reconcile the debt disclosures, including the $910.2 million note-principal schedule, Series A and subsequent Series B bonds, maturity dates, collateral, covenants, and refinancing progress.
- Assess unrestricted cash and near-term liquidity against debt maturities, operating cash use, development commitments, and management’s asset-sale and refinancing plans.
- Review collectability, collateral, terms, and concentration of related-party receivables, particularly amounts due from ARL and UHF, and the $39.1 million guarantee.
- Confirm project-level funding, remaining costs, completion schedules, and lease-up assumptions for the development pipeline.
- Evaluate the impact of deferred gains and related-party land transactions on reported earnings and cash proceeds; check progress on collecting the Dynex judgment.
- Clarify portfolio counts where the filing differs: it variously reports 51 or 53 apartment communities and 59 or 61 income-producing properties. The filing text does not provide a clear reconciliation.