Transcontinental Realty Investors, Inc. — 2016 Form 10-K
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2016; it is not a quarterly filing. TCI acquires, develops, and operates residential and commercial real estate and land. At year-end, it reported 50 apartment communities with 8,226 units, seven commercial properties totaling about 1.7 million square feet, a golf course, and approximately 3,519 acres of land. TCI consolidates IOT, in which it held 81.1%, and is 77.6% owned by subsidiaries of ARL. TCI has no employees and is externally managed by Pillar.
Financial results and position
- Revenue: $118.5 million, up $16.3 million, or about 15.9%, from $102.2 million in 2015. Management attributed most of the increase to apartment acquisitions and portfolio growth.
- Operating results: Operating income was $17.6 million versus $9.3 million; operating margin was about 14.9% versus 9.1%. Operating expenses rose to $100.8 million from $92.9 million, including higher property costs and depreciation.
- Profit: Net income was $0.3 million, but preferred dividends resulted in a $0.9 million loss applicable to common shares, or $(0.10) per share. The year included $16.2 million of gains on income-property sales and $3.1 million of land-sale gains. Before sale gains, the loss before taxes and non-controlling interest was $19.0 million.
- Cash flow: Operating cash flow was $8.0 million, compared with cash used of $50.9 million in 2015. Investing used $66.9 million and financing provided $61.2 million. Year-end cash was $17.5 million; restricted cash was another $38.2 million.
- Debt and liquidity: Debt principal was approximately $858.1 million, including $119.9 million of mezzanine financing; the reported weighted-average rate was 4.79%. About $37.6 million was variable-rate debt. Total notes and interest payable, net of deferred borrowing costs, were $841.5 million. Management said 2017 operating cash would not be sufficient to meet all obligations as due and planned asset sales, refinancing, extensions, and additional real-estate-secured borrowing. Scheduled 2017 principal repayments were $130.5 million.
- Balance sheet: Total assets were $1.186 billion, real estate net of depreciation was $891.2 million, and total shareholders’ equity was $224.5 million. The company also reported $101.6 million due from related parties.
- Shareholder returns: No common dividends were declared in 2016, 2015, or 2014. Series D preferred dividends were $0.9 million in 2016.
Material changes versus 2015
- Revenue increased, supported by acquisitions, while operating expenses and interest expense also rose. Mortgage and loan interest expense increased to $53.1 million from $46.5 million.
- Common-share loss narrowed to $0.9 million from $8.5 million. The comparison reflects different asset-sale gains: 2016 included $16.2 million of income-property gains, while 2015 included $18.9 million of land gains. The 2015 period also included a $5.3 million impairment of the U.S. Virgin Islands golf course and related assets; there was no impairment provision in 2016.
- TCI acquired four apartment properties adding 723 units for $79.7 million and acquired development land for $12.5 million. It sold two apartment communities for $20.4 million, generating $16.2 million in aggregate gains, sold 129.7 acres for $29.1 million, and sold an industrial warehouse at a loss of about $0.2 million.
- Operating cash flow improved substantially from 2015, while financing cash inflow declined from $193.7 million to $61.2 million.
Outlook, risks, and unusual items
- Management expects excess cash from property operations in 2017, but explicitly states it will not cover all obligations as they fall due. The plan depends on selling assets and obtaining or extending financing; completion and terms are not assured.
- Debt maturities, balloon payments, covenant compliance, refinancing access, variable interest rates, and the real-estate collateral pledged against borrowings are material risks. A 100-basis-point increase in variable borrowing rates was estimated to reduce 2017 net income by $0.4 million.
- Three apartment projects were in development at year-end, with 1,085 planned units and projected total costs of $162.8 million. Construction delays, cost overruns, permitting, financing, and lease-up are risks.
- Related-party exposure is significant: related entities account for about 85% of the mortgage-note portfolio, and TCI reported a $101.6 million related-party receivable. The company also guarantees a $60.4 million UHF mezzanine loan; UHF was reported to be covenant-compliant at year-end. Management cautions related-party dealings may not be on arm’s-length terms.
- About 91 acres sold to related parties remained accounted for as “subject to sales contract,” with sale recognition deferred. TCI is pursuing collection of a court judgment against Dynex Commercial; the judgment awarded TCI $19.5 million plus post-judgment interest, but collection is not assured.
- After year-end, an indirect subsidiary accepted applications for approximately 276 million Israeli shekels (about $73.7 million) of unsecured bonds at an average annual rate of approximately 7.38%. The filing does not establish that this amount was ultimately issued or quantify its final proceeds and terms.
- The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Near-term maturities, covenant headroom, and the status and terms of refinancing or extensions, especially against management’s warning that operating cash is inadequate for all obligations.
- Whether planned asset sales and additional borrowing are completed, and the net proceeds available after debt repayment and transaction costs.
- Collectability and repayment timing of related-party receivables, including the large balance due from ARL and notes involving UHF; assess the $60.4 million guarantee exposure.
- Final issuance, proceeds, interest, and repayment terms of the Southern subsidiary’s bond offering, and any parent-level support or restrictions.
- Execution, projected costs, financing, and lease-up progress for the three developments; also monitor commercial vacancy and upcoming lease expirations.
- Collection prospects for the Dynex judgment and whether related-party land sales will close and qualify for revenue recognition.