Transcontinental Realty Investors, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company owns and develops multifamily and commercial real estate, primarily in the southern United States. At period-end, its portfolio included 14 multifamily properties with 2,328 units, four office buildings, and approximately 1,858 acres of land. Unless otherwise indicated, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $12.2 | $7.8 | $23.9 | $15.6 |
| Net operating loss | $(3.5) | $(2.8) | $(6.1) | $(7.0) |
| Net income attributable to TCI | $0.5 | $16.5 | $4.0 | $31.0 |
| EPS, basic and diluted | $0.06 | $1.91 | $0.47 | $3.58 |
| Net cash used in operating activities | — | $(8.4) | $(7.5) |
Q2 rental revenue was $11.4 million, up from $7.3 million. Multifamily segment profit rose to $3.2 million from $1.2 million, principally reflecting the properties acquired from the VAA joint venture and the lease-up of restored Landing Bayou units. Commercial segment profit fell to $1.2 million from $2.2 million, as lower occupancy at Stanford Center and higher insurance costs weighed on results.
Q2 net income was substantially below the prior year, which included larger foreign-currency gains, gains on asset sales, and joint-venture income. For the six months, these items also drove much of the year-over-year decline. Interest income increased and interest expense decreased, partly offsetting those comparisons. Q2 FFO-adjusted was $5.4 million versus $5.6 million; six-month FFO-adjusted was $11.1 million versus $12.8 million. FFO is a supplemental, non-GAAP measure and is not equivalent to operating cash flow.
Balance sheet, cash flow and liquidity
- Total assets were $1,081.5 million at June 30, 2023, down from $1,218.2 million at December 31, 2022. Total equity was $845.2 million.
- Cash and cash equivalents were $58.9 million, restricted cash $10.9 million, and short-term investments $137.0 million. Cash, cash equivalents and restricted cash together were $69.8 million.
- Mortgages and other notes payable totaled $180.8 million, versus $184.5 million at year-end; bonds payable were zero after repayment. Six-month cash used in investing activities was $8.8 million and cash used in financing activities was $135.3 million, principally reflecting bond repayments. Cash, cash equivalents and restricted cash decreased by $152.5 million.
- The company reported $135.6 million of notes receivable, including $66.6 million from related parties, and $146.1 million of net receivables from related parties.
- Management expects cash and cash equivalents, together with collections of notes and interest receivable, to meet cash requirements, but cautioned that operating cash surplus might not cover all obligations as due. It may sell properties, refinance or extend debt, or obtain additional real-estate-secured borrowings.
Material changes, outlook and risks
- TCI repaid its Series C bonds in January and its remaining Series A and B bonds in May 2023, eliminating bonds payable but incurring a $1.7 million early-extinguishment loss. The company withdrew from the Tel Aviv Stock Exchange.
- A $33.0 million Lake Wales construction loan bears interest at SOFR plus 3%, matures in March 2026, and has two one-year extension options. The 240-unit project is expected to be completed in 2025 at an estimated total cost of $55.3 million; $10.8 million had been incurred by June 30.
- TCI was not in compliance with the minimum debt-service coverage ratio on the 770 South Post Oak loan. The lender requires surplus property cash flow to be held in a lender-controlled account until compliance is maintained for two consecutive quarters. The Athens loan was due August 2023, and the Windmill Farms loan matures in February 2024.
- The company is still negotiating lender approval to assume mortgages associated with the seven VAA Holdback Portfolio properties. Certain notes receivable have past-due maturities; TCI said it is working with borrowers on extensions and/or may exercise conversion options.
- Management provided no quantified earnings or revenue guidance. It highlighted risks from financing availability and interest rates, occupancy and leasing demand, property sales, construction costs and delays, and economic conditions. Related-party transactions are significant; the filing cautions that their terms may not be arm’s length.
- The company reported no legal proceedings and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Near-term refinancing, extension, and repayment arrangements for maturing property loans, including Athens and Windmill Farms, and the 770 South Post Oak covenant shortfall.
- Collections and credit quality of notes and related-party receivables, including overdue notes and the concentration in UHF-related balances.
- Leasing and occupancy trends at Stanford Center and the performance of recently acquired and restored multifamily properties.
- Funding, costs, timing, and related-party fees for the Lake Wales development, as well as lender approval for assumed VAA property mortgages.
- Whether liquidity remains adequate given negative operating cash flow, planned capital spending, and management’s stated reliance on asset sales, refinancing, and additional borrowing.