Transcontinental Realty Investors, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless noted, dollar amounts below are in millions; the filing reports financial statements in thousands. TCI owns and develops multifamily and commercial real estate, land, and related investments. At quarter-end, its portfolio included four office buildings, seven directly owned multifamily properties, about 1,847 acres of land, and an interest in a joint venture (VAA) that owned seven multifamily properties after its portfolio sale.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $8.3 | $10.0 | $23.9 | $32.7 |
| Net operating loss | $(2.8) | $(4.6) | $(9.7) | $(12.0) |
| Net income attributable to TCI | $378.4 | $26.2 | $409.3 | $18.1 |
| EPS, basic and diluted | $43.79 | $3.04 | $47.38 | $2.10 |
| FFO adjusted for debt-extinguishment and foreign-currency effects | $6.4 | $8.0 | $19.1 | $27.1 |
Rental revenue fell 21% in Q3 and 26% for the first nine months year over year. Segment profit was $2.9 million in Q3 and $9.8 million for nine months, down from $4.0 million and $13.7 million, respectively; management attributed much of the decline to properties sold or otherwise no longer included in the comparison. Interest income exceeded interest expense by $3.4 million in Q3 and $4.0 million year to date. Cash paid for interest was $17.8 million for nine months.
Reported net income is dominated by TCI’s share of the VAA portfolio-sale gain: equity income from the joint venture was $464.1 million in Q3 and $470.4 million year to date. The sale generated an $88.0 million Q3 tax provision ($88.1 million year to date). These unusual items substantially elevate GAAP income and EPS; Q3 FFO was negative $8.5 million before the company’s additional FFO adjustments.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was negative $5.4 million, compared with negative $7.2 million in 2021. Investing cash flow was positive $153.4 million, including $180.2 million of joint-venture distributions; financing cash flow was negative $71.5 million, including $70.2 million of debt repayments.
- At September 30, cash and cash equivalents were $131.2 million, restricted cash $18.0 million, and short-term investments $75.3 million. Total assets were $1.165 billion and total equity $781.4 million.
- Mortgages and other notes payable were $155.0 million and bonds payable $127.5 million, totaling $282.5 million, down from $366.2 million at year-end 2021. Bond balances are denominated in Israeli shekels and subject to foreign-exchange movements and covenants restricting SPC cash distributions.
- Management said cash and expected collections should meet cash requirements, while also cautioning that property-operation cash surpluses might not cover every obligation as due. It expects to use asset sales, refinancing, and additional real-estate-secured borrowing as needed.
Material changes, outlook, and risks
On September 16, VAA sold 45 properties for $1.811 billion. TCI recorded its share of the resulting gain through equity income and received an initial $182.8 million distribution, including repayment of its mezzanine loan and accrued interest. On November 1, after quarter-end, TCI received a further $203.9 million cash distribution and operational control of VAA’s seven-property holdback portfolio; TCI was working to assume the portfolio’s mortgage debt. Management plans to use sale proceeds for real-estate investment, debt reduction, and general corporate purposes.
TCI sold Toulon and Sugar Mill Phase III during 2022 and used part of the proceeds to repay their mortgages. It also sold a small commercial building and land parcels. It spent $3.7 million on Windmill Farms development in the first nine months. Renovation work at Landing Bayou, damaged by Hurricane Ida, included $5.0 million of 2022 capital expenditures funded by insurance proceeds; completion was expected by year-end.
Debt and refinancing warrant attention: Series C bonds of $66.1 million mature January 31, 2023; Series A bonds of $28.8 million mature July 31, 2023. The Stanford Center mortgage was paid off October 21, 2022. Some land mortgages were being modified, extended, or refinanced. TCI reported noncompliance with the minimum debt-service coverage ratio on 770 South Post Oak; surplus property cash must remain in a lender-controlled account until compliance is achieved for two consecutive quarters.
Management cited lower commercial occupancy, which it believed temporary, and continuing uncertainty from COVID-19. Other disclosed risks include leasing and property-market conditions, rising interest rates, access to financing, development delays and cost overruns, asset-sale timing, and foreign-exchange changes. The company is externally managed by Pillar, an affiliate of its controlling shareholder; related-party transactions include advisory fees, expenses, receivables, and notes. A shareholder lawsuit concerning IOR property transactions had been stipulated for dismissal with prejudice, but the filing text does not clearly confirm the final court disposition.
Important facts for investors to verify
- How much of the VAA proceeds is ultimately available to TCI after holdback-property debt assumption, SPC bond restrictions, and other obligations.
- Repayment, refinancing, or extension plans for the 2023 bond maturities and other near-term property debt.
- Progress toward restoring covenant compliance at 770 South Post Oak and resolving land-loan maturities.
- Whether the VAA transaction-driven gain, tax charge, and reported EPS obscure ongoing property-level performance; compare GAAP results with FFO and operating cash flow.
- Developments in commercial occupancy, Landing Bayou renovation, and related-party exposures and transactions.