Income Opportunity Realty Investors, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Financial statement amounts are in thousands of dollars, except per-share data. Comparative period is Q1 2020.
Business context
IOR is an externally advised investment company with no employees. Its primary business is investing in mortgage receivables, and its principal revenue source is interest from related parties. At March 31, 2021, Transcontinental Realty Investors (TCI) owned approximately 81.1% of IOR. The company reported approximately $95.6 million of notes receivable due from related parties; its reported balance sheet separately shows $94.3 million due from related parties and $11.5 million of noncurrent notes and interest receivable.
Financial performance and position
- Revenue from operations: $0 in both Q1 2021 and Q1 2020. Interest income from related parties was $1.218 million, down from $1.479 million.
- Other income: $1.017 million, compared with zero a year earlier. This resulted from collecting the remaining balance of a previously fully reserved note.
- Expenses: $524,000, up from $414,000. This included $188,000 of general and administrative expenses, $197,000 of advisory fees, and a $139,000 net income fee to a related party.
- Net income: $1.352 million, or $0.32 per basic and diluted share, versus $841,000, or $0.20 per share. No operating revenue was reported, so operating margins are not meaningful.
- Cash flow: Operating activities provided $3.769 million, compared with $1.284 million. Investing activities used $3.781 million, compared with $1.275 million. Cash declined by $12,000 during the quarter to zero.
- Balance sheet and liquidity: Total assets were $105.810 million, up from $104.468 million at year-end 2020. Total liabilities were $2,000, and the company reported no outstanding debt. Current assets were $94.307 million, predominantly receivables from related parties.
- Equity: $105.808 million, compared with $104.456 million at December 31, 2020. No quarterly dividends were paid in either comparative period.
Changes versus Q1 2020
- Net income increased $511,000, principally reflecting the $1.017 million collection recorded as other income, partly offset by lower interest income and higher expenses.
- Interest income fell by approximately $300,000, which management attributed primarily to a lower prime rate used to calculate interest on amounts owed by the Advisor and other related parties.
- General and administrative expenses rose $49,000, primarily due to higher audit fees and expense reimbursements to Pillar. Advisory fees increased $8,000, and the related-party net income fee increased $53,000.
- Operating cash flow increased $2.485 million; investing cash outflow increased $2.506 million. Management said the investing activity reflected greater cash investment with its Advisor.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings, revenue, or cash-flow guidance. Management identifies collections of mortgage notes and receivables from related companies as principal sources of cash and recurring expenses as the main liquidity need.
- Receivables are highly concentrated in related parties, including UHF. UHF notes are junior mortgage loans, carry a 12% interest rate, mature in December 2032, and are repayable from surplus cash flow, property sales, or refinancing. Management notes that related-party dealings may not be on arm’s-length terms or be in IOR’s best interests.
- In February 2021, IOR collected $1.017 million on a previously fully reserved note and also collected $1.9 million of principal and $600,000 of accrued interest on UHF notes. The latter funds were transferred to IOR’s parent, TCI, under company policy.
- A shareholder lawsuit alleging fiduciary-duty and related claims remains in discovery. Defendants deny the allegations and intend to defend the case; management says ordinary-course litigation is not expected to materially affect the company.
- Management is monitoring COVID-19 effects but says the impact on financial condition, results, and cash flows remains uncertain. It reported no significant disruptions during 2020 and no changes to previously disclosed risk factors.
- The company reported no material environmental liability known to management. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s related-party receivable disclosures: approximately $95.6 million of notes receivable in the overview versus $94.3 million current receivables and $11.5 million noncurrent notes and interest receivable on the balance sheet.
- Review the concentration, collectability, collateral, and repayment prospects of amounts due from TCI, UHF, and other related parties, particularly given zero cash at quarter-end.
- Confirm UHF-related interest income: Note 2 reports $330,000 of interest accrued on the listed notes, while Note 3 states $360,000 recognized on those notes.
- Assess the ongoing shareholder litigation, related-party fees and transfers, and the company’s dependence on its external Advisor.