Income Opportunity Realty Investors, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company is an externally advised real estate investor with no employees; TCI owns approximately 81.25%. Its portfolio includes 131.1 acres of developable land in Farmers Branch, Texas, held under a sales contract. Its principal income source is interest on related-party receivables.
Financial results and position
- Revenue: No rental or other property revenue was reported in Q2 or the first half. Interest income from related parties was $1.081 million for Q2 and $2.123 million for the six months.
- Profit: Q2 net income was $707,000 ($0.17 per share), versus $1.009 million ($0.24) a year earlier. First-half net income was $1.409 million ($0.34 per share), versus $1.746 million ($0.42).
- Expenses: First-half operating expenses were $714,000, including $276,000 general and administrative, $332,000 advisory fees, and $106,000 net income fees to related parties. There were no property operating expenses.
- Cash flow: First-half operating cash flow was $2.150 million, down from $3.394 million. Investing activities used $2.152 million, compared with $3.395 million used in 2017. Financing cash flow was zero; period-end cash was zero.
- Balance sheet and liquidity: Total assets were $89.308 million and shareholders’ equity was $89.296 million at June 30, 2018. Liabilities were $12,000, and the company reported no outstanding debt. Assets included $51.783 million receivable from related parties and $14.015 million of notes and interest receivable from related parties. The filing identifies collections, asset sales and refinancing as liquidity sources.
- Margins: The company reported no property revenue, so a property operating margin is not meaningful. Net income was primarily supported by related-party interest income.
Changes, outlook and risks
- First-half net income declined $337,000 year over year; related-party interest income decreased $85,000. General and administrative expenses rose $27,000, while net income fees fell $31,000.
- The company continues to account for the Mercer Crossing land sale under the deposit method: no sale revenue is recognized and the $22.717 million land asset remains on the balance sheet. The 2015 transaction covers land held by IOR and related parties for total consideration of $75 million; final allocation remains undetermined pending development commitments and collection of the note.
- IOR’s notes to Unified Housing Foundation are secured junior mortgage loans bearing 12% interest and maturing in December 2032. Repayment depends on surplus cash flow, sale or refinancing of underlying properties, exposing collections to borrower and collateral performance.
- Management provided no numerical earnings or operating guidance. It cited general real estate, financing, interest-rate, property-sale, development, environmental and other risks; it reported no changes to the risks in its 2017 Form 10-K. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no material environmental liability known to it.
- Related-party dependence and transactions are significant: TCI and affiliates are connected to the company’s cash management, receivables and advisory arrangements. The filing cautions that such transactions may not be on arm’s-length terms or favorable to IOR.
Investor facts to verify
- Collectability and terms of the $51.783 million related-party receivable and the $14.015 million related-party notes and accrued interest.
- Status, buyer performance, remaining conditions and proceeds allocation for the Mercer Crossing sale contract and seller-financed transaction.
- Liquidity available to the company given zero cash, reliance on related-party balances and no outstanding debt.
- Related-party advisory, cash-management and fee arrangements, including how they affect cash flows and shareholder returns.
- Whether the company’s interest income and receivable collections remain sufficient to cover operating costs; no quarterly dividends were paid in the first half of 2018.