Income Opportunity Realty Investors, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. IOT is externally advised, has no employees, and TCI owns approximately 81.1% of its common stock.
Business context
IOT held 184.7 acres of land in Farmers Branch, Texas, for future development or sale. It reported no rental or other property revenue in either comparable period; its primary income source was interest on related-party receivables. The filing describes substantial related-party activity, including notes with Unified Housing Foundation (UHF), and cash management and advisory arrangements involving affiliates.
Financial results and position
- Revenue: Rental and other property revenue was zero in Q3 and the first nine months of both 2015 and 2014. Related-party interest income was $1.137 million for Q3 2015 and $3.376 million for the nine months.
- Profit: Q3 net income was $680,000, or $0.16 per basic and diluted share, versus $623,000, or $0.15, a year earlier. Nine-month net income was $1.837 million, or $0.44 per share, versus $1.877 million, or $0.45.
- Costs and margins: Nine-month operating expenses were $1.098 million, compared with $1.132 million. Net operating loss was $1.098 million before other income; net income depended on interest income net of interest expense. A property operating margin is not meaningful because property revenue was zero.
- Cash flow: Nine-month operating cash flow was $3.329 million, down from $5.667 million. Investing cash outflow was $2.675 million, including a $3.0 million easement payment received and a $5.675 million increase in related-party receivables and accrued interest. Financing cash outflow was $659,000, versus $2.117 million in 2014. Cash ended at just $2,000.
- Assets and liquidity: Total assets were $94.238 million, versus $93.076 million at December 31, 2014. Related-party receivables and accrued interest were $46.135 million; net notes and interest receivable were $24.317 million, after a $1.826 million allowance. The filing reports $9.581 million of related-party notes and interest payable and total liabilities of $9.602 million.
- Debt: The related-party mortgage matures December 30, 2016, bears interest at prime plus 1.5% with a 6% floor, and is secured by IOT and affiliate land. The filing estimates a 1% rate increase would reduce annual net income by $96,000, or $0.02 per share.
Changes and notable items
- In Q3, IOT received $3.0 million from the City of Farmers Branch for additional easement rights, retained title to the land, and recorded the proceeds as a reduction in land holdings. Land carrying value declined from $25.717 million at year-end 2014 to $22.717 million at September 30, 2015.
- Compared with Q3 2014, net income rose by $57,000, mainly as lower general and administrative costs and mortgage interest more than offset lower interest income and higher property costs. For the nine months, net income fell by $40,000; related-party interest income decreased by $171,000, partly offset by lower expenses.
- No quarterly dividends were paid in 2015 or 2014, and no shares were repurchased in Q3 2015. The company reported no real estate sales in either 2015 or 2014.
- IOT adopted the revised discontinued-operations accounting standard in 2015; management expects substantially fewer property dispositions to qualify for discontinued-operations presentation. It also adopted debt issuance cost presentation guidance during 2015.
Outlook, risks, and contingencies
The filing gives no numerical earnings or development guidance. Management identifies collections on receivables, asset sales, and mortgage refinancing as principal cash sources. It says that if refinancing and operating cash are insufficient, it may sell or refinance real estate or incur additional property-secured borrowings. The company’s cash balance is minimal relative to its assets and obligations.
Key risks include dependence on related-party borrowers and transactions, uncertainty over collection of junior mortgage loans, refinancing and variable-rate debt exposure, and the lack of current property revenue. UHF-related notes are junior mortgages, generally repayable from surplus property cash flow, sales, or refinancing; the notes are cross-collateralized. Management reports an ongoing lawsuit filed by the Clapper parties against IOT, directors, and officers, disputes the claims, and says it intends to defend the case and believes IOT has no liability. Management says ordinary-course litigation is not expected to materially affect the company. A $2.7 million deferred tax asset is fully offset by a valuation allowance. No material environmental liability was known to management.
Investor verification points
- Assess the collectability and collateral values of the UHF notes and the $46.135 million related-party receivable, including the concentration and terms of affiliate exposures.
- Verify liquidity and repayment or refinancing plans for the mortgage due December 30, 2016, given the $2,000 cash balance and variable interest rate.
- Review the valuation and development or sale prospects for the Farmers Branch land, and the effect of the easement transaction on future plans.
- Monitor the Clapper litigation and confirm whether subsequent developments alter management’s stated view of IOT’s exposure.
- Reconcile the filing’s reported $9.581 million debt balance with the $9.661 million balance used in its interest-rate sensitivity disclosure.