Income Opportunity Realty Investors, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are in thousands of dollars, except per-share data. The company holds land for development or sale and earns most of its income from interest on related-party receivables. It reported no rental or other property revenue. TCI owns approximately 81.1% of the company; the company is externally advised by Pillar Income Asset Management.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Rental and other property revenue | $0 | $0 | $0 | $0 |
| Interest income from related parties | $1,120 | $1,236 | $2,239 | $2,369 |
| Total operating expenses | $352 | $363 | $753 | $752 |
| Mortgage and loan interest expense | $165 | $178 | $329 | $363 |
| Net income | $603 | $695 | $1,157 | $1,254 |
| Diluted earnings per share | $0.14 | $0.17 | $0.28 | $0.30 |
Net income fell about 13% for the quarter and 8% for the first half year over year. The filing attributes lower mortgage interest expense to prior-period principal repayments. First-half general and administrative expense increased to $297 from $280, primarily due to professional fees; advisory fees rose to $350 from $343. The net income fee paid to Pillar declined to $90 from $101.
Margins: Property revenue was zero, so a property operating margin is not meaningful. The company remained profitable through interest income, despite an operating loss before other income and expenses of $753 for the first half.
Balance sheet, cash flow and liquidity
- At June 30, 2015, total assets were $93.690 million, versus $93.076 million at December 31, 2014. Land held at cost was $25.717 million, representing 184.7 acres in Farmers Branch, Texas.
- Notes and interest receivable from related parties were $25.037 million net of a $1.826 million allowance. A separate $41.868 million receivable from related parties was also reported.
- Total liabilities were $9.734 million, including $9.717 million of notes and interest payable, primarily to related-party lender Realty Advisors, Inc. The principal balance was $9.714 million; the loan matures December 30, 2016, carries a variable rate of prime plus 1.5% subject to a 6% floor, and is secured in part by land.
- Cash was $2 thousand at June 30, compared with $7 thousand at year-end. First-half operating cash flow was $1.926 million, investing cash outflow was $1.408 million, and financing cash outflow was $523 thousand. Cash declined by $5 thousand.
- The company paid no quarterly dividends in 2015 or 2014. Management identifies receivable collections, asset sales and mortgage refinancing as principal sources of cash, and says it may sell or refinance real estate or borrow more if other cash sources are insufficient.
- A 1% increase in base rates was estimated to reduce annual net income by $98 thousand, or approximately $0.02 per share.
Outlook, risks and notable items
- No specific earnings, revenue or development guidance was provided. Management describes the land as held for future development or sale and notes that future results may differ from interim results.
- All notes receivable are from related party Unified Housing Foundation, Inc. (UHF), are junior mortgage loans, and carry a stated 12% rate with maturities in December 2032. Repayment depends on surplus cash flow, sale or refinancing of underlying properties; loans are cross-collateralized. The filing reports a $1.826 million allowance for doubtful accounts.
- The company warns that related-party dealings may not be on arm’s-length terms or be in its best interests. Pillar also advises and manages cash for affiliated entities.
- Management said ordinary-course litigation was not expected to materially affect the company. A complaint filed in 2014 by the Clapper Parties names the company, directors and certain officers in connection with disputes primarily involving American Realty Trust and ART Midwest. Management disputes the claim and says the company has no liability for the underlying judgment.
- Environmental, real estate market, financing, interest-rate, development and property-sale risks are disclosed. Management reported no material environmental liability known to it, no changes to previously disclosed risk factors, and effective disclosure controls.
- The company adopted ASU 2014-08, which narrows discontinued-operations reporting; it said future individual property sales will generally be less likely to qualify. No property sales occurred in 2015 or 2014. It also adopted the debt issuance cost presentation standard during the quarter.
Important facts for investors to verify
- Collectability and collateral value supporting UHF-related notes and the separate $41.868 million related-party receivable.
- Terms, allocation and refinancing prospects for the related-party mortgage maturing in December 2016, including exposure to variable rates.
- The company’s ability to fund expenses and debt service given minimal cash and reliance on related-party interest collections, asset sales and refinancing.
- Potential effects of related-party arrangements and the Clapper litigation on the company, its directors and officers.
- Management’s plans and timing for development or sale of the 184.7 acres; the filing provides no specific timetable or financial guidance.