INCOME OPPORTUNITY REALTY INVESTORS, INC. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Dollar figures are in thousands unless noted. The company is an externally advised real estate investor with 178.1 acres of Texas land held for future development or sale; its principal income source is interest on related-party receivables. TCI owns approximately 81.1% of the company, which has no employees.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Rental and other property revenue | $0 | $0 | $0 | $0 |
| Interest income from related parties | $1,236 | $1,417 | $2,369 | $2,824 |
| Operating expenses | $363 | $477 | $752 | $884 |
| Net income | $695 | $646 | $1,254 | $1,341 |
| Diluted EPS | $0.17 | $0.15 | $0.30 | $0.32 |
| Operating cash flow | — | $4,313 | $300 |
There was no rental revenue, so property operating margins are not meaningful; reported net income primarily reflects related-party interest income less land, corporate, advisory and financing costs. Six-month net income included no discontinued-operations loss in 2014, versus a $12 net loss in 2013.
Balance sheet, debt and liquidity
- At June 30, 2014, total assets were $92,800, down from $93,813 at December 31, 2013. Shareholders’ equity was $82,494, compared with $81,240.
- Notes and interest receivable from related parties were $25,605 net of a $1,826 allowance; separate receivables and accrued interest from related parties were $41,403. Cash was just $3.
- Total liabilities were $10,306, including $10,240 of notes and interest payable, compared with liabilities of $12,573 at year-end. The principal related-party borrowing was $10,236, secured by company and affiliate land, due December 2016, and variable-rate at prime plus 1.5%, subject to a 6% floor. A $1.5 million principal payment was made in May. The filing also identifies a $3,936 property-tax loan at 12.5%, due June 2020; the balance-sheet debt presentation does not clearly reconcile this amount to the $10,240 total.
- Six-month investing cash outflow was $2,196, largely related-party receivables; financing outflow was $2,117 for repayment of related-party notes. Cash remained $3. Operating cash flow rose to $4,313, including a $3,262 decrease in accrued interest receivable from related parties.
- No quarterly dividends were paid in 2014 or 2013. Management said funding for a loan buyout was expected from a property-sale contract and new financing; the supplied filing text does not clearly quantify the contemplated transaction or proceeds.
Changes, outlook and risks
- Q2 net income increased $49 year over year, while six-month net income declined $87. Lower general and administrative and advisory expenses contributed to Q2 improvement. Interest income fell $181 in Q2 and $455 for the six-month period, principally because the receivable owed by the Advisor decreased.
- Mortgage and loan interest expense declined $116 in Q2 and $218 for six months, which management attributed to the December 2013 replacement of a $27.7 million mortgage with a new note. The filing reports no property sales in 2014 or 2013.
- Management provided no quantified earnings or operating guidance. It described refinancing, collecting receivables, selling assets and potential additional property-secured borrowing as liquidity sources if operating cash and refinancing prove insufficient.
- Related-party concentration is material: the company’s primary income and substantial receivables involve affiliates, including UHF and TCI, and the filing cautions that related-party dealings may not be on arm’s-length terms. The notes are junior mortgage loans at 12%, generally due December 2032; payment depends on surplus cash flow, sale or refinancing of underlying properties. The $1,826 allowance is described as a purchase allowance.
- A 1% increase in base rates was estimated to reduce annual net income by $102, or $0.03 per share, on variable-rate debt. Management cited general real estate, financing, interest-rate, development, property-sale, environmental and other risks; it reported no change to the risk factors in its 2013 Form 10-K.
- The company is involved in ordinary-course lawsuits; management believed their outcomes would not materially affect financial condition, results or liquidity. Management reported no known material environmental liability and no subsequent events. A $1.422 million deferred tax asset was fully valuation-allowed.
Important facts for investors to verify
- Collectability and timing of payment on related-party notes and accrued-interest receivables, including support for the allowance and the borrowers’ underlying collateral cash flows.
- Reconciliation of the $3,936 property-tax loan disclosure with reported total notes payable, and the terms, collateral and funding status of the contemplated loan buyout and property-sale contract.
- Liquidity adequacy given only $3 of cash, dependence on related parties and refinancing, and the substantial increase in operating cash flow attributable in part to receivable movements.
- Terms and governance of related-party transactions, including advisory fees, cash management and the effects of TCI’s controlling ownership.