Transcontinental Realty Investors, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in millions of dollars except per-share data. The company owns multifamily and commercial properties, land, notes receivable, and an interest in a large multifamily joint venture. Its operations are managed by related-party adviser Pillar.
Financial performance
- Revenue: $7.8, down 34% from $11.8 in Q1 2021. Rental revenue fell to $7.5 from $10.4; other income was $0.3 versus $1.5.
- Profit: Net income was $14.6, down from $22.9; net income attributable to the company was $14.5, or $1.68 per share, versus $22.6, or $2.62 per share. The company reported a $4.1 net operating loss, compared with a $2.2 loss.
- Segments: Multifamily segment profit declined to $1.5 from $1.7; commercial segment profit declined to $1.9 from $2.8. Management attributed much of the commercial decline to properties sold.
- Other significant income-statement items: Gains on asset sales or write-downs were $11.1, down from $16.1; foreign-currency gains were $3.8, down from $7.6. Equity income from the unconsolidated joint venture rose to $4.7 from $3.3. Interest expense fell to $5.0 from $6.6, while interest income rose to $5.8 from $4.7. The company also recorded a $1.6 loss on extinguishment of debt.
- Cash flow: Operating activities used $4.2, versus $0.9 used in Q1 2021. Investing activities provided $5.6, versus $14.1; financing activities used $38.8, versus $25.2. Cash, cash equivalents and restricted cash ended at $35.4, down from $72.7 at year-end.
- Liquidity and assets: Cash and cash equivalents were $13.8; restricted cash was $21.6; short-term investments were $32.6. Total assets were $751.0, down from $788.4. Receivables from related parties were $141.3, and notes receivable were $129.6.
- Debt and equity: Mortgages and other notes payable were $165.7 and bonds payable were $163.6, for total reported debt of $329.2, down from $366.2 at year-end. Total equity was $386.2. Cash paid for interest was $9.2.
- Supplemental measure: FFO was $5.1 versus $13.9; adjusted FFO, excluding foreign-currency gains and including the debt-extinguishment loss, was $3.0 versus $6.3. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Material changes and notable activity
- The company sold Toulon, a 240-unit multifamily property, in January for $26.8, recognizing a $9.4 gain; proceeds repaid its $14.7 mortgage and were also used for general corporate purposes. It also sold 8.6 acres of Windmill Farms land for $2.3, with a reported $2.0 gain.
- Real estate declined to $284.5 from $296.4. The company spent $1.9 on Windmill Farms development during the quarter and reported $6.4 of development and renovation spending in cash flows.
- The company paid $38.2 of mortgages, notes and bonds during the quarter, including the Toulon mortgage payoff. It extended the Stanford Center loan to February 2023. Series A and C bonds mature in 2023; Series B bonds mature in 2025.
- Management reported noncompliance with the minimum debt-service coverage ratio for the 770 South Post Oak loan. The lender may require excess property cash flow to be placed in a controlled account until compliance is restored for two consecutive quarters. The company said some land mortgages were being modified, extended or refinanced.
Outlook, risks and contingencies
- Management said cash and cash equivalents, together with expected 2022 cash from notes and interest receivable, were anticipated to meet cash requirements. It also expects to use property and land sales, refinancing or extensions, and additional property-secured borrowing to address liquidity needs. Separately, the filing cautions that expected excess property cash flow over the next 12 months may not be sufficient to discharge all obligations as they become due.
- The company and Macquarie are pursuing a sale of the VAA joint-venture portfolio. The filing cites appraised value of approximately $1.4 billion as of March 31, 2022, but cautions that this value may not be realized; the sale agreement would terminate August 1, 2022 if the portfolio had not sold. The company’s VAA interest is subject to bond-covenant restrictions on distributions.
- The filing describes an earn-out dispute with Macquarie: an arbitration decision required approximately $39.6 to be paid, with $27.1 still owed at quarter-end and payment to come from the company’s share of future VAA distributions. The filing also refers to a $29.6 charge recorded in connection with remeasurement of the obligation; the relationship of that charge to the reported quarterly results is not clear from the filing text and warrants verification.
- Management reported lower occupancy at commercial properties amid COVID-19 effects and uncertainty about future impacts. Other cited risks include leasing and tenant credit, financing availability and interest rates, development delays and cost overruns, property sales timing, and economic and market conditions.
- A lawsuit filed in 2019 alleges improper property transactions involving the company and IOR; the company intends to defend the claims, and trial was set for November 2022. The company also disclosed significant related-party dealings, including $3.0 of advisory fees to Pillar in Q1 and substantial related-party receivables and notes.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the reported $29.6 earn-out charge with the quarterly income statement, cash flows and the $27.1 remaining obligation.
- Track the 770 South Post Oak covenant breach, any cash-trap requirement, and progress on debt modifications, refinancing and near-term maturities.
- Assess available unrestricted liquidity and the collectability and timing of related-party receivables and notes receivable.
- Monitor the VAA portfolio sale, actual proceeds versus appraisals, distribution restrictions, and the effect of the earn-out on future distributions.
- Evaluate whether lower revenue and segment profits, commercial occupancy trends, and reliance on asset-sale gains affect recurring performance and liquidity.