Business context and reporting period
Transcontinental Realty Investors, Inc. (NYSE: TCI) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company acquires, develops and owns multifamily, commercial real estate and land; its portfolio included six commercial properties, ten directly owned apartment communities with 1,639 units, approximately 1,980 acres of land, and a 50% interest in a joint venture owning 51 communities with 10,137 units. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
- Third quarter: Total revenue was $12.2 million, down from $13.4 million a year earlier. Rental revenue was nearly flat at $11.5 million versus $11.4 million; other income declined to $0.7 million from $2.0 million. Operating expenses were $13.7 million, producing a $1.5 million net operating loss versus $0.4 million of operating income. Net income attributable to common shares was $7.7 million, or $0.88 per share, compared with a $7.8 million loss, or $0.89 per share, in 2019. The 2020 result included $12.3 million of gains on asset sales or write-downs.
- Nine months: Revenue was $38.3 million versus $41.7 million; rental revenue remained essentially flat at $34.5 million. Net income attributable to common shares was $8.1 million, or $0.93 per share, compared with a $19.7 million loss, or $2.26 per share, in 2019. The 2020 result included $21.8 million of asset-sale/write-down gains and a $0.8 million foreign-currency gain, compared with a $13.3 million currency loss in 2019.
- Cash flow: For the nine months, operating activities used $15.2 million, investing activities provided $12.4 million, and financing activities used $19.5 million. Cash, cash equivalents and restricted cash totaled $61.0 million at September 30, down from $83.3 million at year-end; unrestricted cash was $33.0 million and restricted cash was $28.0 million.
- Debt and equity: Mortgages and notes payable were $242.3 million and bonds payable, net, were $203.2 million, totaling approximately $445.5 million. Total liabilities were $482.7 million and total equity was $362.6 million. Management reported a 5.35% weighted-average borrowing rate; $235.2 million of the $242.3 million mortgage/note balance was fixed-rate and $7.1 million variable-rate.
- Related-party assets: Notes receivable totaled $123.9 million, including $66.3 million from related parties; receivables from related parties were another $140.1 million. Related-party interest income was $3.8 million in the quarter and $11.3 million for the nine months.
Material changes versus prior comparable periods
- Third-quarter earnings improved sharply from a loss to profit, primarily because asset-sale gains increased and the foreign-currency loss narrowed; this was partly offset by lower other income and interest income and higher property operating expenses.
- Nine-month earnings also swung to profit, reflecting higher asset-sale gains and the reversal from a substantial currency loss to a gain. Rental revenue was broadly stable, while interest income declined and general and administrative expense increased.
- Debt balances fell from $469.0 million at December 31, 2019 to approximately $445.5 million, principally reflecting bond principal payments and property debt paid off or assumed in property sales. Cash and restricted cash declined by $22.3 million.
- Investing cash flow improved from a $16.8 million use in the first nine months of 2019 to $12.4 million provided in 2020, driven by higher real estate sale proceeds and joint-venture distributions, partly offset by note advances and development spending.
Outlook, risks and unusual items
- Liquidity: Management expects excess cash from property operations over the next 12 months but cautions it may not be sufficient to discharge all obligations as due. The company plans to sell assets, refinance or extend debt, and seek additional real-estate-secured borrowing. No quantified earnings or revenue guidance was provided.
- COVID-19: Management reported collection of approximately 96% of third-quarter rents (95% multifamily and 97% office), 91% occupancy, no significant rent abatements or deferrals, positive leasing spreads and no development work stoppages. It emphasized that the pandemic’s future impact remains uncertain and that commercial real estate markets are under pressure.
- Debt and currency exposure: The company has bonds denominated in Israeli shekels, creating foreign-exchange volatility. It is negotiating an extension of a $13.1 million loan from the Estate of Robert Shaw, which matured July 5, 2020. A variable-rate increase of 100 basis points was estimated to add $0.02 million in annual interest cost.
- Contingencies and governance: TCI is primary guarantor of a $24.3 million mezzanine loan to Unified Housing Foundation; the borrower was reported in covenant compliance. A $24.8 million judgment in TCI’s favor against Dynex is fully reserved due to collection uncertainty. TCI is defending a 2019 lawsuit alleging improper property sales or transfers with subsidiary IOR. Management says ordinary-course litigation is not expected to materially affect financial condition, results or liquidity. The company is externally managed, and it discloses significant related-party balances and transactions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether operating cash generation, asset sales, refinancing and new borrowing will be sufficient to meet debt maturities and other obligations, including the status of the overdue Estate of Robert Shaw loan.
- Collectability and repayment terms for the $140.1 million related-party receivable and $66.3 million of related-party notes receivable, and the concentration of related-party interest income.
- How much reported earnings depend on asset-sale gains and currency movements, rather than recurring property operations.
- Subsequent rent collections, occupancy, tenant credit quality and COVID-19 effects on leasing, property values and development costs.
- Status of the $24.3 million mezzanine-loan guarantee and the Berger and Dynex legal matters, including potential effects not reflected in current earnings.