Transcontinental Realty Investors, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Dollar amounts below are in millions unless stated otherwise. The company owns and develops commercial and residential real estate and land, and also invests in mortgage notes and joint ventures. Its portfolio included 10 directly owned apartment communities, seven commercial properties, about 1,982 acres of land, and a 50% interest in VAA, which owned 51 apartment communities.
Financial performance and position
- Revenue: Rental and other property revenue was $11.9 million, essentially unchanged from Q1 2019. Commercial revenue was $7.9 million and apartment revenue was $4.0 million.
- Profit: Net income attributable to TCI was $4.6 million, or $0.53 per basic and diluted share, versus a $5.6 million loss, or $0.64 loss per share, a year earlier. Results included a $7.8 million foreign-currency transaction gain and $4.1 million gain on land sales. The company reported a $4.0 million net operating loss, compared with a $1.3 million loss.
- Cash flow: Operating activities used $7.8 million, improving from $17.6 million used in Q1 2019. Investing activities provided $1.6 million, versus $5.4 million used; financing activities used $9.0 million, versus $3.4 million used. Cash, cash equivalents and restricted cash fell $15.2 million to $68.1 million; unrestricted cash was $39.9 million.
- Assets and equity: Total assets were $850.8 million, down from $865.9 million at year-end 2019. Shareholders’ equity was $358.8 million, up from $354.1 million.
- Debt and interest: Notes and interest payable totaled $252.7 million, compared with $246.5 million at year-end; bonds and bond interest payable were $207.8 million, down from $229.7 million. Cash interest paid was $11.4 million, up from $8.9 million. The company reported a 5.0% weighted-average borrowing rate; $255.2 million of notes payable had fixed rates and $3.7 million was variable-rate debt.
- Receivables: Notes and interest receivable, net, were $126.9 million, including $60.5 million from related parties. Related-party receivables were $130.9 million.
Changes versus Q1 2019 and notable items
- The swing to profit primarily reflected the $13.7 million improvement in foreign-currency results, from a $5.8 million loss to a $7.8 million gain. Management attributed the gain to the U.S. dollar strengthening against the Israeli shekel. Land-sale gains rose to $4.1 million from $2.2 million.
- Property revenue was flat, while operating expenses increased to $15.9 million from $13.2 million. Franchise taxes and other expenses rose to $1.5 million from $0.1 million; advisory fees rose to $2.1 million from $1.6 million.
- TCI sold 18.7 acres in Texas for $5.7 million and recognized a $4.1 million gain. It acquired about 49.2 acres in Kent, Ohio, for $5.4 million, partly financed by a $3.4 million note bearing 10% interest and maturing in November 2024. It also purchased $7.4 million of related-party notes.
- In January, the company paid $11.6 million of Series A bond principal and $7.3 million of interest on Series A, B and C bonds. It also converted $16.0 million to shekels for a scheduled July 31, 2020 bond principal and interest payment.
- VAA reported a $7.9 million quarterly net loss; TCI’s recognized share of the loss was $0.4 million. TCI received a $5.3 million distribution from an equity investee during the quarter.
Outlook, risks and contingencies
- Management expects excess cash from property operations in 2020 but cautions it may not be enough to meet all obligations as they come due. Its stated plans include selling income-producing assets, refinancing or extending real estate debt, and obtaining additional real-estate-secured borrowing. No numerical earnings or revenue guidance is provided.
- COVID-19 had created uncertainty around tenants, operations, capital markets and foreign exchange. Management said the impact on later-period results could not be predicted and warned that market disruption could hinder financing or refinancing. It stated there were no near-term debt maturities and no current adverse impact on financing activities or credit ratings.
- Liquidity is affected by the company’s negative operating cash flow, scheduled bond payments, development spending and reliance on asset sales, refinancing and borrowing. Restricted cash is set aside for contractual reserves and bond-related expenses.
- Related-party dealings are substantial, including advisory fees, interest income and receivables. The filing cautions such transactions may not be on arm’s-length terms. Some UHF notes are unsecured and depend on surplus cash flow or property sales/refinancing for repayment.
- Management assessed ordinary-course litigation as not expected to materially harm TCI’s financial condition, operations or liquidity. Disclosed matters include the Berger litigation involving TCI and affiliates, and an old Dynex judgment in TCI’s favor for which collection efforts continue. The filing also discusses litigation involving former entities, which it says do not obligate TCI.
- Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether rent collections, tenant conditions and property operations were affected by COVID-19 after March 31, 2020.
- The timing and funding of the July 2020 bond payment, subsequent bond maturities, and the company’s ability to refinance or meet obligations without relying on asset sales.
- How much of reported earnings depended on the $7.8 million foreign-currency gain and land-sale gains, and whether those items recur.
- Collectability and collateral coverage of the $126.9 million notes receivable, especially related-party and unsecured UHF balances.
- The terms and economic effects of related-party transactions, and developments in the Berger litigation and Dynex judgment collection.