Transcontinental Realty Investors, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; dollar figures below are in millions unless stated otherwise. TCI invests in apartments, commercial real estate, development land and mortgage loans. At quarter-end, it owned or had interests in 56 income-producing properties and 3,608 acres of land. TCI is externally advised, has no employees, and is approximately 80.9% owned by subsidiaries of American Realty Investors, Inc.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Rental and other property revenue | $29.8 | $27.5 | $89.2 | $73.6 |
| Net operating income, as presented | $4.3 | $2.9 | $14.2 | $10.4 |
| Mortgage and loan interest expense | $13.6 | $13.6 | $38.8 | $32.0 |
| Net loss applicable to common shares | $(4.8) | $(6.8) | $(4.1) | $(7.0) |
| Basic loss per share | $(0.79) | $(0.79) | $(0.47) | $(0.81) |
- Nine-month operating cash flow was $17.1, versus cash used of $44.4 in 2015. Management attributed much of the change to related-party receivables; working-capital movements also affected cash flow.
- Investing cash outflow was $65.2, compared with $120.8 in 2015; financing provided $40.2, compared with $165.0. Cash and cash equivalents fell to $7.3 from $15.2 at December 31, 2015. Restricted cash was $33.5.
- Total assets were $1,151.5 and total liabilities $930.4 at September 30, 2016. The balance sheet reports notes and interest payable of $817.3; the debt note reports $823.5 including accrued interest and net of deferred borrowing costs. Shareholders’ equity was $221.1.
- Debt included $136.4 of mezzanine financing. Variable-rate debt was $37.8; management estimated a 100-basis-point rate increase would raise annual interest costs by $0.4 and reduce EPS by $0.04. HUD apartment financing had a weighted-average rate of 3.83%.
Material changes versus the prior period
- Nine-month revenue rose $15.6, primarily from apartment growth and a Houston office acquisition. Property operating expenses increased $9.3 and depreciation and amortization rose $1.4.
- Nine-month interest expense increased $6.8, primarily due to mezzanine debt and apartment acquisitions, partly offset by lower land debt following land sales.
- Nine-month net loss applicable to common shares improved to $4.1 from $7.0. Results included $4.9 of gains on income-producing property sales and $3.9 of land-sale gains, versus $0.7 and $5.1, respectively, in 2015.
- The company acquired two apartment communities for $40.0 and three land parcels for $8.9 during the first nine months. It sold an apartment community, an industrial warehouse and land; reported gains included a $5.2 apartment-sale gain and a $0.2 warehouse-sale loss.
- TCI reported $91.4 due from a related party at quarter-end. Related-party mortgage notes and accrued interest, net of allowances, totaled $68.7; related-party interest income was $6.6 for the nine months.
Outlook, risks and unusual items
- No quantitative earnings or revenue guidance was provided. Management expected property operations to generate excess cash in 2016, but stated it would not be sufficient to meet all obligations as due. Planned sources include property and land sales, refinancing or extending debt, and additional real-estate-secured borrowing.
- Some land mortgages were being modified or extended. Certain properties transferred to related parties and still recorded as subject to sales contracts have mortgages in default, primarily for nonpayment; discussions with lenders were ongoing. The Mercer Crossing land transaction is being accounted for under the deposit method, so the land remains on the books and sale revenue is deferred.
- TCI is pursuing collection of a court judgment against Dynex Commercial that awarded TCI $19.5, plus post-judgment interest; the company said collection efforts were ongoing. Management also estimated possible aggregate exposure from deficiency claims at up to approximately $20.0, if any, in future years.
- TCI is primary guarantor on a $60.35 mezzanine loan to Unified Housing Foundation; the borrower was reported in compliance with loan covenants at quarter-end. Series D preferred shares carry a 9% annual dividend; approximately $5.1 of accrued dividends to related-party holders was unpaid.
- Management cited real-estate market and tenant risks, financing availability and interest rates, development delays and cost overruns, property-sale timing, litigation and environmental exposures. It reported no material change in previously disclosed risk factors. Disclosure controls were deemed effective; no material quarterly change in internal control was reported.
Important facts for investors to verify
- The MD&A says Q3 2016 net loss applicable to common shares was $6.8 and diluted loss per share was $0.79. This conflicts with the financial statements, which report a $4.8 common-share loss and basic loss per share of $0.79 (diluted loss per share is shown as $0.55). Confirm the correct quarterly figures and the EPS presentation.
- Reconcile the $817.3 balance-sheet notes and interest payable figure with the $823.5 debt-note total, including the note’s treatment of accrued interest and deferred borrowing costs.
- Assess the timing and collectability of the $91.4 related-party receivable, the $68.7 related-party mortgage-note exposure, and the deferred land-sale proceeds.
- Review debt maturities, refinancing progress, mortgage defaults and potential deficiency claims against the company’s stated liquidity shortfall and reliance on asset sales and additional borrowing.
- Evaluate the collectability and ultimate allocation of the Dynex judgment, and the potential exposure under the $60.35 mezzanine-loan guarantee.