Transcontinental Realty Investors, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are against December 31, 2013. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context
TCI is an externally advised real estate owner and investor, with residential apartments, commercial properties, development land and mortgage loans. At quarter-end, it reported 35 apartment communities with 5,846 units, nine commercial properties totaling about 2.3 million rentable square feet, and 4,094 acres of land. TCI has no employees; Pillar Income Asset Management provides advisory and cash-management services.
Key financial results and liquidity
| Metric | Q1 2014 | Q1 2013 or prior date |
|---|---|---|
| Rental and other property revenue | $19.7m | $19.5m |
| Net operating income, as presented | $1.8m | $2.6m |
| Income (loss) from continuing operations | $1.2m | $(7.3)m |
| Net income (loss) attributable to TCI | $4.6m | $(3.1)m |
| Net income (loss) applicable to common shares | $4.3m | $(3.4)m |
| Diluted EPS applicable to common shares | $0.49 | $(0.40) |
| Net cash used in operating activities | $(23.6)m | $(12.5)m in cash flow statement |
| Net cash provided by investing activities | $17.8m | $25.5m |
| Net cash provided by (used in) financing activities | $7.9m | $(22.5)m |
| Cash and cash equivalents | $18.2m | $16.1m at Dec. 31, 2013 |
| Total assets | $900.4m | $897.7m at Dec. 31, 2013 |
| Total liabilities | $704.5m | $706.1m at Dec. 31, 2013 |
| Total debt, including accrued interest and debt on sale-related properties | $614.8m | Not clearly stated on a comparable basis |
The reported net operating income equates to about 9.1% of rental and other property revenue. Q1 net income included $3.5m from discontinued operations, which itself included a $6.1m property-sale gain and $1.9m of income tax expense. The quarter also included a $3.8m litigation-settlement credit in other income. These items materially affect comparisons of reported earnings with recurring property operations.
Restricted cash was $27.2m, separate from cash and cash equivalents. Notes and interest receivable totaled $61.8m, and receivables from related parties were $80.1m. These balances should not be assumed to be immediately available cash.
Material changes and notable transactions
- Revenue increased $0.2m year over year: apartment revenue rose $0.7m, while commercial revenue fell $0.5m, primarily due to tenant vacancies. Management reported average apartment occupancy of 95%.
- Net operating income declined $0.8m. Property operating expenses rose $0.2m and depreciation and amortization increased $0.7m, partly offset by lower interest expense, borrowing-cost amortization and loan charges.
- TCI sold the 232-unit Pecan Pointe apartment complex for $23.1m; the buyer assumed $16.5m of existing debt. TCI recorded a $6.1m gain. It also sold McKinney Ranch land for about $1.7m and recorded a $0.8m gain.
- On March 28, TCI obtained $40m of financing at 12% interest, with a five-year term and quarterly principal payments beginning April 2015. On February 28, it refinanced the Parc at Denham Springs mortgage at 3.75%, with maturity in 2051.
- TCI settled obligations relating to the Amoco Building: it paid $1.2m, and the remaining $3.5m note balance plus accrued interest was forgiven. The company also reported a favorable $3.8m litigation-settlement credit.
- After quarter-end, on April 3, TCI sold the 1010 Common commercial building for $16.6m and estimated a $4.1m gain.
Outlook, risks and contingencies
- Management expected property operations to generate excess cash in 2014, but stated that it would not be enough to meet all obligations as they come due. Its stated plans include selling land and income-producing properties, refinancing or extending debt, and obtaining additional real-estate-secured borrowings. No numeric earnings or revenue guidance was provided.
- Some land mortgages were in modification or extension discussions. Mortgages on properties transferred to related parties but still reported as subject to sales contracts were described as in default, primarily for nonpayment; TCI and the lenders were discussing settlement or cure. TCI retained continuing involvement and had not recognized those transfers as sales for accounting purposes.
- TCI was defending deficiency claims relating to foreclosed assets. Management estimated aggregate maximum exposure, if any, at approximately $20m, potentially arising in future years.
- The long-running Dynex litigation remained unresolved. The Texas appellate decision was favorable to TCI, but the company expected further challenges and additional trial-court proceedings concerning damages, fees and interest.
- Related-party exposure is significant: $58.1m of junior mortgage loans and accrued interest, net of allowances, was due from related parties, and $80.1m was receivable from ARL. Management noted that related-party dealings may not be on arm’s-length terms.
- TCI disclosed $55.3m of variable-rate debt; a 1 percentage-point increase in base rates was estimated to reduce annual net income by $0.6m, or $0.06 per share. Other stated risks include financing availability and cost, vacancies and rents, property sales, development execution, economic and interest-rate conditions, and environmental or uninsured liabilities.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the cash flow statement reports Q1 2013 operating cash use of $12.5m, while the MD&A cash-flow summary reports $11.8m.
- Review debt maturities, defaults, guarantees and lender negotiations, including obligations tied to properties reported as subject to sales contracts; the filing does not provide a clear consolidated maturity schedule in the supplied text.
- Assess the collectability and timing of related-party receivables, especially the ARL balance and related-party mortgage notes, and distinguish restricted cash from funds available for general use.
- Check the realized cash proceeds and final gain from the April 1010 Common sale, and distinguish sale gains and settlement credits from recurring property performance.
- Follow developments in the Dynex case and deficiency claims, including whether the potential exposure or expected timing changes.