Income Opportunity Realty Investors, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company owns 178.1 acres of land held for development or sale in Farmers Branch, Texas, and earns most of its income from interest on related-party receivables. It is externally advised, has no employees, and TCI owns approximately 81.1% of its common stock. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Rental and other property revenue | $0 | $0 | $0 | $0 |
| Interest income from related parties | $1.179 | $1.427 | $3.547 | $4.251 |
| Operating expenses | $0.380 | $0.505 | $1.132 | $1.388 |
| Net income | $0.623 | $0.625 | $1.877 | $1.966 |
| Diluted EPS | $0.15 | $0.15 | $0.45 | $0.47 |
Property operations generated no revenue; interest income was the principal earnings source. Operating losses were $0.380 million for Q3 and $1.132 million for the first nine months, offset by interest income and other income. Conventional revenue margins are not meaningful given the absence of property revenue.
Balance sheet, cash flow and liquidity
- At September 30, 2014, total assets were $93.396 million, liabilities $10.279 million, and shareholders’ equity $83.117 million. Cash was only $3,000.
- Net notes and interest receivable from related parties were $24.865 million, after a $1.826 million allowance. A further $42.753 million was due from related parties, primarily TCI. The filing reports $67.618 million in these two related-party receivable categories combined.
- Debt included $10.236 million payable to related party Realty Advisors, Inc., plus a $4,000 property-tax loan. The principal related-party note is variable-rate, with a 6% floor and maturity in December 2016. A 1% rate increase was estimated to reduce annual net income by $102,000, or $0.03 per share.
- For the first nine months, operating cash flow was $5.667 million, investing cash flow was negative $3.550 million, and financing cash flow was negative $2.117 million; cash remained $3,000. The company paid $519,000 in interest and paid no quarterly dividends.
- Management identifies debt service, recurring expenses, capital expenditures and acquisitions as liquidity needs. It expects to use receivable collections, refinancing and property sales, and says it may sell or refinance real estate or incur additional secured borrowings if other sources are insufficient.
Changes versus prior comparable periods
- Q3 net income was nearly unchanged year over year; nine-month net income declined by $89,000 and diluted EPS fell from $0.47 to $0.45.
- Nine-month related-party interest income decreased $704,000, which management attributed mainly to a lower receivable balance owed from its Advisor. Mortgage and loan interest expense fell $341,000, primarily following the December 2013 refinancing of the Mercer/Travelers mortgage.
- Nine-month property operating, general and administrative, and advisory expenses all decreased, by $30,000, $114,000 and $105,000, respectively. Management attributed lower property and administrative costs mainly to reduced professional and legal fees.
- Total assets declined from $93.813 million at year-end 2013 to $93.396 million; related-party notes and interest payable declined from $12.357 million to $10.240 million. Shareholders’ equity increased from $81.240 million to $83.117 million.
- Operating cash flow improved from negative $561,000 to positive $5.667 million, while investing cash flow shifted from positive $562,000 to negative $3.550 million. The filing attributes current-period investing activity mainly to investment of cash with the Advisor.
Outlook, risks and other notable items
- The filing gives no specific earnings, revenue, development, or dividend guidance. Management cautions that interim results are not necessarily indicative of full-year results and disclaims any obligation to update forward-looking statements.
- Credit and concentration risk is notable: the company depends on interest and repayment from related parties, including Unified Housing Foundation, and its reported related-party receivables are substantial relative to assets. The junior loans bear 12% interest, mature in December 2032, and are repayable from surplus cash flow or property sale or refinancing; they are cross-collateralized. The filing says the loans were performing.
- Related-party dealings are not necessarily on arm’s-length terms. Pillar is the external advisor and cash manager and also advises TCI and ARL; the company warns such transactions may not be in its best interests.
- Other stated risks include real estate market and financing conditions, development delays and cost overruns, interest-rate changes, property-sale timing, environmental exposure and uninsured losses. Management reported no material environmental liability and said ordinary-course litigation was not expected to materially affect financial condition, results or liquidity.
- No properties were sold in 2014 or 2013; the prior-year nine-month discontinued-operations loss was $12,000. No subsequent events were reported. Management said disclosure controls were effective and there was no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Recoverability and timing of collection of the large related-party receivables, including the collateral value and borrowers’ ability to pay.
- Available liquidity and refinancing plans given only $3,000 of cash and the December 2016 maturity of the principal related-party debt.
- Terms, allocation and balance of the related-party mortgage and any collateral or payment obligations shared with TCI or other affiliates.
- Progress and value assumptions for the 178.1 acres held for future development or sale, since the land generated no revenue during the periods reported.
- Effect of changes in interest rates and related-party balances on the company’s interest income and borrowing costs.