Income Opportunity Realty Investors, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012. The company is a Nevada C corporation, no longer a REIT, and operates principally through Texas land holdings and related-party mortgage receivables. TCI owned approximately 81.12% of IOT at year-end. The company has no employees and relies on its external advisor, Pillar.
Business context and financial performance
- The portfolio included 178.1 acres of land in Farmers Branch, Texas, carried at $24.511 million. Land held for development or sale was the company’s sole operating segment; it generated no operating revenue in 2012 or 2011.
- Revenue primarily came from interest on notes and other balances due from related parties. Interest income from related parties was $5.183 million, up from $4.447 million in 2011.
- Operating expenses were $1.396 million, versus $1.388 million in 2011, producing an operating loss of $1.396 million. Mortgage and loan interest expense was $1.284 million, versus $1.211 million.
- Income before tax was $2.466 million, compared with $1.796 million in 2011. Income tax expense was $876,000. Net income was $1.521 million, or $0.36 per basic and diluted share, up from $669,000, or $0.16 per share. The company also reported a $69,000 loss from discontinued operations in 2012.
- Operating cash flow rose to $3.385 million from $903,000, mainly reflecting interest receipts. Investing cash flow was negative $3.384 million, including $6.374 million invested in affiliate receivables; financing cash flow was nil. Year-end cash was just $2,000.
- Total assets were $109.506 million; total liabilities were $33.784 million; shareholders’ equity was $75.722 million. Net notes and interest receivable from related parties were $25.176 million after a $1.826 million allowance. Receivables and accrued interest from related parties totaled $58.534 million.
Material changes and unusual items
- Effective January 1, 2012, IOT began accruing interest as earned on surplus-cash-flow notes, rather than recognizing accrued interest only when cash was received. Management cited consistent cash receipts; the change contributed to higher reported interest income.
- Unified Housing Foundation, a related party, paid $3.3 million in February 2012 to settle a $3.0 million note and accrued interest. Total notes and interest receivable declined from $29.786 million to $25.176 million.
- The $58.534 million affiliate receivable balance included $1.1 million of interest income from TCI. IOT also paid TCI $839,000 under a tax-sharing agreement. Related-party balances and transactions are significant; the auditor specifically drew attention to them.
- In 2011, the company sold the Eagle Crest land and warehouse; no properties were sold in 2012. The 2011 sale and results were presented as discontinued operations.
- A contract was signed to sell 100 acres of Travelers land to an independent buyer for $17.5 million. The buyer’s inspection period ran through August 15, 2013; the filing does not establish that the sale closed.
Debt, liquidity, outlook and risks
- Notes and interest payable were $28.508 million at year-end. The Travelers land mortgage was in default and accelerated by the lender; it was subject to a forbearance agreement expiring April 12, 2013. Required monthly payments of $150,000 were applied to accrued interest. IOT was jointly and severally liable with TCI for the entire $36.0 million underlying loan, including the portion held on TCI’s books. The filing says management expected annual extensions, but this was not assured.
- Principal payments listed for 2013 were $27.711 million. Management said 2013 operating cash might not cover all cash requirements or maturing debt. It planned to sell selected assets, refinance or extend debt, seek additional borrowing, and reduce cash invested with its advisor. No formal earnings guidance was provided.
- Management said a 100-basis-point increase in variable borrowing rates would reduce 2013 net income by an estimated $277,100. The company also faces refinancing, covenant, real-estate liquidity, market concentration, and property-value risks.
- Management identified related-party dealings and potential conflicts as risks; TCI owns most of IOT and owes substantial amounts to it. The advisor also serves related entities with similar investment objectives. IOT declared no dividends in 2010–2012 and said quarterly dividends in 2013 were unlikely.
- Management concluded disclosure controls and internal control over financial reporting were effective at year-end. The auditor issued an unqualified opinion on the financial statements; its report did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the $17.5 million land sale closed, and the proceeds actually received and applied.
- The status and terms of the Travelers mortgage after the April 12, 2013 forbearance expiry, including any extension, refinancing, or foreclosure action.
- Collectability, payment terms, collateral, and credit quality of the $58.534 million affiliate receivable and $25.176 million net related-party notes receivable.
- The basis and cash consequences of interest accrual on surplus-cash-flow notes, tax-sharing payments, and other related-party transactions.
- Available liquidity and compliance with debt covenants in light of the large 2013 principal maturity and minimal year-end cash.