Transcontinental Realty Investors, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Dollar amounts below are in millions unless noted. TCI owns and develops residential and commercial real estate, land, and mortgage notes; its portfolio included 10 directly owned apartment communities, seven commercial properties, about 1,891 acres of land, and a 50% interest in VAA, a multifamily joint venture.
Financial performance and position
- Q2 revenue: Rental and other property revenue was $11.9, up slightly from $11.8 in Q2 2019. Operating expenses were $12.8 versus $15.2, and operating loss improved to $0.8 from $3.4.
- Q2 earnings: Net loss attributable to TCI was $4.2, or $0.48 per common share, compared with a $6.3 loss, or $0.73 per share, a year earlier. The quarter included a $5.3 land-sale gain and a $5.6 foreign-currency transaction loss.
- First-half earnings: Revenue was $23.9 versus $23.8. Net income attributable to TCI was $0.5, or $0.05 per share, compared with a $12.0 loss, or $1.37 per share, in 2019. Results included $9.5 in land-sale gains and a $2.2 foreign-currency gain; the prior-year period included an $8.1 currency loss.
- Cash flow: First-half operating cash flow was negative $9.4, improving from negative $15.8. Investing activities provided $4.9 versus using $7.9; financing activities used $6.4 versus $0.7. Cash, cash equivalents and restricted cash declined $10.9 to $72.4, including $42.3 of unrestricted cash at June 30. Cash interest paid was $14.7.
- Debt and liquidity: Notes payable, net, plus accrued interest totaled $255.9; bonds, net, plus accrued interest totaled $218.2. Total assets were $864.2, total liabilities $509.2, and shareholders’ equity $354.9. Management said property cash generation may not cover all obligations as due and expects to rely on asset sales, refinancing and additional real-estate-secured borrowing.
- Receivables and related parties: Notes and interest receivable, net, were $135.7, including $68.2 from related parties; the Company also reported $128.6 receivable from related parties. Allowance for estimated note losses was $1.8.
Material changes and management commentary
- Q2 operating expenses fell mainly because property replacement costs declined; general and administrative expense also decreased. First-half depreciation rose, and franchise taxes and other expenses included $1.5 not reported in the comparable 2019 period.
- TCI sold 44.9 acres of land in the first half for $12.2, recognizing a $9.5 gain. It acquired development land and purchased $10.9 of related-party notes during the first half.
- Management reported collecting about 97% of Q2 rents—approximately 95% from multifamily tenants and 98% from office tenants—and said it had not granted abatements or significant rent deferrals. Occupancy at non-lease-up properties was 87%, compared with 89% a year earlier. Development continued without reported work stoppages.
- Management said the pandemic’s future effects remain uncertain. It also cautioned that excess operating cash in 2020 might not be sufficient to meet all obligations, despite its intent to sell assets, refinance and borrow as needed. No quantified earnings guidance was provided.
Risks, contingencies and unusual items
- TCI is the primary guarantor on a $24.3 mezzanine loan to related party UHF; UHF was reported to be in compliance with loan covenants at June 30, 2020. The Company’s substantial related-party lending, receivables, fees and transactions warrant attention.
- Disclosed litigation includes the Berger matter, with discovery ongoing, and litigation involving Dynex Commercial, for which TCI said it was pursuing collection of a judgment and post-judgment interest. Management did not expect ordinary-course litigation to materially affect TCI; some described litigation relates to other entities and is not an obligation of TCI.
- On July 16, 2020, TCI entered into an agreement to sell a multifamily property to a related party for $13.3, with $5.4 of net cash proceeds and assumption of $9.1 of debt.
- TCI reported $261.7 of notes payable before deferred borrowing costs, of which $258.0 bore fixed rates and $3.7 was variable-rate debt. The filing identifies interest-rate and refinancing exposure, and notes that some mortgage obligations reference LIBOR.
Important facts for investors to verify
- Whether operating cash generation, collections and available financing can meet debt service, maturities and development commitments.
- How much of first-half earnings depended on land-sale gains and foreign-currency movements, and whether those items recur.
- Collectability and collateral coverage of related-party notes and receivables, including UHF exposures and the mezzanine-loan guarantee.
- Subsequent-sale completion, proceeds and debt assumption, along with the status of material litigation and bond maturities.
- COVID-19 effects on rent collections, occupancy, leasing, property values and refinancing; management said these effects could not yet be predicted.