Business context and reporting period
Transcontinental Realty Investors, Inc. (TCI) is an externally advised real estate company with commercial, apartment and land-development assets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; financial amounts below are in millions unless stated otherwise. TCI reported nine directly owned apartment communities (1,512 units), seven commercial properties (about 1.7 million square feet), approximately 2,256 acres of land, and a 50% interest in VAA, which owned 51 apartment communities. TCI is majority-owned by affiliates of American Realty Investors.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Rental and other property revenue | $11.8 | $31.6 | $23.8 | $62.7 |
| Net operating income (loss), as reported | ($3.4) | $4.6 | ($4.6) | $9.8 |
| Net income (loss) applicable to common shares | ($6.3) | $7.0 | ($12.0) | $6.6 |
| Diluted earnings (loss) per share | ($0.73) | $0.81 | ($1.37) | $0.75 |
| Operating cash flow | Not separately provided for quarter | ($15.8) | $1.1 |
For the six months, investing cash outflow was $7.9 million and financing cash outflow was $0.7 million. Cash, cash equivalents and restricted cash totaled $82.2 million at June 30, including $37.6 million of cash and cash equivalents and $44.6 million restricted. Unrestricted cash therefore was substantially below reported total cash resources.
At June 30, total assets were $853.9 million, total liabilities $485.0 million, and shareholders’ equity $368.9 million. Notes payable, net of borrowing costs, plus accrued interest were $283.8 million; bonds, net of issuance costs, plus accrued interest were $157.3 million. Notes and bonds combined were approximately $441.1 million. The weighted-average borrowing rate was about 7.2%; $41.6 million of approximately $292 million in notes payable was variable-rate debt. A 100-basis-point increase in variable rates was estimated to add about $0.2 million in annual interest expense.
Material changes versus prior comparable periods
- Revenue and reported property expenses fell sharply year over year, principally because 49 apartment properties were contributed to the VAA joint venture in late 2018 and are no longer consolidated. The change in consolidation also reduced depreciation and mortgage interest; it does not represent a like-for-like decline in the remaining portfolio.
- TCI recorded a $8.1 million foreign-currency transaction loss for the first half, versus a $7.6 million gain in 2018, primarily reflecting exchange-rate movements on NIS-denominated bonds.
- Land-sale gains were $4.3 million for the first half, versus $1.3 million in 2018. First-half 2019 land sales generated $16.3 million of proceeds; a multifamily property sale generated a $0.08 million loss.
- General and administrative expense rose to $5.7 million from $4.4 million for the first half, while interest income increased to $9.4 million from $7.4 million, substantially reflecting interest on related-party receivables.
- Operating cash flow deteriorated to a $15.8 million outflow, including a $31.9 million increase in related-party receivables. Investing outflows were lower than in 2018, partly because development spending declined.
Outlook, risks and unusual items
- Management expects excess cash from property operations in 2019 but says it will not be sufficient to meet all obligations as due. Its stated plans include selling land and income-producing real estate, refinancing debt and obtaining additional real-estate-secured borrowing. No specific earnings or revenue guidance is provided.
- After quarter-end, TCI issued NIS 275 million of Series C bonds, reported as approximately $78 million, bearing 4.65% annual interest and secured by a commercial building. About $42 million of proceeds was used in August to repay that building’s mortgage.
- TCI purchased $31.9 million of related-party notes during the quarter. Notes and interest receivable totaled $116.9 million, including $68.7 million from related parties; the balance sheet also reported a $125.4 million receivable from a related party. These exposures and the terms and collectability of the notes merit attention.
- TCI is primary guarantor of a $39.1 million mezzanine loan to UHF; the borrower was reported in covenant compliance at June 30. Management says ordinary-course litigation is not expected to materially affect TCI. The filing also describes the Berger action alleging fiduciary-duty breaches involving TCI, affiliates and IOR; defendants deny the allegations and motions to dismiss were pending. Other described legacy litigation principally concerns formerly owned entities, and TCI is pursuing collection of a judgment against Dynex Commercial.
- Management identified real-estate demand, leasing, development and construction execution, access to financing, interest and currency movements, asset-sale timing, environmental exposure and related-party dealings among the risks. It reported no changes to the risk factors in the 2018 Form 10-K and said disclosure controls were effective.
Key facts investors should verify
- Whether the large related-party receivables and note portfolio are collectible on the stated terms, and how much cash they generate.
- Near-term debt maturities, refinancing capacity and liquidity available after excluding restricted cash; management expressly says operating cash will not cover all obligations.
- The economics and financial effects of the VAA investment, including its losses, debt and future funding or support requirements.
- The currency exposure and repayment terms of NIS-denominated bonds, including the post-quarter Series C issuance and use of proceeds.
- Progress and outcomes in the Berger litigation, the UHF guarantee exposure, and material property sales, development spending and land-sale proceeds.