Transcontinental Realty Investors, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. TCI owns and operates apartments, commercial properties and development land, and also holds mortgage notes. It reported 43 income-producing properties, 6,062 apartment units and approximately 1.8 million rentable commercial square feet. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Rental and other property revenue | $18.5 | $18.7 | $55.3 | $55.3 |
| Net operating income | $1.2 | $1.2 | $2.3 | $5.0 |
| Net income (loss) attributable to common shares | $(2.6) | $(6.2) | $3.8 | $2.1 |
| Basic and diluted earnings (loss) per share | $(0.29) | $(0.74) | $0.45 | $0.25 |
| Cash from operating activities | Not stated by quarter | $(10.3) | $(16.5) | |
| Cash from investing activities | Not stated by quarter | $2.3 | $70.9 | |
| Cash from financing activities | Not stated by quarter | $(3.8) | $(62.0) |
Nine-month 2014 net income included $9.3 million from discontinued operations, including $14.8 million of property-sale gains before tax. Continuing operations recorded a $4.5 million net loss. For Q3, discontinued operations contributed $1.5 million, while continuing operations lost $3.7 million.
Financial position and liquidity
- At September 30, 2014, total assets were $896.0 million, total liabilities $699.4 million and shareholders’ equity $196.6 million.
- Cash and cash equivalents were $4.3 million; restricted cash was $27.8 million. Cash and cash equivalents were $16.1 million at December 31, 2013.
- The debt table reports $607.0 million of total debt, including accrued interest and debt associated with properties held for sale or subject to sales contracts. Separately, balance-sheet notes and interest payable were $545.3 million, versus $562.7 million at year-end 2013.
- Management said property-operation cash was not expected to cover all obligations as due. Its planned funding sources include property and land sales, refinancing, extensions and additional real-estate-secured borrowing.
- TCI used $10.3 million in operating cash in the first nine months. Investing cash flow was far below 2013, largely reflecting lower property-sale proceeds, note-receivable acquisitions and a property acquisition.
Material changes and notable items
- Nine-month rental revenue was essentially flat year over year. Apartment occupancy averaged above 93%, according to management; apartment revenue increased, while commercial revenue declined in Q3.
- Nine-month net operating income fell to $2.3 million from $5.0 million. Property operating costs rose $1.6 million, and depreciation and amortization rose $1.2 million. Management cited higher taxes, apartment repairs and commercial tenant improvements.
- Interest income rose $2.8 million to $9.2 million for the nine months, partly from acquired notes and accrued interest on related-party notes. Mortgage and loan interest expense declined $1.1 million to $21.3 million.
- Nine-month results included a $3.7 million litigation-settlement credit, mainly from forgiveness of a $3.5 million balance in the Amoco Building settlement. The prior-year period included $2.7 million of settlement expense.
- TCI sold several properties during the period, including Pecan Pointe, 1010 Common and Sesame Square. It acquired the 216-unit Sunset Lodge complex by forgiving a $3.5 million receivable and accrued interest. A Bridgewood Ranch transfer was not recognized as a sale because of continuing involvement and a repurchase option.
- After quarter-end, TCI sold the 290-unit Blue Ridge complex on November 4 for $52.8 million, paid off its $23.7 million mortgage and recorded a $26.7 million gain. Sunset Lodge and related land were also under contract, with anticipated gains disclosed by the company.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected apartment performance to remain supported by occupancy and rental rates, and anticipated commercial leasing improvements over the following 12 months.
- Management’s liquidity plan depends on asset dispositions and access to refinancing or new borrowing; the filing cautions that operating cash alone will not satisfy all obligations.
- Some land mortgages were being modified or extended. Mortgages on properties transferred to a related party but still reported on TCI’s books were in default, primarily for nonpayment, with lender discussions ongoing.
- Management estimated potential aggregate exposure from deficiency claims relating to foreclosed assets at no more than approximately $20 million, if any, in future years. The long-running Dynex litigation remained unresolved; the appellate ruling was favorable to TCI but further challenges were expected.
- TCI held $71.1 million of related-party receivables at quarter-end and reported $68.0 million of net junior mortgage loans and accrued interest receivable from related parties. These exposures, and the related-party nature of many transactions, merit attention.
- Variable-rate debt was $58.5 million. The filing estimated that a 1 percentage-point rate increase would reduce annual net income by approximately $585,000, or $0.07 per share.
Most important facts for investors to verify
- Liquidity, debt maturities and the feasibility and timing of planned sales, refinancing and loan extensions.
- Collection prospects and collateral values for related-party notes and receivables, including accrued interest.
- Status and potential outcomes of mortgage defaults, deficiency claims, Dynex litigation and other contingencies.
- How much reported earnings depends on property-sale gains, settlement credits and discontinued operations rather than recurring operations.
- Completion and final economics of the post-quarter Blue Ridge sale and the Sunset Lodge and land contracts.