Transcontinental Realty Investors, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Dollar amounts are in millions unless stated otherwise. TCI owns and operates apartments, commercial real estate and development land, and also invests in mortgage notes. At quarter-end it reported 60 income-producing properties, including 47 apartment communities with 8,553 units and 13 commercial properties, plus 4,154 acres of land.
Financial results and condition
- Revenue: Q3 rental and other property revenue was $28.1 million, down 4.3% from $29.3 million. Nine-month revenue was $87.0 million, up 3.8% from $83.8 million.
- Profitability: Q3 operating income was $3.8 million versus $2.7 million; net loss applicable to common shares was $0.5 million, or $0.07 per share, compared with income of $0.6 million, or $0.08 per share. For nine months, operating income was $14.5 million versus $4.2 million; common-share loss was $3.0 million, or $0.36 per share, versus a $26.1 million loss, or $3.13 per share.
- Margins: Calculated operating margin was approximately 13.5% for Q3 and 16.7% for nine months. The filing does not present a separately defined margin measure.
- Cash flow: Nine-month operating cash flow was negative $32.7 million, compared with negative $68.7 million in 2011. Investing provided $92.2 million, down from $228.8 million, while financing used $73.1 million, compared with $163.6 million used in 2011. Cash declined $13.7 million to $6.3 million.
- Debt and liquidity: Notes and interest payable were $753.5 million; additional obligations included $53.4 million related to properties subject to sales contracts and $2.2 million in stock-secured notes. Management said operating cash would not cover all obligations as they come due and plans to use property sales, refinancings and additional real-estate-secured borrowing. Total assets were $1,044.3 million and total equity $139.6 million at September 30.
Changes versus prior comparable periods
- Q3 revenue declined, principally from lower commercial-property revenue; apartment revenue increased. Management reported apartment occupancy averaging above 95%.
- Nine-month results improved substantially from 2011, when the company recorded significant impairment charges. No impairment provision was recorded in the first nine months of 2012, versus $5.6 million in 2011.
- Nine-month interest income rose to $8.1 million from $1.6 million, largely reflecting cash received on related-party UHF cash-flow notes. Other income increased to $4.7 million from $1.9 million, primarily under a UHF consulting agreement.
- Nine-month interest expense increased to $41.1 million from $37.5 million. Management cited refinancing-related financing-cost write-offs and prepayment penalties, as well as interest on completed developments no longer eligible for capitalization. Q3 interest expense, by contrast, declined to $9.0 million from $11.8 million.
- Land-sale gains were $8.1 million for nine months, compared with $8.4 million, despite much lower land sales proceeds ($35.1 million versus $135.7 million). Discontinued operations contributed $2.6 million of nine-month income, mainly including gains on property sales.
Outlook, risks and unusual items
- Management expected excess cash from property operations in 2012, but not enough to meet all obligations. It planned selective property sales, refinancings or extensions, and further secured borrowing. No earnings or revenue guidance was provided.
- Some mortgages on related-party properties classified as subject to sales contracts were in default, primarily for nonpayment; the company said it was discussing resolution with lenders. Sales recognition on certain related-party transactions was deferred because of continuing involvement, inadequate initial investment or uncertainty over recovery.
- Related-party exposure is significant: subsidiaries of ARL owned approximately 84.7% of TCI, and $55.2 million of performing notes receivable was from related parties. UHF was a major source of interest and other income.
- At quarter-end, $134.6 million of debt bore variable rates; the filing estimated a 1 percentage-point rate increase would reduce annual net income by $1.35 million, or $0.16 per share.
- A $58.9 million net deferred tax asset was fully valuation-allowed because management could not conclude realization was more likely than not. Management reported no known material environmental liability and considered ordinary-course litigation not expected to have a material adverse effect. No subsequent events were reported.
Key facts for investors to verify
- Near-term debt maturities, refinancing availability and the company’s ability to meet obligations with only $6.3 million of cash.
- Status and potential consequences of mortgage defaults on properties subject to sales contracts, including any guarantees or lender settlements.
- Collectability and cash receipts on related-party notes, particularly UHF notes, and terms of related-party consulting and property transactions.
- Whether planned property sales and refinancings can generate sufficient liquidity, and how much sale gain is deferred or dependent on related-party transactions.
- Assumptions supporting the full valuation allowance against deferred tax assets and the carrying values of real estate and mortgage notes.