Transcontinental Realty Investors, Inc. — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in millions of dollars unless noted. TCI owns and develops apartments, commercial properties and land, and also invests in real-estate loans. At quarter-end it reported 68 income-producing properties, including 49 apartment communities with 9,027 units and 19 commercial properties, plus 1,856 acres of land.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Rental and other property revenue | $31.302 | $28.124 | $89.796 | $85.441 |
| Operating income (loss) | $3.045 | $1.817 | $(16.913) | $5.028 |
| Net loss attributable to TCI | $(0.764) | $(8.955) | $(53.511) | $(39.622) |
| Net loss applicable to common shares | $(1.043) | $(9.224) | $(54.342) | $(40.419) |
| Basic and diluted loss per common share | $(0.13) | $(1.14) | $(6.50) | $(4.98) |
- Margins: Not expressly reported. For the first nine months, operating expenses totaled $106.709 million, including a $26.247 million impairment provision; mortgage and loan interest was $39.553 million.
- Cash flow, nine months: Operating activities used $11.721 million, versus $5.437 million used in 2010. Investing activities provided $171.785 million, primarily from property and land sales; financing activities used $163.582 million. Cash declined $3.518 million to $7.741 million.
- Balance sheet at September 30: Total assets were $1,151.581 million, down from $1,384.761 million at December 31, 2010. Notes and interest payable were $797.400 million, with a further $64.412 million of notes related to properties subject to sales contracts. Total equity was $132.161 million, down from $183.448 million.
- Receivables: Notes and interest receivable, net of a $3.777 million allowance, totaled $56.550 million; $1.432 million was non-performing.
- Interest-rate exposure: $189.918 million of variable-rate notes payable carried a 5.15% weighted-average rate. The filing estimates a 1% rate increase would reduce annual net income by $1.899 million, or $0.23 per share.
Material changes and operating developments
- Q3 property revenue increased $3.178 million year over year, driven by apartment revenue growth; management said apartment occupancy averaged above 95%. Commercial same-property revenue fell amid higher vacancy.
- For the first nine months, revenue rose $4.355 million, but TCI recorded a $26.247 million impairment provision, compared with none in the prior-year period. Management attributed most of the impairment to land and properties involved in related-party sales-contract arrangements.
- Q3 general and administrative expense rose to $2.798 million from $1.338 million; the nine-month expense rose to $7.452 million from $4.955 million. Management cited increased professional services and write-offs on unrealized potential deals.
- Nine-month land-sale gains were $6.707 million, compared with a $6.005 million loss in 2010. TCI reported $260.072 million of property-sale prices in the segment disclosure, while the MD&A describes approximately $261.3 million of land and income-producing property sales.
- TCI spent $39.927 million on construction and development during the nine months and capitalized $2.4 million of interest. It acquired $13.0 million of income-producing properties.
- Several refinancings lowered rates on apartment mortgages. The company also drew $38.3 million on construction loans during the period.
Liquidity, outlook, risks and unusual items
- Management said property operations were expected to generate excess cash in 2011, but not enough to meet all obligations as they become due. Planned sources include asset sales, refinancing, extensions of real-estate debt and additional property-secured borrowing. No numerical earnings or revenue guidance is provided.
- TCI disclosed that mortgages on properties sold to related parties under common control and accounted for as “subject to sales contract” were in default, primarily for nonpayment. The company said it was negotiating with lenders to settle or cure defaults; properties might be transferred back to sellers after resolution.
- Related-party transactions are significant: ARL subsidiaries owned approximately 82.7% of TCI’s common stock, and TCI reported $32.742 million payable to affiliates at quarter-end. The filing cautions that related-party dealings may not be on arm’s-length terms.
- On October 12, 2011, Willowbrook Village was transferred to its lender for credit against the loan balance; the filing said the deferred sale would be recognized in Q4. On October 20, TCI sold 7.4 acres of land for $4.2 million.
- Management reported no material adverse environmental liability and said ordinary-course litigation was not expected to materially affect financial condition, results or liquidity. It cited real-estate demand, tenant occupancy, financing availability, debt, development costs, asset-sale timing and interest rates among key risks.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether the company can meet debt service and maturities given its stated cash shortfall, limited cash balance and reliance on sales and refinancing.
- Which loans and properties remain in default, the status of lender negotiations, and any further transfers, impairments or deferred-sale recognition.
- The valuation and recoverability of notes receivable, especially the non-performing loan and substantial related-party balances.
- The basis and terms of material related-party property sales, seller financing and affiliate payables.
- Whether apartment occupancy and development returns can offset commercial vacancies, ongoing losses and impairment risk.