Transcontinental Realty Investors, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Unless stated otherwise, amounts below are in millions of dollars; the filing’s financial statements are presented in thousands.
Business context
TCI is an externally managed real estate company focused on multifamily and commercial properties, land and mortgage-note investments, primarily in the southern United States. At year-end, it reported 10 directly owned multifamily properties with 1,636 units, a 50% interest in the VAA joint venture with 51 properties and 9,888 units, six commercial properties totaling about 1.58 million square feet, and approximately 1,961 acres of land. TCI has no employees; Pillar Income Asset Management manages its operations. American Realty Investors, Inc. controls approximately 78% of TCI’s common stock.
Financial and operating highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $57.0 | $48.1 |
| Net income (loss) | $7.5 | ($26.1) |
| Net income (loss) attributable to TCI | $6.7 | ($26.9) |
| Basic and diluted EPS | $0.77 | ($3.09) |
| Net cash from (used in) operating activities | $5.6 | ($35.7) |
| Net cash from (used in) investing activities | $0.4 | ($9.6) |
| Net cash from (used in) financing activities | ($2.3) | $22.0 |
Revenue included $51.9 million of rental revenue and $5.1 million of other income. Segment operating profit was $27.5 million, or about 53% of segment revenue; the company-wide net margin was about 13% of revenue. Net income included $32.1 million of gains on asset sales or write-downs and a $13.4 million foreign-currency transaction loss. Interest expense was $29.4 million, compared with $18.7 million of interest income. Company-reported FFO was $16.0 million; adjusted FFO was $29.4 million.
At year-end, total assets were $879.1 million and total liabilities were $517.6 million. Mortgages and other notes payable totaled $236.1 million and bonds payable $237.9 million, for approximately $474.0 million of debt. Cash and cash equivalents were $36.8 million; restricted cash was $50.2 million. Notes receivable totaled $123.6 million, and receivables from related parties were $159.8 million. TCI reported compliance with loan and bond covenants at December 31, 2020. No common dividends were declared in 2020, 2019 or 2018.
Changes versus 2019
- Net income improved by $33.6 million, from a $26.1 million loss to $7.5 million of income. The swing reflected higher asset-sale gains, the absence of 2019’s $5.2 million debt-extinguishment loss, and improved joint-venture results, partly offset by continued foreign-currency losses.
- Multifamily segment profit rose $1.5 million, mainly from improved occupancy at lease-up properties. Commercial segment profit rose $5.0 million, primarily including a $6.0 million Browning Place lease-termination payment; same-property rental revenue was affected by lower occupancy.
- Operating cash flow improved by $41.4 million, but remained positive at only $5.6 million. Management attributed much of the year-over-year change to a large related-party receivable movement in 2019.
- TCI sold three properties and land parcels, recording $32.1 million in total net gains on asset sales or write-downs, versus $14.8 million in 2019. It also completed Parc at Denham Springs Phase II and Sugar Mill Phase III.
Liquidity, outlook and material risks
Management said year-end cash and expected 2021 collections of notes and interest receivable should meet cash requirements, while also planning to sell assets, refinance or extend debt, and obtain additional property-secured borrowings. The auditor included an emphasis of liquidity, and management acknowledged that property-generated excess cash might not cover all obligations as they fall due. Scheduled bond maturities included $44.8 million in 2021 and $130.3 million in 2023; mortgage and other note principal maturities included $14.1 million in 2021 and $37.7 million in 2023. Certain loan extensions or commitments were reported in early 2021, including the $10.4 million Windmill Farms loan extension to February 2023 at 5%.
The filing provides no quantified earnings or operating guidance. COVID-19, tenant payment and occupancy trends, eviction restrictions, construction delays, property-market conditions, refinancing access, interest rates and the company’s substantial leverage are identified as risks. Other notable exposures include related-party balances and transactions, including the $142.1 million receivable from ARL; an unresolved $10.0 million VAA earn-out liability subject to arbitration; and litigation alleging improper property transfers with IOR. A Dynex judgment receivable is fully reserved because collection is uncertain. The filing gives conflicting judgment amounts for Dynex in different sections.
TCI reported effective disclosure controls and management-assessed internal control over financial reporting. The auditor’s report contains critical audit matters involving real estate impairment, notes-receivable collectability and commercial straight-line rental revenue; it also states that the auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Confirm near-term liquidity and refinancing status, particularly bond and loan maturities, restricted cash, and management’s reliance on asset sales and new borrowing.
- Assess collectability and concentration of the $123.6 million notes receivable and $159.8 million related-party receivables, including the ARL balance and UHF exposure.
- Review the VAA earn-out arbitration, the Berger lawsuit and the fully reserved Dynex claim; the filing cites Dynex judgment amounts of $49.0 million and $24.8 million in different sections.
- Verify the auditor opinion wording: the supplied filing text identifies the audited financial statements as those of “American Realty Investors, Inc.” although the report is TCI’s Form 10-K.
- Evaluate how much reported earnings depend on property-sale gains, foreign-currency movements and nonrecurring lease-termination income, rather than recurring property operations.