Transcontinental Realty Investors, Inc. — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Amounts are in dollars in thousands unless otherwise noted. The company owns and develops multifamily and commercial real estate and land, primarily in the Southern United States. At quarter-end, its portfolio included 14 multifamily properties with 2,328 units, four office buildings, and approximately 1,858 acres of land. It is externally managed by Pillar, a related party.
Financial results and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $11,688 | $7,787 |
| Net operating loss | $(2,573) | $(4,126) |
| Net income | $3,715 | $14,620 |
| Net income attributable to the Company | $3,517; $0.41 per share | $14,502; $1.68 per share |
| Operating cash flow | $1,533 provided | $4,178 used |
| Cash, cash equivalents and restricted cash | $110,501 | $222,307 at Dec. 31, 2022 |
| Short-term investments | $158,086 | $119,787 at Dec. 31, 2022 |
| Total assets | $1,128,806 | $1,218,165 at Dec. 31, 2022 |
| Mortgages and other notes payable | $183,637 | $184,462 at Dec. 31, 2022 |
| Bonds payable, net | $41,672 | $129,218 at Dec. 31, 2022 |
| Total equity | $844,327 | $840,612 at Dec. 31, 2022 |
Multifamily segment revenue was $7,373 and segment profit was $3,665, versus $3,229 and $1,508, respectively, in Q1 2022. Commercial segment revenue was $3,636 and segment profit was $1,238, versus $4,252 and $1,945. The filing reports a $2,573 operating loss after total operating expenses of $14,261; it does not present a single consolidated operating-margin measure.
FFO was $6,619 versus $5,113; FFO adjusted for foreign-currency effects and early debt-extinguishment costs was $5,648 versus $2,980. These are non-GAAP supplemental measures, not substitutes for GAAP earnings or operating cash flow.
Material changes and drivers
- Revenue increased $3,901, primarily reflecting the seven multifamily properties acquired from the VAA joint venture in November 2022. Multifamily segment profit rose, while commercial segment profit declined, principally due to lower occupancy at Stanford Center.
- Net income fell $10,905 year over year. Q1 2022 included $11,148 of gains on asset sales/write-downs, $4,706 of joint-venture income, and a $3,772 foreign-currency gain; Q1 2023 had no asset-sale gain, $688 of joint-venture income, and a $971 currency gain.
- Net interest income increased to $5,741 from $787, reflecting higher interest income on loans and investments and lower interest expense following debt repayments.
- Investing cash flow was a $24,212 use, including net purchases of short-term investments and $5,653 of real-estate development and renovation spending. Financing cash flow was an $89,127 use, largely from debt payments, including $88,279 to repay Series C bonds.
- At March 31, bonds outstanding were $43,147 before $1,475 of unamortized issuance costs. The company repaid the remaining Series A and B bonds on May 4, 2023 and withdrew from the Tel Aviv Stock Exchange.
Outlook, risks and notable items
- Management said cash and cash equivalents, together with expected collections of notes and interest receivable, were anticipated to meet cash requirements, but also cautioned that excess cash from property operations might not be sufficient for all obligations as due. Planned liquidity sources include property sales, refinancing, and additional property-secured borrowing; no quantified earnings guidance was provided.
- The company has a $33,000 interest-only construction loan for a 240-unit Lake Wales, Florida project, bearing interest at SOFR plus 3%, maturing in March 2026 with two one-year extension options. Total project cost is estimated at approximately $55,330, with completion expected in 2025; $10,140 had been incurred by quarter-end. A $1,637 development fee is payable to related-party manager Pillar over the construction period.
- For the 770 South Post Oak loan, the company was not in compliance with the minimum debt-service coverage ratio covenant at quarter-end. The lender requires surplus property cash flow to be held in a lender-controlled account until compliance is achieved for two consecutive quarters. Management reported compliance with other loan covenants.
- The Windmill Farms loan was extended to February 2024 at 7.75%. Some notes receivable had past-due maturities; the company said it was working with borrowers on extensions and/or conversion rights. Certain Unified Housing Foundation note repayments depend on surplus cash flow, property sales, or refinancing.
- Landing Bayou, damaged by Hurricane Ida, had incurred $10,400 in restoration costs, substantially funded by insurance; completion and lease-up were expected by year-end 2023. The filing highlights real-estate, financing and interest-rate, occupancy, development, construction-cost, property-sale, environmental, and other risks.
- Related-party balances and dealings are significant: interest income from related parties was $6,081, related-party interest expense was $944, and Pillar advisory fees were $2,170 in the quarter. The company is approximately 78% owned by American Realty Investors, Inc.
Important facts for investors to verify
- Confirm the cash, short-term investment, and restricted-cash balances available for general use, particularly after the May 4 bond repayment and given restrictions on SPC cash distributions.
- Track the 770 South Post Oak covenant status and the effect of lender control over surplus cash flow.
- Assess refinancing, repayment, and collection risks for debt maturities and notes receivable, including past-due notes and related-party exposures.
- Monitor Lake Wales construction costs, financing terms, schedule, and the related-party development fee; verify Landing Bayou restoration and lease-up progress.
- Evaluate the sustainability of rental and interest income and the extent to which quarterly earnings depend on acquisitions, interest rates, joint ventures, and nonrecurring gains.