Transcontinental Realty Investors, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company owns and develops multifamily and commercial real estate, land, and interests in joint ventures. Unless noted otherwise, financial amounts below are in millions of dollars; the filing reports amounts in thousands.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $7.770 | $10.795 | $15.557 | $22.623 |
| Net income (loss) attributable to TCI | $16.461 | ($30.733) | $30.963 | ($8.101) |
| Basic and diluted EPS | $1.91 | ($3.56) | $3.58 | ($0.94) |
| FFO, basic and diluted | $19.711 | $5.140 | $29.041 | $21.645 |
| FFO adjusted for FX and debt extinguishment | $5.579 | $9.933 | $12.776 | $18.821 |
For the six months, rental revenue fell to $14.740 million from $20.555 million. Segment profit declined to $6.900 million from $9.665 million: multifamily profit was $2.745 million versus $3.131 million, and commercial profit was $4.155 million versus $6.534 million. Management attributed lower segment results principally to disposed properties. Operating expenses also declined, including general, administrative and advisory costs.
Net income improvement was substantially affected by non-operating and transaction items, not just property operations. Six-month results included a $17.904 million foreign-currency gain, a $15.041 million net gain on asset sales/write-downs, and a $6.343 million equity contribution from the unconsolidated joint venture. The 2021 comparison included a $29.600 million VAA earn-out remeasurement loss. The filing does not provide a single company-wide operating margin measure.
Cash flow, balance sheet and debt
- Six-month operating cash flow was a use of $7.517 million, versus $0.449 million provided in 2021. Investing provided $32.294 million, including $32.875 million of asset-sale proceeds; financing used $39.839 million, chiefly for debt payments.
- Cash and cash equivalents were $38.199 million at June 30, 2022, down from $50.735 million at year-end; restricted cash was $19.460 million. Combined cash, cash equivalents and restricted cash totaled $57.659 million.
- Total assets were $754.466 million and total equity was $402.849 million. Mortgages and other notes payable were $164.618 million; bonds payable, net, were $148.834 million. Combined carrying debt was $313.452 million, down from $366.202 million at December 31, 2021.
- Cash paid for interest was $9.839 million in the first half, versus $14.840 million in 2021. The company reported $39.249 million of principal payments on mortgages, notes and bonds.
- TCI was not in compliance with the minimum debt-service-coverage covenant on its 770 South Post Oak loan. The lender requires surplus property cash flow to be placed in a controlled cash-trap account until compliance is maintained for two consecutive quarters. The company also reported land mortgages being modified, extended or refinanced.
Material changes, outlook and risks
- TCI sold Toulon, a 240-unit multifamily property, in January for $26.750 million, recognized a $9.364 million gain, and paid off its $14.740 million mortgage. It also sold a commercial building and 26.9 acres of Windmill Farms land during the first half. Real estate declined to $283.696 million from $296.363 million at year-end.
- VAA agreed to sell a 45-property portfolio to two private-equity funds for $1.825 billion; closing was expected in Q3 2022, subject to an inspection period that could reduce the properties sold by up to five. The buyer deposited $50 million in escrow. TCI also planned to sell Sugar Mill Phase III to the buyer. VAA expected to distribute net proceeds and holdback properties after closing; TCI’s interest is subject to SPC bond-covenant restrictions on cash distributions.
- TCI owed $27.147 million on the VAA earn-out obligation at June 30. A $10.178 million VAA distribution paid directly to Macquarie on July 16 was to reduce that obligation.
- Management said cash and expected collections of notes and interest in the remainder of 2022 were anticipated to meet cash requirements, while cautioning that excess property-operating cash might not cover all obligations as due. The company may sell assets, refinance or extend debt, and obtain additional secured borrowings. No numerical earnings or revenue guidance was provided.
- Near-term financing items include Series C bonds maturing January 2023, the Stanford Center loan in February 2023, Windmill Farms in February 2023, and Series A bonds in July 2023. Series B bonds mature in July 2025. Bonds are denominated in New Israeli shekels, so exchange-rate movements affect reported results; SPC bond covenants also restrict distributions.
- Management reported lower commercial-property occupancy amid COVID-19-related uncertainty, though it characterized the decline as potentially temporary and did not expect a significant rental-revenue decrease. Broader risks include leasing and tenant demand, financing availability and interest rates, development costs and delays, property-sale timing, and real-estate market conditions.
- Related-party exposure is significant: TCI is approximately 78% owned by ARL, uses affiliated Pillar for management, and reported $143.240 million of related-party receivables and $66.632 million of related-party notes receivable. Related-party transactions may not be on arm’s-length terms.
- A shareholder lawsuit involving IOR had a stipulated dismissal with prejudice, but further shareholder action could affect final dismissal. As of the filing date, the court could enter the dismissal order if no other shareholder acted by August 19, 2022.
Important facts for investors to verify
- Whether the VAA portfolio sale closed on the expected terms, what proceeds were distributed to TCI, and how much was applied to the earn-out obligation.
- Progress on the 770 South Post Oak covenant breach and the status, terms and refinancing of upcoming debt maturities.
- Collection timing and credit quality of the related-party receivables and notes, including UHF-related balances.
- Whether the decline in commercial occupancy and rental revenue continued, and how property dispositions affect ongoing operating results.
- The extent to which reported earnings depend on currency movements, asset-sale gains and other nonrecurring items; adjusted FFO also declined year over year for the first half.