Transcontinental Realty Investors, Inc. — 2019 Q3 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2019, compared with the same 2018 periods. TCI owns commercial and apartment properties, land, and real-estate-related notes; it is externally advised and managed. At quarter-end, it owned nine apartment communities with 1,512 units, seven commercial properties totaling about 1.7 million square feet, and approximately 2,273 acres of land. Its 50%-owned VAA joint venture held 51 apartment communities with 9,643 units.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Rental and other property revenue | $11.9 million | $33.5 million | $35.7 million | $96.2 million |
| Net operating income (loss) | $(1.1) million | $5.8 million | $(5.7) million | $15.6 million |
| Net income (loss) applicable to common shares | $(7.8) million | $22.0 million | $(19.7) million | $28.5 million |
| Basic and diluted EPS | $(0.89) | $2.52 | $(2.26) | $3.27 |
| Operating cash flow | Not presented by quarter | $(9.3) million | $(20.3) million |
- Balance sheet at September 30: Total assets were $872.9 million; total liabilities were $511.8 million; total shareholders’ equity was $361.0 million, down from $380.4 million at December 31, 2018. Cash and cash equivalents were $63.1 million and restricted cash was $36.9 million.
- Debt: Notes payable totaled $248.1 million before deferred borrowing costs, and bonds totaled $231.4 million before issuance costs. Balance-sheet amounts, including accrued interest and net of issuance costs, were $241.4 million for notes payable and $223.4 million for bonds. Weighted average borrowing rate was approximately 4.9%.
- Cash flows: Investing activities used $16.8 million and financing activities provided $19.5 million during the first nine months. Cash, cash equivalents and restricted cash together declined by $6.6 million to $100.0 million.
- Other financial items: Nine-month interest expense was $23.6 million; interest income was $14.7 million. Land-sale gains were $9.5 million. Foreign-currency transaction losses were $13.3 million, and debt-extinguishment loss was $5.2 million.
Material changes versus the prior comparable period
- Revenue fell by $21.6 million in Q3 and $60.5 million for the nine-month period. The primary reason was the fourth-quarter 2018 contribution of 49 apartment properties to VAA: those properties were deconsolidated, so their rental revenue and operating costs no longer appear in TCI’s consolidated property results. TCI instead accounts for VAA using the equity method.
- Property expenses, depreciation and mortgage interest also declined largely because of that deconsolidation. The reported revenue decline therefore reflects a substantial portfolio/accounting change and should not be read alone as a same-property trend.
- TCI reported a $1.5 million equity loss from VAA for the first nine months. VAA itself reported a $50.4 million net loss for that period; TCI’s allocated loss reflects adjustments and its investment allocation.
- Foreign-currency results swung from a $6.4 million gain in the first nine months of 2018 to a $13.3 million loss in 2019, reflecting unfavorable shekel-dollar movements on Southern’s shekel-denominated bonds.
- Other income was lower year over year, partly because the prior-year period included a $17.6 million gain from recognition of deferred income. TCI also recorded a $5.2 million loss when it repaid $41.5 million of commercial mortgage debt, including a prepayment penalty and write-off of borrowing costs.
- Land-sale gains were lower: $9.5 million on $23.3 million of land sales in the first nine months of 2019, versus $13.6 million on $38.5 million in 2018.
Outlook, risks and unusual items
- Liquidity outlook: Management expected excess cash from property operations in 2019, but stated it would not be sufficient to discharge all obligations as they become due. The company intends to sell land and income-producing property, refinance or extend real-estate debt, and seek additional property-secured borrowing. No quantitative earnings or revenue guidance was provided.
- Financing and foreign exchange: Southern issued approximately $78.1 million of Series C bonds, denominated in NIS, at 4.65% annual interest, with principal due in 2023. Proceeds included repayment of $41.5 million of commercial mortgage debt. A six-month currency hedge was entered into in September 2019; its cost and quarter-end fair value were reported as immaterial. The filing notes that only $4.4 million of $248 million in notes payable was variable-rate; a 100-basis-point increase was estimated to add about $0.05 million to annual interest cost.
- Concentration and related parties: TCI reported $135.2 million receivable from related parties and $66.6 million of related-party notes and interest receivable. Interest income and advisory, management and other charges also involve related parties. The filing cautions that such transactions may not be on arm’s-length terms.
- Contingencies: TCI is the primary guarantor on a $39.1 million UHF mezzanine loan; UHF was reported in compliance with its covenants at September 30. The filing discusses ongoing litigation, including a stockholder suit concerning transactions involving IOR and related entities; defendants deny the allegations and motions to dismiss were pending. Management said ordinary-course litigation was not expected to materially affect TCI, and identified no known environmental liability expected to have a material adverse effect.
- Other: The company invested $26.4 million in apartment construction or predevelopment during the nine months. Management identified real-estate demand, financing availability and terms, interest rates, development costs and delays, property-sale timing, and economic conditions among relevant risks. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- How the $135.2 million related-party receivable and $66.6 million related-party note balance are expected to be collected, and the associated timing, terms and collateral.
- Near-term debt maturities, refinancing capacity and the availability of asset sales or new secured borrowing, given management’s warning that operating cash alone will not meet all obligations.
- Exposure to NIS exchange-rate movements on the bonds, the hedge’s coverage and duration, and the effect of exchange-rate changes on reported earnings and debt.
- VAA’s operating performance, financing obligations and losses, and how the joint-venture allocation affects TCI’s reported results and cash distributions.
- The sustainability of land-sale gains and property cash generation, separating those items from recurring rental operations and the effects of the VAA deconsolidation.
- Developments in the IOR stockholder litigation, the UHF loan guarantee, and other disclosed legal contingencies.