Transcontinental Realty Investors, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. TCI owns and operates apartments, commercial properties, land and mortgage investments. At quarter-end, it reported 52 income-producing properties, including 43 apartment communities with 7,085 units, nine commercial properties and 4,044 acres of land. TCI is externally advised by Pillar, has no employees, and is approximately 80.9% owned by ARL subsidiaries.
Financial performance and position
- Revenue: Q2 rental and other property revenue was $23.8 million, up $5.2 million from $18.5 million. First-half revenue was $46.1 million, up $9.2 million from $36.8 million.
- Operating results: Reported net operating income was $4.4 million for Q2 versus $0.1 million a year earlier, and $7.5 million for the first half versus $1.0 million. Property operating costs and depreciation increased with acquisitions and portfolio growth.
- Net income and common-share results: Q2 net income was $0.4 million, but net loss applicable to common shares was $0.1 million, or $0.01 per share, after preferred dividends. First-half net income was $0.2 million; common-share loss was $0.2 million, or $0.02 per share. The comparable 2014 periods reported common-share income of $2.1 million and $6.4 million, respectively.
- Cash flow: First-half operating cash flow was negative $45.1 million, versus negative $15.7 million in 2014. Investing used $96.7 million, compared with providing $31.1 million, largely reflecting $105.7 million of property acquisitions. Financing provided $148.7 million, versus using $18.1 million. Cash and cash equivalents increased $6.9 million to $19.1 million; restricted cash was another $52.1 million.
- Assets, debt and equity: Total assets were $1.068 billion at June 30, up from $930.4 million at year-end 2014. The balance sheet reports notes and interest payable of $727.2 million, compared with $588.7 million at year-end; it also lists $0.9 million of notes related to real estate held for sale and $18.3 million related to sales contracts. Total liabilities were $834.8 million and shareholders’ equity was $233.2 million.
- Related-party receivable: Receivable from related parties rose to $94.1 million from $58.4 million. Related-party interest income was $6.2 million in the first half, out of total interest income of $6.8 million.
Material changes versus 2014
- Revenue growth reflected acquisitions and same-property gains: first-half apartment revenue increased $4.6 million and commercial revenue increased $4.6 million. Management reported apartment occupancy above 95% for the first half.
- First-half common-share results declined from income of $6.4 million to a loss of $0.2 million. The 2014 comparison included $13.1 million of gains on income-producing property sales in discontinued operations; there were no such property sales in the first half of 2015. TCI instead recorded $4.1 million of land-sale gains.
- Interest expense rose to $18.4 million for the first half from $16.9 million, partly due to new borrowing; lower-rate apartment mortgage refinancings partly offset the increase. General and administrative expense fell to $3.0 million from $4.3 million, mainly due to lower professional fees and franchise taxes.
- TCI acquired six apartment complexes during the first half—three from third parties for $31.5 million and three from related parties for $11.6 million—and bought a commercial office building for $16.8 million. It sold approximately 43 acres of land for $9.1 million, recognizing a $4.1 million gain.
Liquidity, outlook and risks
- Management expects excess cash from property operations in 2015, but states it will not be sufficient to discharge all obligations as they come due. Its plans include land and property sales, refinancing or extending debt, and additional real-estate-secured borrowing. No numerical earnings or revenue guidance is provided.
- On May 28, TCI secured a five-year, $120 million financing facility; $84.4 million was advanced at closing. It bears interest at 30-day LIBOR plus 10.75%, is interest-only, and is secured by equity interests in residential properties. The company said it was in compliance with the facility’s financial covenants at June 30. The filing also describes a separate amended $40 million loan at 12% interest.
- TCI disclosed land mortgages undergoing modification or extension. Several properties transferred to a related party for a proposed debt or organizational restructuring remain on TCI’s books because accounting sale criteria were not met. The underlying mortgages were in default, primarily for nonpayment, and discussions with lenders were ongoing; some loans have corporate guarantees.
- Management estimated potential aggregate exposure from deficiency claims related to foreclosures at no more than approximately $20 million, if any, potentially in future years. Management said it intends to vigorously defend a separate Clapper Parties lawsuit and believes TCI has no liability for any judgment in that matter.
- A July 20, 2015 court judgment against Dynex Commercial awarded TCI $19.5 million, including prejudgment interest, plus post-judgment interest and a share of attorneys’ fees awarded collectively. TCI said it was reviewing the judgment with counsel; the filing does not establish when or how much will be collected.
- Interest-rate sensitivity: TCI reported $139.4 million of variable-rate notes at a weighted average rate of 8.75%; a 1 percentage-point rise in base rates was estimated to reduce annual net income by $1.4 million. Other disclosed risks include financing availability and cost, property demand and occupancy, development delays and cost overruns, property-sale timing, and related-party dealings.
- TCI reported a $63.3 million net deferred tax asset with a 100% valuation allowance. It adopted the revised discontinued-operations standard in 2015, resulting in fewer property disposals qualifying for that presentation. Management said disclosure controls were effective and there was no material change in internal control over financial reporting.
Important facts for investors to verify
- Debt maturities, extension progress and covenant compliance, including the terms and cost of the high-rate financing.
- Collection and terms of the $94.1 million related-party receivable, along with the concentration and collectability of related-party notes.
- Status of defaulted mortgages on properties subject to sales contracts, lender negotiations, and any continuing guarantees or cash-shortfall obligations.
- Cash availability and the company’s ability to execute planned asset sales, refinancing and additional borrowing to meet obligations.
- Enforceability, appeal status and collectability of the Dynex judgment, as well as the outcome and exposure from deficiency claims and other litigation.
- Acquisition contributions to same-property performance, occupancy and operating costs, and whether reported earnings can improve without gains from asset sales.