Transcontinental Realty Investors, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the same 2020 periods. The company owns and develops multifamily and commercial real estate and land, and also holds a 50% investment in the VAA multifamily joint venture. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $10.034 | $12.162 | $32.657 | $38.346 |
| Operating loss | $(4.558) | $(1.537) | $(12.009) | $(4.045) |
| Net income | $26.380 | $7.693 | $18.689 | $8.548 |
| Net income attributable to the company | $26.246 | $7.693 | $18.145 | $8.148 |
| Basic and diluted earnings per share | $3.04 | $0.88 | $2.10 | $0.93 |
| Net cash used in operating activities | — | — | $(7.198) | $(15.217) |
| Net cash provided by investing activities | — | — | $106.039 | $12.409 |
| Net cash used in financing activities | — | — | $(101.870) | $(19.456) |
At September 30, 2021, cash and cash equivalents were $63.848 million and restricted cash was $20.090 million. Mortgages and notes payable were $178.362 million and bonds payable, net of issuance costs, were $184.198 million, for total reported debt of $362.560 million. Total liabilities were $411.021 million and total equity was $380.220 million.
Rental revenue was $9.628 million in Q3 and $30.183 million for the nine months, down from $11.454 million and $34.461 million, respectively. Q3 multifamily segment profit increased to $1.631 million from $1.272 million; commercial segment profit fell to $2.387 million from $3.794 million. Nine-month segment profit was $4.762 million for multifamily and $8.921 million for commercial, compared with $4.477 million and $11.477 million, respectively.
Management reported adjusted FFO of $7.985 million for Q3 versus $9.552 million, and $27.083 million for the nine months versus $18.071 million. FFO is a supplemental non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
Material changes versus prior periods
- Revenue declined in both comparison periods, primarily reflecting commercial-property dispositions. Nine-month commercial segment revenue fell to $19.115 million from $23.518 million.
- Net income rose substantially, but results included significant asset-sale gains. The company sold the 600 Las Colinas office building for $74.750 million in August, recording a $27.270 million gain and using proceeds in part to repay its property mortgage. Nine-month net gain on asset sales or write-downs was $22.970 million.
- The nine-month results also included a $29.600 million loss from remeasurement of the VAA Earn Out Obligation. The arbitration decision requires approximately $39.600 million to be paid to Macquarie; the company said payment is to come from its future VAA distributions.
- Total reported debt fell from $473.957 million at December 31, 2020 to $362.560 million at September 30, 2021. The company reported $117.193 million of debt and bond repayments during the first nine months, partly funded by asset-sale proceeds.
- Operating cash use improved by $8.019 million year over year but remained negative. Investing cash flow increased sharply, principally because of asset-sale proceeds; financing cash use increased as debt was repaid.
Outlook, risks, and unusual items
- Management expected cash on hand and cash generated during the remainder of 2021 from notes and interest receivable to meet cash requirements. It also said excess cash from property operations in the next 12 months might not be sufficient to discharge all obligations as due. Planned liquidity sources include asset sales, refinancing, and additional real-estate-secured borrowing.
- The company was not in compliance with the minimum debt service coverage ratio covenant on its 770 South Post Oak loan. The lender may require surplus property cash flow to be placed in a controlled cash-trap account until the company meets the covenant for two consecutive quarters.
- COVID-19 had not caused significant reported disruptions during the nine months, but commercial properties experienced lower occupancy. Management considered the decline potentially temporary, while stating that the pandemic’s future effects were uncertain.
- A lawsuit filed in 2019 alleges improper property sales or transfers involving Income Opportunity Realty Investors, Inc. The company intends to defend the claims; trial was scheduled for November 2022. Management said ordinary-course litigation was not expected to materially affect financial condition, results, or liquidity.
- Related-party relationships are significant: the company is approximately 78% owned by American Realty Investors, Inc.; it is externally managed by Pillar, and related-party advisory fees were $10.144 million for the nine months, up from $6.483 million. The filing cautions that related-party terms may not be arm’s length.
- The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting. No specific earnings or revenue guidance was provided.
Important facts for investors to verify
- How the company will fund the approximately $39.6 million VAA earn-out obligation, and the timing and amount of future VAA distributions available for that purpose.
- Whether the 770 South Post Oak covenant breach leads to a cash trap or other lender action, and the company’s ability to meet upcoming debt maturities.
- Whether commercial occupancy and rental revenue recover, particularly after the sale of major commercial assets.
- How much reported earnings depend on property-sale gains and other nonrecurring items, compared with recurring property operations and cash generation.
- The collectability and related-party concentration of the $133.892 million notes receivable, including $68.989 million from related parties.