Transcontinental Realty Investors, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; filed August 14, 2018. TCI is an externally advised real estate company with apartments, commercial properties, land and mortgage-note investments. At quarter-end it owned or had interests in 53 income-producing properties, including 8,195 apartment units, and held 3,398 acres of land. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
- Revenue: Q2 rental and other property revenue was $31.6 million, up 1.0% from $31.3 million. First-half revenue was $62.7 million, down slightly from $62.8 million.
- Operating performance: Q2 net operating income, as presented in the filing, was $4.6 million versus $5.8 million; first-half NOI was $9.8 million versus $11.0 million. First-half property operating costs declined $1.2 million, while general and administrative costs rose $1.3 million to $4.4 million.
- Net income and EPS: Q2 net income applicable to common shares was $7.0 million, or $0.81 per diluted share, compared with a $10.6 million loss, or $1.22 loss per diluted share, in Q2 2017. First-half common income was $6.6 million, or $0.75 per diluted share, versus a $16.0 million loss, or $1.83 loss per diluted share.
- Cash flow: First-half operating cash flow was $1.1 million, down from $4.5 million. Investing used $49.8 million, chiefly reflecting $47.5 million of construction and development spending; financing provided $53.1 million. Cash, cash equivalents and restricted cash totaled $92.8 million at June 30, including $28.1 million of unrestricted cash.
- Assets, debt and equity: Total assets were $1,368.7 million, up from $1,313.4 million at year-end 2017. Notes and interest payable were $915.2 million and bonds payable were $143.9 million, versus $892.1 million and $113.0 million, respectively, at year-end. Total shareholders’ equity was $215.1 million.
- Borrowing costs and liquidity: The weighted-average borrowing rate was 6.19%; $65.2 million of notes payable was variable-rate debt. Management stated that anticipated excess cash from property operations in 2018 would not be enough to meet all obligations as they come due.
Changes, unusual items and management commentary
- The improvement from the prior-year losses was substantially supported by non-operating items: $6.6 million of insurance proceeds following an “as is” sale of a hurricane-damaged property, and foreign-exchange gains of $5.9 million in Q2 and $7.6 million for the first half related to NIS-denominated bonds. The currency gains were unrealized and non-cash at the reporting date.
- Mortgage and loan interest expense fell $1.6 million in Q2 and $2.7 million for the first half, partly due to repayment of maturing debt. However, advisory fees and general and administrative expenses increased; management attributed much of the G&A increase to advisor reimbursements and professional fees.
- TCI invested $47.5 million in apartment construction or predevelopment in the first half and capitalized $3.5 million of interest. It purchased an 80-unit Baton Rouge apartment community for $12 million, funded partly with seller financing and new debt.
- Asset sales included 62 acres of land, a golf course, and six income-producing properties. The six properties were sold to a related party for $8.5 million, with much of the consideration in notes receivable; no gain or loss was recorded on the income-producing property sales. Certain related-party land sales remain classified as subject to sales contracts, with gain recognition deferred.
- Management plans to address liquidity through asset sales, refinancing or extending debt, and additional real-estate-secured borrowing. No numerical earnings or revenue guidance was provided. A subsequent July 2018 Southern Properties bond placement raised approximately $19.8 million.
Risks, contingencies and other notable disclosures
- Some land mortgages were being modified or extended after loan expirations. The filing also says mortgages on certain properties transferred to a related party were in default, primarily for nonpayment, and that discussions with lenders were ongoing; impairment was recorded where management judged property value below carrying basis.
- TCI reported $126.2 million due from related parties, including $114.9 million from ARL, and $50.0 million of related-party notes and interest receivable. It also reported substantial related-party fees and transactions. Collection and terms warrant attention.
- TCI is the primary guarantor on a $39.1 million UHF mezzanine loan; UHF was reported in covenant compliance at June 30, 2018. The company is also pursuing collection of a prior court judgment against Dynex Commercial; collection is not assured.
- Management cited financing availability and terms, property demand and occupancy, development delays or cost overruns, interest rates, property sales, and environmental or uninsured losses among the risks. It reported no changes to the risk factors in its 2017 Form 10-K and said disclosure controls were effective.
Important facts for investors to verify
- Near-term maturities, loan extensions and refinancing capacity, given management’s warning that operating cash will not cover all obligations.
- Liquidity quality: unrestricted versus restricted cash, operating cash generation, and the ability to convert related-party receivables and seller-financed notes into cash.
- How much reported earnings depended on insurance proceeds and non-cash NIS currency gains, and whether these items recur.
- Progress on defaulted or modified property loans, deferred related-party sales, and recovery of the Dynex judgment.
- Development funding needs and returns, including completion and stabilization of the ten apartment projects in development.