Transcontinental Realty Investors, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial amounts below are in millions unless stated otherwise. The interim statements are unaudited. TCI is an externally advised real estate company with apartments, commercial properties, land and mortgage-note investments.
Business context and portfolio
- At June 30, 2017, TCI owned or had interests in 58 income-producing properties: 50 apartment communities with 8,226 units, seven commercial properties totaling approximately 1.7 million rentable square feet, and a golf course. It also held 3,527 acres of land.
- Seven apartment projects were in development. During the first half, TCI acquired four land parcels for $12.9 million and sold 10.82 acres for $1.6 million.
- Subsidiaries of American Realty Investors owned approximately 80.9% of TCI’s common stock. TCI has no employees and relies on external advisor Pillar for day-to-day operations.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Rental and other property revenue | $31.3 | $30.5 | $62.8 | $59.4 |
| Reported net operating income | $5.8 | $5.8 | $11.0 | $9.9 |
| Net income (loss) applicable to common shares | $(10.6) | $4.4 | $(16.0) | $0.7 |
| Basic and diluted EPS | $(1.22) | $0.51 | $(1.83) | $0.08 |
| Cash from operating activities | Not separately reported by quarter | $5.3 | $30.9 |
- Six-month revenue increased 5.7% year over year, primarily reflecting apartment portfolio growth; reported NOI margin was approximately 17.6% of revenue, versus 16.6% in 2016. Q2 reported NOI margin was approximately 18.7%, versus 18.9%.
- Six-month mortgage and loan interest expense rose to $31.0 million from $25.3 million. The company also recorded a $3.7 million unrealized foreign-currency loss on Israeli-shekel-denominated bonds.
- There were no income-producing property sales in the first half of 2017, compared with $4.9 million in gains on such sales in 2016; land-sale results shifted from a $3.4 million gain to a loss of less than $0.1 million.
- At June 30, total assets were $1,250.1 million, total liabilities $1,041.3 million and total shareholders’ equity $208.8 million. Cash and cash equivalents were $59.0 million, with a further $37.4 million of restricted cash.
- Debt included $819.4 million of notes and interest payable, $104.5 million of bonds, and $4.4 million of notes related to property held for sale or subject to sales contracts. The filing’s note-payable schedule reports $823.8 million including accrued interest and applicable property-related notes, net of deferred borrowing costs.
- Cash increased by $41.5 million in the first half, principally reflecting $68.5 million of financing cash flow, including bond proceeds. Investing used $32.2 million; operating activities provided $5.3 million. Cash paid for interest was $26.5 million.
Changes, outlook and risks
- Management said 2017 property-operation cash generation would not be sufficient to discharge all obligations as due. It plans to sell land and income-producing real estate, refinance or extend debt, and obtain additional real-estate-secured borrowing.
- Southern Properties Capital, an indirect subsidiary, issued Series A bonds with a reported June 30 liability of $104.5 million. The bonds are payable in Israeli shekels, carry a 7.3% stated rate and a 9.25% effective yield, with principal repayments scheduled from 2019 through 2023. The currency loss recorded in 2017 was unrealized; an additional approximately $6.7 million bond sale closed July 12, 2017.
- Management reported refinancing three loans totaling $80.1 million during the first half, with lower monthly payments and extended maturities. Some land mortgages were under modification or extension discussions.
- Loans associated with properties sold to a related party and recorded as subject to sales contracts were described as in default, primarily for lack of payment; discussions with lenders were ongoing. TCI had reviewed the assets and recorded impairment where it believed necessary.
- TCI is the primary guarantor on a $60.4 million mezzanine loan to Unified Housing Foundation; the borrower was reported in compliance with loan covenants at June 30. TCI also reported a $39.9 million deferred tax asset fully offset by a valuation allowance.
- In April 2017, plaintiffs filed a new $50 million lawsuit against Dynex Capital and Dynex Commercial alleging, among other matters, fraudulent transfer and alter ego. Management said ordinary-course litigation was not expected to materially adversely affect the company.
- Key risks include real-estate demand and leasing, access to financing, interest rates, development delays and cost overruns, property-sale timing, environmental exposure, and dependence on related parties and external management. Management reported no changes to the risk factors in its prior Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Near-term debt maturities, extensions and refinancing capacity, given management’s stated liquidity shortfall.
- Progress and terms of the property sales and additional borrowing expected to support liquidity.
- Performance and collectability of related-party receivables and mortgage notes, including the UHF/FBH exposures and defaulted property-related loans.
- Effect of shekel exchange-rate movements and the cost and repayment profile of the Series A bonds.
- Whether development projects are completed and stabilized on schedule and within budget, and whether rental growth offsets higher interest and operating costs.