Transcontinental Realty Investors, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in millions of dollars unless stated otherwise. TCI is an externally advised real estate owner and lender; subsidiaries of American Realty Investors, Inc. own approximately 80.9% of TCI’s common stock. Its portfolio included 56 income-producing properties, including 48 apartment communities with 8,083 units, seven commercial properties, a golf course, and 3,612 acres of land.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Rental and other property revenue | $30.5 | $23.8 | $59.4 | $46.1 |
| Net operating income | $5.8 | $4.4 | $9.9 | $7.5 |
| Net income (loss) applicable to common shares | $4.4 | $(0.1) | $0.7 | $(0.2) |
| Diluted EPS | $0.51 | $(0.01) | $0.08 | $(0.02) |
| Cash provided by (used in) operating activities | — | — | $30.9 | $(45.1) |
- Q2 property revenue rose $6.7 million, reflecting apartment and commercial acquisitions. Operating expenses increased $4.0 million, depreciation and amortization increased $0.7 million, and mortgage and loan interest expense increased $3.9 million.
- For the six-month period, revenue increased $13.3 million, while property operating expenses rose $8.1 million and mortgage and loan interest expense rose $6.9 million. Management attributed much of the revenue and expense growth to acquired apartment communities and a Houston office building.
- Reported earnings benefited from property-sale gains: $5.2 million from an apartment sale in Q2 and $3.4 million from land sales over six months. The six-month period also included a $0.2 million loss on an industrial warehouse sale. These gains are not a measure of recurring property operations.
- At June 30, total assets were $1,133.4 million and shareholders’ equity was $225.8 million. Cash and cash equivalents were $20.0 million, with a further $29.9 million in restricted cash. Total liabilities were $907.6 million.
- Notes and interest payable on the balance sheet were $800.4 million. A debt schedule reports $806.8 million of total debt after unamortized borrowing costs, including accrued interest; the filing’s presentations differ by basis. The schedule identifies $37.9 million of variable-rate debt. Debt carrying amounts increased from year-end 2015.
- Six-month investing cash use was $51.2 million, including property acquisitions and development. Financing provided $25.1 million. Operating cash flow improved substantially year over year, but management said the change was primarily due to related-party receivables and other working-capital movements, so it should not be read as solely recurring operating cash generation.
Material changes and transactions
- TCI acquired one income-producing apartment community for $32.1 million and three development land parcels for $8.9 million during the first half. It spent $12.7 million on apartment construction or predevelopment and capitalized $0.7 million of interest.
- TCI sold 53.1 acres of land for $7.3 million, generating a $3.4 million gain, and sold an Irving apartment community for $8.1 million, generating a $5.2 million gain. It also sold an industrial warehouse at a loss of approximately $0.2 million.
- Rental and other property revenue increased about 29% for the quarter and 29% for the six-month period compared with 2015; the filing attributes the growth primarily to acquisitions, rather than providing a same-property growth measure here.
- Related-party receivables totaled $75.6 million at quarter-end. Performing notes and interest receivable totaled $76.0 million before a $1.8 million allowance; approximately $67.8 million of performing notes were from related parties.
Outlook, liquidity, risks and unusual items
- Management expected property operations to generate excess cash in 2016, but stated it would not be enough to meet all obligations as they come due. Its plans included selling land and income-producing properties, refinancing or extending debt, and obtaining additional property-secured borrowing. No quantified earnings or revenue guidance was provided.
- Land mortgages were undergoing modification or extension discussions. Certain properties sold to related parties but still carried on the balance sheet as subject to sales contracts had mortgages in default, primarily for nonpayment; the company said it was discussing settlements or cures with lenders.
- The Mercer Crossing land transaction has $75 million of total consideration across multiple related and unrelated parties. TCI is to hold a subordinated $50 million buyer note; because of the limited down payment and seller financing, TCI uses deposit-method accounting and has not recognized the sale or related revenue. Allocation of proceeds remains undetermined pending specified conditions and note collection.
- TCI is pursuing collection of a 2015 court judgment awarding it $19.5 million, plus post-judgment interest, against Dynex Commercial; collection progress and ultimate recovery are uncertain. Management also disclosed deficiency claims related to foreclosures, with aggregate maximum exposure estimated at approximately $20 million, if any, in future years.
- TCI is primary guarantor on a $60.35 million mezzanine loan to Unified Housing Foundation; the borrower was reported in covenant compliance at June 30, 2016. The Series D preferred stock carries a 9% annual dividend, and approximately $4.9 million of dividends were accrued unpaid to related-party holders.
- A 100-basis-point increase in variable interest rates was estimated to raise annual interest costs by $0.4 million and reduce EPS by $0.04. Management cited real estate demand, financing availability and terms, development execution, property sales, interest rates, and related-party transactions among relevant risks. It reported no changes to the risk factors in its 2015 Form 10-K.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No subsequent events were reported through August 12, 2016.
Important facts for investors to verify
- Debt maturities, extensions, covenant status, and progress on refinancing—particularly given management’s warning that operating cash will not cover all obligations.
- Whether the $75.6 million related-party receivable and related-party mortgage notes are collectible on the expected timetable, and the collateral and repayment sources supporting them.
- Collection of the Dynex judgment, the potential outcome of foreclosure deficiency claims, and exposure under the $60.35 million mezzanine-loan guarantee.
- Conditions, allocation of proceeds, and collectibility of the Mercer Crossing subordinated note; no sale revenue has yet been recognized under deposit-method accounting.
- How much of earnings and cash flow is recurring versus attributable to acquisitions, asset-sale gains, receivable collections, and other working-capital changes.