Transcontinental Realty Investors, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Dollar amounts below are in millions unless stated otherwise. TCI is an externally advised real estate owner and lender; its portfolio included 47 apartment communities with 8,553 units, 14 commercial properties totaling about 3.6 million rentable square feet, and 4,275 acres of land. ARL subsidiaries owned approximately 84.7% of TCI’s common stock.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Rental and other property revenue | $30.2 | $28.3 | $58.9 | $54.5 |
| Operating income | $6.6 | $4.8 | $10.7 | $1.5 |
| Net income (loss) applicable to common shares | $2.0 | $(14.5) | $(2.5) | $(26.7) |
| Diluted EPS | $0.21 | $(1.72) | $(0.29) | $(3.21) |
| Operating cash flow | Not presented by quarter | $(2.4) | $(70.0) |
- Q2 returned to common-shareholder profitability, but the first-half result remained a loss. The first-half operating margin was approximately 18% of property revenue; reported operating income excludes interest and other non-operating items.
- Q2 and first-half gains on land sales were $4.7 million and $5.2 million, respectively. First-half discontinued operations contributed $2.9 million of net income, including $5.1 million of gains on property sales.
- Cash and equivalents were $17.5 million at June 30, down from $20.0 million at year-end. Investing activities provided $55.3 million, primarily from property sales; financing activities used $55.4 million.
- Total assets were $1,093.8 million, versus $1,160.3 million at December 31, 2011. Total equity was $140.1 million, versus $141.3 million.
- Debt-related balance-sheet categories totaled approximately $825.5 million at June 30, compared with approximately $884.3 million at year-end. This total includes notes payable classified with held-for-sale and sales-contract assets. Variable-rate debt was $150.5 million, with a disclosed 5.11% weighted-average rate; a 1% rate increase was estimated to reduce annual net income by $1.5 million, or $0.18 per share.
Changes versus the prior comparable periods
- First-half property revenue rose $4.4 million, primarily from apartment properties in lease-up and higher same-property apartment revenue. Management reported apartment occupancy above 95%; same-property commercial revenue declined.
- First-half common-shareholder loss narrowed by $24.2 million. The comparison reflects, among other items, no current-period impairment provision versus $5.6 million in 2011, higher recognized land-sale gains, and substantially lower general and administrative expense.
- First-half interest income rose to $7.1 million from $1.1 million, largely because TCI began accruing interest as earned on certain surplus-cash notes and recognized accrued interest related to Unified Housing Foundation. Management’s accounting change and the timing of collections make this increase important to assess for cash realization.
- First-half mortgage and loan interest expense increased $6.4 million to $32.1 million. Management attributed much of the apartment increase to write-offs of deferred financing costs and prepayment penalties on refinanced loans, as well as interest on completed properties no longer eligible for capitalization.
- Property-sale proceeds and capital spending were both lower than in first-half 2011. Management said the majority of sale proceeds went toward loan obligations.
Outlook, risks, and unusual items
- Management expected excess cash from property operations in 2012, but stated it would not be sufficient to discharge all obligations as they come due. Its liquidity plan relies on asset sales, refinancing or extending debt, and additional real-estate-secured borrowing; the filing provides no earnings or revenue guidance.
- Several properties sold to related parties remain classified as subject to sales contracts, with gain recognition deferred because of continuing involvement or other sale-accounting criteria. The filing says mortgages on many such properties are in default, primarily for nonpayment, and the company is discussing settlement or cure with lenders.
- TCI reported $79.2 million of performing notes receivable, including approximately $79.2 million from affiliates and related parties, and $36.3 million payable to affiliates. Related-party transactions include property transfers, financing, advisory fees and other services; ARL controls TCI and Pillar advises both companies.
- TCI refinanced numerous apartment mortgages during the period, generally with long amortization schedules and maturities extending to 2045–2052. These transactions involve ongoing debt-service obligations despite lower stated rates on many new loans.
- On July 11, 2012, after quarter-end, Dunes Plaza was sold for $3.0 million. Management reported ordinary-course litigation and environmental exposures but did not expect them to have a material adverse effect. It also stated that the risk factors were unchanged from the 2011 Form 10-K.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Near-term debt maturities, loan defaults, refinancing availability, and the company’s ability to generate liquidity through asset sales and additional borrowing.
- Cash collections and recoverability of the large related-party note portfolio, including the interest accrued on surplus-cash notes.
- Terms, valuation, and status of related-party property sales, deferred gains, guarantees, and lender discussions for defaulted loans.
- How much reported earnings depends on land and property sale gains, discontinued operations, and noncash or newly accrued interest income.
- Reconciliation of the disclosed debt categories and cash-flow movements to detailed loan schedules and subsequent filings.