Transcontinental Realty Investors, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY 2010. TCI owns and operates residential and commercial real estate and land. At year-end, it reported 50 apartment communities with 9,317 units, 16 commercial properties totaling approximately 3.6 million square feet, and 4,720 acres of land. American Realty Investors, Inc. (ARL) owned 82.7% of TCI’s common shares.
Financial results and position
| Metric | FY 2011 / Dec. 31, 2011 | FY 2010 / Dec. 31, 2010 |
|---|---|---|
| Operating revenues | $114.1 million | $110.3 million |
| Operating loss | $31.0 million | $16.6 million |
| Net loss applicable to common shares | $47.4 million; approximately $5.67 per share | $68.3 million; $8.41 per share |
| Impairment provision on notes and real estate assets | $41.8 million | $22.6 million |
| Cash from operating activities | $6.5 million | Use of $7.2 million |
| Cash from investing activities | $149.8 million | $185.8 million |
| Cash used in financing activities | $147.6 million | $173.0 million |
| Cash and cash equivalents | $20.0 million | $11.3 million |
| Total notes payable, per debt disclosure | $868.3 million | Not stated here on the same basis |
| Total assets / total equity | $1,160.3 million / $141.3 million | $1,384.8 million / $183.4 million |
All financial amounts above are consolidated; dollar values are rounded. FY 2011 rental and other property revenue rose 3.5%. Apartment revenue increased $9.6 million, while commercial revenue fell $5.8 million, primarily because of higher vacancy. Property operating expenses were $63.5 million, depreciation and amortization were $20.6 million, and mortgage and loan interest expense was $53.1 million. The filing does not provide a single company-wide operating margin measure.
Debt comprised approximately $681.6 million fixed-rate and $186.7 million variable-rate borrowings, with a 6.52% weighted-average rate at year-end. Scheduled principal payments included $202.7 million in 2012 and $100.0 million in 2013. Separately, contractual obligations, including estimated interest, show $239.9 million due in 2012. TCI reported $15.7 million of interest payable. Substantially all assets were pledged as collateral.
Material changes versus FY 2010
- Common-stockholder net loss narrowed by $20.8 million, but operating loss increased by $14.3 million and impairment expense rose by $19.2 million.
- Land sales shifted from a $15.2 million loss in 2010 to a $17.0 million gain in 2011. TCI reported selling 3,809 acres of land in 2011 for aggregate consideration of $163.1 million.
- Discontinued operations contributed $8.4 million of net income, including $18.3 million of gains on real estate sales, compared with $4.7 million of net income in 2010.
- Real estate, net, declined from $1,213.1 million to $988.3 million; total assets declined by $224.4 million. TCI reported $288.5 million of land and income-producing property sales and $45.5 million of acquisitions during 2011.
- Commercial vacancy pressured results; management said it was prioritizing apartment development and had paused some land projects pending improved economic conditions.
Outlook, risks and unusual items
- Liquidity: Management said expected 2012 cash from operations would not be sufficient to meet all obligations as they come due. Its plans include selective asset sales, refinancing or extending debt, and additional real-estate-secured borrowing. The filing gives no assurance these actions will be completed on acceptable terms.
- Defaults and related-party transactions: TCI disclosed that mortgages on properties classified as subject to sales contracts were in default, primarily for nonpayment, while it negotiated with lenders to settle or cure defaults. Many transactions involved related parties, seller financing, debt assumptions, or deferred gain recognition; some properties could transfer back to TCI. Assess pricing, recourse, guarantees and actual lender outcomes carefully.
- Concentration and credit exposure: Approximately 97% of the mortgage notes receivable portfolio, or $74.3 million, was due from affiliated entities. Cash flows and asset values are exposed to tenant vacancies, regional real-estate conditions, refinancing access and interest-rate changes. Management estimated a 100-basis-point increase in variable borrowing rates would increase 2012 interest expense by $1.9 million.
- Other unusual matters: TCI recorded substantial asset impairments; recognized certain gains only when ownership transferred to lenders; and disclosed ongoing litigation concerning the Addison Hanger properties. Preferred stockholders’ redemption request was disputed, with management expecting resolution in 2012. The company declared no common dividends for 2009–2011.
- Governance and reporting: Pillar Income Asset Management replaced Prime as external advisor and cash manager on April 30, 2011; affiliated entities also provide commercial property management and other services. TCI reported effective disclosure controls and internal control over financial reporting. The auditor issued an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
- Forward-looking outlook: Management described plans to continue apartment development and pursue property sales and refinancing, subject to liquidity and market conditions. It did not provide quantified earnings or revenue guidance.
Investor verification priorities
- Confirm the 2012 debt maturity and contractual-payment schedule, covenant status, defaults, guarantees, and refinancing or extension progress.
- Reconcile related-party property sales, deferred gains, seller-financed notes and lender transfers, including the valuation and collectability of affiliate receivables.
- Review the assumptions supporting the $41.8 million impairment provision and the remaining carrying values of land and properties subject to sales contracts.
- Track commercial occupancy, apartment lease-up, operating cash generation and the cash required for development and capital expenditures.
- Check resolution of the preferred-stock redemption dispute and Addison Hanger litigation, and review any subsequent lender settlements or asset dispositions.