TRANSCONTINENTAL REALTY INVESTORS INC annual report, FY2023

Transcontinental Realty Investors, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. TCI is an externally managed real estate company focused on multifamily and commercial properties, land development and mortgage investments, primarily in the Southern United States. It reported 14 multifamily properties with 2,328 units, four office properties totaling about 1.06 million square feet, and approximately 1,843 acres of land.

Financial results and key metrics

Metric	2023	2022
Total revenue	$49.9 million	$36.7 million
Net operating loss	$(10.0) million	$(9.3) million
Net income attributable to TCI	$5.9 million	$468.3 million
EPS, basic and diluted	$0.69	$54.20
Net cash used in operating activities	$(31.1) million	$(45.4) million
Net cash provided by investing activities	$26.8 million	$307.4 million
Net cash used in financing activities	$(139.0) million	$(112.4) million

All amounts above are reported in U.S. dollars. Revenue increased 36%, mainly because the seven multifamily properties received from the VAA joint venture in late 2022 were included for a full year in 2023. Multifamily segment profit rose to $14.9 million from $8.3 million; commercial segment profit declined to $4.3 million from $7.4 million. Commercial revenue fell to $14.4 million from $16.3 million, with management citing lower occupancy and higher insurance costs. Overall property operating expenses rose to $27.9 million from $18.3 million.

TCI recorded a $10.0 million net operating loss despite positive net income, reflecting significant interest income and other non-operating items. Net income attributable to TCI fell sharply from 2022, when results included a large share of the VAA portfolio sale gain and a gain on remeasurement of properties. Adjusted FFO was $22.4 million, versus $32.0 million in 2022; FFO is a supplemental, non-GAAP measure and is not a substitute for cash flow.

At year-end, total assets were $1.04 billion, total liabilities $196.1 million, and total equity $847.0 million. Mortgages and other notes payable totaled $179.1 million, down from $184.5 million; bond debt was fully repaid during 2023. Cash and cash equivalents were $36.7 million, restricted cash $42.3 million, and short-term investments $90.4 million. Notes receivable were $133.8 million and receivables from related parties were $136.2 million. The filing does not present a current ratio or a conventional operating margin measure.

TCI had no common-stock dividends declared in 2021–2023. The common stock repurchase program had 650,250 shares remaining at year-end; no shares were repurchased in 2023.

Material changes and notable items

• TCI repaid its Series C bonds in January 2023 and its remaining Series A and B bonds in May, paying off $110.4 million of bond principal during the year and recording a $1.7 million early-extinguishment loss. It then withdrew from the Tel Aviv Stock Exchange.
• Interest expense declined, while interest income rose, contributing to a $13.8 million increase in net interest income. Short-term investments funded in part by VAA sale distributions generated higher interest income.
• The VAA transaction was a major driver of 2022 comparisons: TCI’s share of joint-venture income was $468.1 million in 2022 versus $1.1 million in 2023. The 2022 results also included a $73.2 million gain on remeasurement of the seven-property portfolio acquired from VAA.
• 2023 included a $1.9 million net loss on asset sales, remeasurement or write-downs, compared with an $89.2 million gain in 2022. Foreign-currency gains also fell to $1.0 million from $20.1 million.
• Fourth-quarter 2023 net income attributable to TCI was a loss of $2.6 million, compared with income of $58.9 million in fourth-quarter 2022. Quarterly revenue was $13.5 million versus $12.8 million.

Liquidity, debt, outlook and risks

Management stated that year-end cash, cash equivalents and short-term investments, together with cash expected from notes and interest receivables in 2024, should be sufficient for cash requirements. However, the filing also cautions that excess cash from property operations over the next 12 months might not cover all obligations as due. Management expects to address liquidity needs through asset sales, refinancing and additional real-estate-secured borrowings. The independent auditor highlighted liquidity in its report.

Scheduled principal payments on mortgages and other notes totaled $23.3 million in 2024, before later-year maturities. The Windmill Farms loan was extended after year-end, on February 8, 2024, to February 2026 at 7.50%. One property loan, on 770 South Post Oak, was not in compliance with its minimum debt-service-coverage covenant at year-end; the lender requires surplus cash flow to be held in a controlled deposit account until the property meets the covenant for two consecutive quarters. TCI disclosed approximately $128.9 million of HUD-insured mortgage debt, about 72% of total indebtedness.

TCI entered into three construction loans for multifamily developments: Lake Wales ($33.0 million), Merano ($25.4 million) and Bandera Ridge ($23.5 million). No advances had been drawn on these loans as of year-end. Each project is expected to be completed in 2025, with estimated total costs of approximately $55.3 million, $51.9 million and $49.6 million, respectively. TCI also spent $5.0 million in 2023 on Windmill Farms land development; agreements cover 125 acres and approximately 470 residential lots, with estimated proceeds of $24.3 million and development expected to begin in the third quarter of 2024.

Key risks include weak office demand and low occupancy at several commercial properties (40.8%–53.2% at three of the four offices), refinancing and variable-rate interest risk, construction cost and schedule overruns, geographic concentration, illiquidity of real estate, and tenant and operating-cost pressures. TCI is externally managed by Pillar, has no employees, and shares its advisor and management relationships with controlling-stockholder affiliates. Related-party balances and dealings are significant: receivables from Pillar were $136.2 million at year-end, and related-party notes receivable were $65.1 million. TCI paid Pillar $9.2 million in advisory fees and $3.7 million in cost reimbursements in 2023; it also paid $0.4 million in development fees. Management disclosed no material environmental liability, no legal proceedings, and no subsequent event requiring adjustment to the financial statements.

The company reported effective disclosure controls and effective internal control over financial reporting as of year-end; the auditor did not provide an internal-control attestation. The audit opinion was unqualified. The auditor identified critical audit matters involving real estate impairment assessments, note-receivable collectability and straight-line commercial rent revenue.

Important facts for investors to verify

• Whether the large related-party receivable from Pillar and the $133.8 million notes-receivable balance are collectible on the expected timing and terms.
• Progress on refinancing and repayment of 2024 maturities, including the 770 South Post Oak covenant restriction and the Windmill Farms extension.
• Leasing, occupancy and rent trends at the commercial properties, and whether higher insurance and other operating costs continue to pressure property results.
• Development budgets, remaining funding needs, loan draws and completion or lease-up progress for Lake Wales, Merano, Bandera Ridge and Windmill Farms.
• How much of 2023 earnings and liquidity depends on non-operating interest income and related-party balances, given the operating loss and negative operating cash flow.
• Terms, approval processes and potential conflicts associated with transactions and fees involving Pillar, Regis, UHF and other affiliates.