Transcontinental Realty Investors, Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. The company invests in and operates multifamily and commercial real estate, development land, and a 50%-owned multifamily joint venture. Unless noted, dollar amounts below are in millions.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $11.8 | $12.8 |
| Net operating loss | $(2.2) | $(3.1) |
| Net income | $22.9 | $4.8 |
| Net income attributable to company; diluted EPS | $22.6; $2.62 | $4.6; $0.53 |
| Net cash used in operating activities | $(0.9) | $(7.8) |
| Cash and cash equivalents | $53.9 | $36.8 |
| Restricted cash | $21.2 | $50.2 |
| Mortgages/notes payable and bonds, net carrying amounts | $218.2 / $208.0 | $236.1 / $237.9 |
| Total assets; total equity | $837.5; $384.4 | $879.1; $361.5 |
Segment profit was $4.5 million, down from $5.1 million; multifamily profit rose to $1.7 million from $1.6 million, while commercial profit fell to $2.8 million from $3.5 million. Total segment revenues were $10.4 million, implying a segment profit margin of about 43.7%, versus 45.0% a year earlier. This is a derived segment measure, not a reported consolidated margin.
Investing activities provided $14.1 million, principally from property-sale proceeds and joint-venture distributions; financing activities used $25.2 million, mainly for debt repayments. Cash, cash equivalents and restricted cash together were $75.1 million at quarter-end, down from $87.0 million at year-end. The filing reports $12.1 million of cash interest paid.
Material changes and drivers
- Net income increased $18.1 million year over year, but was substantially driven by gains rather than recurring rental operations: $16.1 million of net gains on sales/write-downs versus $4.1 million in Q1 2020. The 2021 amount included $8.7 million of previously deferred gains recognized after UHF sold two properties, a $1.4 million gain on the Overlook transaction, and land-sale gains.
- A $7.6 million foreign-currency gain on Israeli-shekel-denominated bonds also contributed materially to reported income; the comparable 2020 gain was $7.8 million. Interest expense declined to $6.6 million from $8.0 million.
- Rental revenue declined to $10.4 million from $11.4 million. Commercial revenue was pressured by lower occupancy at Browning Place after a tenant occupying about 25% of the building left at year-end; the replacement tenant was expected to take possession in Q2 2021. Multifamily segment revenue increased.
- General, administrative and advisory expenses together declined by $1.3 million, mainly because of lower legal and consulting costs. Equity income from unconsolidated ventures was $3.3 million versus a $0.4 million loss, attributed in part to improved occupancy at VAA lease-up properties.
- Notes receivable rose to $131.1 million, including $68.6 million from related parties. Real estate, net, decreased to $351.1 million. Debt carrying amounts declined by about $47.8 million in total during the quarter.
- FFO was $13.9 million versus $8.4 million; FFO adjusted for foreign-currency gains was $6.3 million versus $0.5 million. FFO is a supplemental, non-GAAP measure and should not be treated as operating cash flow or cash available for all needs.
Outlook, risks and unusual items
- Management expects quarter-end cash and cash generated during the remainder of 2021 from notes and interest receivable to meet cash requirements. It also expects to use selective property sales, refinancing/extensions and additional real-estate-secured borrowing. Separately, the filing cautions that excess cash from property operations might not cover all obligations as due.
- Near-term refinancing remains relevant: a $14.7 million HSW Partners loan was due June 17, 2021; management said it was working with lenders on certain land-loan modifications, extensions or refinancing. The company reported compliance with all loan covenants at March 31, 2021. Other disclosed extensions included the Athens loan to 2022 and Windmill Farms loan to 2023.
- Two multifamily developments, Athens and Heritage McKinney, comprised 402 planned units, with $0.6 million of costs incurred against $59.5 million of projected total costs.
- COVID-19 had not caused significant disruption in the quarter, but management said its future effects on property markets, results and cash flows remained uncertain.
- A $10.0 million liability is recorded for a VAA property earn-out; the parties disagree on the remeasured value and have filed for arbitration. A lawsuit alleges improper property transactions involving IOR; the company intends to defend itself. A $24.8 million judgment against Dynex remains fully reserved because collection is uncertain. The $24.3 million UHF mezzanine-loan guarantee was removed after repayment in January 2021.
- Related-party dealings are significant, including advisory and other charges, and the filing cautions that such transactions may not be on arm’s-length terms. The company is controlled by American Realty Investors, and operations are externally managed.
Important facts for investors to verify
- How much of reported earnings and EPS is repeatable after excluding property gains and foreign-currency effects; review the company’s FFO reconciliation and cash flows alongside GAAP income.
- Whether the Browning Place replacement tenant occupied the space as expected and how occupancy and rental collections developed after quarter-end.
- Repayment, extension or refinancing of near-term debt maturities and the availability and terms of future borrowing.
- Collectability and repayment timing of notes receivable, particularly related-party balances, and the outcome and potential cost of the VAA earn-out arbitration and pending litigation.
- Development funding needs, project costs and the continuing effects of COVID-19 on the company’s markets and tenants.