Transcontinental Realty Investors, Inc. — Q3 2015 Form 10-Q
Business context and period. The filing covers the three and nine months ended September 30, 2015. TCI is an externally advised real estate company with apartments, commercial properties, development land and mortgage investments. At quarter-end it reported 45 apartment communities with 7,511 units, nine commercial properties and 3,885 acres of land. TCI has no employees; Pillar Income Asset Management provides advisory and cash-management services. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Rental and other property revenue | $27.5 | $18.5 | $73.6 | $55.3 |
| Operating expenses | $24.6 | $17.3 | $63.2 | $53.0 |
| Reported net operating income | $2.9 | $1.2 | $10.4 | $2.3 |
| Net income (loss) attributable to common shares | $(6.8) | $(2.6) | $(7.0) | $3.8 |
| Diluted earnings (loss) per share | $(0.79) | $(0.29) | $(0.81) | $0.45 |
- Revenue rose about 49% in Q3 and 33% year to date, mainly from acquired properties; management reported apartment occupancy averaging approximately 95%. Operating costs and depreciation also increased as the portfolio expanded.
- Interest expense was $12.0 million in Q3 and $29.7 million year to date, versus $8.0 million and $23.3 million, respectively, in 2014. Land-sale gains were $1.0 million in Q3 and $5.1 million year to date; the company also recorded a $0.7 million gain on debt extinguishment after an Ohio apartment property was transferred to its lender.
- Total assets were $1,076.6 million at September 30, 2015, up from $930.4 million at December 31, 2014. Net real estate was $815.7 million. Shareholders’ equity was $226.5 million, down from $233.4 million.
- Balance-sheet notes and interest payable were $754.6 million, compared with $588.7 million at year-end. A separate debt table reports $763.0 million of notes and accrued interest net of deferred borrowing costs; additional debt is separately classified for property held for sale or subject to sales contracts.
- Cash and cash equivalents were $12.0 million; restricted cash was $42.2 million. For the first nine months, operating cash flow was $(44.4) million, investing cash flow $(120.8) million and financing cash flow $165.0 million. Investing included $131.2 million for acquisitions of income-producing properties; financing included $221.5 million in note proceeds. The filing attributes much of the operating cash-flow shortfall to related-party receivables, which increased by $42.6 million in the cash-flow reconciliation.
Material changes and notable items
- TCI acquired eight apartment communities during the first nine months: five from third parties for $67.5 million and three from related parties for $11.6 million, adding 1,459 units in total. It also acquired a Texas office building for $16.8 million.
- The company sold approximately 198 acres of land for $12.0 million and recognized $5.1 million of gains. No income-producing properties were sold in the first nine months of 2015; 2014 results included property-sale gains reported in discontinued operations.
- Adoption of ASU 2014-08 effective January 1, 2015 narrowed the criteria for discontinued-operations presentation, so individual property dispositions are expected to qualify less often.
- Related-party receivable from ARL increased to $101.0 million from $58.4 million at year-end. The company also reported $60.4 million of performing notes receivable from related parties.
Liquidity, debt, outlook and risks
- Management stated that property operations were expected to generate excess cash in 2015, but not enough to meet all obligations as they become due. Its planned sources include asset sales, refinancing or extending debt, and additional real-estate-secured borrowing.
- In May 2015, TCI obtained a five-year, $120 million financing commitment at 30-day LIBOR plus 10.75%; $84.4 million was advanced at closing. The loan is interest-only and secured by equity interests in residential properties. Management said it was in compliance with the loan’s financial covenants at September 30. TCI also reported land mortgages in modification or extension discussions and certain mortgages on properties sold to a related party that were in default, primarily for nonpayment.
- Variable-rate debt totaled $139.0 million at a weighted average rate of 8.76%. The filing estimates that a 1 percentage-point rate increase would reduce annual net income by $1.39 million, or $0.16 per share. Management cited fixed-rate HUD financing at a 4.03% weighted average rate as a partial offset.
- A July 2015 court judgment awarded TCI $19.5 million, including prejudgment interest, against Dynex Commercial, plus post-judgment interest and a share of collective attorneys’ fees. TCI said it was consulting counsel on next steps. In separate Clapper-related litigation, management said it believed TCI had no liability and intended to defend the company.
- Management identified real-estate market and tenant risks, financing availability and cost, interest-rate changes, development delays and cost overruns, asset-sale uncertainty, and environmental or uninsured liabilities. No changes to the prior annual report’s risk factors were reported. TCI had a $98.9 million deferred tax asset fully offset by a valuation allowance because realization was not considered more likely than not.
- No numerical earnings or revenue guidance was provided. Management’s outlook was focused on asset sales, refinancing and borrowing to address liquidity needs. The filing says disclosure controls were effective and reports no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Near-term debt maturities, the status of extensions or modifications, and the terms and covenant headroom of the high-cost mezzanine financing.
- Whether property operations, land or property sales, refinancing, and additional borrowing can cover obligations given management’s stated liquidity shortfall and negative operating cash flow.
- Collectability, timing and terms of the $101.0 million related-party receivable and related-party mortgage notes, including the nature of transactions and cash transfers involving affiliates.
- Whether the Dynex judgment is collectible and its timing, and any developments in the Clapper litigation or mortgage defaults on properties subject to related-party sales contracts.
- How much revenue growth reflects acquisitions versus same-property performance, and whether increased operating, depreciation and interest costs continue to pressure earnings.