Transcontinental Realty Investors, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts are in U.S. dollars; financial-statement amounts are in thousands unless noted. The filing is unaudited.
Business context
TCI is an externally advised real estate company investing in apartments, commercial properties, land and mortgage loans. At quarter-end it reported 59 income-producing properties, including 46 apartment communities with 8,239 units and 13 commercial properties totaling approximately 3.4 million rentable square feet, plus 4,105 acres of land. TCI has no employees; its external advisor, Pillar Income Asset Management, also advises related companies. Subsidiaries of American Realty Investors (ARL) own approximately 83.8% of TCI’s common stock.
Financial results and position
| Metric | Q1 2013 | Q1 2012 or prior date |
|---|---|---|
| Rental and other property revenue | $27.277 million | $27.215 million |
| Operating income | $4.962 million | $4.272 million |
| Operating margin | 18.2% | 15.7% |
| Continuing-operations net loss | $7.073 million | $5.542 million |
| Net loss applicable to common shares | $3.383 million; $0.41 per share | $4.484 million; $0.53 per share |
| Net cash used in operating activities | $11.841 million | $7.932 million |
| Net cash provided by investing activities | $25.542 million | $0.128 million |
| Net cash used in financing activities | $22.485 million | $4.365 million |
| Cash and cash equivalents | $7.836 million | $16.620 million at Dec. 31, 2012 |
| Total assets | $999.611 million | $1,045.344 million at Dec. 31, 2012 |
| Total equity | $129.857 million | $133.129 million at Dec. 31, 2012 |
Q1 2013 discontinued operations generated $4.075 million of net income, including a $6.190 million property-sale gain, partially offset by a $2.195 million tax expense. Without that gain, the company reported a loss from continuing operations. Cash fell by $8.784 million during the quarter. The cash-flow statement shows $24.267 million of proceeds from income-producing property sales and $2.537 million from land sales; most sale proceeds were used to cover loan obligations.
At March 31, balance-sheet notes payable were $712.855 million, with an additional $18.183 million related to assets held for sale and $53.838 million related to properties subject to sales contracts. A separate debt schedule reports total debt of $787.088 million, including stock-secured loans and accrued interest. These are different presentations; investors should reconcile the classifications and amounts. The company had $133.821 million of variable-rate notes, with a 4.56% weighted average rate; management estimated a 1% rate increase would reduce annual net income by $1.338 million, or $0.16 per share.
Changes versus the prior comparable period
- Property revenue was nearly flat, while operating income increased $0.690 million, primarily alongside lower general and administrative expense and advisory fees.
- Mortgage and loan interest expense declined $2.490 million to $9.987 million, reflecting lower-rate apartment refinancings and reduced default interest and late fees on certain commercial loans.
- Those savings were partly offset by $2.433 million of deferred borrowing-cost amortization, up $1.537 million, and $3.982 million of loan charges and prepayment penalties, up $1.590 million, associated mainly with refinancing.
- Interest income fell $1.053 million, and other income fell $1.575 million, in part because prior-year UHF-related deferred interest and consulting income did not recur.
- Net loss applicable to common shares narrowed from $4.484 million to $3.383 million, chiefly reflecting higher property-sale gains in discontinued operations. Continuing-operations loss widened by $1.531 million.
- Operating cash outflow increased $3.909 million; investing cash inflow increased substantially due to property sales, while financing outflow increased as repayments on maturing debt rose to $94.725 million.
Outlook, risks and unusual items
- Liquidity: Management expects excess cash from property operations in 2013, but explicitly says it will not be sufficient to meet all obligations as they come due. Planned sources include property and land sales, refinancings, extensions and additional real-estate-secured borrowing.
- Debt and defaults: Some land mortgages were being modified or extended. Mortgages on properties transferred to related parties but still accounted for by TCI were reported in default, primarily for nonpayment; the company was negotiating with lenders. Management said it had recorded impairments where it believed property values were below carrying basis.
- Sales and refinancing: TCI sold the 314-unit Verandas at City View for $25.3 million in January, recognizing a $6.2 million gain; the buyer assumed $18.2 million of debt. Seven apartment-property refinancings were completed, including several at 2.50% with 40-year amortization. Refinancing generated substantial one-time costs and fees.
- Contingencies: A Texas appellate ruling favored TCI in the long-running Dynex case and directed entry of a judgment based on jury findings, including $12.1 million previously awarded to TCI and subsidiaries plus $252,577 in additional damages; attorneys’ fees and interest remained to be determined, and further challenges were expected. Management estimated potential aggregate exposure from deficiency claims at up to approximately $20 million, if any, in future years.
- Subsequent events: In May, TCI settled the Petra dispute through a $5.0 million promissory note secured by collateral; the note includes potential forgiveness of $3.5 million if repaid by March 1, 2014, or $2.5 million if repaid later but before March 1, 2015. TCI also recognized an approximately $10 million gain on the Amoco building transfer after settling obligations and terminating a reacquisition option. These are post-quarter events, not Q1 results.
- Tax and governance: A $65.8 million net deferred tax asset was fully offset by a valuation allowance because realization was not considered more likely than not. Related-party transactions and external management are significant features of the business. Management reported disclosure controls effective and no material change in internal control during the quarter.
- The filing gives no quantitative earnings or operating guidance. Management’s liquidity plans depend on asset sales, refinancing and new borrowing; stated forward-looking expectations are subject to real-estate, financing, interest-rate, development and market risks.
Important facts for investors to verify
- Reconcile total debt of $787.088 million in the debt schedule with the balance-sheet debt categories, and review maturities, defaults, guarantees and covenant status.
- Assess whether the company can meet near-term obligations given $7.836 million of cash, negative operating cash flow and management’s stated funding shortfall.
- Separate recurring property performance from gains on dispositions and one-time refinancing costs; verify the status and expected timing of planned sales and refinancings.
- Review related-party loans, property transfers, cash-management arrangements and advisor fees, including the UHF notes and properties subject to sales contracts.
- Track outcomes and cash consequences of the Dynex litigation, deficiency claims and Petra settlement, including note repayment and potential forgiveness conditions.
- Confirm whether the May 2013 Amoco gain and other subsequent events affect future periods, and do not treat them as Q1 earnings.