Transcontinental Realty Investors, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Dollar amounts below are in millions unless stated otherwise. TCI owns multifamily and commercial real estate and land, primarily in the Southern United States. It reported 14 multifamily properties, four office buildings, and approximately 1,858 acres of land. The company is externally managed by Pillar and has no employees.
Financial results and position
- Third-quarter revenue: $12.5, up from $8.3 a year earlier. Rental revenue rose to $11.8 from $7.6, primarily reflecting the acquired VAA multifamily properties and lease-up of restored Landing Bayou. Segment profit was $3.1 for multifamily and $1.3 for commercial.
- Third-quarter earnings: Net operating loss improved to $1.8 from $2.8; net income attributable to TCI was $4.5, or $0.52 per share, versus $378.4, or $43.79 per share. The prior-year result included a large share of VAA’s gain on its property portfolio sale and related tax effects.
- Nine-month results: Revenue was $36.5 versus $23.9; net operating loss was $7.9 versus $9.7. Net income attributable to TCI was $8.5, or $0.98 per share, compared with $409.3, or $47.38 per share, in 2022, which also included the VAA sale-related gain. Adjusted FFO, a non-GAAP measure, was $18.8 versus $19.1.
- Margins and costs: Operating expenses exceeded revenue in both periods, although the operating loss narrowed. Multifamily segment profit improved, while commercial segment profit declined, reflecting lower occupancy at Stanford Center and higher insurance costs. Depreciation and amortization increased.
- Cash flow: Nine-month operating cash flow was positive $7.8 versus negative $5.4. Investing activities used $9.6, compared with providing $153.4 in 2022, when TCI received substantial VAA distributions and property-sale proceeds. Financing activities used $137.3, primarily reflecting repayment of bonds.
- Liquidity and debt: At September 30, cash and cash equivalents were $47.2, restricted cash $36.1, and short-term investments $134.2. Mortgages and other notes payable were $178.9; bonds payable were zero, down from $129.2 at year-end 2022. Total liabilities were $230.4 and total equity was $850.0.
- Receivables: Notes receivable were $135.4, including $66.6 from related parties; net related-party receivables were $132.3. Interest income for the first nine months was $27.0, including $16.0 from related parties.
Material changes and notable items
- TCI repaid its Series C bonds in January 2023 and Series A and B bonds in May, and withdrew from the Tel Aviv Stock Exchange. The May repayment resulted in a $1.7 loss on early extinguishment of debt.
- Multifamily revenue growth reflects consolidation of seven VAA properties acquired in November 2022 and Landing Bayou’s restoration and lease-up. Commercial revenue and segment profit declined.
- In March 2023, TCI received a further $18.0 distribution from VAA. The company also invested in short-term instruments and used proceeds from earlier VAA distributions to reduce debt and fund real estate and general purposes.
- TCI is developing a 240-unit property in Lake Wales, Florida, with expected completion in 2025 and estimated cost of $55.3, partly funded by a $33.0 construction loan. No advances had been drawn on that loan at September 30. After quarter-end, TCI entered a Pillar development agreement for a 216-unit McKinney, Texas project, estimated at $51.3 and partly funded by a $25.4 construction loan.
Outlook, risks, and contingencies
- Management expects cash, collections, and investment balances to meet cash requirements, but says it may sell properties, refinance or extend debt, or obtain additional property-secured borrowings. The filing also cautions that operating cash surplus may not be sufficient to discharge all obligations as due.
- TCI was not in compliance with the minimum debt-service coverage ratio covenant on its 770 South Post Oak loan. The lender requires surplus property cash flow to be placed in a lender-controlled account until compliance is achieved for two consecutive quarters. Management reported compliance with other loan covenants.
- Windmill Farms debt of $4.4 carried a 7.75% rate and matured February 28, 2024 after an extension. Other listed maturities include a $7.0 Forest Grove loan in May 2024, a $3.4 EQK Portage loan in November 2024, and a $5.1 RCM HC Enterprises loan in December 2024. The Lake Wales construction loan bears interest at SOFR plus 3%.
- Management cited real estate demand and occupancy, leasing and tenant credit, financing availability and interest rates, development delays and cost overruns, property sales, and economic conditions among key risks. Related-party transactions and dependence on the external manager are additional considerations; the filing notes such transactions may not be on arm’s-length terms.
- No material changes to previously disclosed risk factors were reported; no legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. No specific earnings or operating guidance was provided.
Important facts for investors to verify
- Progress toward restoring compliance with the 770 South Post Oak debt-service coverage covenant and any resulting restrictions on property cash.
- Refinancing or repayment plans for near-term maturities, particularly Windmill Farms in February 2024, and the terms and draw status of construction financing.
- Collection, collateral performance, maturity extensions, and related-party exposure within the $135.4 of notes receivable and $132.3 of related-party receivables.
- Stanford Center occupancy and the effect of commercial-property insurance costs on segment performance.
- Lake Wales and McKinney project budgets, funding, development fees payable to Pillar, and completion schedules.
- The sustainability of liquidity and operating performance without VAA sale-related distributions and other nonrecurring gains; assess GAAP results alongside FFO and cash flow.