Transcontinental Realty Investors, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Dollar figures below are in millions unless stated otherwise. The company owns commercial and apartment properties, land, and real-estate notes; it is externally managed and has significant related-party relationships.
Financial highlights
| Metric | Q1 2019 | Q1 2018 / prior year-end |
|---|---|---|
| Rental and other property revenue | $11.9 | $31.1 |
| Net operating income (loss) | $(1.3) | $5.2 |
| Net loss applicable to common shares | $(5.6); $(0.64) per share | $(0.5); $(0.05) per share |
| Operating cash flow | $(17.6) | $1.7 |
| Investing cash flow | $(5.4) | $(24.1) |
| Financing cash flow | $(3.4) | $30.3 |
| Cash and cash equivalents | $28.2 | $36.4 at Dec. 31, 2018 |
| Cash plus restricted cash | $80.1 | $106.6 at Dec. 31, 2018 |
| Total assets | $852.6 | $862.4 at Dec. 31, 2018 |
| Total liabilities | $477.7 | $482.0 at Dec. 31, 2018 |
Notes and interest payable were $283.9 million and bonds and bond interest payable were $151.5 million at March 31, 2019—about $435.4 million combined. Management reported a weighted-average borrowing rate of approximately 7.1%; $42.6 million of notes payable bore variable rates.
Material changes and operating context
- Revenue fell $19.2 million year over year, primarily because 49 apartment properties were contributed to the 50%-owned Victory Abode Apartments (VAA) joint venture in Q4 2018 and were no longer consolidated. Property operating expenses fell $8.5 million and depreciation and amortization fell $3.3 million for the same reason.
- Mortgage and loan interest expense declined $6.2 million to $8.0 million, also reflecting the VAA transaction. The company recorded a $1.1 million equity-method loss from VAA.
- A $5.8 million foreign-currency transaction loss replaced a $1.8 million gain in Q1 2018. The filing associates the current-quarter loss with bonds denominated in Israeli shekels and reports a January bond payment of $10.4 million principal and $5.8 million interest.
- Other income rose to $3.9 million, including $3.6 million of deferred gain recognized in connection with third-party land sales. Separately, the company sold approximately 22.3 acres for $8.7 million and recognized a $2.2 million gain.
- Operating cash use was driven in part by increases in related-party receivables and other working-capital movements. Investing outflows included development and property improvements; financing outflows included bond and debt principal payments.
Outlook, risks and contingencies
- Liquidity: Management expects excess cash from property operations in 2019 but says it will not be sufficient to discharge all obligations as due. The company plans to use land and property sales, refinancing, extensions and additional real-estate-secured borrowing to meet liquidity needs.
- Debt and maturities: The filing lists $11.0 million of bond principal maturing in 2019, with further maturities through 2023 and thereafter. Some land mortgages were being modified or extended after loan expiration; management anticipated timely resolution. A 100-basis-point increase in variable rates was estimated to increase annual interest cost by $0.1 million and reduce EPS by $0.01.
- Guarantee and litigation: TCI is the primary guarantor on a $39.1 million mezzanine loan to related party UHF; UHF was reported in covenant compliance. The company is pursuing collection of a prior court judgment against Dynex Commercial. A shareholder lawsuit filed in February 2019 alleges fiduciary-duty and related claims concerning transactions involving IOR; defendants deny the allegations and intend to defend the case. Management says ordinary-course litigation is not expected to materially affect the company.
- Other risks: Property-market and tenant risks, financing availability and cost, development delays and cost overruns, asset-sale timing, environmental liability, and reliance on key personnel. Management reported no known environmental liability expected to have a material adverse effect. The filing says risk factors were unchanged from the 2018 Form 10-K.
- Guidance and controls: No quantitative earnings or revenue guidance is provided. Management’s liquidity expectations are described above. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether planned asset sales, refinancing, loan extensions and new borrowing can cover obligations, given management’s stated cash shortfall and negative operating cash flow.
- Recoverability and timing of the $143.4 million related-party receivable, including the $136.0 million balance due from ARL, and the related-party notes and interest receivable.
- Debt terms, maturities, covenant compliance, and progress on expired or extended land mortgages; also review the currency exposure of the Israeli-shekel bonds.
- VAA’s operating performance and the effect of its losses on TCI’s equity-method investment and future cash distributions.
- Status and potential financial consequences of the UHF guarantee, the IOR shareholder litigation, and collection efforts on the Dynex judgment.
- That the sharp year-over-year revenue decline primarily reflects the VAA deconsolidation, while reported common-share loss nevertheless widened to $5.6 million.