Business context and reporting period
Transcontinental Realty Investors, Inc. (TCI) filed this unaudited Form 10-Q for the three months ended March 31, 2015. TCI invests in apartments, commercial real estate, development land, and mortgage loans. At quarter-end, it owned or held interests in 37 apartment communities with 6,024 units, eight commercial properties, and 4,053 acres of land. TCI has no employees and is externally advised by Pillar Income Asset Management; subsidiaries of American Realty Investors, Inc. (ARL) own approximately 80.9% of TCI’s common stock.
Financial performance and position
Unless otherwise noted, amounts are in millions of dollars.
| Metric | Q1 2015 | Q1 2014 / prior date |
|---|---|---|
| Rental and other property revenue | $22.304 | $18.303 |
| Net operating income (as reported) | $3.040 | $0.927 |
| Net income (loss) attributable to common shares | $(0.117); $(0.02) per diluted share | $4.277; $0.49 per diluted share |
| Operating cash flow | $22.323 | $(23.619) |
| Investing cash flow | $(4.926) | $17.829 |
| Financing cash flow | $(9.993) | $7.881 |
| Cash and cash equivalents | $19.605 | $12.201 at Dec. 31, 2014 |
| Total assets | $917.836 | $930.405 at Dec. 31, 2014 |
| Total shareholders’ equity | $233.047 | $233.448 at Dec. 31, 2014 |
Property operating expenses were $10.864 million and depreciation and amortization was $4.644 million. Net operating income divided by rental and other property revenue was approximately 13.6%, versus 5.1% in Q1 2014. Interest expense on mortgages and loans was $7.744 million; interest income was $3.760 million. TCI recorded a $2.876 million gain on land sales.
At March 31, notes and interest payable were $579.788 million, with a further $1.227 million related to real estate held for sale and $18.434 million related to real estate subject to sales contracts—approximately $599.449 million in total. Restricted cash was $35.749 million. Notes and interest receivable, net of allowance, totaled $88.751 million. The filing does not provide a clear current ratio or other conventional liquidity ratio.
Material changes versus the prior comparable period
- Revenue rose $4.001 million, or about 21.9%, reflecting growth in apartment and commercial portfolios, including acquired properties. Management reported apartment occupancy averaging above 95%.
- Property operating expenses increased $1.661 million; depreciation and amortization also increased. Reported net operating income nevertheless improved to $3.040 million.
- Common shareholders’ result moved from income of $4.277 million to a loss of $0.117 million. The comparison includes $6.053 million of gain from income-producing property sales in discontinued operations in Q1 2014, versus none in Q1 2015, and a change from $3.839 million of litigation-settlement income in 2014 to $0.073 million of settlement expense in 2015.
- TCI sold 33.387 acres in two McKinney, Texas transactions for a total of $7.257 million and recognized $2.876 million of gains. It paid down approximately $5.1 million of associated multi-tract debt.
- Operating cash flow improved by $45.942 million year over year, while investing and financing cash flows declined. Management attributed much of the operating cash-flow change to reduced obligations to related parties; cash flow also reflected changes in escrow and related-party receivables. The improvement should not be read as an equivalent increase in recurring property cash generation.
- Debt transactions included a $11.5 million refinancing of Heather Creek apartments at 3.24% and a rate reduction on the Toulon apartments mortgage to 3.24%.
Outlook, risks, contingencies, and unusual items
- Management expects excess cash from property operations in 2015, but states it will not be sufficient to meet all obligations as they come due. Plans include selling land and income-producing properties, refinancing or extending debt, and obtaining additional real-estate-secured borrowings. No quantified earnings or revenue guidance is provided.
- Some land mortgages are undergoing modification or extension discussions. TCI also disclosed defaults, primarily for nonpayment, on mortgages tied to properties transferred to a related party as part of a debt or organizational restructuring. The sales remain unrecognized; the properties and related debt remain on the balance sheet, and the deferred gain is $51.356 million.
- Variable-rate debt was $57.166 million, with a 5.64% weighted-average rate. Management estimated that a 1 percentage-point increase in base rates would reduce annual net income by approximately $0.572 million, or $0.07 per share.
- Management estimates potential aggregate exposure on deficiency claims related to foreclosed assets at no more than approximately $20 million, if any, in future years. TCI is also defending a Clapper Parties lawsuit; management disputes the claims. In the separate Dynex litigation, an appellate ruling was favorable to TCI, but further challenges and proceedings over damages, interest, and attorney fees are expected.
- TCI reported a $68.9 million net deferred tax asset with a full valuation allowance because realization was not considered more likely than not. The filing also highlights real-estate market, leasing, financing, development, interest-rate, environmental, and related-party transaction risks; it reported no changes to the risk factors in its 2014 Form 10-K.
- After quarter-end, on April 30, 2015, TCI purchased a 99% limited partner interest in Whispering Pines Apartments from an ARL subsidiary for $1.1 million plus assumption of $8.8 million of debt.
Important facts for investors to verify
- Near-term debt maturities, extension and modification outcomes, and the availability and terms of replacement financing, given management’s warning that operating cash is insufficient for all obligations.
- Collectability and repayment timing for related-party notes and receivables, including the concentration of loans connected with UHF and FBH and the status of mortgages in default.
- Whether deferred related-party property sales will close or be reversed, and the eventual debt and guarantee exposure associated with those properties.
- Recurring property-level performance behind the revenue and operating cash-flow improvements, separating acquired-asset growth, working-capital movements, and land-sale gains.
- Developments in the Dynex, Clapper, and deficiency-claim litigation, including any quantified awards, settlements, or changes in estimated exposure.