Business context and reporting period
Transcontinental Realty Investors, Inc. (TCI) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. TCI invests in real estate and mortgage loans and is externally advised by Pillar Income Asset Management. At quarter-end, its portfolio included 46 apartment communities with 8,239 units, 13 commercial properties totaling about 3.4 million rentable square feet, and 4,105 acres of land. TCI has no employees; subsidiaries of American Realty Investors, Inc. (ARL) own approximately 83.8% of its common stock.
Key financial results and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q1 2013 | Q1 2012 / prior balance |
|---|---|---|
| Rental and other property revenue | $27.3 | $27.2 |
| Operating income | $5.0 | $4.3 |
| Operating margin | 18.2% | 15.7% |
| Loss from continuing operations | $(7.1) | $(5.5) |
| Net loss attributable to TCI | $(3.1) | $(4.2) |
| Net loss applicable to common shares | $(3.4), or $(0.41) per share | $(4.5), or $(0.53) per share |
| Net cash used in operating activities | $(11.8) | $(7.9) |
| Net cash provided by investing activities | $25.5 | $0.1 |
| Net cash used in financing activities | $(22.5) | $(4.4) |
| Cash and cash equivalents, quarter-end | $7.8 | $16.6 at Dec. 31, 2012 |
| Total assets | $999.6 | $1,045.3 at Dec. 31, 2012 |
| Total equity | $129.9 | $133.1 at Dec. 31, 2012 |
Quarter-end debt included $712.9 million of notes and interest payable, $18.2 million tied to assets held for sale, $53.8 million tied to properties subject to sales contracts, and $2.2 million of stock-secured notes. A separate debt schedule reports $787.1 million in total debt including accrued interest. Cash paid for interest was $10.2 million.
Changes versus the prior comparable period
- Property revenue was broadly flat, while operating income increased by $0.7 million; lower general and administrative expense contributed to the improvement.
- Interest income declined by $1.1 million, and other income fell by $1.6 million, partly offsetting lower mortgage and loan interest expense, which decreased by $2.5 million.
- Deferred borrowing-cost amortization rose by $1.5 million and loan charges and prepayment penalties rose by $1.6 million, mainly in connection with refinancings.
- TCI reported a $6.2 million gain on the sale of Verandas at City View, compared with a $3.6 million gain on discontinued-property sales in Q1 2012. Discontinued operations produced $4.1 million of net income after tax, versus $1.4 million.
- Operating cash use increased by $3.9 million. Investing cash flow improved substantially, primarily reflecting increased property-sale proceeds; financing cash use also increased, including $94.7 million of payments on maturing notes.
Outlook, risks, contingencies, and unusual items
- Liquidity: Management expected excess cash from property operations during 2013 but stated it would not be sufficient to meet all obligations as due. Planned sources include asset sales, refinancing or extending debt, and additional real-estate-secured borrowing. Cash fell to $7.8 million at quarter-end.
- Debt and rates: The company had $133.8 million of variable-rate notes at a weighted average rate of 4.56%. Management estimated a 1 percentage-point rate increase would reduce annual net income by about $1.3 million, or $0.16 per share. Some land mortgages were under modification or extension discussions. Mortgages on properties sold to related parties but still accounted for as subject to sales contracts were reported in default, primarily for nonpayment; discussions with lenders were ongoing.
- Refinancing costs: Several apartment mortgages were refinanced at 2.50% with long amortization schedules, while the quarter included refinancing-related write-offs, fees, and prepayment penalties. These charges weighed on reported results despite lower interest expense.
- Legal matters: A February 2013 appellate decision favored TCI in its long-running Dynex case, including prior jury damages awarded to TCI of approximately $12.1 million and an additional $0.3 million, but further challenges and trial-court proceedings were expected. Management estimated aggregate potential exposure from deficiency claims at no more than approximately $20 million, if any, in future years.
- Subsequent events: In May 2013, TCI resolved the Petra proceeding with a $5.0 million secured promissory note; specified early-payment provisions could forgive $3.5 million or $2.5 million depending on repayment timing. TCI also recognized an approximately $10.0 million gain after settling obligations and terminating a reacquisition option related to the Amoco building. A separate April transfer of Eton Square to its lender resulted in no gain or loss.
- Related parties and tax: Related-party dealings are significant, including advisory arrangements and substantial related-party notes receivable; terms may not be arm’s length. TCI reported a $65.8 million net deferred tax asset fully offset by a valuation allowance because realization was not considered more likely than not.
- Management cited real-estate market, leasing, financing, development, interest-rate, environmental, and property-sale risks. It reported no change to the risk factors in the 2012 Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Near-term debt maturities, lender extensions or modifications, and the company’s ability to fund obligations given its limited cash and negative operating cash flow.
- Whether planned asset sales and refinancing generate sufficient cash, and whether sale proceeds are available after secured debt repayments.
- Status and terms of defaulted mortgages on properties subject to sales contracts, including potential guarantees or other continuing obligations.
- Final outcomes and amounts in the Dynex litigation and deficiency claims, plus the payment schedule and potential forgiveness under the Petra note.
- Collection prospects for the substantial related-party notes receivable, including the extended UHF notes, and the implications of related-party governance and transactions.