Income Opportunity Realty Investors, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 14, 2019. Dollar amounts below are in millions unless stated otherwise.
Business context
IOR is an externally advised real estate and mortgage-investment company with no employees. It reported no real estate holdings at quarter-end. Its primary income source was interest on receivables from related parties; TCI owned approximately 81.25% of IOR. Pillar Income Asset Management provides advisory and cash-management services.
Financial performance and position
| Metric | Q3 2019 / Sep. 30, 2019 | Comparable 2018 / Dec. 31, 2018 |
|---|---|---|
| Interest income, Q3 / nine months | $1.672 / $4.991 | $1.201 / $3.324 |
| Net income, Q3 / nine months | $1.030 / $3.087 | $5.988 / $7.397 |
| EPS, Q3 / nine months | $0.25 / $0.74 | $1.44 / $1.77 |
| Total assets | $99.208 | $96.123 |
| Related-party receivables: balance-sheet lines | $85.629 plus $13.578 | $82.089 plus $14.030 |
| Cash and cash equivalents | $0.001 | $0.004 |
| Total liabilities | $0.024 | $0.026 |
| Shareholders’ equity | $99.184 | $96.097 |
Operating expenses were $0.368 million in Q3 and $1.230 million for the nine months, producing operating losses of the same amounts. The filing does not provide a conventional revenue or operating-margin measure. IOR reported no outstanding debt. Nine-month operating cash flow was $3.537 million versus $1.256 million in 2018; investing cash outflow was $3.540 million versus $1.257 million. No quarterly dividends were paid in either nine-month period.
Material changes and notable items
- Q3 net income fell from $5.988 million to $1.030 million year over year; nine-month net income declined from $7.397 million to $3.087 million. The principal comparison factor was a $7.323 million land-sale gain recognized in 2018, with no such gain in 2019.
- Interest income increased by $0.471 million in Q3 and $1.667 million for the nine months, which management attributed to larger amounts owed by the Advisor and other related parties.
- For the nine months, general and administrative expense rose $0.048 million, primarily due to legal fees; advisory fees increased $0.050 million. Net-income fees to the related-party Advisor decreased $0.216 million.
- Other income of $0.147 million in the 2019 nine-month period was a City of Farmers Branch reimbursement for prior infrastructure development.
- Management described approximately $95.9 million of receivables as the primary revenue base, including $13.1 million of notes. The balance-sheet related-party receivable lines total approximately $99.2 million; the filing text does not clearly reconcile these figures.
Outlook, risks and contingencies
The filing provides no specific earnings, investment, or liquidity guidance. Management identifies collections of mortgage notes and related-company receivables as principal cash sources. Risks include reliance on related parties and their ability to repay, the terms and fairness of related-party transactions, real estate and financing-market conditions, and property-sale timing. The filing says there were no changes to the risk factors in the 2018 Form 10-K.
A shareholder lawsuit filed in February 2019 alleges fiduciary-duty breaches relating to past transactions among IOR and affiliates and seeks unspecified damages and other relief. Defendants deny the allegations, intend to defend the case, and had motions to dismiss pending. Management stated ordinary-course litigation was not expected to materially adversely affect the company. Management reported no known material environmental liability and no subsequent events requiring disclosure through November 14, 2019.
Important facts for investors to verify
- Collectability and payment terms of the concentrated related-party receivables, including the UHF mortgage notes; note payments depend on surplus cash flow, sales, or refinancing of underlying properties.
- The reconciliation of management’s approximately $95.9 million receivables figure to the approximately $99.2 million total of related-party receivable balance-sheet lines.
- Progress and potential financial exposure from the Berger litigation and the status of the pending dismissal motions.
- IOR’s very limited cash balance and dependence on receivable collections, despite reporting no debt.
- Related-party advisory and income-fee arrangements, including the Advisor’s 0.75% annual gross-asset fee and 7.5% net-income fee.