Transcontinental Realty Investors, Inc. — Q1 2016 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in millions except per-share data. The company is an externally advised real estate owner and lender; subsidiaries of American Realty Investors own approximately 80.9% of TCI’s common stock.
Business context and portfolio
At quarter-end, TCI owned or had interests in 56 income-producing properties: 48 apartment communities with 7,983 units, seven commercial properties with approximately 1.7 million rentable square feet, and a golf course. It also held approximately 3,625 acres of land. Three apartment projects were in development. Apartment occupancy averaged 95%.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Rental and other property revenue | $28.9 | $22.3 |
| Operating expenses | $24.8 | $19.3 |
| Net operating income (as presented) | $4.1 | $3.0 |
| Mortgage and loan interest expense | $12.5 | $8.3 |
| Net loss attributable to TCI | $(3.5) | $0.1 income |
| Net loss applicable to common shares | $(3.8), or $(0.43) per share | $(0.1), or $(0.02) per share |
| Net cash from operating activities | $(6.3) | $22.3 |
| Net cash from investing activities | $(2.1) | $(4.9) |
| Net cash from financing activities | $3.5 | $(10.0) |
| Cash and cash equivalents | $10.2 | $15.2 at Dec. 31, 2015 |
| Total assets / total equity | $1,102.7 / $221.3 | $1,110.2 / $225.1 at Dec. 31, 2015 |
Revenue rose $6.6 million, primarily from apartment revenue growth of $5.8 million and commercial revenue growth of $0.8 million. Property operating expenses increased $4.1 million and depreciation and amortization increased $1.2 million. Interest expense increased $4.1 million, largely reflecting new apartment acquisitions and corporate borrowing. Land-sale gains declined to $1.7 million from $2.9 million; TCI also recorded a $0.2 million loss on a commercial property sale.
At March 31, notes and interest payable on the balance sheet were $777.8 million, with a further $6.6 million of notes related to property held for sale or subject to sales contracts. The debt note reports $803.7 million of total debt before $19.3 million of unamortized borrowing costs, or $784.4 million net carrying value. Cash plus restricted cash was $40.6 million; restricted cash was $30.4 million. The filing does not provide a current ratio or a comprehensive schedule of near-term maturities in the provided text.
Operating cash outflow contrasted with $22.3 million of operating cash inflow in Q1 2015. The company attributed much of the variance to prior-period property-sale gains and changes in related-party receivables. Development and construction spending included $8.4 million in the quarter; cash from financing included $43.5 million of new borrowing, offset by $36.2 million of payments on maturing notes.
Material changes, outlook, risks and unusual items
- Liquidity: Management expects excess cash from property operations in 2016 but states it will not be enough to meet all obligations as due. TCI plans to sell land and income-producing properties, refinance or extend debt, and obtain additional real-estate-secured borrowings.
- Debt and defaults: Certain land mortgages were being modified or extended. Loans secured by properties sold to related parties were described as in default, primarily for nonpayment, with discussions underway with lenders to cure or settle them. Management reports having recorded impairment where it believed property value was below carrying basis.
- Sales-contract accounting: A 2015 Mercer Crossing land transaction had total consideration of $75 million across TCI and related entities. TCI is to hold a $50 million subordinated buyer note, but final allocation of proceeds remains undetermined. Because of the down payment and seller financing, TCI uses the deposit method and has not recognized revenue or removed the land from its books pending satisfaction of recognition criteria. Approximately 91 acres sold to related parties in other transactions also remain classified as subject to sales contracts, with sales recognition deferred.
- Contingencies: A July 2015 court judgment awarded TCI $19.5 million, including prejudgment interest, against Dynex Commercial, plus post-judgment interest at 5% annually from April 25, 2014. The company was reviewing next steps with counsel. TCI also disclosed deficiency claims related to foreclosed assets; management estimates aggregate maximum exposure of approximately $20 million, if any, in future years.
- Guarantee and related parties: TCI is the primary guarantor on a $60.35 million mezzanine loan to Unified Housing Foundation; the borrower was reported covenant-compliant at quarter-end. TCI reported a $95.6 million receivable from related parties, principally ARL, and substantial related-party notes receivable. Related-party transactions and the external advisor relationship are material areas for review.
- Preferred stock: Series D preferred dividends were $0.222 million for the quarter at a 9% annual rate. Approximately $4.7 million of dividends were accrued and unpaid to related-party holders.
- Interest-rate exposure: $38.1 million of variable-rate debt had a 5.65% weighted-average rate; a 1 percentage-point rate increase was estimated to reduce annual net income by $0.381 million, or $0.04 per share. Management cited fixed-rate HUD financing as a mitigating factor.
- Guidance and risks: No quantified earnings or revenue guidance was provided. Management cited real-estate demand, financing availability and cost, interest rates, property sales, development delays and cost overruns, and litigation among risks. It reported no material change to the risk factors in the 2015 Form 10-K.
Most important facts for investors to verify
- Debt maturities, covenant status, extensions, defaults, and the availability and cost of refinancing.
- Cash-generation assumptions behind the 2016 liquidity plan and the timing and proceeds of planned asset sales or additional borrowing.
- Collection and recoverability of the $95.6 million related-party receivable and related-party mortgage notes.
- Status and accounting treatment of the Mercer Crossing transaction, its subordinated note, and other deferred related-party land sales.
- Enforceability, collectability, and accounting recognition of the Dynex judgment, alongside potential deficiency-claim exposure.
- Development funding needs, project completion and stabilization timing, and the performance of the expanded apartment portfolio.