INCOME OPPORTUNITY REALTY INVESTORS INC /TX/ - Quarter Report: 2013 September (Form 10-Q)

iot10q093013.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-14784

INCOME OPPORTUNITY REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)


Nevada	75-2615944
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

1603 Lyndon B. Johnson Freeway, Suite 800, Dallas, Texas 75234

(Address of principal executive offices)

(Zip Code)

(469) 522-4200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. xYes ¨No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes ¨No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨	Accelerated filer	¨

Non-accelerated filer ¨ (Do not check if smaller reporting company)	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes xNo

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Common Stock, $.01 par value	4,168,214
(Class)	(Outstanding at November 5, 2013)

INCOME OPPORTUNITY REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at September 30, 2013 (unaudited) and December 31, 2012	3

	Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)	4

	Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2013 (unaudited)	5

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 6.	Exhibits	27

SIGNATURES		28

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
	September 30,			December 31,
	2013			2012
	(dollars in thousands, except par value amount)
Assets
Real estate land holdings, at cost	$	24,511		$	24,511
Total real estate		24,511			24,511

Notes and interest receivable from related parties		28,388			27,002
Less allowance for doubtful accounts		(1,826	)		(1,826	)
Total notes and interest receivable		26,562			25,176

Cash and cash equivalents		3			2
Receivable and accrued interest from related parties		57,972			58,534
Other assets		2,226			1,283
Total assets	$	111,274		$	109,506

Liabilities and Shareholders’ Equity
Liabilities:
Notes and interest payable	$	28,350		$	28,508
Deferred gain (from sales to related parties)		5,127			5,127
Accounts payable and other liabilities		109			149
Total liabilities		33,586			33,784
Shareholders’ equity:
Common stock, $0.01 par value, authorized 10,000,000. issued 4,173,675 and outstanding 4,168,214 shares in 2013 and 2012		42			42
Treasury stock at cost, 5,461 shares in 2013 and 2012		(39	)		(39	)
Paid-in capital		61,955			61,955
Retained earnings		15,730			13,764
Total shareholders' equity		77,688			75,722
Total liabilities and shareholders' equity	$	111,274		$	109,506

The accompanying notes are an integral part of these consolidated financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
	(dollars in thousands, except per share amounts)
Revenues:
Rental and other property revenues	$	-		$	-		$	-		$	-

Expenses:
Property operating expenses (including $13 and $11 for the three months and $36 and $53 for the nine months ended 2013 and 2012, respectively, from related parties)		49			14			72			60
General and administrative (including $60 and $34 for the three months and $178 and $115 for the nine months ended 2013 and 2012, respectively, from related parties)		192			42			536			283
Net income fee to related party		55			23			159			141
Advisory fee to related party		209			206			621			609
Total operating expenses		505			285			1,388			1,093
Net operating loss		(505	)		(285	)		(1,388	)		(1,093	)

Other income (expenses):
Interest income from related parties		1,427			972			4,251			3,868
Mortgage and loan interest		(297	)		(276	)		(879	)		(828	)
Earnings from unconsolidated subsidiaries and investees		-			(14	)		-			(37	)
Total other income		1,130			682			3,372			3,003
Net income from continuing operations before tax		625			397			1,984			1,910
Income tax expense		-			(14	)		(6	)		(17	)
Net income from continuing operations		625			383			1,978			1,893
Discontinued operations:
Net loss from discontinued operations		-			(41	)		(18	)		(48	)
Gain (loss) on the sale of real estate from discontinued operations		-			-			-			-
Income tax benefit from discontinued operations		-			14			6			17
Net loss from discontinued operations		-			(27	)		(12	)		(31	)
Net income	$	625		$	356		$	1,966		$	1,862

Earnings per share - basic
Net income from continuing operations	$	0.15		$	0.09		$	0.47		$	0.45
Net loss from discontinued operations		-			(0.01	)		-			(0.01	)
Net income applicable to common shares	$	0.15		$	0.08		$	0.47		$	0.44

Earnings per share - diluted
Net income from continuing operations	$	0.15		$	0.09		$	0.47		$	0.45
Net loss from discontinued operations		-			(0.01	)		-			(0.01	)
Net income applicable to common shares	$	0.15		$	0.08		$	0.47		$	0.44

Weighted average common shares used in computing earnings per share		4,168,214			4,168,214			4,168,214			4,168,214
Weighted average common shares used in computing diluted earnings per share		4,168,214			4,168,214			4,168,214			4,168,214

The accompanying notes are an integral part of these consolidated financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2013
(unaudited, dollars in thousands)



			Common Stock				Treasury			Paid-in		Retained
	Total		Shares		Amount		Stock			Capital		Earnings

Balance, December 31, 2012	$	75,722		4,173,675	$	42	$	(39	)	$	61,955	$	13,764
Net income		1,966		-		-		-			-		1,966

Balance, September 30, 2013	$	77,688		4,173,675	$	42	$	(39	)	$	61,955	$	15,730

The accompanying notes are an integral part of these consolidated financial statements.

INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
	For the Nine Months Ended
	September 30,
	2013			2012
	(dollars in thousands)
Cash Flow From Operating Activities:
Net income	$	1,966		$	1,862
Adjustments to reconcile net income applicable to common shares to net cash flows from operating activities:
Earnings from unconsolidated subsidiaries and investees		-			37
Decrease (increase) in assets:
Accrued interest receivable		(1,386	)		2,327
Other assets		(943	)		40
Decrease in liabilities:
Accrued interest payable		(158	)		-
Other liabilities		(40	)		(10	)
Net cash provided by (used in) operating activities		(561	)		4,256

Cash Flow From Investing Activities:
Proceeds from notes receivable		-			2,990
Related party receivables		562			(7,047	)
Net cash provided by (used in) investing activities		562			(4,057	)

Cash Flow From Financing Activities:
Payments on notes payable		-			(189	)
Net cash used in financing activities		-			(189	)

Net increase in cash and cash equivalents		1			10
Cash and cash equivalents, beginning of period		2			1
Cash and cash equivalents, end of period	$	3		$	11


Supplemental disclosures of cash flow information:
Cash paid for interest	$	879		$	828

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

As used herein, the terms “IOT”, “the Company”, “we”, “our”, “us” refer to Income Opportunity Realty Investors, Inc., a Nevada corporation, individually or together with its subsidiaries. Income Opportunity Realty Investors, Inc. is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985. The Company is headquartered in Dallas, Texas, and its common stock trades on the New York Stock Exchange Euronext (“NYSE MKT”) under the symbol (“IOT”).

Transcontinental Realty Investors, Inc. (“TCI”) owns approximately 81.1% of the Company’s common stock. Effective July 17, 2009, IOT’s financial results were consolidated with those of American Realty Investors, Inc. (“ARL”) and TCI and their subsidiaries. IOT is a “C” Corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with ARL and its ultimate parent, Realty Advisors Management, Inc. We have no employees.

IOT invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing the affairs of IOT, and for setting the policies which guide it, the day-to-day operations of IOT are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with IOT’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and ARL.

Our primary business is investing in real estate and mortgage receivables. Land held for development or sale is our sole operating segment. At September 30, 2013, our land consisted of 178.1 acres of land held for future development or sale. All of our land holdings are located in Texas. The principal source of revenue for the Company is interest income on over $25.4 million of note receivables due from related parties.

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, or GAAP, have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

The year-end Consolidated Balance Sheet at December 31, 2012, was derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Certain 2012 financial statement amounts have been reclassified to conform to the 2013 presentation, including adjustments for discontinued operations.

Principles of Consolidation

The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions. As of September 30, 2013, IOT was not the primary beneficiary of a VIE.

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in net income. Our investment in TCI Eton Square, LP was accounted for under the equity method. As of April 8, 2013 the underlying asset owned by this entity was transferred to the existing lender in a settlement agreement and IOT no longer recorded on its books, an investment in this entity. The investment was previously written down to a zero basis and at the date of the transfer IOT recorded no gain or loss on the transfer.

Real Estate, Depreciation and Impairment

Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements – 10-40 years; furniture, fixtures and equipment – 5-10 years). The Company continually evaluates the recoverability of the carrying value of our real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment”. Factors considered by management in evaluating impairment of our existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

Real Estate Held For Sale

We periodically classify real estate assets as “held for sale”. An asset is classified as held for sale after the approval of our Board of Directors, after an active program to sell the asset has commenced and if the sale is probable. One of the deciding factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is probable within the year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

Cost Capitalization

Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. We capitalize interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average interest rate of non-project specific debt.

We capitalize interest, real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready for its intended use, but no later than one year from the cessation of major construction activity.

We capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.

Fair Value Measurement

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures”, to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:


Level 1 –	Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2 –	Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 –	Unobservable inputs that are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Related Parties

We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

Newly Issued Accounting Pronouncements

We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our Consolidated Financial Statements, including that which we have not yet adopted. We do not believe that any such guidance will have a material effect on our financial position or results of operations.

NOTE 2. REAL ESTATE ACTIVITY

Our properties consist of 178.1 acres of land, located in Texas, held for future development or sale.

Land	Location	Acres
Mercer Crossing/Travelers Land	Farmers Branch, TX		178.10
	Total Land/Development		178.10

The Company entered into a sales contract with an independent third party, for 100 acres of Travelers land for $17.5 million or $4.02/sf. The buyer is entitled to an inspection period and has not terminated the agreement. This land is collateral on a mortgage note, see Note 5. “Notes and Interest Payable” for details.

NOTE 3. NOTES AND INTEREST RECEIVABLE FROM RELATED PARTIES

Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens on the underlying real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.

At September 30, 2013, we had junior mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $26.6 million.

Our mortgage notes receivable consist of junior mortgage loans (dollars in thousands):

		Maturity	Interest
Borrower		Date	Rate	Amount	Security
Performing loans:
	Unified Housing Foundation, Inc. (Echo Station)	12/32	12.00%	$ 1,481	100% Membership Interest in Unified Housing of Temple, LLC
	Unified Housing Foundation, Inc. (Lakeshore Villas)	12/32	12.00%	2,000	Unsecured
	Unified Housing Foundation, Inc. (Lakeshore Villas)	12/32	12.00%	6,363	Membership Interest in Housing for Seniors of Humble, LLC
	Unified Housing Foundation, Inc. (Limestone Canyon)	12/32	12.00%	3,057	100% Membership Interest in Unified Housing of Austin, LLC
	Unified Housing Foundation, Inc. (Limestone Ranch)	12/32	12.00%	2,250	100% Membership Interest in Unified Housing of Vista Ridge, LLC
	Unified Housing Foundation, Inc. (Parkside Crossing)	12/32	12.00%	1,936	100% Membership Interest in Unified Housing of Parkside Crossing, LLC
	Unified Housing Foundation, Inc. (Sendero Ridge)	12/32	12.00%	5,174	100% Membership Interest in Unified Housing of Sendero Ridge, LLC
	Unified Housing Foundation, Inc. (Timbers of Terrell)	12/32	12.00%	1,323	100% Membership Interest in Unified Housing of Terrell, LLC
	Unified Housing Foundation, Inc. (Tivoli)	12/32	12.00%	1,826	100% Membership Interest in Unified Housing of Tivoli, LLC
	Accrued interest			2,978
Total Performing				$ 28,388

	Allowance for doubtful accounts			(1,826)
Total				$ 26,562

All are related party notes.

The company has various notes receivable from Unified Housing Foundation, Inc. (“UHF”). UHF is determined to be a related party to the company due to our significant investment in the performance of the collateral secured under the notes receivable and its consulting agreement with our parent, TCI.

The loans mature on December 31, 2032 with interest rates of 12.0%. Payments are due from surplus cash flow from operations, sale or refinance of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. The allowance on the notes was a purchase allowance that was netted against the notes when acquired. These notes are cross-collateralized to the extent that any surplus cash available from the sale or refinancing of the underlying properties.

As of January 1, 2013, the Company agreed to extend the maturity on the notes receivable from UHF for an additional term of five years for the early termination of the preferred interest rate period. The original notes gave a five-year period of preferred interest rate at 5.25%, before returning to the original note rate of 12.0%.

NOTE 4. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES AND INVESTEES

Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting.

Our interest in TCI Eton Square, LP was 0% and 10% as of September 30, 2013 and September 30, 2012, respectively. We accounted for this interest under the equity method because the general partner is a related party and exercised significant influence over the operations and financial activities. Accordingly, the investment was carried at cost, adjusted for the companies’ proportionate share of earnings or losses. Due to the losses accounted for under the equity method, our investment was at zero.

On April 8, 2013 the underlying asset owned by this entity was transferred to the existing lender in a settlement agreement and was no longer recorded as an investment. IOT recorded no gain or loss on the transfer.

The market value as of September 30, 2013 was zero, due to the transfer. The market value as of September 30, 2012 was not determinable as there were no traded markets, either active or inactive, for this investment.

The following is a summary of the financial position and results of operations from our investees (dollars in thousands):

As of September 30,	2013			2012
Real estate, net of accumulated depreciation	$	-		$	12,586
Other assets		-			659
Notes payable		-			(9,363	)
Other liabilities		-			(3,950	)
Partners' capital		-			68

For the Nine Months Ended September 30,		2013			2012
Rental and other property revenues	$	224		$	866
Depreciation and amortization		(140	)		(350	)
Property operating expenses		(224	)		(636	)
General and administrative		(5	)		-
Mortgage and loan interest		(155	)		(314	)
Loss from continuing operations		(300	)		(434	)
Income from discontinued operations		-			-
Net loss	$	(300	)	$	(434	)

Company's proportionate share of earnings	$	(30	)	$	(43	)

NOTE 5. NOTES AND INTEREST PAYABLE

The following table lists the mortgage notes payable as of September 30, 2013 (dollars in thousands):

Lender	Maturity	Principal Balance
BDF TCI Mercer III, LLC*	04/12/13	$	27,710
Propel Financial Services	06/01/20		4
Accrued interest			636

		$	28,350

* This mortgage note represents the allocation, based upon the original funding, of a note with an aggregate outstanding balance of $36.0 million and accrued interest of $0.9 million as of September 30, 2013. The remaining balance of this note, $8.3 million, is held on the books of TCI, the Company’s parent. As a joint grantor of the mortgage loan, we have joint and several liability of the obligations and liabilities of the loan in its entirety, which include, but are not limited to, payment of all unpaid and accrued interest and principal for the entire outstanding loan balance. Since April 11, 2010, interest has accrued on the loan and as of April 12, 2011, the borrower is in default under the current loan documents and the lender accelerated the maturity of the indebtedness. On April 28, 2011, a one-year forbearance agreement was entered into between the borrower, the guarantor and the lender in order to temporarily suspend the lender from the exercise of its rights and remedies under the loan documents and foreclose on the property. The forbearance agreement has been subsequently modified and the Fourth Modification to the Forbearance Agreement expired on April 12, 2013.

On June 7, 2013 a wholly-owned subsidiary of the Company entered into a Settlement and Release Agreement and a Loan Purchase Agreement to purchase at a discount the Mercer/Travelers land mortgage note due to BDF TCI Mercer III, LLC (“BDF”), the existing lender. The Company is required to make four deposits of $250,000 through September 5, 2013 and close on October 5, 2013.

On October 5, 2013, the Loan Purchase Agreement was modified. The Company was required to pay an extension fee of $300,000 and the close was extended to November 5, 2013. The Company has the option to pay a second extension fee of $400,000 and extend the close to December 5, 2013. A final lump sum payment of $28,663,277 will be due at closing. The Company also agreed to purchase an obligation known as the Lamar land loan, due by a subsidiary of its parent, TCI, from BDF. The Lamar land loan is to be purchased for $1,836,723. This loan will also be due at closing.

From June 7, 2013 through September 5, 2013, the Company was still obligated to make monthly mortgage payments of $150,000 for the Travelers land loan according to the Fourth Modification to the Forbearance Agreement, and $3,500 for the Lamar land loan.

There is also a property tax loan in the amount of $4,256 that accrues interest at 12.50% and matures on June 1, 2020.

NOTE 6. RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES

From time to time, IOT and its related parties have made unsecured advances to each other which include transactions involving the purchase, sale, and financing of property. In addition, we have a cash management agreement with our Advisor. The agreement provides for excess cash to be invested in and managed by our Advisor, Pillar, a related party. The table below reflects the various transactions between IOT, Pillar, and TCI (dollars in thousands):

	TCI			Pillar			Total
Related party receivable, December 31, 2012	$	58,534		$	-		$	58,534
Cash transfers		-			(348	)		(348	)
Advisory fees		-			(621	)		(621	)
Net income fee		-			(159	)		(159	)
Cost reimbursements		-			(178	)		(178	)
Expenses paid by advisor		-			(8	)		(8	)
Financing (mortgage payments)		-			(1,039	)		(1,039	)
Interest income		1,791			-			1,791
Purchase of obligation		(2,353	)		2,353			-
Related party receivable, September 30, 2013	$	57,972		$	-		$	57,972

We have historically engaged in and will continue to engage in certain business transactions with related parties, including but not limited to asset acquisitions and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.

NOTE 7. OPERATING SEGMENTS

Our segments are based on management’s method of internal reporting which classifies its operations by property type. The segments are land and other. Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow.

Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships, and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.

The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.

Presented below is the operating segment information for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):

For the Three Months Ended September 30, 2013	Land			Other		Total
Rental and other property revenues	$	-		$	-	$	-
Property operating expenses		49			-		49
Mortgage and loan interest		297			-		297
Interest income from related parties		-			1,427		1,427
Segment operating income (loss)	$	(346	)	$	1,427	$	1,081

Real estate assets		24,511			-		24,511


For the Three Months Ended September 30, 2012	Land			Other		Total
Rental and other property revenues	$	-		$	-	$	-
Property operating expenses		14			-		14
Mortgage and loan interest		276			-		276
Interest income from related parties		-			972		972
Segment operating income (loss)	$	(290	)	$	972	$	682

Real estate assets		24,511			-		24,511

The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:

	For the Three Months Ended
	September 30,
	2013			2012
Segment operating income	$	1,081		$	682
Other non-segment items of income (expense)
General and administrative		(192	)		(42	)
Net income fee due to related party		(55	)		(23	)
Advisory fee to related party		(209	)		(206	)
Equity from unconsolidated subsidiaries and investees		-			(14	)
Income tax expense		-			(14	)
Net income from continuing operations	$	625		$	383

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:

	September 30,
	2013		2012
Real estate assets	$	24,511	$	24,511
Notes and interest receivable		26,562		24,469
Other assets		60,201		60,724
Total assets	$	111,274	$	109,704

For the Nine Months Ended September 30, 2013	Land			Other		Total
Rental and other property revenues	$	-		$	-	$	-
Property operating expenses		72			-		72
Mortgage and loan interest		879			-		879
Interest income from related parties		-			4,251		4,251
Segment operating income (loss)	$	(951	)	$	4,251	$	3,300

Real estate assets		24,511			-		24,511


For the Nine Months Ended September 30, 2012	Land			Other		Total
Rental and other property revenues	$	-		$	-	$	-
Property operating expenses		60			-		60
Mortgage and loan interest		828			-		828
Interest income from related parties		-			3,868		3,868
Segment operating income (loss)	$	(888	)	$	3,868	$	2,980

Real estate assets		24,511			-		24,511

The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:

	For the Nine Months Ended
	September 30,
	2013			2012
Segment operating income	$	3,300		$	2,980
Other non-segment items of income (expense)
General and administrative		(536	)		(283	)
Net income fee due to related party		(159	)		(141	)
Advisory fee to related party		(621	)		(609	)
Equity from unconsolidated subsidiaries and investees		-			(37	)
Income tax expense		(6	)		(17	)
Net income from continuing operations	$	1,978		$	1,893

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:

	September 30,
	2013		2012
Real estate assets	$	24,511	$	24,511
Notes and interest receivable		26,562		24,469
Other assets		60,201		60,724
Total assets	$	111,274	$	109,704

NOTE 8. DISCONTINUED OPERATIONS

We apply the provisions of ASC Topic 360, “Property, Plant and Equipment”, which requires that long-lived assets that are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.

Discontinued operations relates to properties that were either sold or held for sale as of the period ended September 30, 2013. Included in the loss from discontinued operations are legal expenses relating to a commercial property sold in 2011. There were no properties sold in 2013. The gain on sale of the properties, if applicable, is also included in discontinued operations for those years.

The following table summarizes revenue and expense information for the properties sold and held for sale (dollars in thousands):

	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2013		2012			2013			2012
Revenues:
Rental and other property revenues	$	-	$	-		$	-		$	-

Expenses:
Property operating expense		-		1			-			1
General and administrative		-		40			18			47
Total operating expenses		-		41			18			48
Loss from discontinued operations		-		(41	)		(18	)		(48	)

Income tax benefit		-		14			6			17
Net loss from discontinued operations	$	-	$	(27	)	$	(12	)	$	(31	)

Our application of ASC Topic 360 results in the presentation of the net operating results of these qualifying properties sold or held for sale during 2013 as income from discontinued operations. This does not have an impact on net income available to common shareholders and only impacts the presentation of these properties within the Consolidated Statements of Operations.

NOTE 9. COMMITMENTS AND CONTINGENCIES

Litigation. IOT is involved in various lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on the Company’s financial condition, results of operations or liquidity.

NOTE 10. SUBSEQUENT EVENTS

There were no subsequent events for the period ending September 30, 2013.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will”, “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

•

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

•

risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments;

•

demand for apartments and commercial properties in the Company’s markets and the effect on occupancy and rental rates;

•

the Company’s ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties;

•

risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;

•

failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

•

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

•

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

•

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

•

potential liability for uninsured losses and environmental contamination; and

•

risks associated with our dependence on key personnel whose continued service is not guaranteed.

The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements, include among others, the factors listed and described in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2012.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise as we file them with the SEC.

Overview

We are an externally advised and managed real estate investment company that currently owns land held for development or sale. As of September 30, 2013, we owned or had interests in 178.1 acres of land, located in Texas and held for future development or sale. We have no employees.

Our primary source of revenue is from the interest income on over $25.4 million of notes receivable due from related parties.

We have historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing the affairs of IOT, and for setting the policies which guide it, the day-to-day operations of IOT are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with IOT’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and ARL.

Critical Accounting Policies

We present our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The FASB Accounting Standards Codification (“ASC”) is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, we no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, we refer to the ASC Codification as the sole source of authoritative literature.

The accompanying financial statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders, as a group, lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

Real Estate

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-market” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with ASC Topic 805 “Business Combinations”, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

We record acquired “above-market” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate – General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We cease capitalization when a building is considered substantially complete and ready for its intended use, but no later than one year from the cessation of major construction activity.

Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

ASC Topic 360 “Property, Plant and Equipment” requires that qualifying assets and liabilities and the results of operations that have been sold, or otherwise qualify as held for sale, be presented as discontinued operations in all periods presented if the property operations are expected to be eliminated and we will not have significant continuing involvement following the sale. The components of the property’s net income that is reflected as discontinued operations include the net gain (or loss) upon the disposition of the property held for sale, operating results, depreciation and interest expense (if the property is subject to a secured loan). We generally consider assets to be held for sale when the transaction has been approved by our Board of Directors, or a committee thereof, and there are no known significant contingencies relating to the sale, such that the property sale within one year is considered probable. Following the classification of a property as held for sale, no further depreciation is recorded on the assets.

Depreciation and Impairment

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other project costs incurred during the period of development.

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

Recognition of Revenue

Our revenues are composed of interest income on notes receivable. In accordance with ASC 805 “Business Combinations”, we recognize rental revenue of acquired in place and “above-market” and “below-market” leases at their fair values over the terms of the respective leases, as applicable.

Revenue Recognition on the Sale of Real Estate

Sales and the associated gains or losses of real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC Topic 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

Non-Performing Notes Receivable

We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

Interest Recognition on Notes Receivable

We record interest income as earned in accordance with the terms of the related loan agreements.

Allowance for Estimated Losses

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 4 “Notes and Interest Receivable from Related Parties” for details on our notes receivable.

Fair Value of Financial Instruments

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures and includes three levels defined as follows:


Level 1 –	Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2 –	Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 –	Unobservable inputs that are significant to the fair value measurement.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Related parties

Results of Operations

The following discussion is based on our “Statement of Operations” for the three months and nine months ended September 30, 2013 and 2012, as included in Part I, Item 1. “Financial Statements” of this report. It is not meant to be an all-inclusive discussion of the changes in our net income applicable to common shares. Instead, we have focused on significant fluctuations within our operations that we feel are relevant to obtain an overall understanding of the change in income applicable to common shareholders.

Our current operations consist of land held for future development or sale. Our operating expenses relate mainly to the administration and maintenance costs associated with the land held for development or sale.

We also have other income and expense items. We receive interest income from the funds deposited with our Advisor at a rate of prime plus 1%. We have receivables from related parties which also provide interest income. Our other significant expense item is from the mortgage expense which includes interest payments on the debt secured by our land portfolio.

Comparison of the three months ended September 30, 2013 to the same period ended 2012

We had net income of $625,000 or $0.15 per diluted earnings per share for the period ended September 30, 2013, as compared to net income of $356,000 million or $0.08 per diluted earnings per share for the same period ended 2012.

Revenues

Land held for development or sale is our sole operating segment. There was no income generated from this segment for the three months ended September 30, 2013, nor for the prior period ended 2012.

Expenses

Property operating expenses were $49,000 for the three months ended September 30, 2013. This represents an increase of $35,000, as compared to the prior period operating expenses of $14,000. This increase was due to expenses for professional services relating to the land portfolio.

General and administrative expenses were $192,000 for the three months ended September 30, 2013. This represents an increase of $150,000, as compared to the prior period general and administrative expenses of $42,000. This increase was primarily due to an increase in professional fees and the cost reimbursements to our Advisor.

Other income (expense)

Interest income was $1.4 million for the three months ended September 30, 2013. This represents an increase of $0.4 million as compared to the prior period interest income of $1.0 million. This increase was due to an agreement made on January 1, 2013, whereby the Company extended the maturity on the surplus cash flow notes receivable from UHF for an additional term of five years in exchange for the early termination of the preferred interest rate. The original notes gave a five-year period of preferred interest rate at 5.25%, before returning to the original note rate of 12.0%.

Mortgage and loan interest was $297,000 for the three months ending September 30, 2013. This represents an increase of $21,000 as compared to the prior period mortgage and loan interest expense of $276,000. The lender for the Mercer/Travelers land mortgage was applying 100% of the monthly debt service to principal until the October 2012 extension of the forbearance agreement. The lender reallocated the payments to accrued interest, thereby changing the amount of interest owed.

There were no earnings from unconsolidated subsidiaries and investees relating to IOT’s investment in TCI Eton Square, LP for the three months ended September 30, 2013. This investment was accounted for under the equity method and recognized its portion of the prior period earnings until IOT recorded the sale of its investment on April 8, 2013.

The following table summarizes revenue and expense information for the properties sold and held for sale (dollars in thousands):

	For the Three Months Ended
	September 30,
	2013		2012
Revenues:
Rental and other property revenues	$	-	$	-

Expenses:
Property operating expense		-		1
General and administrative		-		40
Total operating expenses		-		41
Loss from discontinued operations		-		(41	)

Income tax benefit		-		14
Net loss from discontinued operations	$	-	$	(27	)

Comparison of the nine months ended September 30, 2013 to the same period ended 2012

We had net income of $2.0 million or $0.47 per diluted earnings per share for the nine months ended September 30, 2013, as compared to a net income of $1.9 million or $0.44 per diluted earnings per share for the same nine months ended 2012.

Revenues

Land held for development or sale is our sole operating segment. There was no income generated from this segment for the nine months ended September 30, 2013, nor for the prior period ended 2012.

Expenses

Property operating expenses were $72,000 for the nine months ended September 30, 2013. This represents an increase of $12,000, as compared to the prior period operating expenses of $60,000. This increase was due to an increase in professional services relating to the land portfolio, offset by a decrease in POA fees.

General and administrative expenses were $536,000 for the nine months ended September 30, 2013. This represents an increase of $253,000 as compared to the prior period expenses of $283,000. This increase relates to the other portfolio and was primarily due to an increase in professional fees and the cost reimbursements to our Advisor.

Other income (expense)

Interest income was $4.3 million for the nine months ended September 30, 2013. This represents an increase of $0.4 million as compared to the prior period interest income of $3.9 million. This increase was due to an agreement made on January 1, 2013, whereby the Company extended the maturity on the surplus cash flow notes receivable from UHF for an additional term of five years in exchange for the early termination of the preferred interest rate. The original notes gave a five-year period of preferred interest rate at 5.25%, before returning to the original note rate of 12.0%.

Mortgage loan and interest expense was $879,000 for the nine months ended September 30, 2013. This represents an increase of $51,000 as compared to the prior period expense of $828,000. The lender for the Mercer/Travelers land mortgage was applying 100% of the monthly debt service to principal until the October 2012 extension of the forbearance agreement. The lender reallocated the payments to accrued interest, thereby changing the amount of interest owed.

There were no earnings from unconsolidated subsidiaries and investees relating to IOT’s investment in TCI Eton Square, LP for the nine months ended September 30, 2013. This investment was accounted for under the equity method and recognized its portion of the prior period earnings until IOT recorded the sale of its investment on April 8, 2013.

Discontinued operations relates to properties that were either sold or held for sale as of the period ended September 30, 2013. There were no properties sold in 2013. The gain on sale of the properties, if applicable, is also included in discontinued operations for those years. The following table summarizes revenue and expense information for the properties sold and held for sale (dollars in thousands):

	For the Nine Months Ended
	September 30,
	2013			2012
Revenues:
Rental and other property revenues	$	-		$	-

Expenses:
Property operating expense		-			1
General and administrative		18			47
Total operating expenses		18			48
Loss from discontinued operations		(18	)		(48	)

Income tax benefit		6			17
Net loss from discontinued operations	$	(12	)	$	(31	)

Liquidity and Capital Resources

General

Our principal liquidity needs are:

•

meet debt service requirements including balloon payments;

•

fund normal recurring expenses;

•

fund capital expenditures; and

•

fund new property acquisitions.

Our primary source of cash is from rents, collection on receivables, sale of assets, and the refinancing of existing mortgages. We will refinance debt obligations as they become due and generate cash from interest payments on notes receivable and the sale of properties. However, if refinancing and excess cash from operations does not prove to be sufficient to satisfy all our obligations as they mature, we may sell real estate, refinance real estate, and incur additional borrowings secured by real estate to meet our cash requirements.

Management believes that it has adequate funding sources to complete the loan buyout described in Note 5. “Notes and Interest Payable” from the proceeds from the sales contract described in Note 2 “Real Estate Activity” and from securing new financing.

Cash Flow Summary

The following summary discussion of our cash flows is based on the Statement of Cash Flows from Part I, Item 1. “Financial Statements” and is not meant to be an all inclusive discussion of the changes in our cash flows (dollars in thousands):

	September 30,
	2013			2012			Variance

Net cash provided by (used in) operating activities	$	(561	)	$	4,256		$	(4,817	)
Net cash provided by (used in) investing activities	$	562		$	(4,057	)	$	4,619
Net cash used in financing activities	$	-		$	(189	)	$	189

The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash is from interest income on notes receivable. In the prior period, a note receivable due from UHF was paid off from refinance proceeds, generating more cash flow in the prior period.

Our primary cash outlays for investing activities are for investment of excess cash with our Advisor. During the current period, cash was withdrawn from the investment with our Advisor. The investing activity in the prior period was mainly due to the proceeds received on the notes receivable, allowing the Company to invest more net cash with our Advisor.

Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable. During the current periods, the Company was not obligated to repay any debt obligations, outside of current accrued interest.

We did not pay quarterly dividends in 2013 or 2012.

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, we may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air and third parties may seek recovery for personal injury associated with such materials.

Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on our business, assets or results of operations.

Inflation

The effects of inflation on our operations are not quantifiable. Fluctuations in the rate of inflation affect the sales value of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings, as well as the cost of variable interest rate debt, will be affected.

Tax Matters

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. IOT has alternative minimum tax credit carryforwards available for 2013 and has a loss for federal income tax purposes after consolidation in the ARL group for the first nine months of 2013; therefore, it recorded no provision for income taxes.

At September 30, 2013, IOT had a net deferred tax asset of approximately $1,460,000 due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that IOT will realize the benefit of the deferred tax asset, a 100% valuation allowance has been established.

In prior periods, IOT was part of the ARL consolidated federal group. During the third quarter 2012, Realty Advisors Management, Inc. and its subsidiaries acquired stock of ARL such that more than 80% of ARL was owned by Realty Advisors Management, Inc. As a result, IOT joined the Realty Advisors Management, Inc. consolidated group for federal income tax reporting.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2013, IOT’s exposure to a change in interest rates on its debt was as follows (dollars in thousands, except per share):

			Weighted		Effect of 1%
			Average		Increase In
	Balance		Interest Rate		Base Rates
Notes payable:
Variable rate	$	27,710		4.25%	$	277
Total decrease in IOT’s annual net income						277
Per share					$	0.07

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation by our management (with the participation of our Principal Executive Officer and Principal Financial Officer), as of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On December 5, 1989, the governing body of the predecessor of the Company approved a share repurchase program authorizing the repurchase of up to a total of 200,000 shares of the predecessor. In June 2000, the Board of Directors of the Company increased the authorization to 500,000 shares. With the 3-for-1 forward split of the Company’s Common Stock in June 2005, such authorization would be appropriately increased to 1,500,000 shares and the number of shares previously purchased would be appropriately increased by the same ratio. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 150,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,650,000 shares of our common stock. This repurchase program has no termination date. The following table represents shares repurchased on a monthly basis during the third quarter of 2013:

					Total Number of		Maximum Number of
					Shares Purchased		Shares that May
	Total Number of		Average Price		as Part of Publicly		Yet be Purchased
	Shares Purchased		Paid per Share		Announced Program		Under the Program
Period
Balance as of June 30, 2013						1,034,761		615,239
July 31, 2013		-	$	-		1,034,761		615,239
August 31, 2013		-	$	-		1,034,761		615,239
September 30, 2013		-	$	-		1,034,761		615,239

Total		-

ITEM 6. EXHIBITS

The following documents are filed herewith as exhibits or incorporated by reference as indicated:


Exhibit Number		Description
3.0		Articles of Incorporation of Income Opportunity Realty Investors, Inc., (incorporated by reference to Appendix C to the Registrant’s Registration Statement on Form S-4, dated February 12, 1996).

3.1		Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix D to the Registrant’s Registration Statement on Forms S-4 dated February 12, 1996).

10.3		Advisory Agreement dated as of April 30, 2011 between Income Opportunity Realty Investors, Inc. and Pillar Income Asset Management, Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s current on Form 10-Q for event of May 2, 2011).

10.4		Loan Purchase Agreement (without exhibits), dated as of June 7, 2013 between IORI Operating Inc. and BDF TCI Mercer III, LLC.

10.5		Settlement and Release Agreement dated June 7, 2013 among TCI Mercer Crossing, Inc., Income Opportunity Realty Investors, Inc., Transcontinental Lamar, Inc., Transcontinental Realty Investors, Inc., Prime Income Asset Management, LLC, American Realty Investors, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., BDF TCI Mercer III, LLC, and Transcontinental BDF III, LLC.

31.1	*	Certification by the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.

31.2	*	Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.

32.1	*	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Interactive data files pursuant to Rule 405 of Regulation S-T.

__________________

*	Filed herewith

SIGNATURE PAGE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	INCOME OPPORTUNITY REALTY INVESTORS, INC.

Date: November 14, 2013	By:	/s/ Daniel J. Moos
		Daniel J. Moos
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 14, 2013	By:	/s/ Gene S. Bertcher
		Gene S. Bertcher
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)