TRANSCONTINENTAL REALTY INVESTORS INC - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
or
| ☐ | 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 001-09240
TRANSCONTINENTAL REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 94-6565852 |
|
(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)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | TCI | NYSE |
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer ☐ | Accelerated filer | ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company | ☒ | |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No.
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 | 8,717,767 |
| (Class) | (Outstanding at November 12, 2020) |
TRANSCONTINENTAL REALTY INVESTORS, INC.
FORM 10-Q
TABLE OF CONTENTS
2
| Item 1. | Financial Statements |
| TRANSCONTINENTAL REALTY INVESTORS, INC. |
|
(dollars in thousands, except share and par value amounts) (Unaudited) |
| September 30, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Real estate, net | $ | 380,715 | $ | 387,790 | ||||
| Notes receivable (including $66.287 in 2020 and $57,817 in 2019 from related parties) | 123,854 | 112,357 | ||||||
| Cash and cash equivalents | 32,967 | 51,179 | ||||||
| Restricted cash | 28,030 | 32,082 | ||||||
| Investment in unconsolidated joint ventures | 71,171 | 81,780 | ||||||
| Receivable from related parties | 140,050 | 141,541 | ||||||
| Other assets | 68,558 | 59,189 | ||||||
| Total assets | $ | 845,345 | $ | 865,918 | ||||
| Liabilities and Equity | ||||||||
| Liabilities: | ||||||||
| Mortgages and notes payable | $ | 242,300 | $ | 245,773 | ||||
| Bonds payable | 203,192 | 223,265 | ||||||
| Accounts payable and other liabilities (including $937 in 2020 and $935 in 2019 to related parties) | 24,642 | 26,115 | ||||||
| Accrued interest payable | 3,281 | 7,230 | ||||||
| Deferred revenue | 9,315 | 9,468 | ||||||
| Total liabilities | 482,730 | 511,851 | ||||||
| Equity | ||||||||
| Shareholders' Equity: | ||||||||
| Common stock, $0.01 par value, authorized 10,000,000 shares; issued 8,717,967 shares at September 30, 2020 and December 31, 2019. | 87 | 87 | ||||||
| Treasury stock at cost, 200 shares in 2020 and 2019 | (2 | ) | (2 | ) | ||||
| Paid-in capital | 257,853 | 257,853 | ||||||
| Retained earnings | 82,813 | 74,665 | ||||||
| Total shareholders' equity | 340,751 | 332,603 | ||||||
| Non-controlling interest | 21,864 | 21,464 | ||||||
| Total equity | 362,615 | 354,067 | ||||||
| Total liabilities and equity | $ | 845,345 | $ | 865,918 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Revenues: | ||||||||||||||||
| Rental revenues (including $262 and $212 for the three months and $673 and $527 for the nine months ended 2020 and 2019, respectively, from related parties) | $ | 11,453 | $ | 11,407 | $ | 34,461 | $ | 34,352 | ||||||||
| Other income | 706 | 1,990 | 3,885 | 7,394 | ||||||||||||
| Total revenues | 12,159 | 13,397 | 38,346 | 41,746 | ||||||||||||
| Expenses: | ||||||||||||||||
| Property operating expenses (including $254 and $237 for the three months ended and $750 and $741 for the nine months ended 2020 and 2019, respectively, from related parties) | 6,388 | 5,403 | 18,507 | 18,722 | ||||||||||||
| Depreciation and amortization | 3,526 | 3,416 | 10,338 | 9,964 | ||||||||||||
| General and administrative (including $1,017 and $935 for the three months ended and $2,783 and $3,355 for the nine months ended 2020 and 2019, respectively, from related parties) | 1,643 | 1,929 | 7,063 | 6,468 | ||||||||||||
| Advisory fee to related party | 2,139 | 2,200 | 6,483 | 6,196 | ||||||||||||
| Total operating expenses | 13,696 | 12,948 | 42,391 | 41,350 | ||||||||||||
| Net operating (loss) income | (1,537 | ) | 449 | (4,045 | ) | 396 | ||||||||||
| Interest income (including $3,752 and $4,618 for the three months ended and $11,255 and $13,483 for the nine months ended 2020 and 2019, respectively, from related parties) | 4,348 | 5,232 | 13,102 | 14,668 | ||||||||||||
| Interest expense (including $380 and $514 for the three months ended and $1,193 and $1,517 for the nine months ended 2020 and 2019, respectively, from related parties) | (6,291 | ) | (8,037 | ) | (21,999 | ) | (23,642 | ) | ||||||||
| (Loss) gain on foreign currency transaction | (1,470 | ) | (5,153 | ) | 774 | (13,296 | ) | |||||||||
| Loss on extinguishment of debt | — | (5,219 | ) | — | (5,219 | ) | ||||||||||
| Income (losses) from unconsolidated joint ventures | 365 | (178 | ) | (740 | ) | (1,474 | ) | |||||||||
| Gain on sales or write-down of assets | 12,328 | 5,140 | 21,802 | 9,409 | ||||||||||||
| Income tax expense | (50 | ) | — | (346 | ) | — | ||||||||||
| Net income (loss) | 7,693 | (7,766 | ) | 8,548 | (19,158 | ) | ||||||||||
| Net income attributable to non-controlling interest | — | (21 | ) | (400 | ) | (583 | ) | |||||||||
| Net income (loss) attributable to common shares | $ | 7,693 | $ | (7,787 | ) | $ | 8,148 | $ | (19,741 | ) | ||||||
| Earnings (loss) per share - attributable to common shares | ||||||||||||||||
| Basic and diluted | $ | 0.88 | $ | (0.89 | ) | $ | 0.93 | $ | (2.26 | ) | ||||||
| Weighted-average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 8,717,767 | 8,717,767 | 8,717,767 | 8,717,767 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
| TRANSCONTINENTAL REALTY INVESTORS, INC. |
|
CONSOLIDATED STATEMENT OF EQUITY (dollars in thousands, except share amounts) (Unaudited) |
| Common Stock | Treasury | Paid-in | Retained | Total Shareholders' | Non-controlling | Total | ||||||||||||||||||||||||||
| Shares | Amount | Stock | Capital | Earnings | Equity | Interest | Equity | |||||||||||||||||||||||||
|
For the three months ended September 30, 2020 |
||||||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 75,120 | $ | 333,058 | $ | 21,864 | $ | 354,922 | ||||||||||||||||
| Net income | — | — | — | — | 7,693 | 7,693 | — | 7,693 | ||||||||||||||||||||||||
| Balance, September 30, 2020 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 82,813 | $ | 340,751 | $ | 21,864 | $ | 362,615 | ||||||||||||||||
|
For the three months ended September 30, 2019 |
||||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,938 | $ | 89,631 | $ | 347,654 | $ | 21,243 | $ | 368,897 | ||||||||||||||||
| Distribution to equity partner | — | — | — | (85 | ) | — | (85 | ) | — | (85 | ) | |||||||||||||||||||||
| Net loss | — | — | — | — | (7,787 | ) | (7,787 | ) | 21 | (7,766 | ) | |||||||||||||||||||||
| Balance, September 30, 2019 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 81,844 | $ | 339,670 | $ | 21,264 | $ | 361,046 | ||||||||||||||||
|
For the nine months ended September 30, 2020 |
||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 74,665 | $ | 332,603 | $ | 21,464 | $ | 354,067 | ||||||||||||||||
| Net income | — | — | — | — | 8,148 | 8,148 | 400 | 8,548 | ||||||||||||||||||||||||
| Balance, September 30, 2020 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 82,813 | $ | 340,751 | $ | 21,864 | $ | 362,615 | ||||||||||||||||
|
For the nine months ended September 30, 2019 |
||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 258,050 | $ | 101,585 | $ | 359,720 | $ | 20,681 | $ | 380,401 | ||||||||||||||||
| Distribution to equity partner | — | — | — | (197 | ) | — | (197 | ) | — | (197 | ) | |||||||||||||||||||||
| Net loss | — | — | — | — | (19,741 | ) | (19,741 | ) | 583 | (19,158 | ) | |||||||||||||||||||||
| Balance, September 30, 2019 | 8,717,967 | $ | 87 | $ | (2 | ) | $ | 257,853 | $ | 81,844 | $ | 339,782 | $ | 21,264 | $ | 361,046 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
| For the Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash Flow From Operating Activities: | ||||||||
| Net income (loss) | $ | 8,548 | $ | (19,158 | ) | |||
| Adjustments to reconcile net income (loss) to used in operating activities: | ||||||||
| (Gain) loss on foreign currency transactions | (774 | ) | 13,296 | |||||
| Loss on debt extinguishment | — | 5,219 | ||||||
| Gain on sales or write-down of assets | (21,802 | ) | (9,409 | ) | ||||
| Depreciation and amortization | 13,023 | 12,818 | ||||||
| Loss from unconsolidated joint ventures | 740 | 1,474 | ||||||
| Distribution of income from unconsolidated joint ventures | 1,782 | — | ||||||
| Changes in assets and liabilities, net of dispositions: | ||||||||
| Other assets | (14,179 | ) | 12,888 | |||||
| Related party receivables | 1,491 | (35,257 | ) | |||||
| Accrued interest payable | (94 | ) | (1,557 | ) | ||||
| Accounts payable and other liabilities | (3,745 | ) | 5,441 | |||||
| Deferred revenue | (153 | ) | 4,957 | |||||
| Net cash used in operating activities | (15,163 | ) | (9,288 | ) | ||||
| Cash Flow From Investing Activities: | ||||||||
| Collection of notes receivables | 3,467 | 255 | ||||||
| Origination and advances on notes receivable | (15,718 | ) | (7,262 | ) | ||||
| Acquisition of real estate | (2,664 | ) | (3,422 | ) | ||||
| Development and renovation of real estate | (12,488 | ) | (31,311 | ) | ||||
| Deferred leasing costs | (96 | ) | — | |||||
| Proceeds from sale of real estate | 31,768 | 23,030 | ||||||
| Distributions from unconsolidated joint ventures | 8,086 | 1,928 | ||||||
| Net cash provided by (used in) investing activities | 12,355 | (16,782 | ) | |||||
| Cash Flow From Financing Activities: | ||||||||
| Proceeds from mortgages and notes payable | 10,234 | 16,934 | ||||||
| Payments on mortgages and notes payable | (7,912 | ) | (45,623 | ) | ||||
| Proceeds from bonds payable | — | 78,125 | ||||||
| Payments on bonds payable | (21,724 | ) | (21,742 | ) | ||||
| Debt extinguishment costs | — | (3,799 | ) | |||||
| Deferred finance costs | (54 | ) | (4,241 | ) | ||||
| Distributions to equity partner | — | (197 | ) | |||||
| Net cash (used in) provided by financing activities | (19,456 | ) | 19,457 | |||||
| Net decrease in cash, cash equivalents and restricted cash | (22,264 | ) | (6,613 | ) | ||||
| Cash, cash equivalents and restricted cash, beginning of period | 83,261 | 106,565 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 60,997 | $ | 99,952 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest, net of amounts capitalized | $ | 21,109 | $ | 27,470 | ||||
| Schedule of noncash investing and financing activities: | ||||||||
| Land acquired in exchange for note payable | $ | 3,350 | $ | — | ||||
| Note receiveable issued in exchange for property | $ | 1,761 | $ | — | ||||
| Debt assumed in sale of properties | $ | 8,238 | $ | — | ||||
| Land received in exhange for note receivable | $ | — | $ | 1,800 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 1. | Organization |
As used herein, the terms “the Company”, “We”, “Our”, or “Us” refer to Transcontinental Realty Investors, Inc. a Nevada corporation which was formed in 1984. Our common stock is listed and trades on the New York Stock Exchange (“NYSE”) under the symbol “TCI”.
We are a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with American Realty Investors, Inc. (“ARL”), whose common stock is traded on the NYSE under the symbol “ARL”. ARL owns 78.38% and the parent of ARL owns 7.20% of the Company.
Our primary business is the acquisition, development and ownership of income-producing multifamily apartment communities and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate revenues from gains on sales of income-producing properties and land.
At September 30, 2020, our portfolio of income-producing properties consisted of:
| ● | Six commercial properties consisting of five office buildings and one retail property comprising in aggregate of approximately 1.6 million square feet; |
| ● | Ten multifamily apartment communities owned directly by us comprising in 1,639 units, excluding apartments being developed; |
| ● | Approximately 1,980 acres of developed and undeveloped land; and |
| ● | Fifty-one multifamily apartment communities totaling 10,137 units owned by our 50% owned investee Victory Abode Apartments, LLC (“VAA”). |
Our day to day operations are managed by Pillar Income Asset Management, Inc. (“Pillar”). Their 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 with third party lenders and investors. All of the Companies employees are Pillar employees.
Our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. Our multifamily apartment communities are managed by outside management companies.
| 2. | Summary of Significant Accounting Policies |
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 of America (“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 consolidated balance sheet at December 31, 2019 was derived from the audited consolidated 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 consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2019. Certain 2019 consolidated financial statement amounts have been reclassified to conform to the current presentation.
7
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
We consolidate entities in which we are considered to be the primary beneficiary of a variable interest entity (“VIE”) or have a majority of the voting interest of the entity. We have determined that we are a primary beneficiary of the VIE when we have (i) the power to direct the activities of a VIE that most significantly impacts its economic performance, and (ii) the obligations to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, we consider qualitative and quantitative factors, including ownership interest, management representation, ability to control decision and other contractual rights.
We account for entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary under the equity method of accounting. Accordingly, we include our share of the net earnings or losses of these entities in our results of operations.
Newly Issued Accounting Standards
In October 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The adoption of the standard on January 1, 2020, did not have a material impact on our financial position and results of operations.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard provides guidance, optional expedients and exceptions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The standard was effective upon issuance and can be applied through December 31, 2022. We have mortgage notes payable with interest rates that reference LIBOR, and therefore, we will adopt this standard when LIBOR is discontinued.
On April 10, 2020, the FASB issued a Staff Q&A (“Q&A”) related to the application of the lease guidance in ASC 842 for the accounting impact of lease concessions related to the COVID-19 pandemic. The Q&A, allows an entity to make an election to account for lease concessions related to the effects of the COVID-19 as though enforceable rights and obligations for those concessions existed. As a result of this election, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance in ASC 842, as long as the concessions do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Our adoption of the guidance of the Q&A did not have a significant impact on our consolidated financial statements during the nine months ended September 30, 2020.
8
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 3. | Earnings per Share |
Earnings per share (“EPS”) have been computed by dividing income available to common shares by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding.
The following table details our basic and diluted earnings per common share calculation:
|
For the Three Months Ended
September 30, |
For the Nine Months Ended
September 30, |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net income (loss) | $ | 7,693 | $ | (7,766 | ) | $ | 8,548 | $ | (19,158 | ) | ||||||
| Net (income) attributable to non-controlling interest | — | (21 | ) | (400 | ) | (583 | ) | |||||||||
| Net income (loss) attributable to common shares | $ | 7,693 | $ | (7,787 | ) | $ | 8,148 | $ | (19,741 | ) | ||||||
| Weighted-average common shares outstanding — basic and diluted | 8,717,767 | 8,717,767 | 8,717,767 | 8,717,767 | ||||||||||||
| EPS - attributable to common shares — basic and diluted | $ | 0.88 | $ | (0.89 | ) | $ | 0.93 | $ | (2.26 | ) | ||||||
| 4. | Supplemental Cash Flow Information |
The following is a reconciliation of our cash and cash equivalents, and restricted cash to the total presented in the consolidated statement of cash flows:
|
For the Period Ended September 30, |
||||||||
| 2020 | 2019 | |||||||
| Beginning of period | ||||||||
| Cash and cash equivalents | $ | 51,179 | $ | 36,358 | ||||
| Restricted cash | 32,082 | 70,207 | ||||||
| Cash, cash equivalents and restricted cash | $ | 83,261 | $ | 106,565 | ||||
| End of period | ||||||||
| Cash and cash equivalents | $ | 32,967 | $ | 63,069 | ||||
| Restricted cash | 28,030 | 36,883 | ||||||
| Cash, cash equivalents and restricted cash | $ | 60,997 | $ | 99,952 | ||||
Amounts included in restricted cash represent funds required to be set aside to meet contractual obligations with certain financial institutions for the payment of reserve replacement, tax and insurance escrow. In addition, restricted cash includes funds for bond principle and interest payments (See Note 11 – Bonds Payable).
9
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 5. | Operating Segments |
Our segments are based on the internal reporting that we review for operational decision-making purposes. We operate in two reportable segments: (i) the acquisition, development, ownership and management of multifamily apartment communities and (ii) the acquisition, ownership and management of commercial real estate properties. The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, advisory fees, interest income and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level.
The following table presents our reportable segments for the three and nine months ended September 30, 2020 and 2019:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Multifamily Segment | ||||||||||||||||
| Revenues | $ | 3,683 | $ | 3,383 | $ | 10,943 | $ | 10,077 | ||||||||
| Operating expenses | (2,412 | ) | (2,243 | ) | (6,466 | ) | (6,363 | ) | ||||||||
| Profit from segment | 1,271 | 1,140 | 4,477 | 3,714 | ||||||||||||
| Commercial Segment | ||||||||||||||||
| Revenues | 7,770 | 8,024 | 23,518 | 24,275 | ||||||||||||
| Operating expenses | (3,976 | ) | (3,160 | ) | (12,041 | ) | (12,359 | ) | ||||||||
| Profit from segment | 3,794 | 4,864 | 11,477 | 11,916 | ||||||||||||
| Total profit from segments | $ | 5,065 | $ | 6,004 | $ | 15,954 | $ | 15,630 | ||||||||
The table below reflects the reconciliation of total profit from segments to net income (loss) for the three and nine months ended September 30, 2020 and 2019:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Total profit from segments | $ | 5,065 | $ | 6,004 | $ | 15,954 | $ | 15,630 | ||||||||
| Other non-segment items of income (expense) | ||||||||||||||||
| Depreciation | (3,526 | ) | (3,416 | ) | (10,338 | ) | (9,964 | ) | ||||||||
| General and administrative | (1,643 | ) | (1,930 | ) | (7,063 | ) | (6,468 | ) | ||||||||
| Advisory fee to related party | (2,139 | ) | (2,199 | ) | (6,483 | ) | (6,196 | ) | ||||||||
| Interest income | 4,348 | 5,232 | 13,102 | 14,668 | ||||||||||||
| Other income | 706 | 1,990 | 3,885 | 7,394 | ||||||||||||
| Interest expense | (6,291 | ) | (8,037 | ) | (21,999 | ) | (23,642 | ) | ||||||||
| (Loss) gain on foreign currency transaction | (1,470 | ) | (5,153 | ) | 774 | (13,296 | ) | |||||||||
| Loss on extinguishment of debt | — | (5,219 | ) | — | (5,219 | ) | ||||||||||
| Income (losses) from unconsolidated joint ventures | 365 | (178 | ) | (740 | ) | (1,474 | ) | |||||||||
| Gain on sales or write-down of assets | 12,328 | 5,140 | 21,802 | 9,409 | ||||||||||||
| Income tax expense | (50 | ) | — | (346 | ) | — | ||||||||||
| Net income (loss) | $ | 7,693 | $ | (7,766 | ) | $ | 8,548 | $ | (19,158 | ) | ||||||
10
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 6. | Leases |
We lease our multifamily apartment communities and commercial properties under agreements that are classified as operating leases. Our multifamily leases generally include minimum rents and charges for ancillary services. Our commercial property leases generally included minimum rents and recoveries for property taxes and common area maintenance. Minimum rental revenues are recognized on a straight-line basis over the terms of the related leases.
The following table summarizes the components of rental revenue for the three and nine months ended September 30, 2020 and 2019:
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Fixed component | $ | 11,107 | $ | 10,827 | $ | 33,111 | $ | 32,963 | ||||||||
| Variable component | 346 | 580 | 1,350 | 1,389 | ||||||||||||
| $ | 11,453 | $ | 11,407 | $ | 34,461 | $ | 34,352 | |||||||||
The following table summarizes the future rental payments to us from under non-cancelable leases. The table exclude multifamily leases, which typically have a term of one-year or less:
| Twelve months ended September 30, 2020 | Amount | ||||
| 2021 | $ | 6,444 | |||
| 2022 | 23,155 | ||||
| 2023 | 20,038 | ||||
| 2024 | 14,606 | ||||
| 2025 | 8,737 | ||||
| Thereafter | 7,071 | ||||
| $ | 80,051 | ||||
| 7. | Real Estate Activity |
Below is a summary of the real estate owned as of September 30, 2020 and December 31, 2019:
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Land | $ | 50,759 | $ | 49,887 | ||||
| Building and improvements | 297,068 | 286,280 | ||||||
| Tenant improvements | 49,423 | 49,431 | ||||||
| Construction in progress | 77,116 | 84,399 | ||||||
| 474,366 | 469,997 | |||||||
| Less accumulated deprecation | (97,883 | ) | (90,173 | ) | ||||
| 376,483 | 379,824 | |||||||
| Property held for sale | 4,232 | 7,966 | ||||||
| Total | $ | 380,715 | $ | 387,790 | ||||
11
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
The gain (loss) on sale or write-down of assets, net for the three and nine months ended September 30, 2020 and 2019 consist of the following:
|
For the Three Months Ended
September 30, |
For the Nine Months Ended
September 30, |
||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||
| Land(1) | $ | 5,774 | $ | 5,140 | $ | 15,248 | $ | 9,489 | |||||||||
| Residential Properties(2) | 3,704 | — | 3,704 | (80 | ) | ||||||||||||
| Commercial Properties(3) | 4,609 | — | 4,609 | — | |||||||||||||
| Other(4) | (1,759 | ) | — | (1,759 | ) | — | |||||||||||
| Total | $ | 12,328 | $ | 5,140 | $ | 21,802 | $ | 9,409 | |||||||||
| (1) | Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings. |
| (2) | On September 14, 2020, we sold Bridgeview Plaza, a 122,205 square foot retail center in La Crosse, Wisconsin for $5,250, resulting in a gain on sale of $4,744. The proceeds from the sale were used to pay off the $3,375 mortgage note payable on the property (See Note 10 – Mortgages and Notes Payable) and for general corporate purposes. |
| (3) | On May 1, 2020, we sold Villager Apartments, a 33 unit multifamily apartment community in Pensacola, Florida for $2,426, resulting in a gain on sale of $898. The sales price was funded by the issuance of a $1,761 note receivable and the assumption of the $665 mortgage note payable on the property (See Note 10 – Mortgages and Notes Payable). On July 16, 2020, we sold Farnham Park Apartments, a 144 unit multifamily apartment community in Port Arthur, Texas for $13,300, resulting in a gain on the sale of of $2,684. The sales price was funded by cash payment of $4,215 and the assumption of the $9,085 mortgage note payable on the property (See Note 10 – Mortgages and Notes Payable). |
| (4) | Includes the write-off of development costs. |
12
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 8. | Notes Receivable |
The following table summarizes our notes receivable as of September 30, 2020 and December 31, 2019:
| Carrying value | ||||||||||||||||
| Property/Borrower | September 30, 2020 | December 31, 2019 | Interest Rate | Maturity Date | ||||||||||||
| ABC Land and Development, Inc. | $ | 7,408 | $ | 7,408 | 9.50 | % | 06/21 | |||||||||
| ABC Paradise, LLC | 1,210 | 1,210 | 9.50 | % | 06/21 | |||||||||||
| Autumn Breeze(1) | 1,807 | 1,302 | 5.00 | % | 10/21 | |||||||||||
| Bellwether Ridge(1) | 3,559 | 3,765 | 5.00 | % | 11/20 | |||||||||||
| Big River NV LLC | 344 | — | — | 07/20 | ||||||||||||
| Forest Pines Phase I(1) | 2,869 | 2,868 | 5.00 | % | 11/20 | |||||||||||
| JEM Holdings, Inc. | 300 | 300 | 6.00 | % | 07/16 | |||||||||||
| One Realco Land Holding, Inc. | 1,728 | 1,728 | 9.50 | % | 06/21 | |||||||||||
| Oulad-Chikh Family Trust | 174 | 174 | 8.00 | % | 03/21 | |||||||||||
| Parc at Ingleside(1) | 2,294 | 1,531 | 5.00 | % | 12/21 | |||||||||||
| Parc at Windmill Farms(1) | 7,949 | 7,602 | 5.00 | % | 11/20 | |||||||||||
| Phillips Foundation for Better Living, Inc. | — | 314 | 12.00 | % | 03/22 | |||||||||||
| Plum Tree(1) | 792 | 413 | 5.00 | % | 10/21 | |||||||||||
| Prospectus Endeavors 4, LLC | 5,907 | 5,907 | 12.00 | % | 01/23 | |||||||||||
| Prospectus Endeavors 6, LLC | 496 | 496 | 12.00 | % | 10/22 | |||||||||||
| Riverview on the Park Land, LLC | 1,045 | 1,045 | 9.50 | % | 06/21 | |||||||||||
| RNC Revolving Line of Credit | 8,853 | 8,802 | 5.00 | % | 09/24 | |||||||||||
| Spyglass of Ennis(1) | 5,359 | 5,288 | 5.00 | % | 11/20 | |||||||||||
| Steeple Crest(1) | 6,498 | 6,665 | 5.00 | % | 08/21 | |||||||||||
| TPS Income, Inc. | 4,554 | 4,554 | 6.00 | % | 09/20 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 10,401 | 10,401 | 12.00 | % | 12/21 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 10,096 | 10,096 | 12.00 | % | 03/22 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 2,882 | 3,795 | 12.00 | % | 07/21 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 212 | 212 | 12.00 | % | 08/21 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 7,051 | 6,831 | 12.00 | % | 03/23 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 3,615 | — | 12.00 | % | 05/23 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 6,831 | — | 12.00 | % | 10/21 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 495 | 525 | 12.00 | % | 12/21 | |||||||||||
| Unified Housing Foundation, Inc. (2) | 19,125 | 19,125 | 12.00 | % | 12/32 | |||||||||||
| Total | $ | 123,854 | $ | 112,357 | ||||||||||||
| (1) | The note is convertible, at our option, into a 100% ownership interest in the underlying development property, and are collateralized by the underlying development property. |
| (2) | Principal and interest payments on the notes from Unified Housing Foundation, Inc. (“UHF”) are funded from surplus cash flow from operations, sale or refinancing of the underlying properties and are cross collateralized to the extent that any surplus cash available from any of the properties underlying the notes. UHF is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. |
13
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 9. | Investment in Unconsolidated Joint Ventures |
The following is a summary of the financial position and results of operations of our unconsolidated joint ventures:
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||
| VAA | ARL | Total | VAA | ARL | Total | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Property, net | $ | 1,224,905 | $ | 31,719 | $ | 1,256,624 | $ | 1,242,957 | $ | 35,213 | $ | 1,278,170 | ||||||||||||
| Other assets | 56,660 | 69,165 | 125,825 | 62,222 | 67,441 | 129,663 | ||||||||||||||||||
| Total Assets | $ | 1,281,565 | $ | 100,884 | $ | 1,382,449 | $ | 1,305,179 | $ | 102,654 | $ | 1,407,833 | ||||||||||||
| Liabilities and partners' capital | ||||||||||||||||||||||||
| Mortgage and other notes payable | $ | 832,819 | $ | 6,702 | $ | 839,521 | $ | 832,779 | $ | 8,327 | $ | 841,106 | ||||||||||||
| Other liabilities | 270,534 | 23,599 | 294,133 | 271,290 | 26,947 | 298,237 | ||||||||||||||||||
| Company's capital | 89,106 | 635 | 89,741 | 100,555 | 606 | 101,161 | ||||||||||||||||||
| Outside partner's capital | 89,106 | 69,948 | 159,054 | 100,555 | 66,774 | 167,329 | ||||||||||||||||||
| Total liabilties and partners' capital | $ | 1,281,565 | $ | 100,884 | $ | 1,382,449 | $ | 1,305,179 | $ | 102,654 | $ | 1,407,833 | ||||||||||||
| Investments in unconsolidated joint ventures | ||||||||||||||||||||||||
| Company's capital | $ | 89,106 | $ | 635 | $ | 89,741 | $ | 100,555 | $ | 606 | $ | 101,161 | ||||||||||||
| Basis adjustments | (40,601 | ) | 22,031 | (18,570 | ) | (41,407 | ) | 22,026 | (19,381 | ) | ||||||||||||||
| Investment in unconsolidated joint ventures | $ | 48,505 | $ | 22,666 | $ | 71,171 | $ | 59,148 | $ | 22,632 | $ | 81,780 | ||||||||||||
| For the Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| VAA | ARL | Total | VAA | ARL | Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Rents | $ | 29,998 | $ | — | $ | 29,998 | $ | 27,347 | $ | 60 | $ | 27,407 | ||||||||||||
| Other | 1,593 | 3,000 | 4,593 | 2,310 | 114 | 2,424 | ||||||||||||||||||
| Interest | 1 | 1,075 | 1,076 | 56 | 1,622 | 1,678 | ||||||||||||||||||
| Total revenue | 31,592 | 4,075 | 35,667 | 29,713 | 1,796 | 31,509 | ||||||||||||||||||
| Expenses | ||||||||||||||||||||||||
| Operating | 16,172 | (470 | ) | 15,702 | 14,138 | 860 | 14,998 | |||||||||||||||||
| Depreciation and amortization | 7,832 | — | 7,832 | 16,036 | — | 16,036 | ||||||||||||||||||
| Interest | 13,839 | 1,331 | 15,170 | 15,424 | 2,383 | 17,807 | ||||||||||||||||||
| Other expenses (income) | (556 | ) | — | (556 | ) | 699 | — | 699 | ||||||||||||||||
| Total expenses | 37,287 | 861 | 38,148 | 46,297 | 3,243 | 49,540 | ||||||||||||||||||
| Net (loss) income | $ | (5,695 | ) | $ | 3,214 | $ | (2,481 | ) | $ | (16,584 | ) | $ | (1,447 | ) | $ | (18,031 | ) | |||||||
| Company's equity in net (loss) income | $ | 336 | $ | 29 | $ | 365 | $ | (165 | ) | $ | (13 | ) | $ | (178 | ) | |||||||||
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||||||
| VAA | ARL | Total | VAA | ARL | Total | |||||||||||||||||||
| Revenue | ||||||||||||||||||||||||
| Rents | $ | 86,841 | $ | — | $ | 86,841 | $ | 79,435 | $ | 60 | $ | 79,495 | ||||||||||||
| Other | 4,034 | 5,269 | 9,303 | 6,550 | 4,262 | 10,812 | ||||||||||||||||||
| Interest | 38 | 3,358 | 3,396 | 139 | 4,845 | 4,984 | ||||||||||||||||||
| Total revenue | 90,913 | 8,627 | 99,540 | 86,124 | 9,167 | 95,291 | ||||||||||||||||||
| Expenses | ||||||||||||||||||||||||
| Operating | 47,463 | 453 | 47,916 | 42,345 | 2,339 | 44,684 | ||||||||||||||||||
| Depreciation and amortization | 23,253 | — | 23,253 | 46,792 | — | 46,792 | ||||||||||||||||||
| Interest | 43,107 | 4,296 | 47,403 | 45,294 | 6,154 | 51,448 | ||||||||||||||||||
| Other expenses (income) | (1,453 | ) | — | (1,453 | ) | 2,058 | — | 2,058 | ||||||||||||||||
| Total expenses | 112,370 | 4,749 | 117,119 | 136,489 | 8,493 | 144,982 | ||||||||||||||||||
| Net (loss) income | $ | (21,457 | ) | $ | 3,878 | $ | (17,579 | ) | $ | (50,365 | ) | $ | 674 | $ | (49,691 | ) | ||||||||
| Company's equity in net (loss) income | $ | (775 | ) | $ | 35 | $ | (740 | ) | $ | (1,480 | ) | $ | 6 | $ | (1,474 | ) | ||||||||
14
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
| 10. | Mortgages and Notes Payable |
The following table summarizes our mortgages and other notes payable as of September 30, 2020 and December 31, 2019:
| Carrying value | |||||||||||||||
| Property / Entity | September 30, 2020 | December 31, 2019 |
Effective Interest Rate |
Maturity Date | |||||||||||
| 600 Las Colinas Building | $ | 35,773 | $ | 36,302 | 5.30 | % | 11/1/2023 | ||||||||
| 770 South Post Oak Building | 11,924 | 12,077 | 4.40 | % | 6/1/2025 | ||||||||||
| Bridgeview Plaza Shopping Center(1) | — | 3,824 | 7.75 | % | 11/1/2020 | ||||||||||
| Chelsea Apartments | 8,627 | 8,749 | 3.40 | % | 12/1/2050 | ||||||||||
| EQK Portage-Kent Ohio Land(2) | 3,350 | — | 10.00 | % | 11/13/2024 | ||||||||||
| Estate of Robert Shaw(3) | 13,065 | 13,032 | 9.50 | % | 7/5/2020 | ||||||||||
| Farnham Apartments(4) | — | 9,144 | 3.39 | % | 12/1/2050 | ||||||||||
| Forest Pines Phase II Apartments(5) | 7,057 | — | 3.75 | % | 5/5/2024 | ||||||||||
| Forest Pines Phase II(5) | — | 1,390 | 3.75 | % | 5/5/2024 | ||||||||||
| Landing Apartments | 15,286 | 15,467 | 3.50 | % | 9/1/2053 | ||||||||||
| LD Athens Lindsay Ln Land | 1,155 | 1,155 | 5.90 | % | 2/28/2021 | ||||||||||
| Legacy at Pleasant Grove Apartments | 13,727 | 13,944 | 3.60 | % | 4/1/2048 | ||||||||||
| McKinney 36 Land | 856 | 944 | 8.00 | % | 6/30/2022 | ||||||||||
| Overlook at Allensville Phase II Apartments | 15,666 | 15,798 | 3.80 | % | 5/1/2059 | ||||||||||
| Parc at Denham Spring Phase II Apartments | 16,168 | 14,785 | 4.10 | % | 2/1/2060 | ||||||||||
| Stanford Center Building | 39,191 | 39,255 | 6.00 | % | 12/26/2021 | ||||||||||
| Sugar Mill Phase III Apartments | — | 5,908 | 4.50 | % | 2/1/2060 | ||||||||||
| Sugar Mill Phase III Apartments | 8,906 | — | 4.50 | % | 2/1/2060 | ||||||||||
| Toulon Apartments | 18,283 | 18,465 | 3.20 | % | 12/1/2051 | ||||||||||
| Villager Apartments(6) | — | 556 | 2.50 | % | 3/1/2043 | ||||||||||
| Villas at Bon Secour Apartments | 10,860 | 11,026 | 4.00 | % | 1/1/2022 | ||||||||||
| Vista Ridge Apartments | 10,015 | 10,122 | 4.00 | % | 8/1/2053 | ||||||||||
| Windmill Farms Land | 12,391 | 13,830 | 6.00 | % | 2/28/2021 | ||||||||||
| Total | $ | 242,300 | $ | 245,773 | |||||||||||
| (1) | On September 14, 2020, we paid off the loan in connection with the sale of the underlining property (See Note 7 – Real Estate Activity). |
| (2) | On March 5, 2020, we acquired 49.2 acres of land in Kent, Ohio in exchange for the note payable. |
| (3) | We are currently negotiating an extension of the loan with the lender. |
| (4) | On July 16, 2020, the loan was assumed by a third party in connection with the sale of the underlying property (See Note 7 – Real Estate Activity). |
| (5) | The loan bears interest at prime rate plus 0.5%. |
| (6) | On May 1, 2020, the loan was assumed by a third party in connection to sale of the underlying property (See Note 7 – Real Estate Activity). |
| 11. | Bonds Payable |
We have issued bonds through our subsidiary, Southern Properties Capital LTD, which are listed and trade on the Tel Aviv Stock Exchange. Payments of principal and interest are denominated in New Israeli Shekels. In connection with the principal and interest payments, we incurred a (loss) gain on foreign currency transactions of ($1,470) and ($5,153) for the three months ended September 30, 2020 and 2019, respectively, and $744 and ($13,296) for the nine months ended September 30, 2020 and 2019, respectively.
15
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
The following table summarizes the bonds payable as of September 30, 2020 and December 31, 2019:
| September 30, | December 31, | ||||||||||
| 2020 | 2019 | Maturity Date | |||||||||
| Bonds (Series A) | $ | 69,747 | $ | 92,653 | 7/31/2023 | ||||||
| Bonds (Series B) | 61,029 | 60,764 | 7/31/2025 | ||||||||
| Bonds (Series C) | 79,919 | 79,572 | 1/31/2023 | ||||||||
| Total outstanding bonds | 210,695 | 232,989 | |||||||||
| Less: unamortized deferred bond issuance costs | (7,503 | ) | (9,724 | ) | |||||||
| Total outstanding bonds, net | $ | 203,192 | $ | 223,265 | |||||||
| 12. | Deferred Income |
In previous years, we sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such we deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gain on these transactions have been deferred until the properties are sold to a non-related third party. As of September 30, 2020 and December 31, 2019, we had deferred gain of $9,315 and $9,468, respectively.
| 13. | Related Party Transactions |
Rental income includes $262 and $212 for the three months ended September 30, 2020 and 2019, respectively, and $673 and $527 for the nine months ended September 30, 2020 and 2019, respectively, for office space leased to Pillar, Regis and VAA.
Property operating expense includes $254 and $237 for the three months ended September 30, 2020 and 2019, respectively, and $750 and $741 for the nine months ended September 30, 2020 and 2019, respectively, for management fees on commercial properties payable to Regis.
General and administrative expense includes $1,017 and $935 for the three months ended September 30, 2020 and 2019, respectively, and $2,783 and $3,355 for the nine months ended September 30, 2020 and 2019, respectively, for employee compensation and other reimbursable costs payable to Pillar.
Advisor fees are were $2,139 and $2,200 for the three months ended September 30, 2020 and 2019, respectively, and $6,483 and $6,196 for the nine months ended September 30, 2020 and 2019, respectively.
Interest income on notes receivable issued by UHF and Pillar (See Note 8 – Notes Receivable) was $3,752 and $4,618 for the three months ended September 30, 2020 and 2019, respectively, and $11,255 and $13,483 for the nine months ended September 30, 2020 and 2019, respectively.
Interest expense on these notes payable to Pillar was $380 and $514 for the three months ended September 30, 2020 and 2019, respectively, and $1,193 and $1,517 for the nine months ended September 30, 2020 and 2019, respectively.
16
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share and square foot amounts)
(Unaudited)
Related party receivables represents amounts outstanding from advances to related parties in addition to unreimbursed fees, expenses and costs as provided above. The net amounts outstanding consist of the following:
| As of | ||||||||
| September 30, | December 31, | |||||||
| 2020 | 2019 | |||||||
| ARL | $ | 146,215 | $ | 142,117 | ||||
| Pillar | (6,165 | ) | (576 | ) | ||||
| Total | $ | 140,050 | $ | 141,541 | ||||
| 14. | Commitments and Contingencies |
We believes that we will generate excess cash from property operations in the next twelve months; such excess, however, might not be sufficient to discharge all of our obligations as they become due. We intend to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet our liquidity requirements.
We are the primary guarantor, on a $24,300 mezzanine loan between UHF and a lender. In addition, ARL is limited recourse guarantors of the loan. As of September 30, 2020 UHF was in compliance with the covenants to the loan agreement.
We were the plaintiff in a lawsuit against Dynex Commercial, Inc. (“Dynex”) for failure to fulfill certain loan commitments. In January 2015, the court awarded us with a judgment of $24,800. We are pursuing all legal means to collect this award. However, due to the uncertainty of the collectability of the award, the receivable has been fully reserved.
In February 2019, we were charged in a lawsuit brought by Paul Berger (“Berger”) that alleges that we completed improper sales and/or transfers of property with Income Opportunity Realty Investors, Inc. (“IOR”), our consolidated subsidiary. Berger requests that we pay off various related party loans to IOR and that IOR then distribute the funds to its shareholders. We intend to vigorously defend against the allegations.
| 15. | Subsequent Events |
The date to which events occurring after September 30, 2020, the date of the most recent balance sheet, have been evaluated for possible adjustment to the consolidated financial statements or disclosure is November 12, 2020, which is the date on which the consolidated financial statements were available to be issued.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this Quarterly Report on Form 10-Q (the “Quarterly Report”) and in our Form 10-K for the year ended December 31, 2019 (the “Annual Report”).
This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business”, “Risk Factors” and “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 our markets and the effect on occupancy and rental rates; |
| ● | Our 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; |
| ● | risks associated with our dependence on key personnel whose continued service is not guaranteed; and |
| ● | the other risk factors identified in this Form 10-Q, including those described under the caption “Risk Factors.” |
18
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 at Part I, Item 1A. “Risk Factors” Annual Report on Form 10-K, which investors should review.
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and our property portfolio. While we did not incur significant disruptions during the three months ended September 30, 2020 from the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The pandemic is having a significant impact on the U.S. economy and on the local markets in which our properties are located. Nearly every industry has been impacted directly or indirectly, and the commercial real estate market has come under pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, and restrictions on travel and “shelter-in-place” or “stay-at-home” orders.
The following provides an overview of the impact of COVID-19 on our financial condition, results of operations and cash flows.
| ● | We have collected approximately 96% of our third quarter rents, comprised of approximately 95% from multi-family tenants and 97% from office tenants. |
| ● | We have not granted any abatements or granted any significant deferments of contractual rents. |
| ● | Occupancy remains stable at 91% at September 30, 2020 and 2019. |
| ● | We continue to obtain positive leasing spreads for new leases and renewals at properties. |
| ● | Our ground up development work continues unabated and thus far we have not experienced any work stoppages. |
In addition, we believe that our financing activities will not be significantly impacted by COVID-19, as most of our mortgage notes payable are secured by HUD guarantees which have long-term maturities.
The future impact of COVID-19 on our business and financial activities will depend on future developments, which at this stage are unpredictable considering the fluctuations of COVID-19 outbreaks and the resulting changes in the markets.
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 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.
Management Overview and Summary
We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. Our portfolio of income-producing properties includes multifamily apartment communities, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties, as well as developing new properties on land already owned or acquired for a specific development project.
We acquire land primarily in urban in-fill locations or high-growth suburban markets and are an active buyer and seller of real estate.
19
As of September 30, 2020, we owned (i) six commercial properties consisting of five office buildings and one retail property comprising on aggregate of 1.6 million square feet, (ii) 1,639 units in ten multifamily apartment communities, excluding apartment communities being developed, (iii) approximately 1,980 acres of developed and undeveloped land, and (iv) fifty-one multifamily apartment communities totaling 10,137 units owned by our 50% owned investee VAA. We currently own income-producing properties and land in eight states.
During the nine months ended September 30, 2020, we sold (i) a total of 62.0 acres of land from our holdings in Windmill Farms for $20.2 million, in aggregate, resulting in gains on sale of $15.2 million; (ii) Bridgeview Plaza, a retail property in La Crosse, Wisconsin for $5.3 million, resulting in a gain on sale of $4.8 million; and (iii) Farnham Park Apartments, a 144 unit multifamily apartment community in Port Arthur, Texas for $13.3 million, resulting in a gain on sale of $2.7 million.
During the nine months ended September 30, 2020, we acquired (i) 49.2 acres of land in Kent, Ohio for $5.4 million that was funded by a $2.0 million cash payment and a $3.4 million note payable that bares interest at 10% and matures on November 13, 2024; (ii) 0.7 acres of commercial land in Lewisville, Texas for $0.1 million, and (iii) 1.3 acres of land in McKinney, Texas for $0.5 million.
We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. We will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of our wholly-owned properties. When we sell assets, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. We generate operating revenues primarily by leasing apartment units to residents and leasing office, retail and industrial space to commercial tenants. We have no employees.
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.
Our day to day operations are managed by Pillar Income Asset Management, Inc. (“Pillar”). Their 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 with third party lenders and investors. All of the Companies employees are Pillar employees.
Our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. Our multifamily apartment communities are managed by outside management companies.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, the allocation of purchase price between tangible and intangible assets, capitalization of costs and fair value measurements. Our significant accounting policies are described in more detail in Note 2—Summary of Significant Accounting Policies in our notes to the consolidated financial statements. However, the following policies are deemed to be critical.
20
Fair Value of Financial Instruments
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 our own separate interests, or affiliates of the entity.
Results of Operations
The following discussion and analysis is based on our Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019, as included in Part I, Item 1. “Financial Statements” of this report. At September 30, 2020 and 2019, we owned or had interests in a portfolio of ten and nine income-producing properties, respectively.
Comparison of the three months ended September 30, 2020 to the same period ended 2019:
We reported a net income attributable to common shares of $7.7 million or $0.88 per diluted share for 2020, compared to a net loss applicable to common shares of $7.8 million or $0.89 per diluted share for 2019.
Rental revenues were $11.5 million for 2020, compared to $11.4 for 2019. For 2020, we generated revenues of $7.8 million and $3.7 million from our commercial and multifamily segments, respectively.
Property operating expenses increased by $1.0 million to $6.4 for 2020 as compared to $5.4 million for 2019.
Depreciation and amortization increased by $0.1 million to $3.5 million for 2020 as compared to $3.4 million for 2019.
21
General and administrative expense was $1.6 million for 2020, compared to $1.9 million for 2019. The decrease of $0.3 million in general and administrative expenses was primarily due to decrease in professional and other expenses.
Interest income was $4.3 million for 2020, compared to $5.2 million for 2019. The decrease of $0.9 million was due to decrease in interest income of $0.9 million on notes receivable from related parties.
Mortgage and loan interest expense was $6.3 million for 2020 as compared to $8.0 million for 2019.
Loss on foreign currency transactions was $1.5 million for 2020 as compared to a loss of $5.2 million for 2019. The decrease in loss was the result of the strengthening of the US Dollar against the Israel Shekels due to economic uncertainties most likely as a result of the global pandemic outbreak in 2020.
Income (loss) from unconsolidated joint ventures was $0.4 million for 2020 as compared ($0.2) million for 2019.
Gain sale or write-down of assets was $12.3 million for 2020, compared to $5.1 million for 2019. In 2020, we sold (i) approximately 17.1 acres of land for $8.0 million, resulting in a gain of $5.7 million, (ii) Bridgeview Plaza for a $5.3 million, resulting in a gain of $4.8 million, (iii) Farnham Park Apartments for $13.3 million, resulting in a gain of $2.7 million. For 2019, we sold 16.2 acres of land for $7.0 million, resulting in a gain of $5.1 million.
Comparison of the nine months ended September 30, 2020 to the same period ended 2019:
For 2020, we reported a net income attributable to common shares of $8.1 million or $0.93 per diluted share, compared to a net loss applicable to common shares of $19.7 million or $2.26 per diluted share for 2019.
Rental revenues were $34.5 million for 2020, compared to $34.4 million for 2019. For 2020, rental revenues consisted of $23.5 million and $11.0 million from our commercial and multifamily segments, respectively.
Property operating expenses decreased by $0.2 million to $18.5 million for 2020 as compared to $18.7 million for 2019. The decrease in property operating expenses was primarily attributable to reduction in property replacements cost.
Depreciation and amortization increased by $0.4 million to $10.3 million for 2020 as compared to $9.9 million for 2019. The increase was primarily due to increase of depreciation expense in multifamily segment by $0.4 million.
General and administrative expense was $7.0 million for 2020, compared to $6.4 million for 2019. The increase of $0.6 million in general and administrative expenses was primarily due to increase in franchise taxes and legal services, partially offset by decrease in other expenses.
Interest income was $13.1 million for 2020, compared to $14.7 million for 2019. The decrease of $1.6 million was due to decrease in interest of $1.6 on notes receivable from other related parties.
Mortgage and loan interest expense was $22.0 million for 2020 as compared to $23.6 million for 2019.
Gain (loss) on foreign currency transactions was $0.8 million for 2020 as compared to ($13.3) million for 2019. The change in gain (loss) on foreign currency transactions is primarily attributed to the strengthening of the U.S. Dollar against the Israel Shekels due to perceived liquidity issues in Israel as a result of the global pandemic outbreak in 2020.
Loss from unconsolidated joint ventures was a net of $0.7 million for 2020 as compared to a loss of $1.5 million for 2019.
22
Gain on sale or write-down of assets was $21.8 million for 2020, compared to $9.4 million for 2019. In 2020, we sold (i) approximately 62.0 acres of land for $20.2 million, resulting in a gain of $15.2 million, (ii) Bridgeview Plaza for $5.3 million, resulting in a gain of $4.8 million, and (iii) Farnham Park Apartments for $13.3 million, resulting in a gain of $2.7 million. In 2019, we sold 80.1 acres of land for $23.3 million, resulting in a gain of $9.4 million.
Liquidity and Capital Resources
Our principal liquidity needs are:
| ● | fund normal recurring expenses; |
| ● | meet debt service and principal repayment obligations including balloon payments on maturing debt; |
| ● | fund capital expenditures, including tenant improvements and leasing costs; |
| ● | fund development costs not covered under construction loans; and |
| ● | fund possible property acquisitions. |
Our principal sources of cash have been and will continue to be:
| ● | property operations; |
| ● | proceeds from land and income-producing property sales; |
| ● | collection of mortgage notes receivable; |
| ● | collection of receivables from related party companies; |
| ● | refinancing of existing debt; and |
| ● | additional borrowing, including mortgage notes, mezzanine financing and lines of credit. |
We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans. Management anticipates that our available cash from property operations may not be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowing secured by real estate to meet our liquidity requirements. Although the past cannot predict the future, historically, management has been successful at extending a portion of our current maturity obligations and selling assets as necessary to meet current obligations.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated statements of cash flows as presented in Part I, Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow:
| For the Nine Months Ended September 30, | ||||||||||||
| 2020 | 2019 | Incr /(Decr) | ||||||||||
| Net cash (used in) operating activities | $ | (15,163 | ) | $ | (9,288 | ) | $ | (5,875 | ) | |||
| Net cash provided by (used in) investing activities | $ | 12,355 | $ | (16,782 | ) | $ | 29,137 | |||||
| Net cash (used in) provided by financing activities | $ | (19,456 | ) | $ | 19,457 | $ | (38,913 | ) | ||||
Our 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 from operating activities is from rental income on properties. In addition, we have a related party account in which excess cash is transferred to or from.
Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the nine months ended September 30, 2020, we advanced $15.7 million on various notes receivable, purchased real estate for development for $2.7 million, and invested approximately $12.5 million for the development and renovation of real estate. For the nine months ended September 30, 2019, we advanced $7.3 million on various notes receivable, purchased real estate for development for $3.4 million, and invested approximately $31.3 million for the development and renovation of real estate.
23
Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the nine months ended September 30, 2020, we received sales proceeds of $31.8 million from the sale of real estate and recorded a gain of $21.8 million. In addition, collected $3.5 million on note receivables and received $8.0 million on distributions from one of our unconsolidated joint ventures. For the nine months ended September 30, 2019, we received aggregate sales proceeds of $23.0 million from the sale of real estate and recorded a gain of $9.4 million. In addition, collected $0.3 million on note receivables and received $1.9 million on distributions from one of our unconsolidated joint ventures.
Our primary sources of cash from financing activities are from proceeds on notes payables either through refinancing our existing loans or by obtaining new financing. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.
During the nine months ended September 30, 2020, the decrease in cash flow from financing activities is primarily due to a payment on bond principal of $21.7 million, and payments on our outstanding notes of $7.9 million, partially offset by proceeds from borrowings of approximately $10.2 million. During the nine months ended September 30, 2019, we received $78.1 million from the sale of nonconvertible Series C Bonds by Southern and from borrowings of approximately $10.2 million, which were partially offset by payments on bond principal of $21.7 million and mortgage debt of $45.6 million.
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. Revenues from property operations tend to fluctuate proportionately with inflationary increases, market conditions and decreases in real estate costs. Fluctuations in the rate of inflation also affect sales values 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, the cost of new financings and the cost of variable interest rate debt will be affected.
Tax Matters
We are a member of the May Realty Holdings, Inc., (“MRHI”) consolidated group for federal income tax reporting. There is a tax sharing and compensating agreement between American Realty Investors, Inc. (“ARL”), Income Opportunities Realty Investors, Inc. (“IOR”), and the Company.
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.
For the quarter ended September 30, 2020, we had income before income taxes of $8.9 million driven mostly by the gains from sale of assets of $21.8 million.
24
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.
As of September 30, 2020, our outstanding notes payable balance was $242.3 million, out of which $235.2 million were notes with fixed interest rates and $7.1 million represented a note with a variable interest rate of 3.75%. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, would increase by $0.02 million, and would result in a decrease of $0.003 in our earnings per share.
At September 30, 2020, our weighted average borrowing rate was approximately 5.35%. Our variable rate exposure is mitigated through the ability to secure long-term fixed rate HUD financing on the multifamily apartment communities.
| 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.
| ITEM 1. | LEGAL PROCEEDINGS |
The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although we are involved in various items of litigation incidental to and in the ordinary course of its business, we believe the outcome of such litigation will not have a material adverse impact upon our financial condition, results of operation or liquidity
| ITEM 1A. | RISK FACTORS |
Except as set forth below, there have been no material changes from the risk factors previously disclosed in the 2019 10-K. For a discussion on these risk factors, please see “Item 1A. Risk Factors” contained in the 2019 10-K.
Risks Related to COVID-19 Pandemic
We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and our property portfolio. While we did not incur significant disruptions during the three months ended September 30, 2020 from the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. The pandemic is having a significant impact on the U.S. economy and on the local markets in which our properties are located. Nearly every industry has been impacted directly or indirectly, and the commercial real estate market has come under pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, and restrictions on travel and “shelter-in-place” or “stay-at-home” orders.
25
The following provides an overview of the impact of COVID-19 on our financial condition, results of operations and cash flows.
| ● | We have collected approximately 96% of our third quarter rents, comprised of approximately 95% from multi-family tenants and 97% from office tenants. |
| ● | We have not granted any abatements or granted any significant deferments of contractual rents. |
| ● | Occupancy remains stable at 91% at September 30, 2020 and 2019. |
| ● | We continue to obtain positive leasing spreads for new leases and renewals at properties. |
| ● | Our ground up development work continues unabated and thus far we have not experienced any work stoppages. |
In addition, we believe that our financing activities will not be significantly impacted by COVID-19, as most of our mortgage notes payable are secured by HUD guarantees which have long-term maturities.
The future impact of COVID-19 on our business and financial activities will depend on future developments, which at this stage are unpredictable considering the fluctuations of COVID-19 outbreaks and the resulting changes in the markets.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of our common stock. In September 2000, the Board increased this authorization to 1,387,000 shares. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,637,000 shares of our common stock. This repurchase program has no termination date. There were no shares purchased under this program during the first nine months ended September 30, 2020. As of September 30, 2020, 1,230,535 shares have been purchased and 406,465 shares may be purchased under the program.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable
| ITEM 5. | OTHER INFORMATION |
None
26
| ITEM 6. | EXHIBITS |
The following exhibits are filed with this report or incorporated by reference as indicated;
|
Exhibit
Number |
Description | |
| 3.0 | Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991). | |
| 3.1 | Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996). | |
| 3.2 | Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). | |
| 3.3 | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998). | |
| 3.4 | Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). | |
| 3.5 | Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). | |
| 3.6 | Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001). | |
| 3.7 | By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991). |
| 3.8 | Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrant’s Current Report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof). | |
| 10.1 | Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc., and Pillar Income Asset Management, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K for event occurring May 2, 2011). | |
| 31.1* | Certification of the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. | |
27
| 32.1* | Certification pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith.
28
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.
| TRANSCONTINENTAL REALTY INVESTORS, INC. | ||
| Date: November 12, 2020 | By: | /s/ Erik L. Johnson |
| Erik L. Johnson | ||
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
|
||
29