INCOME OPPORTUNITY REALTY INVESTORS, INC. 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:
? risks associated with the availability and terms of financing and the
use of debt to fund acquisitions and developments;
? failure to manage effectively our growth and expansion into new markets
or to integrate acquisitions successfully;
? risks associated with downturns in the national and local economies,
increases in interest rates and volatility in the securities markets;
? 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
As further set forth under the caption "Risk Factors" in Par I, Item 1A of the Form 10-K, the recent coronavirus ("COVID-19") pandemic as well as the response to mitigate its spread and effect, may adversely impact our Company. We will continue to actively monitor the situation and make further actions as may be required by governmental authorities or that we determine are in the best interest of the Company.
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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
Overview
We are an externally advised and managed investment company. We have no employees.
Our primary source of revenue is from the interest income on approximately
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.
Critical Accounting Policies
We present our Consolidated Financial Statements in accordance with generally
accepted accounting principles in
Recognition of Revenue
Our revenues are composed largely of interest income on notes receivable recorded in accordance with the terms of the notes.
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.
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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 3 "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
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
On
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Results of Operations
The following discussion is based on our "Statement of Operations" for the three
months ended
Our primary business is currently investing in mortgage receivables. Our principal source of revenue is interest income generated from notes receivables due from related parties. We also receive interest income from the funds deposited with our Advisor at a rate of prime plus 1%. Our operating expenses consist mainly of general and administration costs related to the Company.
Comparison of the three months ended
We had net income of
Expenses
General and administrative expenses were
Advisory fees were
Net income fee to related party was
Other income (expense)
Interest income decreased to
Other income was
Liquidity and Capital Resources
General
Our principal liquidity needs are to fund normal recurring expenses. And our principal sources of cash are and will continue to be the collection of mortgage notes receivables, and the collections of receivables and interest from related companies.
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Cash Flow Summary
The following summary discussion of our cash flows is based on the Consolidated
Statements 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):
For the Three Months Ended
March 31,
2021 2020 Variance
(dollars in thousands)
Net cash provided by operating
activities $ 3,769 $ 1,284 $ 2,485
Net cash used in investing
activities $ (3,781 ) $ (1,275 ) $ (2,506 ) The primary use of cash for operations is daily operating costs, general and administrative expenses, and advisory fees. Our primary source of cash for operations is from interest income on notes receivable.
Our primary cash outlays for investing activities are for investment of excess cash with our Advisor. The investing activity in the current period was mainly due to the proceeds received on the notes receivable. We invested more cash with our Advisor in the current period.
We did not pay quarterly dividends during the three months ended
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
IOR is a member of the
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, amortization of discounts on notes receivable and payable and the
difference in the allowance for estimated losses. IOR has taxable income for the
first three months of 2021 on a standalone basis. The income tax expense for
the three months ending
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