TRANSCONTINENTAL REALTY INVESTORS, INC. 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 endedDecember 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."
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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
? 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 theSEC .
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.
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As ofSeptember 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 endedSeptember 30, 2020 , we sold (i) a total of 62.0 acres of land from our holdings inWindmill Farms for$20.2 million , in aggregate, resulting in gains on sale of$15.2 million ; (ii)Bridgeview Plaza , a retail property inLa 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 inPort Arthur, Texas for$13.3 million , resulting in a
gain on sale of$2.7 million .
During the nine months endedSeptember 30, 2020 , we acquired (i) 49.2 acres of land inKent, 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 onNovember 13, 2024 ; (ii) 0.7 acres of commercial land inLewisville, Texas for$0.1 million , and (iii) 1.3 acres of land inMcKinney, 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 byPillar 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
Critical Accounting Policies The preparation of our consolidated financial statements in conformity withUnited 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 endedSeptember 30, 2020 and 2019, as included in Part I, Item 1. "Financial Statements" of this report. AtSeptember 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
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
Depreciation and amortization increased by
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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
Mortgage and loan interest expense was
Loss on foreign currency transactions was
Income (loss) from unconsolidated joint ventures was
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
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
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
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 theU.S. Dollar against the Israel Shekels due to perceived liquidity issues inIsrael as a result of the global pandemic outbreak in 2020.
Loss from unconsolidated joint ventures was a net of
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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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 theMay 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
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