ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes in Part II, Item 8 of this Report. Our results of operations for the year ended December 31, 2022 were affected by the acquisitions and disposition, refinancing activity, development activity as discussed below.
Management's Overview
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 throughout the Southern United States. Our portfolio of income-producing properties generally includes multifamily residential properties, 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.
Our operations are managed by Pillar in accordance with an Advisory Agreement. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges our debt and equity financing with third party lenders and investors. We rely upon on the employees of Pillar render services to us in accordance with the terms of the Advisory Agreement. Pillar is considered to be a related party due to its common ownership with ARL, who is our controlling stockholder.
The following is a summary of our recent acquisition, disposition, financing and development activities:
Acquisitions and Dispositions
•On March 30, 2021, we sold a 50% ownership interest in Overlook at Allensville Phase II, a 144 unit multifamily property in Sevierville, Tennessee to Macquarie, for $2.6 million resulting in a gain on sale of $1.4 million. Concurrent with the sale, we each contributed our 50% ownership interests in Overlook at Allensville Phase II into VAA.
•On August 26, 2021, we sold 600 Las Colinas, a 512,173 square foot office building in Irving, Texas for $74.8 million, resulting in a gain on sale of $27.3 million. We used the proceeds to pay off the mortgage note payable on the property (See "Financing Activities") and for general corporate purposes.
•During the year ended December 31, 2021, we sold a total of 134.7 acres of land from our holdings in Windmill Farms for $20.2 million in aggregate, resulting in gains on sale of $10.3 million. In addition, we sold 14.1 acres of land from our holdings in Mercer Crossing for $9.0 million, resulting in a gain on sale of $6.4 million.
•On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $26.8 million, resulting in a gain on sale of $9.4 million. We used the proceeds to pay off the $14.7 million mortgage note payable on the property and for general corporate purposes.
•On May 17, 2022, we sold Fruitland Park, a 6,722 square foot commercial building in Fruitland Park, Florida for $0.8 million, resulting in a gain on sale of $0.7 million. We used the proceeds for general corporate purposes.
•On September 16, 2022, we sold Sugar Mill Phase III, a 72 unit multifamily property in Baton Rouge, Louisiana for $11.8 million in connection with a sale of properties by VAA (See "Other Developments"), resulting in a gain on sale of $1.9 million. We used the proceeds to pay off the $9.6 million mortgage note payable on the property and for general corporate purposes.
•On November 1, 2022, we acquired seven multifamily properties from VAA (See "Other Developments") with a fair value of $219.5 million.
•During the year ended December 31, 2022, we sold a total of 26.9 acres of land from our holdings in Windmill Farms for $5.1 million in aggregate, resulting in gains on sale of $4.2 million. In addition, we sold 0.9 acres of land from our holdings in Mercer Crossing for $0.7 million, resulting in a gain on sale of $0.2 million.
Financing Activities
•On March 2, 2021, we extended our $1.2 million loan on Athens to August 28, 2022.
•On March 4, 2021, we extended the maturity of our $6.4 million loan on Windmill Farms until February 28, 2023 at a reduced interest rate of 5%.
•On August 25, 2021, we replaced the existing loan on Villas at Bon Secour with a new $20.0 million loan that bears interest at 3.08% and matures on September 1, 2031.
•On August 26, 2021, we paid off the $35.9 million loan on 600 Las Colinas in connection with the sale of the underlying property (See "Acquisitions and Dispositions").
•On January 14, 2022, we paid off the $14.7 million loan on Toulon in connection with the sale of the underlying property (See "Acquisitions and Dispositions").
•On March 3, 2022, the loan on Stanford Center was extended to February 26, 2023.
•On September 1, 2022, we extended our $1.2 million loan on Athens to August 28, 2023.
•On September 16, 2022, the $9.6 million loan on Sugar Mill Phase III was paid off in connection with the sale of the underlying property (See "Acquisitions and Dispositions").
•On October 21, 2022, we paid off the $38.5 million loan on Stanford Center from the cash generated from sale of the VAA Sale Portfolio.
•On November 1, 2022, we assumed the $70.3 million mortgage notes payable on the VAA Holdback Portfolio in connection with the distribution of the underlying properties from VAA (See "Other Developments").
•On January 31, 2023, we paid off our $66.5 million Series C bonds.
Development Activities
During 2022, we spent $6.0 million on our ongoing development of Windmill Farms. Our expenditure includes $1.2 million on the development of land lots for sale to single family home developers and $4.8 million on reimbursable infrastructure investments.
We have investment in nine notes receivable that were issued to fund the development of multifamily properties. Each of these notes are convertible, at our option, into a 100% ownership interest in the underlying property. As of December 31, 2022, one of the projects was in construction, one was in lease-up and seven were stabilized. In 2022, we advanced $2.1 million on these development notes.
Other Developments:
During 2021, we recorded a loss of $29.6 million on the remeasurements of certain assets ("Earn Out Obligation") that were sold in connection with our initial investment in VAA.
On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale Portfolio”) held by VAA and one property held by our SPC subsidiary.
On September 15, 2022, we entered a Distribution and Holdback Property Agreement (“Distribution Agreement”) with Macquarie, which provides the timing and ordering of the distribution of the net proceeds from the sale of the VAA Sale Portfolio, the repayment of the Mezzanine Loans, and the distribution of the remaining seven properties of VAA (“VAA Holdback Portfolio”).
On September 16, 2022, VAA completed the sale of the VAA Sale Portfolio for $1.8 billion, resulting in gain on sale of $738.4 million to the joint venture. In connection with sale, we received an initial distribution of $182.8 million from VAA, which included the payment of the remaining balance of our Earn Out Obligation to Macquarie.
On November 1, 2022, in connection with the sale of the VAA Sale Portfolio, we received an additional distribution from VAA, which included a cash payment of $204.0 million and the full operational control of the VAA Holdback Portfolio, which resulted a $73.2 million gain on the remeasurement of assets. We are in the process of negotiating the assumption of the mortgage notes payable on the VAA Holdback Portfolio.
Our ownership interest in VAA is held by SPC, and and therefore our share of the proceeds from the sale of the VAA Sale Portfolio is subject to the debt covenants on the bonds issued by SPC.These provisions include restrictions on the distribution of cash from SPC.
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.
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 an orderly transaction between willing market participants at the measurement date that is other than a forced or liquidation sale, 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.
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.
We are 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 and decreases in housing 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, our earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.
Results of Operations
Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to the Redevelopment Property, the Acquisition Properties and the Disposition Properties (each as defined below).
For purposes of the discussion below, we define "Same Properties" as all of our properties with the exception of those properties that have been recently constructed or leased-up (“Redevelopment Property”), properties that have recently been acquired ("Acquisition Properties") and properties that have been disposed ("Disposition Properties"). A developed property is considered leased-up, when it achieves occupancy of 80% or more. We move a property in and out of Same Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison.
For the comparison of the year ended December 31, 2022 to the year ended December 31, 2021, the Redevelopment Property is Landing Bayou. The Acquisition Properties are Blue Lake Villas, Blue Lake Villas Phase II, Northside on Travis, Parc at Denham Springs, Residences at Holland Lake, Villas of Park West I and Villas of Park West II. The Disposition Properties are 600 Las Colinas, Fruitland Park, Overlook at Allensville Phase II, Sugar Mill Phase III and Toulon.
The following table provides a summary of the results of operations of 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| | 2022 | | 2021 | | Variance |
| Multifamily Segment | | | | | | |
| Revenue | | $ | 17,828 | | | $ | 14,495 | | | $ | 3,333 | |
| Operating expenses | | (9,524) | | | (8,167) | | | (1,357) | |
| | 8,304 | | | 6,328 | | | 1,976 | |
| Commercial Segment | | | | | | |
| Revenue | | 16,252 | | | 23,313 | | | (7,061) | |
| Operating expenses | | (8,815) | | | (12,693) | | | 3,878 | |
| | 7,437 | | | 10,620 | | | (3,183) | |
| Segment operating income | | 15,741 | | | 16,948 | | | (1,207) | |
| Other non-segment items of income (expense) | | | | | | |
| Depreciation and amortization | | (9,686) | | | (11,870) | | | 2,184 | |
| General, administrative and advisory | | (17,917) | | | (24,207) | | | 6,290 | |
| Interest, net | | 6,932 | | | (5,028) | | | 11,960 | |
| Loss on early extinguishment of debt | | (2,805) | | | (1,451) | | | (1,354) | |
| Gain (loss) on foreign currency transactions | | 20,067 | | | (6,175) | | | 26,242 | |
| Gain on sale, remeasurement or write down of assets | | 89,196 | | | 23,352 | | | 65,844 | |
| Income from joint venture | | 468,086 | | | 14,531 | | | 453,555 | |
| Other (expense) income | | (100,610) | | | 3,977 | | | (104,587) | |
| Net income | | $ | 469,004 | | | $ | 10,077 | | | $ | 458,927 | |
Comparison of the year ended December 31, 2022 to the year ended December 31, 2021:
Our $458.9 million increase in net income in 2022 is primarily attributed to the following:
•The $2.0 million increase in profit the multifamily is due to increases of $2.5 million from the Acquisition Properties and $0.4 million from the Same Properties offset in part be a decrease of $0.6 million from the Disposition Properties and $0.3 million from the Redevelopment Property.
•The $3.2 million decrease in profit from the commercial properties is due to a decrease of $2.6 million from the Disposition Properties and $0.6 million from the Same Properties.
•The decrease in general, administrative and advisory expenses is primarily due to the decrease in legal costs from the arbitration settlement in 2021(See "Other Developments" in Management's Overview) and a decrease in other administrative and advisory costs.
•The change in interest, net is due a $7.2 million increase in interest income and $4.8 million decrease in interest expense. The increase in interest income is due to an increase in interest from our convertible loans, an increase in interest rates and an increase in short term investments in 2022. The increase in short-term investments is due the $388.0 million in cash distributions received from VAA in 2022 (See "Other Developments" in Management's Overview). The decrease in interest expense is primarily due to the pay down of our bonds payable and the repayment of mortgage notes payable on properties sold in 2021 and 2022 (See "Acquisitions and Dispositions" in Management's Overview).
•The increase in gain on foreign currency transactions is due to a favorable change in the U.S. Dollar and the New Israeli Shekel conversion rate.
•Gain on sale, remeasurement or write down of assets increased $65.8 million from $23.4 million in 2021 to $89.2 million in 2022. The increase is due to the $73.2 million gain on remeasurement of the VAA Holdback Portfolio in 2022 and other transactions described in "Other Developments" and "Acquisitions and Dispositions" in Management's Overview.
•The increase in income from joint venture is primarily due our share of the gain on the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in Management's Overview).
•The change in other (expense) income is primarily due to the $104.2 million increase in tax expense as a result of the sale of the VAA Sale Portfolio in 2022.
Comparison of the year ended December 31, 2021 to the year ended December 31, 2020:
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 29, 2022 for a discussion of our results of operations for the year ended December 31, 2021.
Liquidity and Capital Resources
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; collections of receivables from related companies; refinancing of existing mortgage notes payable; and additional borrowings, including mortgage notes and bonds payable, and lines of credit.
Our principal liquidity needs are to 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.
We anticipates that our cash, cash equivalents and short-term investments as of December 31, 2022, along with cash that will be generated in 2023 from notes and interest receivables, will be sufficient to meet all of our cash requirements. We intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet our liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of our current maturity obligations.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | Variance |
| Net cash used in operating activities | $ | (45,394) | | | $ | (10,986) | | | $ | (34,408) | |
| Net cash provided by investing activities | $ | 307,357 | | | $ | 100,325 | | | $ | 207,032 | |
| Net cash used in financing activities | $ | (112,377) | | | $ | (103,585) | | | $ | (8,792) | |
The increase in cash used in operating activities is primarily due to payments of taxes related to our share of the gain on the sale of VAA Sale Portfolio in 2022.
The increase in cash provided by investing activities is primarily due the $376.9 million increase in distribution from joint venture and the $175.3 million redemption of short term investments in 2022 offset in part by the $261.6 million purchase of short term investments in 2022, the $61.0 million decrease in proceeds from the sale of real estate and the $14.6 million decrease in collection of notes receivable. The increase in distribution from joint venture is due to the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in Management's Overview).
The increase in cash used in financing activities is primarily due to the $20.0 million proceeds from mortgages, notes and bonds payable in 2021 offset in part by a $7.9 million decrease in payments of mortgages, notes and bonds payable.
Funds From Operations ("FFO")
We use FFO in addition to net income to report our operating and financial results and considers FFO and FFO-diluted as supplemental measures for the real estate industry and a supplement to GAAP measures. The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of properties, plus real estate related depreciation and amortization, impairment write-downs of real estate and write-downs of investments in an affiliate where the write-downs have been driven by a decrease in the value of real estate held by the affiliate and after adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. We also presents FFO excluding the impact of the effects of foreign currency translation.
FFO and FFO on a diluted basis are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization, as we believe real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. We believe that such a presentation also provides investors with a meaningful measure of our operating results in comparison to the operating results of other real estate companies. In addition, we believe that FFO excluding gain (loss) from foreign currency transactions provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results.
We believe that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs. We also caution that FFO, as presented, may not be comparable to similarly titled measures reported by other real estate companies.
We compensate for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of net income to FFO and FFO-diluted. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.
The following reconciles our net income attributable to FFO and FFO-basic and diluted, excluding the loss from foreign currency transactions and the loss on extinguishment of debt for the years ended December 31, 2022, 2021 and 2020 (dollars and shares in thousands):
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Net income attributable to the Company | $ | 468,262 | | | $ | 9,398 | | | $ | 6,669 | |
| Depreciation and amortization on consolidated assets | 9,686 | | | 11,870 | | | 14,755 | |
| Gain on sale, remeasurement or write down of assets | (89,196) | | | (23,352) | | | (32,107) | |
| Gain on sale of land | 4,752 | | | 16,645 | | | 23,383 | |
| Gain on sale of assets from unconsolidated joint venture at our pro rata share | (367,772) | | | — | | | — | |
| Depreciation and amortization on unconsolidated joint venture at our pro rata share | 8,229 | | | 11,604 | | | 11,295 | |
| FFO-Basic and Diluted | 33,961 | | | 26,165 | | | 23,995 | |
| Loss on early extinguishment of debt | 2,805 | | | 1,451 | | | — | |
| Loss on early extinguishment of debt from unconsolidated joint venture at our pro rata share | 15,254 | | | — | | | — | |
| (Gain) loss on foreign currency transactions | (20,067) | | | 6,175 | | | 13,378 | |
| FFO-adjusted | $ | 31,953 | | | $ | 33,791 | | | $ | 37,373 | |
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of and
Stockholders of Transcontinental Realty Investors, Inc.
Dallas, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American Realty Investors, Inc. as of December 31, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis of Opinion
These consolidated financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of investment in real estate
Description of the Matter
The Company’s net investment in real estate totaled $493.8 million as of December 31, 2022. As discussed in Note 2 to the consolidated financial statements, the Company periodically assesses whether there has been any impairment in the carrying value of its properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. Impairment is recognized on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows for a real estate asset are less than its carrying amount, at which time the real estate asset is written down to its estimated fair value.
Auditing the Company's impairment assessment for real estate assets was complex because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. Our evaluation of management’s identification of indicators of impairment included our related assessment of such indicators, either individually or in combination, in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the real estate asset.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company’s controls over the Company’s real estate asset impairment assessment process. Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment existed for the Company’s real estate assets. Our procedures included obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, including searching for significant tenant write-offs or upcoming lease expirations with little prospects for replacement tenants. We also searched for any significant declines in operating results of a real estate asset due that could be a triggering event or an indicator of potential impairment.
Collectability of Notes Receivable
Description of the Matter
At December 31, 2022, the Company had notes receivable in the amount of $129.3 million. The Company performs an assessment as to whether or not substantially all of the amounts due under these notes receivable is deemed probable of collection. Subsequently, for notes where the Company concludes that it is not probable that it will collect substantially all payments due under the note, the Company creates an allowance for any amounts not probable of collection.
Auditing the Company's collectability assessment is complex due to the judgment involved in the Company’s determination of the collectability of these notes. The determination involves consideration of the terms of the note, whether or not the note is currently performing, and any security for the note.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company's controls over notes receivable and their collectability assessment. Our testing included among other things, confirming selected notes receivable, determining if the notes were performing according to their terms and testing the Company’s evaluation of the underlying security interest if necessary.
Revenue Recognition (straight-line) for commercial tenants
Description of the Matter
During 2022, the Company recognized office rental revenues and tenant recoveries of $16.3 million and deferred rent receivables of $2.4 million at December 31, 2022. As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from commercial properties on a straight-line basis over the terms of the related leases.
Auditing the Company's straight-line calculations is complex due to the free rent periods, lease amendments and escalation clauses contained in many of the leases.
How We Addressed the Matter in Our Audit
We obtained an understanding of the Company's controls over office rental revenues and tenant recoveries, including controls over management’s calculation of the straight-line calculation and deferred rent receivable. To test the straight-line rent revenue and deferred rent receivable, we performed audit procedures that included, among others, evaluating the data and assumptions used in determining the calculation and agreeing amounts in the calculation to copies of lease agreements. In addition, we tested the completeness and accuracy of the data that was used in management’s straight-line rent and deferred rent receivable calculation.
Emphasis of Liquidity
As described in the Note 19, management intends to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet the Company’s liquidity requirements.
Supplemental Information
The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole.
FARMER, FUQUA & HUFF, PC
Richardson, Texas
March 23, 2023
We have served as the Company’s auditor since 2004.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value amounts)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Assets: | | | |
| Real estate | $ | 493,821 | | | $ | 296,363 | |
| Cash and cash equivalents | 113,424 | | | 50,735 | |
| Restricted cash | 108,883 | | | 21,986 | |
| Short-term investments | 119,787 | | | 16,001 | |
Notes receivable (including $66,630 and $68,991 at December 31, 2022 and 2021, respectively, from related parties) | 129,304 | | | 129,726 | |
| Investment in unconsolidated joint ventures | 20,904 | | | 52,879 | |
| Receivable from related parties | 147,142 | | | 136,715 | |
Other assets (including $4,040 and $4,223 at December 31, 2022 and 2021, respectively, from related parties) | 84,900 | | | 84,004 | |
| Total assets | $ | 1,218,165 | | | $ | 788,409 | |
| | | |
| Liabilities and Equity | | | |
| Liabilities: | | | |
| Mortgages and other notes payable | $ | 184,462 | | | $ | 176,750 | |
| Bonds payable | 129,218 | | | 189,452 | |
Accounts payable and other liabilities (including $599 and $616 at December 31, 2022 and 2021, respectively, to related parties) | 58,094 | | | 43,602 | |
| Interest payable | 5,198 | | | 6,416 | |
| Deferred revenue | 581 | | | 581 | |
| Total liabilities | 377,553 | | | 416,801 | |
| | | |
| Equity: | | | |
| Shareholders' equity | | | |
Common stock, $0.01 par value, 10,000,000 shares authorized; 8,639,316 shares issued, 8,639,116 outstanding | 86 | | | 86 | |
| | | |
| Additional paid-in capital | 260,387 | | | 260,387 | |
| Retained earnings | 558,994 | | | 90,732 | |
| Total shareholders’ equity | 819,467 | | | 351,205 | |
| Noncontrolling interest | 21,145 | | | 20,403 | |
| Total equity | 840,612 | | | 371,608 | |
| Total liabilities and equity | $ | 1,218,165 | | | $ | 788,409 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Revenues: | | | | | |
Rental revenues (including $931, $944 and $1,083 for 2022, 2021 and 2020, respectively, from related parties) | $ | 34,080 | | | $ | 37,808 | | | $ | 51,909 | |
| Other income | 2,580 | | | 2,966 | | | 5,113 | |
| Total revenue | 36,660 | | | 40,774 | | | 57,022 | |
| Expenses: | | | | | |
Property operating expenses (including $433, $889 and $990 for 2022, 2021 and 2020, respectively, from related parties) | 18,339 | | | 20,860 | | | 24,360 | |
| Depreciation and amortization | 9,686 | | | 11,870 | | | 14,755 | |
General and administrative (including $3,899, $4,091 and $3,869 for 2022, 2021 and 2020, respectively, from related parties) | 9,943 | | | 12,425 | | | 9,287 | |
| Advisory fee to related party | 7,974 | | | 11,782 | | | 8,648 | |
| Total operating expenses | 45,942 | | | 56,937 | | | 57,050 | |
| Net operating loss | (9,282) | | | (16,163) | | | (28) | |
Interest income (including $19,211, $15,950 and $19,515 for 2022, 2021 and 2020, respectively, from related parties) | 26,745 | | | 19,572 | | | 18,660 | |
Interest expense (including $2,497, $1,621 and $1,581 for 2022, 2021 and 2020, respectively, from related parties) | (19,813) | | | (24,600) | | | (29,374) | |
| Gain (loss) on foreign currency transactions | 20,067 | | | (6,175) | | | (13,378) | |
| Loss on early extinguishment of debt | (2,805) | | | (1,451) | | | — | |
| Equity in income (loss) from unconsolidated joint venture | 468,086 | | | 14,531 | | | (519) | |
| Gain on sale, remeasurement or write down of assets, net | 89,196 | | | 23,352 | | | 32,107 | |
| Income tax provision | (103,190) | | | 1,011 | | | (4) | |
| Net income | 469,004 | | | 10,077 | | | 7,464 | |
| Net income attributable to noncontrolling interest | (742) | | | (679) | | | (795) | |
| Net income attributable to the Company | 468,262 | | | 9,398 | | | 6,669 | |
| | | | | |
| | | | | |
| Earnings per share | | | | | |
| Basic and diluted | $ | 54.20 | | | $ | 1.09 | | | $ | 0.77 | |
| Weighted average common shares used in computing earnings per share | | | | | |
| Basic and diluted | 8,639,316 | | | 8,639,316 | | | 8,639,316 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF EQUITY
(Dollars in thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury
Stock | | Paid-in
Capital | | Retained
Earnings | | Total Shareholders' Equity | | Noncontrolling
Interest | | Total Equity |
|
| Balance, January 1, 2020 | | $ | 86 | | | $ | (2) | | | $ | 257,854 | | | $ | 74,665 | | | $ | 332,603 | | | $ | 21,464 | | | $ | 354,067 | |
| Net income | | — | | | — | | | — | | | 6,669 | | | 6,669 | | | 795 | | | 7,464 | |
| Adjustment to noncontrolling interest | | — | | | — | | | 2,535 | | | — | | | 2,535 | | | (2,535) | | | — | |
| Balance, December 31, 2020 | | 86 | | | (2) | | | 260,389 | | | 81,334 | | | 341,807 | | | 19,724 | | | 361,531 | |
| Net income | | — | | | — | | | — | | | 9,398 | | | 9,398 | | | 679 | | | 10,077 | |
| Cancellation of treasury stock | | — | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
| Balance, December 31, 2021 | | 86 | | | — | | | 260,387 | | | 90,732 | | | 351,205 | | | 20,403 | | | 371,608 | |
| Net income | | — | | | — | | | — | | | 468,262 | | | 468,262 | | | 742 | | | 469,004 | |
| Balance, December 31, 2022 | | $ | 86 | | | $ | — | | | $ | 260,387 | | | $ | 558,994 | | | $ | 819,467 | | | $ | 21,145 | | | $ | 840,612 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash Flow From Operating Activities: | | | | | |
| Net income | $ | 469,004 | | | $ | 10,077 | | | $ | 7,464 | |
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | |
| Gain on sale, remeasurement or write down of assets | (89,196) | | | (23,352) | | | (32,107) | |
| (Gain) loss income on foreign currency transactions | (20,067) | | | 6,175 | | | 13,378 | |
| Loss on early extinguishment of debt | 2,805 | | | 1,451 | | | — | |
| Depreciation and amortization | 13,111 | | | 15,029 | | | 18,579 | |
| Provision (recovery) for bad debts | 140 | | | (1,017) | | | 984 | |
| Equity in (income) loss from unconsolidated joint venture | (468,086) | | | (14,531) | | | 519 | |
| Distribution of income from unconsolidated joint ventures | 2,600 | | | 3,157 | | | 1,782 | |
| Changes in assets and liabilities, net of acquisitions and dispositions: | | | | | |
| Other assets | 5,763 | | | (12,928) | | | (7,397) | |
| Related party receivables | (7,327) | | | 12,572 | | | 4,389 | |
| Accrued interest payable | (1,169) | | | (2,909) | | | (1,340) | |
| Accounts payable and other liabilities | 47,028 | | | (4,710) | | | (620) | |
| Net cash (used in) provided by operating activities | (45,394) | | | (10,986) | | | 5,631 | |
| Cash Flow From Investing Activities: | | | | | |
| Collection of notes receivable | 3,027 | | | 17,674 | | | 4,436 | |
| Originations and advances on notes receivable | (2,305) | | | (4,968) | | | (33,015) | |
| Purchase of short-term investments | (277,641) | | | (16,000) | | | — | |
| Redemption of short-term investments | 175,250 | | | — | | | — | |
| Development and renovation of real estate | (18,686) | | | (8,070) | | | (17,505) | |
| Deferred leasing costs | (1,163) | | | (877) | | | (2,603) | |
| Proceeds from sale of assets | 44,591 | | | 105,547 | | | 40,982 | |
| Contribution to unconsolidated joint venture | — | | | (411) | | | — | |
| Distributions from unconsolidated joint venture | 384,284 | | | 7,430 | | | 8,086 | |
| Net cash provided by investing activities | 307,357 | | | 100,325 | | | 381 | |
| Cash Flow From Financing Activities: | | | | | |
| Proceeds from mortgages, other notes and bonds payable | — | | | 20,015 | | | 30,727 | |
| Payments on mortgages, other notes and bonds payable | (111,022) | | | (118,900) | | | (31,736) | |
| Debt extinguishment costs | (1,355) | | | (4,086) | | | — | |
| Deferred financing costs | — | | | (614) | | | (1,297) | |
| | | | | |
| Net cash used in financing activities | (112,377) | | | (103,585) | | | (2,306) | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 149,586 | | | (14,246) | | | 3,706 | |
| Cash, cash equivalents and restricted cash, beginning of year | 72,721 | | | 86,967 | | | 83,261 | |
| Cash, cash equivalents and restricted cash, end of year | $ | 222,307 | | | $ | 72,721 | | | $ | 86,967 | |
The accompanying notes are an integral part of these consolidated financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 on the New York Stock Exchange (“NYSE”) under the symbol “TCI”. Approximately 78% of our common stock is owned by American Realty Investors, Inc. (“ARL”), whose common stock is listed on the NYSE under the symbol “ARL”, and 7% is owned by the controlling stockholder of ARL.
Our primary business is the acquisition, development and ownership of income-producing residential 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 income from the sales of income-producing properties and land.
Substantially all of our assets are held by our wholly-owned subsidiary, Southern Properties Capital Ltd. (“SPC”), which was formed to allow us to raise funds by issuing non-convertible bonds that are listed and traded on the Tel-Aviv Stock Exchange ("TASE").
At December 31, 2022, our property portfolio consisted of:
● Four office buildings ("commercial properties") comprising in aggregate of approximately 1,056,793 square feet;
● Fourteen multifamily properties comprising in 2,328 units; and
● Approximately 1,858 acres of developed and undeveloped land.
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-related investment opportunities and arranging debt and equity financing with third party lenders and investors. All of our employees are Pillar employees. Three of our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. All of our multifamily properties and one of our commercial properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 14 – Related Party Transactions).
2. Summary of Significant Accounting Policies
Basis of presentation
These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America.
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.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Real estate, depreciation, and impairment
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated remaining useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements—10 to 40 years; furniture, fixtures and equipment—5 to 10 years).
We assess whether an indicator of impairment in the value of our real estate exists by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include projected rental revenue, operating costs and capital expenditures as well as estimated holding periods and capitalization rates. If an impairment indicator exists, the determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. We generally hold and operate our income producing real estate long-term, which decreases the likelihood of their carrying values not being recoverable. Real estate classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell.
Cost capitalization
The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. We also capitalize development costs including costs directly related to planning, developing, initial leasing and constructing a property as well as interest, property taxes, insurance, and other direct project costs incurred during the period of development. Capitalized costs also include direct and certain indirect costs clearly associated with the project. Indirect costs include real estate taxes, insurance and certain shared administrative costs. In assessing the amounts of direct and indirect costs to be capitalized, allocations are made to projects based on estimates of the actual amount of time spent on each activity. Indirect costs not clearly associated with specific projects are expensed as period costs.
We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
Deferred leasing costs
We capitalize leasing costs on our commercial properties, which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement. We allocate these costs to individual tenant leases and amortize them over the related lease term.
Fair value measurement
Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date that is other than in a forced or liquidation sale. In determining fair value we apply the following hierarchy:
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.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Related parties
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.
Recognition of revenue
Rental revenue includes fixed minimum rents, reimbursement of operating costs and other leasing income. Rental revenue for residential property, which is generally leased for twelve months or less, is recorded when due from residents, whereas rental revenue for commercial properties, which is generally leased for more than twelve months, is recognized on a straight-line basis over the terms of the related leases.
Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.
An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.
Cash and Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value. Restricted cash includes cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable.
Concentration of credit risk
We maintain our cash balances at commercial banks and through investment companies, the deposits that are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 2022 and 2021, we maintained balances in excess of the insured amount.
Income taxes
We are a “C” corporation” for U.S. federal income tax purposes. However, we are included in the May Realty Holdings, Inc. ("MRHI") consolidated group for tax purposes. We have a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.
Comprehensive income
Net income and comprehensive income are the same for the year ended December 31, 2022, 2021 and 2020.
Use of estimates
In the preparation of consolidated financial statements in conformity with GAAP, it is necessary for 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 consolidated financial statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Recent accounting pronouncements.
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. We do not have any mortgage notes payable with interest rates that reference LIBOR, and therefore, the adoption of this standard did not have an impact on our consolidated financial statements.
3. Earnings Per Share
Earnings per share (“EPS”) has been computed by dividing net income available to common shares by the weighted-average number of common shares outstanding during the period.
The following table provides our basic and diluted EPS calculation: | | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Net income | $ | 469,004 | | | $ | 10,077 | | | $ | 7,464 | |
| Net income attributable to noncontrolling interest | (742) | | | (679) | | | (795) | |
| Net income attributable to the Company | 468,262 | | | 9,398 | | | 6,669 | |
| Weighted-average common shares outstanding-basic and diluted | 8,639 | | | 8,639 | | | 8,639 | |
| EPS - attributable to common shares- basic and diluted | $ | 54.20 | | | $ | 1.09 | | | $ | 0.77 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
4. Supplemental Cash Flow Information
The following presents the schedule of interest paid and other supplemental cash flow information:
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Cash paid for interest | $ | 17,802 | | | $ | 24,471 | | | $ | 27,127 | |
| Cash paid for income taxes | $ | 54,023 | | | $ | 682 | | | $ | 2,287 | |
| Cash, cash equivalents and restricted cash - beginning of year | | | | | |
| Cash and cash equivalents | $ | 50,735 | | | $ | 36,761 | | | $ | 51,179 | |
| Restricted cash | 21,986 | | | 50,206 | | | 32,082 | |
| $ | 72,721 | | | $ | 86,967 | | | $ | 83,261 | |
| Cash, cash equivalents, restricted cash - end of year | | | | | |
| Cash and cash equivalents | $ | 113,424 | | | $ | 50,735 | | | $ | 36,761 | |
| Restricted cash | 108,883 | | | 21,986 | | | 50,206 | |
| $ | 222,307 | | | $ | 72,721 | | | $ | 86,967 | |
| Proceeds from mortgages, other notes and bonds payable | | | | | |
| Mortgages and other notes payable | $ | — | | | $ | 20,015 | | | $ | 10,942 | |
| Bonds payable | — | | | — | | | 19,785 | |
| $ | — | | | $ | 20,015 | | | $ | 30,727 | |
| Payments on mortgages, other notes and bonds payable | | | | | |
| Mortgages and other notes payable | $ | 67,263 | | | $ | 65,242 | | | $ | 12,144 | |
| Bonds payable | 43,759 | | | 53,658 | | | 19,592 | |
| $ | 111,022 | | | $ | 118,900 | | | $ | 31,736 | |
The following is a schedule of noncash investing and financing activities:
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Assets distributed from joint venture | $ | 133,372 | | | $ | — | | | $ | — | |
| Liabilities assumed by joint venture | $ | 72,143 | | | $ | — | | | $ | — | |
| Distribution from joint venture applied to Earn Out Obligation | $ | 34,159 | | | $ | 5,441 | | | $ | — | |
| Assets contributed to joint venture | $ | — | | | $ | 18,608 | | | $ | — | |
| Liabilities assumed by joint venture | $ | — | | | $ | 15,606 | | | $ | — | |
| Notes receivable received in exchange for related party receivable | $ | — | | | $ | 9,259 | | | $ | — | |
| Property acquired in exchange for note payable | $ | — | | | $ | — | | | $ | 3,350 | |
| Note receivable issued in exchange for property | $ | — | | | $ | — | | | $ | 1,761 | |
| Debt assumed in sale of properties | $ | — | | | $ | — | | | $ | 8,238 | |
| | | | | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 properties ("Residential Segment") and (ii) the acquisition, ownership and management of commercial real estate properties ("Commercial Segment"). The services for our segments include rental of property 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 profit by reportable segment:
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Residential Segment | | | | | |
| Revenue | $ | 17,828 | | | $ | 14,495 | | | $ | 14,686 | |
| Operating expenses | (9,524) | | | (8,167) | | | (8,482) | |
| Profit from segment | 8,304 | | | 6,328 | | | 6,204 | |
| Commercial Segment | | | | | |
| Revenue | 16,252 | | | 23,313 | | | 37,223 | |
| Operating expenses | (8,815) | | | (12,693) | | | (15,878) | |
| Profit from segment | 7,437 | | | 10,620 | | | 21,345 | |
| Total profit from all segments | $ | 15,741 | | | $ | 16,948 | | | $ | 27,549 | |
The following table reconciles our profit by reportable segment to net income:
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Profit from reportable segments | $ | 15,741 | | | $ | 16,948 | | | $ | 27,549 | |
| Other non-segment items of income (expense) | | | | | |
| Depreciation and amortization | (9,686) | | | (11,870) | | | (14,755) | |
| General and administrative | (9,943) | | | (12,425) | | | (9,287) | |
| Advisory fee to related party | (7,974) | | | (11,782) | | | (8,648) | |
| Other income | 2,580 | | | 2,966 | | | 5,113 | |
| Interest income | 26,745 | | | 19,572 | | | 18,660 | |
| Interest expense | (19,813) | | | (24,600) | | | (29,374) | |
| Gain (loss) on foreign currency transactions | 20,067 | | | (6,175) | | | (13,378) | |
| Loss on early extinguishment of debt | (2,805) | | | (1,451) | | | — | |
| Equity in income (loss) from unconsolidated joint venture | 468,086 | | | 14,531 | | | (519) | |
| Gain on sale, remeasurement or write down of assets, net | 89,196 | | | 23,352 | | | 32,107 | |
| Income tax provision | (103,190) | | | 1,011 | | | (4) | |
| Net income | $ | 469,004 | | | $ | 10,077 | | | $ | 7,464 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The table below reconciles our segment information to the corresponding amounts in our consolidated balance sheets:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Segment assets | $ | 461,303 | | | $ | 263,937 | |
| Real estate | 67,747 | | | 63,945 | |
| Investment in unconsolidated joint venture | 20,904 | | | 52,879 | |
| Notes receivable | 129,304 | | | 129,726 | |
| Receivable from related parties | 147,142 | | | 136,715 | |
| Cash, short-term investments and other non-segment assets | 391,765 | | | 141,207 | |
| Total assets | $ | 1,218,165 | | | $ | 788,409 | |
6. Lease Revenue
We lease our multifamily properties 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 years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Fixed component | $ | 32,163 | | | $ | 35,555 | | | $ | 49,974 | |
| Variable component | 1,917 | | | 2,253 | | | 1,935 | |
| Total rental revenue | $ | 34,080 | | | $ | 37,808 | | | $ | 51,909 | |
The following table summarizes the future rental payments to us from under non-cancelable leases, which excludes multifamily properties, which typically have lease terms of one-year or less:
| | | | | | | | |
| Year | | Amount |
| 2023 | | $ | 11,620 | |
| 2024 | | 9,015 | |
| 2025 | | 8,638 | |
| 2026 | | 8,286 | |
| 2027 | | 8,012 | |
| Thereafter | | 21,713 | |
Total | | $ | 67,284 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
7. Real Estate Activity
At December 31, 2022 and 2021, our real estate investment is comprised of the following:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Land | $ | 108,933 | | | $ | 67,514 | |
| Building and improvements | 359,904 | | | 219,327 | |
| Tenant improvements | 25,611 | | | 21,364 | |
| Construction in progress | 65,427 | | | 51,091 | |
| Total cost | 559,875 | | | 359,296 | |
| Less accumulated deprecation | (66,054) | | | (62,933) | |
| | | |
| | | |
| Total real estate | $ | 493,821 | | | $ | 296,363 | |
Construction in progress consists of development of Windmill Farms and the renovation cost associated with Landing Bayou. We incurred depreciation expense of $8,962, $10,820 and $14,755 for the years ending December 31, 2022, 2021 and 2020, respectively.
Gain on sale, remeasurement or write down of assets, net consists of the following: | | | | | | | | | | | | | | | | | |
| For the Year Ended
December 31, |
| 2022 | | 2021 | | 2020 |
| Land(1) | $ | 4,752 | | | $ | 16,645 | | | $ | 23,383 | |
| Residential properties(2) | 83,758 | | | 9,110 | | | 3,702 | |
| Commercial properties(3) | 686 | | | 27,197 | | | 4,610 | |
| Other(4) | — | | | (29,600) | | | 412 | |
| $ | 89,196 | | | $ | 23,352 | | | $ | 32,107 | |
(1)Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings.
(2)On November 1, 2022, we acquired control of the VAA Holdback Portfolio from VAA (See Note 11 – Acquisitions), which resulted in a $73,187 gain on remeasurement of assets.
On September 16, 2022, in connection with the sale of the VAA Sale Portfolio by VAA (See Note 10 - Investment in Unconsolidated Joint Ventures), we sold Sugar Mill Phase III, a 72 unit multifamily property in Baton Rouge, Louisiana for $11,800, resulting in a gain on sale of $1,871. We used the proceeds to pay off the $9,551 mortgage note payable on the property and for general corporate purposes.
On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $26,750, resulting in a gain on sale of $9,364. We used the proceeds to pay off the $14,740 mortgage note payable on the property and for general corporate purposes.
On March 30, 2021 we sold a 50% ownership interest in Overlook at Allensville Phase II to Macquarie in 2021 (See Note 10 – Investment in Unconsolidated Joint Ventures). In 2021, we also recognized the gain on the sale of various multifamily properties that had previously been deferred (See Note 17 – Deferred Income).
On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, 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 a $665 mortgage note payable on the property. On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $13,300, resulting in a gain on sale 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.
(3)On May 17, 2022, we sold Fruitland Park, a 6,722 square foot commercial building in Fruitland Park, Florida for $750, resulting in a gain on sale of $667. We used the proceeds for general corporate purposes.
On August 26, 2021, we sold 600 Las Colinas, a 512,173 square foot office building in Irving, Texas for $74,750, resulting in gain on sale of $27,270. We used the proceeds to pay off the $35,946 mortgage note payable on the property and for general corporate purposes.
(4)In 2021, we incurred a $29,600 loss on the remeasurement of the Earn Out Obligation in connection with our investment in VAA (See Note 10 - Investment in Unconsolidated Joint Ventures).
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
8. Short-term Investments
We have investment in variable denominated floating rate notes and commercial paper with maturities of less than 180 days. At December 31, 2022, the average interest rate on the notes was 4.67%.
9. Notes Receivable
The following table summarizes our notes receivables at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Interest
Rate | | Maturity
Date |
| Borrower / Project | | 2022 | | 2021 | | |
| ABC Land and Development, Inc. | | $ | 4,408 | | | $ | 4,408 | | | 9.50 | % | | 6/30/2026 |
| ABC Paradise, LLC | | 1,210 | | | 1,210 | | | 9.50 | % | | 6/30/2026 |
| Autumn Breeze(1) | | 2,326 | | | 2,486 | | | 5.00 | % | | 7/1/2025 |
| Bellwether Ridge(1) | | 3,798 | | | 3,967 | | | 5.00 | % | | 11/1/2026 |
| Forest Pines(1)(4) | | 6,472 | | | 6,472 | | | 5.00 | % | | 11/1/2022 |
| Lake Wales | | 3,000 | | | 3,000 | | | 9.50 | % | | 6/30/2026 |
| Legacy Pleasant Grove | | 496 | | | 496 | | | 12.00 | % | | 10/23/2024 |
| McKinney Ranch | | 3,926 | | | 4,554 | | | 6.00 | % | | 9/15/2024 |
| One Realco Land Holding, Inc. | | 1,728 | | | 1,728 | | | 9.50 | % | | 6/30/2026 |
| Parc at Ingleside(1) | | 3,759 | | | 3,700 | | | 5.00 | % | | 11/1/2026 |
| Parc at Opelika Phase II(1)(4) | | 3,190 | | | 2,305 | | | 10.00 | % | | 1/13/2023 |
| Parc at Windmill Farms(1)(4) | | 7,886 | | | 7,830 | | | 5.00 | % | | 11/1/2022 |
| | | | | | | | |
| Phillips Foundation for Better Living, Inc.(2) | | 182 | | | 813 | | | 12.00 | % | | 3/31/2024 |
| Plum Tree(1) | | 1,767 | | | 1,537 | | | 5.00 | % | | 4/26/2026 |
| Riverview on the Park Land, LLC | | 1,045 | | | 1,045 | | | 9.50 | % | | 6/30/2026 |
| | | | | | | | |
| Spartan Land | | 5,907 | | | 5,907 | | | 12.00 | % | | 1/16/2025 |
| Spyglass of Ennis(1)(4) | | 5,258 | | | 5,319 | | | 5.00 | % | | 11/1/2022 |
| Steeple Crest(1) | | 6,498 | | | 6,498 | | | 5.00 | % | | 8/1/2026 |
| Unified Housing Foundation(2)(3) | | 2,881 | | | 2,881 | | | 12.00 | % | | 6/30/2023 |
| Unified Housing Foundation(2)(3) | | 212 | | | 212 | | | 12.00 | % | | 6/30/2023 |
| Unified Housing Foundation(2)(3) | | 6,831 | | | 6,831 | | | 12.00 | % | | 6/30/2023 |
| Unified Housing Foundation(2)(3) | | 10,401 | | | 10,401 | | | 12.00 | % | | 6/30/2023 |
| Unified Housing Foundation(2)(3) | | 10,096 | | | 10,096 | | | 12.00 | % | | 3/31/2024 |
| Unified Housing Foundation(2)(3) | | 6,990 | | | 6,990 | | | 12.00 | % | | 3/31/2025 |
| Unified Housing Foundation(2)(3) | | 3,615 | | | 3,615 | | | 12.00 | % | | 5/31/2023 |
| Unified Housing Foundation(2)(3) | | 17,172 | | | 17,172 | | | 12.00 | % | | 12/31/2032 |
| Unified Housing Foundation(2)(3) | | 6,521 | | | 6,521 | | | 12.00 | % | | 3/31/2024 |
| Unified Housing Foundation(2)(3) | | 1,549 | | | 1,549 | | | 12.00 | % | | 4/30/2024 |
| Unified Housing Foundation(2)(3) | | 180 | | | 183 | | | 12.00 | % | | 6/30/2024 |
| | $ | 129,304 | | | $ | 129,726 | | | | | |
(1) The note is convertible, at our option, into a 100% ownership interest in the underlying development property, and is collateralized by the underlying development property.
(2) The borrower is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable.
(3) 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.
(4) We are working with the borrower to extend the maturity and/or exercise our conversion option.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
10. Investment in Unconsolidated Joint Ventures
On November 16, 2018, our SPC subsidiary formed the Victory Abode Apartments, LLC ("VAA"), a joint venture with the Macquarie Group (“Macquarie”). VAA was formed as a result of a sale of the 50% ownership interest in 51 multifamily properties owned by us in exchange for a 50% voting interest / 49% profit participation interest ("Class A interest") in VAA and a note payable (“Mezzanine Loan”). Concurrent with the Contribution, VAA issued Class B interests with a 2% profits participation interest and no voting rights to the manager of VAA (“Class B Member”).
In connection with the formation of VAA, ten of the initial properties were subject to an earn-out provision ("Earn Out") that provided for a remeasurement of value after a two-year period following the completion of construction. Upon the formation of VAA, we recorded an initial liability ("Earn Out Obligation") of $10,000 for the advance on the Earn Out that we received from Macquarie.
On March 30, 2021, we sold a 50% ownership interest in Overlook at Allensville Phase II, a 144 unit multifamily property in Sevierville, Tennessee to Macquarie for $2,551, resulting in gain on sale of $1,417. Concurrent with the sale, we each contributed our 50% ownership interests in Overlook at Allensville Phase II into VAA.
On July 13, 2021, we received the arbitration result of a dispute regarding the measurement of the Earn Out Obligation. Our position and claims were declined, and the position of Macquarie was fully accepted. As a result, we were required to pay approximately $39,600 to Macquarie to satisfy the Earn Out Obligation, and therefore, recorded a charge of $29,600 in 2021 (See Note 7 – Real Estate Activity). In accordance with the joint venture operating agreement, the Earn Out Obligation was paid from our share of subsequent distributions from VAA.
On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale Portfolio”) owned by VAA and one property owned by our SPC subsidiary.
On September 15, 2022, VAA, SPC, Macquarie and Pillar entered a Distribution and Holdback Property Agreement (“Distribution Agreement”), which provided the timing and ordering of the distribution of the net proceeds from the sale of the VAA Sale Portfolio, the repayment of the Mezzanine Loans, and the distribution of the remaining seven properties of VAA (“VAA Holdback Portfolio”).
On September 16, 2022, VAA completed the sale of the VAA Sale Portfolio for $1,810,700, resulting in gain on sale of $738,444 to the joint venture. In connection with sale, we received an initial distribution of $182,848 from VAA, which included the payment of the remaining balance of the Earn Out Obligation.
On November 1, 2022, we received an additional distribution from VAA, which included the full operational control of the VAA Holdback Portfolio (See Note 11 - Acquisitions) and a cash payment of $204,036. We are in the process of negotiating the assumption of the mortgage notes payable on the VAA Holdback Portfolio with the lenders.
We plan to use our share of the proceeds from the sale of the VAA Sale Portfolio to invest in additional income-producing real estate, pay down our debt and for general corporate purposes. Our ownership interest in VAA is held by SPC, and is therefore subject to the debt covenants of the bonds issued by SPC. These provisions include restrictions on the distribution of cash from SPC (See Note 13 - Bonds Payable).
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The following is a summary of our investment in unconsolidated joint venture:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Assets | | | | |
| Assets from discontinued operations | | $ | — | | | $ | 1,135,769 | |
| Real estate | | — | | | 130,954 | |
| Other assets (1) | | 52,404 | | | 14,144 | |
| Total assets | | $ | 52,404 | | | $ | 1,280,867 | |
| Liabilities and Partners Capital | | | | |
| Liabilities from discontinued operations | | $ | 8,824 | | | $ | 807,382 | |
| Mortgage notes payable | | — | | | 70,540 | |
| Mezzanine notes payable | | — | | | 242,942 | |
| Other liabilities | | 1,988 | | | 16,409 | |
| Our share of partners' capital | | 20,904 | | | 71,800 | |
| Outside partner's capital | | 20,688 | | | 71,794 | |
| Total liabilities and partners' capital | | $ | 52,404 | | | $ | 1,280,867 | |
| Investment in unconsolidated joint venture | | | | |
| Our share of partners' capital | | $ | 20,904 | | | $ | 71,800 | |
| Our share of Mezzanine note payable and accrued interest | | — | | | 125,306 | |
| Basis adjustment (2) | | — | | | (144,227) | |
| Total investment in unconsolidated joint venture | | $ | 20,904 | | | $ | 52,879 | |
(1) Includes cash, cash equivalents and restricted cash of $50,058 and $13,828 at December 31, 2022 and 2021, respectively.
(2) We amortized the difference between the cost of our investment in VAA and the book value of our underlying equity in VAA into income on a straight-line basis consistent with the lives of the underlying assets.
The following is a summary of our income (loss) from investments in unconsolidated joint venture:
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenue | | | | | | |
| Rental revenue | | $ | 11,362 | | | $ | 14,632 | | | $ | 13,402 | |
| Other revenue | | 601 | | | 704 | | | 622 | |
| Total revenue | | 11,963 | | | 15,336 | | | 14,024 | |
| Expenses | | | | | | |
| Operating expenses | | 18,139 | | | 12,836 | | | 9,023 | |
| Depreciation and amortization | | 2,525 | | | 3,364 | | | 3,344 | |
| Interest | | 15,412 | | | 23,238 | | | 23,792 | |
| Total expenses | | 36,076 | | | 39,438 | | | 36,159 | |
| Loss from continuing operations | | (24,113) | | | (24,102) | | | (22,135) | |
| Income (loss) from discontinued operations (1) | | 708,341 | | | 7,416 | | | (4,567) | |
| Net income (loss) | | $ | 684,228 | | | $ | (16,686) | | | $ | (26,702) | |
| Our share of net income (loss) in unconsolidated joint venture | | $ | 468,086 | | | $ | 14,531 | | | $ | (519) | |
(1) The amount for the year ended December 31, 2022, includes $738,444 gain on sale of asset and $31,281 loss on early extinguishment of debt that were incurred in connection with the sale of the VAA Sale Portfolio.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
11. Acquisitions
On November 1, 2022, we acquired the remaining 50% ownership interest in the VAA Holdback Portfolio that we did not previously own through a distribution from VAA (See Note 10 – Investment in Unconsolidated Joint Ventures). Prior to the acquisition, we had accounted for the VAA Holdback Portfolio under the equity method of accounting as part of our investment in VAA. As a result of this transaction, we obtained 100% ownership of the VAA Holdback Portfolio. The acquisition was completed in order to obtain 100% ownership and control over this well positioned portfolio of multifamily residential properties in southern United States.
The VAA Holdback Portfolio consisted of the following properties:
| | | | | | | | | | | | | | |
| Property | | Location | | Units |
| Blue Lake Villas | | Waxahachie, TX | | 186 | |
| Blue Lake Villas Phase II | | Waxahachie, TX | | 70 | |
| Northside on Travis | | Sherman, TX | | 200 | |
| Parc at Denham Springs | | Denham Spring, LA | | 224 | |
| Residences at Holland Lake | | Weatherford, TX | | 208 | |
| Villas of Park West I | | Pueblo, CO | | 148 | |
| Villas of Park West II | | Pueblo, CO | | 112 | |
| | | | 1,148 | |
The following is a summary of the preliminary allocation of the fair value of the VAA Holdback Portfolio:
| | | | | | | | |
| Real estate | | $ | 219,500 | |
| Other assets | | 4,843 | |
| Total assets acquired | | 224,343 | |
| Mortgage notes payable | | 70,330 | |
| Accounts payable and other liabilities | | 1,624 | |
| Accrued interest | | 190 | |
| Total liabilities assumed | | 72,144 | |
Fair value of acquired net assets (100% ownership) | | $ | 152,199 | |
We have determined that the purchase price represented the fair value of the additional ownership interest in the VAA Holdback Portfolio that was acquired.
| | | | | | | | |
Fair value of existing ownership interest (at 50% ownership) | | $ | 219,500 | |
| Carrying value of investment | | 146,313 | |
| Gain on remeasurement of assets | | $ | 73,187 | |
From November 1, 2022, we have included the VAA Holdback Portfolio in our consolidated financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
12. Mortgages and Other Notes Payable
Below is a summary of our notes and interest payable as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Interest
Rate | | Maturity
Date |
| Property/ Entity | | 2022 | | 2021 | | |
| 770 South Post Oak | | $ | 11,406 | | | $ | 11,635 | | | 4.40 | % | | 6/1/2025 |
| Athens | | 1,155 | | | 1,155 | | | 4.00 | % | | 8/28/2023 |
| Blue Lake Villas(1) | | 9,673 | | | — | | | 3.15 | % | | 11/1/2055 |
| Blue Lake Villas Phase II(1) | | 3,424 | | | — | | | 2.85 | % | | 6/1/2052 |
| Chelsea | | 7,875 | | | 8,037 | | | 3.40 | % | | 12/1/2050 |
| EQK Portage | | 3,350 | | | 3,350 | | | 10.00 | % | | 11/13/2024 |
| Forest Grove | | 7,128 | | | 7,263 | | | 3.75 | % | | 5/5/2024 |
| Landing Bayou | | 14,161 | | | 14,407 | | | 3.50 | % | | 9/1/2053 |
| Legacy at Pleasant Grove | | 13,039 | | | 13,352 | | | 3.60 | % | | 4/1/2048 |
| Northside on Travis(1) | | 11,656 | | | — | | | 2.50 | % | | 2/1/2053 |
| Parc at Denham Springs(1) | | 16,737 | | | — | | | 3.75 | % | | 4/1/2051 |
| Parc at Denham Springs Phase II | | 15,789 | | | 15,962 | | | 4.05 | % | | 2/1/2060 |
| RCM HC Enterprises(5) | | 5,086 | | | 1,986 | | | 5.00 | % | | 12/31/2022 |
| Residences at Holland Lake(1) | | 10,622 | | | — | | | 3.60 | % | | 3/1/2053 |
| Stanford Center(2) | | — | | | 38,979 | | | 6.00 | % | | 2/26/2023 |
| Sugar Mill Phase III(3) | | — | | | 9,216 | | | 4.50 | % | | 2/1/2060 |
| Toulon(4) | | — | | | 13,697 | | | 3.20 | % | | 12/1/2051 |
| Villas at Bon Secour | | 19,410 | | | 19,492 | | | 3.08 | % | | 9/1/2031 |
| Villas of Park West I(1) | | 9,373 | | | — | | | 3.04 | % | | 3/1/2053 |
| Villas of Park West II(1) | | 8,504 | | | — | | | 3.18 | % | | 3/1/2053 |
| Vista Ridge | | 9,674 | | | 9,830 | | | 4.00 | % | | 8/1/2053 |
| Windmill Farms(5) | | 6,400 | | | 8,389 | | | 5.00 | % | | 2/28/2023 |
| | $ | 184,462 | | | $ | 176,750 | | | | | |
(1) On November 1, 2022, we assumed the mortgage note payable in connection with the acquisition of the underlying property (See Note 11 - Acquisitions).
(2) On October 21, 2022, we paid off the loan, which resulted in a loss on early extinguishment of debt of $1,639.
(3) On September 16, 2022, we paid off the loan in connection with the sale of the underlying property (See Note 7 - Real Estate Activity), which resulted in a loss on early extinguishment of debt of $1,166.
(4) On January 14, 2022, we paid off the loan in connection with the sale of the underlying property (See Note 7 - Real Estate Activity).
(5) We are currently negotiating an extension of the loan with the lender.
Interest payable at December 31, 2022 and 2021, was $2,004 and $1,373, respectively. We capitalized interest of $3,417 and $3,733 during the years ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, we were in compliance with all of our loan covenants except for the minimum debt service coverage ratio (“DSCR”) for the loan on 770 South Post Oak. As a result, the lender requires us to lock the surplus cash flow of the property into a designated deposit account controlled by them, until we are in compliance with the DSCR for a period of two consecutive quarters.
All of the above mortgages and other notes payable are collateralized by the underlying property. In addition, we have guaranteed the loans on Athens, Forest Grove and Villas at Bon Secour.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Future principal payments due on our mortgages and other notes payable at December 31, 2022 are as follows:
| | | | | | | | |
| Year | | Amount |
| 2023 | | $ | 10,912 | |
| 2024 | | 18,899 | |
| 2025 | | 14,080 | |
| 2026 | | 3,265 | |
| 2027 | | 3,377 | |
| Thereafter | | 136,056 | |
| | 186,589 | |
| Deferred finance cost | | (2,127) | |
| | $ | 184,462 | |
13. Bonds Payable
We have issued three series of nonconvertible bonds ("Bonds") through SPC, which are traded on the TASE. The Bonds are denominated in New Israeli Shekels ("NIS") and provide for semiannual principal and interest payments through maturity.
In connection with the Bonds, we incurred a gain (loss) on foreign currency transactions of $20,067, $(6,175), and $(13,378), for the years ended December 31, 2022, 2021 and 2020, respectively.
The outstanding balance of our Bonds at December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Interest Rate | | |
| Bond Issuance | | 2022 | | 2021 | | | Maturity |
| Series A Bonds(1) | | $ | 28,971 | | | $ | 65,563 | | | 7.30 | % | | 7/31/23 |
| Series B Bonds(1) | | 35,806 | | | 54,019 | | | 6.80 | % | | 7/31/25 |
| Series C Bonds(2) | | 66,546 | | | 75,298 | | | 4.65 | % | | 1/31/23 |
| | 131,323 | | | 194,880 | | | | | |
| Less unamortized deferred issuance costs | | (2,105) | | | (5,428) | | | | | |
| | $ | 129,218 | | | $ | 189,452 | | | | | |
(1) The bonds are collateralized by the assets of SPC.
(2) The bonds were collateralized by a trust deed in Browning Place, a 625,297 square foot office building in Dallas, Texas. On January 31, 2023, the series of bonds were paid off.
The aggregate maturities of our Bonds are as follows:
| | | | | | | | |
| Year | | Amount |
| 2023 (1) | | $ | 107,453 | |
| 2024 | | 11,935 | |
| 2025 | | 11,935 | |
| | |
| | |
| | |
| | $ | 131,323 | |
(1) Includes the $66,546 Series C Bonds that were repaid on January 31, 2023.
The Bonds include a number of covenants, including restrictions on the amount of cash that can be distributed from SPC. As of December 31, 2022, we were in compliance with our bond covenants.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
14. Related Party Transactions
We engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions of real estate. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.
Pillar and Regis are wholly owned by an affiliates of the MRHI, which also indirectly owns approximately 90.8% of ARL. Pillar is compensated for services in accordance with an Advisory Agreement. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. In addition, Regis is entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement.
Rental income includes $931, $944 and $1,083 for the years ended December 31, 2022, 2021 and 2020, respectively, for office space leased to Pillar and Regis.
Property operating expense includes $433, $889 and $990 for the years ended December 31, 2022, 2021 and 2020, respectively, for management fees on commercial properties payable to Regis.
General and administrative expense includes $3,899, $4,091 and $3,869 for the years ended December 31, 2022, 2021 and 2020, respectively, for employee compensation and other reimbursable costs payable to Pillar.
Advisory fees paid to Pillar were $7,974, $11,782 and $8,648 for the years ended December 31, 2022, 2021 and 2020, respectively.
Notes receivable include amounts held by UHF and Pillar (See Note 9 – Notes Receivable). UHF is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. Interest income on these notes was $19,211, $15,950 and $19,515 for the years ended December 31, 2022, 2021 and 2020, respectively. Accrued interest on the these notes of $4,040 and $4,223 is included in other assets at December 31, 2022 and 2021, respectively.
Interest expense on notes payable to Pillar was $2,497, $1,621 and $1,581 for the years ended December 31, 2022, 2021 and 2020, respectively.
Related party receivables represent amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above.
15. Noncontrolling Interests
The noncontrolling interest represents the third party ownership interest in Income Opportunity Realty Investors, Inc. ("IOR"). Shares of IOR are listed on the NYSE American under the symbol of IOR. We owned 81.1% in IOR during the years ended December 31, 2022, 2021 and 2020.
16. Stockholders' Equity
Our decision to declare dividends on common stock is determined on an annual basis following the end of each year. In accordance with that policy, no dividends on our common stock were declared for 2022, 2021 or 2020. Future dividends to common stockholders will be determined in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by our board of directors.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
17. Deferred Income
In previous years, we sold properties to related parties where we 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 was not met, and as such, we deferred the gain recognition and accounted for the transactions by applying the finance, deposit, installment or cost recovery methods, as appropriate. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31, 2022, we had a deferred gain of $581.
18. Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The expense (benefit) for income taxes consists of:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current: | | | | | |
Federal | $ | 77,668 | | | $ | (1,011) | | | $ | — | |
State | 7,710 | | | — | | | 4 | |
| Deferred and Other: | | | | | |
Federal | 17,812 | | | — | | | — | |
State | — | | — | | — |
| Total tax expense (benefit) | $ | 103,190 | | | $ | (1,011) | | | $ | 4 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
The reconciliation between our effective tax rate on income from operations and the statutory rate is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Income tax (benefit) expense at federal statutory rate | $ | 118,700 | | | $ | 2,373 | | | $ | 1,328 | |
| State and local income taxes net of federal tax benefit | 7,711 | | | — | | | 4 | |
| Alternative minimum tax refund | — | | | (1,011) | | | — | |
| | | | | |
| Valuation allowance | (23,221) | | | (2,373) | | | (1,328) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Calculated income tax expense (benefit) | $ | 103,190 | | | $ | (1,011) | | | $ | 4 | |
| Effective tax rate | 22.5 | % | | (8.6) | % | | 2.6 | % |
We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2022, our tax years for 2022, 2021, and 2020 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2021, we are no longer subject to U.S federal, state, local, or foreign examinations by tax authorities for the years before 2016.
Components of the Net Deferred Tax Asset or Liability
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred tax asset | | | |
| | | |
| Basis difference for fixed assets | $ | — | | | $ | 705 | |
| Foreign currency translations | 4,279 | | | 2,513 | |
| Net operating loss carryforward | — | | | 12,448 | |
| 4,279 | | | 15,666 | |
| Deferred tax liability | | | |
| Deferred gain | 17,724 | | | 3,340 | |
| Basis differences for fixed assets | 4,373 | | | — | |
| 22,097 | | | $ | 3,340 | |
| (17,818) | | | 12,326 | |
| Less: valuation allowance | — | | | (12,326) | |
| Net deferred tax asset (liability) | $ | (17,818) | | | $ | — | |
We have state net operating losses in many of the various states in which we operate.
19. Commitments and Contingencies
We believe 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 defendants in litigation related to a property sale ("Nixdorf") that was that was completed in 2008, which was tried to a jury in March 2023. On March 18, 2023, the jury in the case returned a “Plaintiff take nothing” verdict in our favor. If judgment is finally rendered by the Court confirming the jury verdict, Plaintiff may well appeal.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
In February 2019, Paul Berger ("Berger") filed suit against us and others that alleged that our subsidiary IOR completed improper sales and/or transfers of property. Berger sought to proceed derivatively and directly, requested a payoff of various related party loans to IOR and that IOR then distribute the funds to its stockholders. After discovery and motions to dismiss substantial portions of the complaint, on June 28, 2022, Berger sought to voluntarily dismiss the action for reasons stated in the motion. The parties have not entered into any settlement, and neither Berger nor their counsel has received any consideration for the voluntary dismissal. On January 4, 2023, the United States District Court entered a formal order that dismissed the action with prejudice.
20. Quarterly Results of Operations
The following is a tabulation of our quarterly results of operations for the years December 31, 2022 and 2021. Quarterly results presented may differ from those previously reported in our Form 10-Q due to the reclassification of the operations.
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Quarter Ended |
| March 31, | | June 30, | | September 30, | | December 31, |
| Revenues | $ | 7,787 | | | $ | 7,770 | | | $ | 8,319 | | | $ | 12,784 | |
| Net operating (loss) income | (4,126) | | | (2,847) | | | (2,765) | | | 456 | |
| Net income attributable to the Company | 14,502 | | | 16,461 | | | 378,351 | | | 58,948 | |
| EPS - basic and diluted | $ | 1.68 | | | $ | 1.91 | | | $ | 43.79 | | | $ | 6.82 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Quarter Ended |
| March 31, | | June 30, | | September 30, | | December 31, |
| Revenues | $ | 11,828 | | | $ | 10,795 | | | $ | 10,034 | | | $ | 8,117 | |
| Net operating loss | (2,226) | | | (5,225) | | | (4,558) | | | (4,154) | |
| Net income (loss) attributable to the Company | 22,632 | | | (30,733) | | | 26,246 | | | (8,747) | |
| EPS - basic and diluted | $ | 2.62 | | | $ | (3.56) | | | $ | 3.04 | | | $ | (1.01) | |
The increase in net income and EPS - basic and diluted during the quarter ended September 30, 2022 is attributable to our share of the gain on the sale of the VAA Sale Portfolio by our joint venture in VAA (See Note 10 – Investment in Unconsolidated Joint Ventures).
21. Subsequent Events
The date to which events occurring after December 31, 2022, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 23, 2023, which is the date of which the financial statements were available to be issued. There are no subsequent events that would require an adjustment to the financial statements.
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Initial Cost | | Cost
Capitalized
Subsequent to
Acquisition | | Gross Amount Carried at End of Year | | | | | | |
| Property/Location | | Encumbrances | | Land | | Buildings | | | Land | | Building &
Improvements | | Total | | Accumulated
Depreciation | | Date of
Construction | | Date
Acquired |
| Multifamily | | | | | | | | | | | | | | | | | | | | |
| Blue Lake Villas | | $ | 9,673 | | | $ | 6,920 | | | $ | 27,680 | | | $ | — | | | $ | 6,920 | | | $ | 27,680 | | | $ | 34,600 | | | $ | 115 | | | 2002 | | 2022 |
| Blue Lake Villas Phase II | | 3,424 | | | 2,400 | | | 9,600 | | | — | | | 2,400 | | | 9,600 | | | 12,000 | | | 40 | | | 2004 | | 2022 |
| Chelsea | | 7,875 | | | 1,225 | | | 11,230 | | | 53 | | | 1,231 | | | 11,277 | | | 12,508 | | | 1,192 | | | 1999 | | 2018 |
| Forest Grove | | 7,128 | | | 1,440 | | | 10,234 | | | 37 | | | 1,440 | | | 10,271 | | | 11,711 | | | 670 | | | 2020 | | 2020 |
| Landing Bayou | | 14,161 | | | 2,011 | | | 18,255 | | | (1,502) | | | 2,011 | | | 16,753 | | | 18,764 | | | 1,732 | | | 2005 | | 2018 |
| Legacy at Pleasant Grove | | 13,039 | | | 2,005 | | | 18,109 | | | 92 | | | 2,033 | | | 18,173 | | | 20,206 | | | 3,716 | | | 2006 | | 2018 |
| Northside on Travis | | 11,656 | | | 7,160 | | | 28,640 | | | — | | | 7,160 | | | 28,640 | | | 35,800 | | | 119 | | | 2008 | | 2022 |
| Parc at Denham Springs | | 16,737 | | | 6,060 | | | 24,240 | | | 14 | | | 6,060 | | | 24,254 | | | 30,314 | | | 101 | | | 2007 | | 2022 |
| Parc at Denham Springs Phase II | | 15,789 | | | 1,505 | | | 16,975 | | | — | | | 1,505 | | | 16,975 | | | 18,480 | | | 1,297 | | | 2010 | | 2009 |
| Residences at Holland Lake | | 10,622 | | | 6,300 | | | 25,200 | | | 7 | | | 6,300 | | | 25,207 | | | 31,507 | | | 105 | | | 2004 | | 2022 |
| Villas at Bon Secour | | 19,410 | | | 2,715 | | | 15,385 | | | 52 | | | 2,715 | | | 15,437 | | | 18,152 | | | 1,708 | | | 2007 | | 2018 |
| Villas of Park West I | | 9,373 | | | 8,200 | | | 32,800 | | | — | | | 8,200 | | | 32,800 | | | 41,000 | | | 137 | | | 2005 | | 2022 |
| Villas of Park West II | | 8,504 | | | 6,860 | | | 27,440 | | | — | | | 6,860 | | | 27,440 | | | 34,300 | | | 114 | | | 2010 | | 2022 |
| Vista Ridge | | 9,674 | | | 1,339 | | | 13,398 | | | 6 | | | 1,339 | | | 13,404 | | | 14,743 | | | 2,939 | | | 2009 | | 2018 |
| | 157,065 | | | 56,140 | | | 279,186 | | | (1,241) | | | 56,174 | | | 277,911 | | | 334,085 | | | 13,985 | | | | | |
| Commercial | | | | | | | | | | | | | | | | | | | | |
| 770 South Post Oak | | 11,406 | | | 1,763 | | | 16,312 | | | 1,142 | | | 1,763 | | | 17,454 | | | 19,217 | | | 3,605 | | | 1970 | | 2015 |
| Browning Place | | 66,546 | | | 5,096 | | | 49,441 | | | 18,895 | | | 5,096 | | | 68,336 | | | 73,432 | | | 31,708 | | | 1984 | | 2005 |
| Stanford Center | | — | | | 20,278 | | | 25,876 | | | 6,250 | | | 20,278 | | | 32,126 | | | 52,404 | | | 16,700 | | | 2007 | | 2008 |
| Other | | — | | | 646 | | | 74 | | | (40) | | | 622 | | | 58 | | | 680 | | | 56 | | | | | |
| | 77,952 | | | 27,783 | | | 91,703 | | | 26,247 | | | 27,759 | | | 117,974 | | | 145,733 | | | 52,069 | | | | | |
| Developed and Undeveloped Land | | | | | | | | | | | | | | | | | | | | |
| Mercer Crossing | | — | | | 2,999 | | | — | | | (166) | | | 2,833 | | | — | | | 2,833 | | | — | | | | | 2018 |
| Windmill Farms | | 6,400 | | | 43,608 | | | — | | | 2,707 | | | 46,315 | | | — | | | 46,315 | | | — | | | | | 2006 |
| Other | | 9,591 | | | 19,608 | | | — | | | 11,301 | | | 30,909 | | | — | | | 30,909 | | | — | | | | | |
| | 15,991 | | | 66,215 | | | — | | | 13,842 | | | 80,057 | | | — | | | 80,057 | | | — | | | | | |
| | $ | 251,008 | | | $ | 150,138 | | | $ | 370,889 | | | $ | 38,848 | | | $ | 163,990 | | | $ | 395,885 | | | $ | 559,875 | | | $ | 66,054 | | | | | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2022
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Reconciliation of Real Estate | | | | | | |
| Balance at January 1, | | $ | 359,296 | | | $ | 459,801 | | | $ | 477,963 | |
Additions | | 240,018 | | | 5,814 | | | 21,223 | |
Deductions | | (39,439) | | | (106,319) | | | (39,385) | |
| Balance at December 31, | | $ | 559,875 | | | $ | 359,296 | | | $ | 459,801 | |
| | | | | | |
| Reconciliation of Accumulated Depreciation | | | | | | |
| Balance at January 1, | | 62,933 | | | 82,418 | | | 90,173 | |
Additions | | 8,962 | | | 10,820 | | | 12,188 | |
Deductions | | (5,841) | | | (30,305) | | | (19,943) | |
| Balance at December 31, | | $ | 66,054 | | | $ | 62,933 | | | $ | 82,418 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE IV - MORTGAGE LOANS
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Interest Rate | | Maturity Date | | Periodic Payment
Terms | | Prior Liens | | Face Amount | | Carrying Value |
| Convertible loans | | | | | | | | | | | | |
| Autumn Breeze | | 5.00% | | 7/1/2025 | | No payments until maturity or conversion | | $ | 24,474 | | | $ | 2,326 | | | $ | 2,326 | |
| Bellwether Ridge | | 5.00% | | 11/1/2026 | | No payments until maturity or conversion | | 17,843 | | | 3,798 | | | 3,798 | |
| Forest Pines | | 5.00% | | 11/1/2022 | | No payments until maturity or conversion | | 26,060 | | | 6,472 | | | 6,472 | |
| Parc at Ingleside | | 5.00% | | 11/1/2026 | | No payments until maturity or conversion | | 24,815 | | | 3,759 | | | 3,759 | |
| Parc at Opelika Phase II | | 10.00% | | 1/13/2023 | | No payments until maturity or conversion | | 21,904 | | | 3,190 | | | 3,190 | |
| Parc at Windmill Farms | | 5.00% | | 11/1/2022 | | No payments until maturity or conversion | | 35,112 | | | 7,886 | | | 7,886 | |
| Plum Tree | | 5.00% | | 4/26/2026 | | No payments until maturity or conversion | | 17,525 | | | 1,767 | | | 1,767 | |
| Spyglass of Ennis | | 5.00% | | 11/1/2022 | | No payments until maturity or conversion | | 22,509 | | | 5,258 | | | 5,258 | |
| Steeple Crest | | 5.00% | | 8/1/2026 | | No payments until maturity or conversion | | 11,298 | | | 6,498 | | | 6,498 | |
| | | | | | | | 201,540 | | | 40,954 | | | 40,954 | |
| Land loans | | | | | | | | | | | | |
| ABC Land and Development, Inc. | | 9.50% | | 6/30/2026 | | No payments until maturity | | — | | | 4,408 | | | 4,408 | |
| ABC Paradise, LLC | | 9.50% | | 6/30/2026 | | No payments until maturity | | — | | | 1,210 | | | 1,210 | |
| Lake Wales | | 9.50% | | 6/30/2026 | | No payments until maturity | | — | | | 3,000 | | | 3,000 | |
| Legacy Pleasant Grove | | 12.00% | | 10/23/2024 | | No payments until maturity | | — | | | 496 | | | 496 | |
| McKinney Ranch | | 6.00% | | 9/15/2024 | | No payments until maturity | | — | | | 3,926 | | | 3,926 | |
| One Realco Land Holding, Inc. | | 9.50% | | 6/30/2026 | | No payments until maturity | | — | | | 1,728 | | | 1,728 | |
| Riverview on the Park Land, LLC | | 9.50% | | 6/30/2026 | | No payments until maturity | | — | | | 1,045 | | | 1,045 | |
| Spartan Land | | 12.00% | | 1/16/2025 | | No payments until maturity | | — | | | 5,907 | | | 5,907 | |
| | | | | | | | — | | | 21,720 | | | 21,720 | |
| Subsidized housing | | | | | | | | | | | | |
| Phillips Foundation for Better Living, Inc. | | 12.00% | | 3/31/2024 | | Payments from excess property cash flows | | — | | | 182 | | | 182 | |
| Unified Housing Foundation | | 12.00% | | 6/30/2023 | | Payments from excess property cash flows | | — | | | 2,881 | | | 2,881 | |
| Unified Housing Foundation | | 12.00% | | 6/30/2023 | | Payments from excess property cash flows | | — | | | 212 | | | 212 | |
| Unified Housing Foundation | | 12.00% | | 6/30/2023 | | Payments from excess property cash flows | | — | | | 6,831 | | | 6,831 | |
| Unified Housing Foundation | | 12.00% | | 6/30/2023 | | Payments from excess property cash flows | | — | | | 10,401 | | | 10,401 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Interest Rate | | Maturity Date | | Periodic Payment
Terms | | Prior Liens | | Face Amount | | Carrying Value |
| Unified Housing Foundation | | 12.00% | | 3/31/2024 | | Payments from excess property cash flows | | — | | | 10,096 | | | 10,096 | |
| Unified Housing Foundation | | 12.00% | | 3/31/2025 | | Payments from excess property cash flows | | — | | | 6,990 | | | 6,990 | |
| Unified Housing Foundation | | 12.00% | | 5/31/2023 | | Payments from excess property cash flows | | — | | | 3,615 | | | 3,615 | |
| Unified Housing Foundation | | 12.00% | | 12/31/2032 | | Payments from excess property cash flows | | 53,039 | | | 17,172 | | | 17,172 | |
| Unified Housing Foundation | | 12.00% | | 3/31/2024 | | Payments from excess property cash flows | | — | | | 6,521 | | | 6,521 | |
| Unified Housing Foundation | | 12.00% | | 4/30/2024 | | Payments from excess property cash flows | | — | | | 1,549 | | | 1,549 | |
| Unified Housing Foundation | | 12.00% | | 6/30/2024 | | Payments from excess property cash flows | | — | | | 180 | | | 180 | |
| | | | | | | | 53,039 | | | 66,630 | | | 66,630 | |
| | | | | | | | $ | 254,579 | | | $ | 129,304 | | | $ | 129,304 | |
TRANSCONTINENTAL REALTY INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
SCHEDULE IV - MORTGAGE LOANS
As of December 31,
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
| Balance at January 1, | | $ | 129,726 | | | $ | 123,556 | | | $ | 112,357 | |
| Additions | | 1,229 | | | 18,844 | | | 26,535 | |
| Deductions | | (1,651) | | | (12,674) | | | (15,336) | |
| Balance at December 31, | | $ | 129,304 | | | $ | 129,726 | | | $ | 123,556 | |
