10-K 1 d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2009

OR

 

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

Commission File Number 001-09240

 

 

Transcontinental Realty Investors, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   94-6565852

(State or other jurisdiction of

Incorporation or organization)

 

(IRS Employer

Identification Number)

1800 Valley View Lane,

Suite 300, Dallas, Texas

  75234
(Address of principal executive offices)   (Zip Code)

(469) 522-4200

Registrant’s Telephone Number, including area code

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of each exchange on which registered
Common Stock, $0.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x

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

 

The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price at which the common equity was last sold which was the sales price of the Common Stock on the New York Stock Exchange as of June 30, 2009 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $13,737,241 based upon a total of 1,138,131 shares held as of June 30, 2009 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

As of March 25, 2010, there were 8,113,669 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. Commission File No. 001-14784

Consolidated Financial Statements of American Realty Investors, Inc. Commission File No. 001-15663

 

 

 


Table of Contents

INDEX TO

ANNUAL REPORT ON FORM 10-K

 

          Page
   PART I   

Item 1.

  

Business

   3

Item 1A.

  

Risk Factors

   10

Item 1B.

  

Unresolved Staff Comments

   15

Item 2.

  

Properties

   16

Item 3.

  

Legal Proceedings

   20

Item 4.

  

Submission of Matters to a Vote of Security Holders

   21
   PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    22

Item 6.

  

Selected Financial Data

   25

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operation

   26

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   38

Item 8.

  

Financial Statements and Supplementary Data

   40

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   84

Item 9A(T).

  

Controls and Procedures

   84

Item 9B.

  

Other Information

   84
   PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

   85

Item 11.

  

Executive Compensation

   92

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management

   93

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

   94

Item 14.

  

Principal Accounting Fees and Services

   96
   PART IV   

Item 15.

  

Exhibits, Financial Statement Schedules

   98

Signatures

   100


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FORWARD-LOOKING STATEMENTS

Certain Statements in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate”, “plan”, “intend”, “expect”, “anticipate”, “believe”, and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described under Part I, Item 1A. “Risk Factors”.

PART I

ITEM 1.    BUSINESS

General

As used herein, the terms “we”, “us”, “our”, “the Company” or “TCI” refer to Transcontinental Realty Investors, Inc. a Nevada corporation. TCI is the successor to a California business trust that was organized on September 6, 1983 and commenced operations on January 31, 1984. On November 30, 1999, TCI acquired all of the outstanding shares of beneficial interest of Continental Mortgage and Equity Trust (“CMET”), a real estate company, in a tax-free exchange of shares, issuing 1,181 shares of its Common Stock for each outstanding CMET share. Prior to January 1, 2000, TCI elected to be treated as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). During the third quarter of 2000, due to a concentration of ownership TCI no longer met the requirement for tax treatment as a REIT. Effective March 31, 2003, TCI financial results were consolidated in the American Realty Investors, Inc. (“ARL”) Form 10-K and related consolidated financial statements. As of December 31, 2009, ARL through subsidiaries owned 82.8% of the outstanding TCI common shares.

On July 17, 2009, the Company acquired from Syntek West, Inc., (“SWI”), 2,518,934 shares of Common Stock, par value $0.01 per share of Income Opportunity Realty Investors, Inc. (“IOT”) at an aggregate price of $17,884,431 (approximately $7.10 per share), the full amount of which was paid by the Company through an assumption of an aggregate amount of indebtedness of $17,884,431 on the outstanding balance owed by SWI to IOT. The 2,518,934 shares of IOT Common Stock acquired by the Company constituted approximately 60.4% of the issued and outstanding Common Stock of IOT. The Company has owned for several years an aggregate of 1,037,184 shares of Common Stock of IOT (approximately 25% of the issued and outstanding). After giving effect to the transaction on July 17, 2009, the Company owns an aggregate of 3,556,118 shares of IOT Common Stock which constitutes approximately 85.3% of the shares of Common Stock of IOT outstanding (which is a total of 4,168,214 shares). Shares of IOT are traded on the American Stock Exchange.

With the Company’s acquisition of the additional shares on July 17, 2009, which increased the aggregate ownership to in excess of 80%, beginning in July 2009, IOT’s results of operations are now consolidated with those of the Company for tax and financial reporting purposes. At the time of the acquisition, the historical accounting value of IOT’s assets was $112 million and liabilities were $43 million. In that the shares of IOT acquired by TCI were from a related party, the values recorded by TCI are IOT’s historical accounting values at the date of transfer. The Company’s fair valuation of IOT’s assets and liabilities at the acquisition date approximated IOT’s book value. The net difference between the purchase price and historical accounting basis of the assets and liabilities acquired was $35 million and has been reflected by TCI as deferred income. The deferred income will be recognized upon the sale of the land that IOT held on its books as of the date of sale, to an independent third party.

 

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TCI’s Board of Directors represents the Company’s shareholders and is responsible for directing the overall affairs of TCI and for setting the strategic policies that guide the Company. The Board of Directors has delegated the day-to-day management of the Company to Prime Income Asset Management, LLC, a Nevada limited liability company (“Prime”) under a written Advisory Agreement that is reviewed annually by TCI’s Board of Directors. The directors of TCI are also directors of ARL. Two directors of TCI also serve as directors of IOT. Certain officers of TCI also serve as officers of ARL, IOT and Prime.

TCI’s contractual advisor is Prime, the sole member of which is Prime Income Asset Management, Inc. a Nevada corporation (“PIAMI”) which is owned 100% by Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc., a Nevada corporation, which is owned 100% by a Trust known as the May Trust. See also Part III, Item 10. “Directors, Executive Officers and Corporate Governance—The Advisor.” Prime also serves as advisor to ARL and IOT.

Prime’s duties include but are not limited to locating, evaluating and recommending real estate and real estate-related investment opportunities. Prime also arranges, for TCI’s benefit, debt and equity financing with third party lenders and investors. Prime is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance”.

For more than the past three years, Triad Realty Services, LP. (“Triad”) an affiliate of Prime has provided property management services for our commercial properties to TCI. Triad subcontracts with other entities for the provision of property-level management services to TCI. The general partner of Triad is PIAMI. The limited partner of Triad is HRS Holdings, LLC (“HRSHLLC”). Triad subcontracts the property-level management and leasing of our commercial properties (office buildings, shopping centers and industrial warehouses) to Regis Realty I, LLC (“Regis I”), which is owned by HRSHLLC. Regis I receives property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad. Regis I is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. The sole member of Regis I is HRSHLLC. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance”.

TCI has no employees. Employees of Prime render services to TCI in accordance with the terms of the Advisory Agreement.

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 revenues from gains on sales of income-producing properties and land. At December 31, 2009, our income-producing properties consisted of:

 

   

28 commercial properties consisting of 19 office buildings, six industrial properties, three retail properties, comprising in aggregate almost 5.1 million square feet; and

 

   

57 residential apartment communities comprising almost 11,354 units.

 

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The following table sets forth the location of our real estate (income-producing properties only) by asset type as of December 31, 2009:

 

     Apartments    Commercial

Location

   No.    Units    No.    SF

Greater Dallas-Ft Worth, TX

   23    4,649    16    2,918,716

Greater Houston, TX

   8    2,272      

San Antonio, TX

   3    852      

Temple, TX

   2    452      

Other Texas

   6    1,329      

Mississippi

   6    328    1    26,000

Arkansas

   4    580      

Tennessee

   3    532      

Baton Rouge, LA

   1    160      

Ohio

   1    200      

New Orleans, LA

         6    1,369,388

Florida

         1    6,722

Indiana

         1    220,461

Michigan

         1    179,741

Oklahoma

         1    225,566

Wisconsin

         1    122,205
                   

Total

   57    11,354    28    5,068,799
                   

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable-rate construction loans that are refinanced with the proceeds of long-term, fixed-rate amortizing mortgages when the development has been completed and occupancy has been stabilized. When we sell properties, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable, secured by the property being sold. We may also from time to time enter into partnerships or joint ventures with various investors to acquire land or income-producing properties or to sell interests in certain of our properties.

We partner with various third-party development companies to construct residential apartment communities. The third-party developer typically holds a general partner as well as a limited partner interest in a limited partnership formed for the purpose of building a single property while we generally take a limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.

At December 31, 2009, our apartment projects in development included (dollars in thousands):

 

Property

   Location    No. of Units    Costs to Date    Total
Projected
Costs

Denham Springs

   Garland, TX    224    $ 3,092    $ 20,632

Toulon

   Gautier, MS    240      2,876      27,350
                     

Total

      464    $ 5,968    $ 47,982
                     

 

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We have made investments in a number of large tracts of undeveloped and partially developed land and intend to a) continue to improve these tracts of land for our own development purposes or b) make the improvements necessary to ready the land for sale to other developers.

At December 31, 2009, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands):

 

Property

  Location   Date(s)
Acquired
  Acres   Cost   Primary Intended Use

Avana (Circle C)

  Austin, TX   2006   1,092   $ 42,953   Single-family residential

Dallas North Tollway Multi-Tracts

  Dallas, TX   2006   17     16,005   Commercial

Capital City Center

  Jackson, MS   2007-2008   8     12,872   Mixed use

Kaufman County Multi-Tracts

  Kaufman County, TX   2000-2008   2,831     11,883   Single-family residential

Las Colinas Multi-Tracts

  Irving, TX   1995-2006   278     34,897   Commercial

US Virgin Islands Multi-Tracts

  St. Thomas, USVI   2005-2008   91     16,320   Single-family residential

McKinney Multi-Tracts

  McKinney, TX   1997-2008   238     30,544   Mixed use

Mercer Crossing

  Dallas, TX   1996-2008   507     99,201   Mixed use

Pioneer Crossing

  Austin, TX   1997-2005   56     3,690   Multi-family residential

Travis Ranch

  Kaufman County, TX   2008   25     2,780   Multi-family residential

Valley Ranch Multi-Tracts

  Irving, TX   2004   30     5,826   Commercial

Waco Multi-Tracts

  Waco, TX   2005-2006   502     4,911   Single-family residential

Windmill Farms

  Kaufman County, TX   2008   246     5,524   Single-family residential

Woodmont Multi-Tracts

  Dallas, TX   2006-2008   76     50,210   Mixed use
               

Subtotal

      5,997     337,618  

Other land holdings

  Various   1990-2008   816     57,747   Various
               

Total land holdings

      6,813   $ 395,365  
               

Significant Real Estate Acquisitions/Dispositions and Financings

A summary of some of the significant transactions for the year ended December 31, 2009 are discussed below:

In January 2009, we sold 9.3 acres of land known as Woodmont Schiff-Park Forest land located in Dallas, Texas for $7.7 million. We received $3.9 million in cash after paying off the existing debt of $3.2 million and closing costs of $0.6 million. In addition, we booked a $2.1 million receivable. There was no gain or loss recorded on the sale of the land parcel.

In April 2009, we sold the Cullman Shopping Center, a 92,500 square foot facility located in Cullman, Alabama for a sales price of $4.0 million. We received $3.0 million in cash after paying off the existing debt of $1.0 million. The project was sold to a related party; therefore the gain of $1.9 million was deferred and will be recorded upon sale to a third party.

In April 2009, we sold 3.02 acres of land known as West End land located in Dallas, Texas for a sales price of $8.5 million. We received $4.6 million in cash after paying off the existing debt of $3.4 million and closing costs of $0.5 million. We recorded a gain on sale of $4.9 million on the land parcel.

In April 2009, we sold 3.13 acres of land known as Verandas at City View land located in Fort Worth, Texas for a sales price of $1.3 million. We paid off the existing debt of $1.3 million and closing costs of $0.01. We recorded a gain on sale of $0.7 million on the land parcel.

 

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In June 2009, we sold 3.96 acres of land known as Teleport land located in Irving, Texas for a sales price of $1.1 million. We received $1.0 million in cash after paying off the existing debt of $0.1 million and closing costs. We recorded a gain on sale of $0.4 million on the land parcel.

In July 2009, we sold 29.53 acres of Hines Meridian land located in Dallas, Texas and 807.90 acres of Travis Ranch land located in Kaufman County, Texas for $16.0 million. We paid off the existing debt of $13.5 million. We recorded no gain or loss on the land parcels.

In July 2009, we sold the 5000 Space Center, a 101,500 square foot commercial facility located in San Antonio, Texas and the 5360 Tulane, a 30,000 square foot commercial facility located in Atlanta, Georgia for a sales price of $4.0 million. We received $2.7 million in cash after paying off the existing debt of $1.3 million. We recorded a gain on sale of $3.0 million on the commercial properties.

In September 2009, we purchased 54.86 acres of Gautier land located at Gautier, Mississippi for $3.4 million.

In September 2009, we obtained a new $5 million loan with a commercial lender which was collateralized by 6.51 acres of Hines land located in Farmers Branch, Texas, 2.194 acres of Valley View 34 land located in Farmers Branch, Texas, and 15.066 acres of Travelers land located in Farmers Branch, Texas. We received cash of $2.0 million after paying off $2.6 million of existing debt and $0.4 million in closing costs.

In October 2009, we sold the 2010 Valley View office building; a 40,666 square foot facility located in Farmers Branch, Texas, for a sales price of $3.2 million. We received $1.2 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.0 million. The property was sold to a related party; therefore the gain of $0.8 million was deferred and will be recorded upon sale to a third party. We also sold the Parkway Centre retail shopping center; a 28,374 square foot facility located in Dallas, Texas, for a sales price of $4.0 million. We received $1.3 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.6 million. The property was sold to a related party; therefore the gain of $0.6 million was deferred and will be recorded upon sale to a third party.

In November 2009, we acquired 27.192 acres of McKinney Ranch land located in McKinney, Texas in lieu of a note receivable payoff of $6.4 million and existing mortgage assumption of $5.3 million.

In November 2009, we purchased the Keller Springs Technical Center, an 80,000 square foot commercial building located in Carrollton, Texas for $6.0 million. We assumed the current mortgage of $6.0 million.

In December 2009, we sold the Bridges on Kinsey Apartments, a 232-unit complex, located in Tyler, Texas for $20.5 million. We received $6.8 million in cash, and the buyer assumed the existing mortgage of $14.0 million secured by the property. The property was sold to a related party; therefore the gain of $5.2 million was deferred and will be recorded upon sale to a third party.

We continue to invest in the development of apartment projects. For the twelve months ended December 31, 2009, we have expended $26.1 million on the construction of various apartment projects and capitalized $7.0 million of interest costs.

Business Plan and Investment Policy

Our business objective is to maximize long-term value for our stockholders by investing in commercial real estate through the acquisition, development and ownership of apartments, commercial properties and land. We intend to achieve this objective through acquiring and developing properties in multiple markets and operating as an industry-leading landlord. We believe this objective will provide the benefits of enhanced investment opportunities, economies of scale and risk diversification, both in terms of geographic market and real estate

 

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product type. We believe our objective will also result in continuing access to favorably priced debt and equity capital. In pursuing our business objective, we seek to achieve a combination of internal and external growth while maintaining a strong balance sheet and employing a strategy of financial flexibility. We maximize the value of our apartments and commercial properties by maintaining high occupancy levels while charging competitive rental rates, controlling costs and focusing on tenant retention. We also pursue attractive development opportunities either directly or in partnership with other investors.

For our portfolio of commercial properties, we generate increased operating cash flow through annual contractual increases in rental rates under existing leases. We also seek to identify best practices within our industry and across our business units in order to enhance cost savings and gain operating efficiencies. We employ capital improvement and preventive maintenance programs specifically designed to reduce operating costs and increase the long-term value of our real estate investments.

We seek to acquire properties consistent with our business objectives and strategies. We execute our acquisition strategy by purchasing properties which management believes will create stockholder value over the long-term. We will also sell properties when management believes value has been maximized or when a property is no longer considered an investment to be held long-term.

We are continuously in various stages of discussions and negotiations with respect to development, acquisition, and disposition projects. The consummation of any current or future development, acquisition, or disposition, if any, and the pace at which any may be completed cannot be assured or predicted.

Substantially all of our properties are owned by subsidiary companies, many of which are single-asset entities. This ownership structure permits greater access to financing for individual properties and permits flexibility in negotiating a sale of either the asset or the equity interests in the entity owning the asset. From time-to-time, our subsidiaries have invested in joint ventures with other investors, creating the possibility of risks that do not exist with properties solely owned by a TCI subsidiary. In those instances where other investors are involved, those other investors may have business, economic, or other objectives that are inconsistent with our objectives, which may in turn, require us to make investment decisions different from those if we were the sole owner.

Real estate generally cannot be sold quickly. We may not be able to promptly dispose of properties in response to economic or other conditions. To offset this challenge, selective dispositions have been a part of our strategy to maintain an efficient investment portfolio and to provide additional sources of capital. We finance acquisitions through mortgages, internally generated funds, and, to a lesser extent, property sales. Those sources provide the bulk of funds for future acquisitions. We may purchase properties by assuming existing loans secured by the acquired property. When properties are acquired in such a manner, we customarily seek to refinance the asset in order to properly leverage the asset in a manner consistent with our investment objectives.

Our businesses are not generally seasonal with regard to real estate investments. Our investment strategy seeks both current income and capital appreciation. Our plan of operation is to continue, to the extent our liquidity permits, to make equity investments in income-producing real estate such as apartments and commercial properties. We may also invest in the debt or equity securities of real estate-related entities. We intend to pursue higher risk, higher reward investments, such as improved and unimproved land where we can obtain reasonably-priced financing for substantially all of a property’s purchase price. We intend to continue the development of apartment properties in selected markets in Texas and in other locations where we believe adequate levels of demand exist. We intend to pursue sales opportunities for properties in stabilized real estate markets where we believe our properties’ value has been maximized. We also intend to be an opportunistic seller of properties in markets where demand exceeds current supply. Although we no longer actively seek to fund or purchase mortgage loans, we may, in selected instances, originate mortgage loans or we may provide purchase money financing in conjunction with a property sale.

 

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Our Board of Directors has broad authority under our governing documents to make all types of investments, and we may devote available resources to particular investments or types of investments without restriction on the amount or percentage of assets that may be allocated to a single investment or to any particular type of investment, and without limit on the percentage of securities of any one issuer that may be acquired. Investment objectives and policies may be changed at any time by the Board without stockholder approval.

The specific composition from time-to-time of our real estate portfolio owned by TCI directly and through our subsidiaries depends largely on the judgment of management to changing investment opportunities and the level of risk associated with specific investments or types of investments. We intend to maintain a real estate portfolio that is diversified by both location and type of property.

Competition

The real estate business is highly competitive and TCI competes with numerous companies engaged in real estate activities (including certain entities described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”), some of which have greater financial resources than TCI. We believe that success against such competition is dependent upon the geographic location of a property, the performance of property-level managers in areas such as leasing and marketing, collection of rents and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to a property, the adequacy of related facilities such as parking and other amenities, and sensitivity to market conditions in determining rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the residents. We believe that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties are developed in the competing submarket are also competitive factors. See also Part I, Item1A. “Risk Factors”.

To the extent that TCI seeks to sell any of its properties, the sales prices for the properties may be affected by competition from other real estate owners and financial institutions also attempting to sell properties in areas where TCI’s properties are located, as well as aggressive buyers attempting to dominate or penetrate a particular market.

As described above and in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”, the officers and directors of TCI serve as officers and directors of ARL, the officers of TCI serve as the officers of IOT and two directors of TCI are also a directors of IOT. Both ARL and IOT have business objectives similar to TCI’s. TCI’s officers and directors owe fiduciary duties to both IOT and ARL as well as to TCI under applicable law. In determining whether a particular investment opportunity will be allocated to TCI, IOT, or ARL, management considers the respective investment objectives of each Company and the appropriateness of a particular investment in light of each Company’s existing real estate and mortgage notes receivable portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all three or two of the entities.

In addition, as described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”, TCI competes with affiliates of Prime having similar investment objectives related to the acquisition, development, disposition, leasing and financing of real estate and real estate-related investments. In resolving any potential conflicts of interest which may arise, Prime has informed TCI that it intends to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

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

 

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Available Information

TCI maintains an internet site at http://www.transconrealty-invest.com. We make available through our website free of charge Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission. In addition, we have posted the charters for our Audit Committee, Compensation Committee and Governance and Nominating Committee, as well as our Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence and other information on the website. These charters and principles are not incorporated in this Report by reference. We will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common stockholders.

ITEM 1A.    RISK FACTORS

An investment in our securities involves various risks. All investors should carefully consider the following risk factors in conjunction with the other information in this Report before trading our securities.

Risk Factors Related to our Business

Adverse events concerning our existing tenants or negative market conditions affecting our existing tenants could have an adverse impact on our ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth.

Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. We could be adversely affected by various facts and events over which the Company has limited or no control, such as:

 

   

lack of demand for space in areas where the properties are located;

 

   

inability to retain existing tenants and attract new tenants;

 

   

oversupply of or reduced demand for space and changes in market rental rates;

 

   

defaults by tenants or failure to pay rent on a timely basis;

 

   

the need to periodically renovate and repair marketable space;

 

   

physical damage to properties;

 

   

economic or physical decline of the areas where properties are located; and

 

   

potential risk of functional obsolescence of properties over time.

At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due, could result in the termination of the tenant’s lease and material losses to the Company.

If tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is re-let, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and our ability to make distributions to shareholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance, and debt service payments, are not necessarily reduced when circumstances cause a decrease in rental income from the properties.

 

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We may not be able to compete successfully with other entities that operate in our industry.

We experience a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.

In our effort to lease properties, we compete for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than we are able to offer.

If the availability of land or high quality properties in our markets diminishes, operating results could be adversely affected.

We may experience increased operating costs which could adversely affect our financial results and the value of our properties.

Our properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs, and maintenance of the properties. While some current tenants are obligated by their leases to reimburse us for a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets to offset the increased expenses, without at the same time decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service indebtedness could be adversely affected.

Our ability to achieve growth in operating income depends in part on its ability to develop additional properties.

We intend to continue to develop properties where warranted by market conditions. We have a number of ongoing development and land projects being readied for commencement.

Additionally, general construction and development activities include the following risks:

 

   

construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;

 

   

construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs;

 

   

some developments may fail to achieve expectations, possibly making them less profitable;

 

   

we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

 

   

we may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If we determine to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss;

 

   

we may expend funds on and devote management’s time to projects which will not be completed; and

 

   

occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations.

 

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We face risks associated with property acquisitions.

We acquire individual properties and various portfolios of properties and intend to continue to do so. Acquisition activities are subject to the following risks:

 

   

when we are able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price;

 

   

acquired properties may fail to perform as expected;

 

   

the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;

 

   

acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and

 

   

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

We may acquire properties subject to liabilities and without any recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, we might be required to pay substantial sums to settle it, which could adversely affect cash flow.

Many of our properties are concentrated in our primary markets and the Company may suffer economic harm as a result of adverse conditions in those markets.

Our properties are located principally in specific geographic areas in the southwestern, southeastern, and mid-western United States. The Company’s overall performance is largely dependent on economic conditions in those regions.

We are leveraged and may not be able to meet our debt service obligations.

We had total indebtedness at December 31, 2009 of approximately $1.2 billion. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. Our leveraged position makes us vulnerable to declines in the general economy and may limit the Company’s ability to pursue other business opportunities in the future.

We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.

We rely on proceeds from property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are among the sources upon which the Company relies. There is no guarantee that we will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

 

   

general economic conditions affecting these markets;

 

   

our own financial structure and performance;

 

   

the market’s opinion of real estate companies in general; and

 

   

the market’s opinion of real estate companies that own similar properties.

 

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We may suffer adverse effects as a result of terms and covenants relating to the Company’s indebtedness.

Required payments on our indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, we could sustain a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.

We anticipate only a small portion of the principal of its debt will be repaid prior to maturity. Therefore, we are likely to refinance a portion of its outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

Our credit facilities and unsecured debt contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt. Our continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on unattractive terms.

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.

The degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make us more vulnerable to a downturn in business or the general economy.

An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.

We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on our debt and the ability to make distributions to shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.

Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow.

If capital expenditures for ongoing or planned development projects or renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, we might not have access to funds on a timely basis to pay the unexpected expenditures.

Construction costs are funded in large part through construction financing, which the Company may guarantee and the Company’s obligation to pay interest on this financing continues until the rental project is completed, leased up and permanent financing is obtained, or the for sale project is sold or the construction loan is otherwise paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

 

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We may need to sell properties from time to time for cash flow purposes.

Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be limited. Real estate investments generally cannot be sold quickly. In the event that we must sell assets to generate cash flow, we cannot predict whether there will be a market for those assets in the time period desired, or whether we will be able to sell the assets at a price that will allow the Company to fully recoup its investment. We may not be able to realize the full potential value of the assets and may incur costs related to the early pay-off of the debt secured by such assets.

The Company intends to devote resources to the development of new projects.

We plan to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:

 

   

we may abandon a project after spending time and money determining its feasibility;

 

   

construction costs may materially exceed original estimates;

 

   

the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;

 

   

we may not be able to obtain financing on favorable terms for development of a property, if at all;

 

   

the Company may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs; and

 

   

we may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.

The overall business is subject to all of the risks associated with the real estate industry.

We are subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

 

   

our real estate assets are concentrated primarily in the southwest and any deterioration in the general economic conditions of this region could have an adverse effect;

 

   

changes in interest rates may make the ability to satisfy debt service requirements more burdensome;

 

   

lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;

 

   

changes in real estate and zoning laws;

 

   

increases in real estate taxes and insurance costs;

 

   

federal or local economic or rent control;

 

   

acts of terrorism; and

 

   

hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.

Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:

 

   

downturns in the national, regional and local economic conditions (particularly increases in unemployment);

 

   

competition from other office and commercial buildings;

 

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local real estate market conditions, such as oversupply or reduction in demand for office or other commercial space;

 

   

changes in interest rates and availability of financing;

 

   

vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

   

increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

 

   

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

   

significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;

 

   

declines in the financial condition of our tenants and our ability to collect rents from our tenants; and

 

   

decreases in the underlying value of our real estate.

Adverse economic conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, and financial condition.

Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the current dislocations in the credit markets and general global economic recession. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, and financial condition as a result of the following, among other potential consequences:

 

   

the financial condition of our tenants may be adversely affected which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

 

   

significant job losses within our tenants may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;

 

   

our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

 

   

reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and

 

   

one or more lenders could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

Real estate investments are illiquid, and the Company may not be able to sell properties if and when it is appropriate to do so.

Real estate generally cannot be sold quickly. We may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code may limit our ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous to do so, thereby adversely affecting returns to stockholders and adversely impacting our ability to meet our obligations.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2.    PROPERTIES

On December 31, 2009, our portfolio consisted of 85 properties. Our properties consisted of 57 apartments totaling 11,354 units, 28 commercial properties consisting of 19 office buildings, six industrial warehouses, and three shopping centers. In addition, we own or control 6,813 acres of improved and unimproved land for future development or sale. The average dollar per square foot for the Company’s apartment/residential portfolio is $9.94 and $12.10 for the commercial portfolio. The table below shows information relating to those properties in which we own or have an ownership interest in.

 

Apartments

  

Location

   Units    Occupancy  

Anderson Estates

   Oxford, MS    48    86.90

Blue Lake Villas I

   Waxahachie, TX    186    90.30

Blue Lake Villas II

   Waxahachie, TX    70    95.70

Breakwater Bay

   Beaumont, TX    176    90.90

Bridgewood Ranch

   Kaufman, TX    106    98.10

Capitol Hill

   Little Rock, AR    156    93.60

Curtis Moore Estates

   Greenwood, MS    104    95.20

Dakota Arms

   Lubbock, TX    208    93.80

David Jordan Phase II

   Greenwood, MS    32    96.90

David Jordan Phase III

   Greenwood, MS    40    87.50

Desoto Ranch

   DeSoto, TX    248    96.20

Dorado Ranch

   Odessa, TX    224    89.70

Falcon Lakes

   Arlington, TX    248    92.70

Foxwood

   Memphis, TN    220    80.00

Heather Creek

   Mesquite, TX    200    92.00

Huntington Ridge

   DeSoto, TX    198    89.90

Island Bay

   Galveston, TX    458    0.00

Kingsland Ranch

   Houston, TX    398    90.20

Laguna Vista

   Dallas, TX    206    91.70

Lake Forest

   Houston, TX    240    90.00

Legends of El Paso

   El Paso, TX    240    97.10

Longfellow Arms

   Longview, TX    216    94.40

Mansions of Mansfield

   Mansfield, TX    208    94.70

Marina Landing

   Galveston, TX    256    0.00

Mariposa Villas

   Dallas, TX    216    93.10

Mason Park

   Katy, TX    312    89.10

Mission Oaks

   San Antonio, TX    228    94.70

Monticello Estate

   Monticello, AR    32    93.80

Northside on Travis

   Sherman, TX    200    82.50

Paramount Terrace

   Amarillo. TX    181    92.80

Parc at Clarksville

   Clarksville, TN    168    94.00

Parc at Maumelle

   Little Rock, AR    240    91.30

Parc at Metro Center

   Nashville, TN    144    94.40

Parc at Rogers

   Rogers, AR    152    87.60

Pecan Pointe

   Temple, TX    232    90.10

Portofino

   Farmers Branch, TX    224    86.20

Preserve at Pecan Creek

   Denton, TX    192    97.90

Quail Hollow

   Holland, OH    200    92.80

Quail Oaks

   Balch Springs, TX    131    90.84

River Oaks

   Wylie, TX    180    91.10

Riverwalk Phase I

   Greenville, MS    32    93.80

Riverwalk Phase II

   Greenville, MS    72    97.20

 

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Apartments

  

Location

   Units    Occupancy  

Savoy of Garland

   Garland, TX    144    69.44

Spyglass

   Mansfield, TX    256    91.00

Stonebridge at City Park

   Houston, TX    240    90.80

Sugar Mill

   Baton Rouge, LA    160    68.75

Treehouse

   Irving, TX    160    90.60

Verandas at City View

   Fort Worth, TX    314    92.60

Vistas of Pinnacle Park

   Dallas, TX    332    94.00

Vistas of Vance Jackson

   San Antonio, TX    240    96.30

Wildflower Villas

   Temple, TX    220    96.40

Windsong

   Fort Worth, TX    188    91.00
          

Total Apartment Units

      10,076   

 

Office Buildings

  

Location

   SqFt    Occupancy  

1010 Common

   New Orleans, LA    512,593    74.41

217 Rampart

   New Orleans, LA    11,913    0.00

225 Baronne

   New Orleans, LA    422,037    0.00

305 Baronne

   New Orleans, LA    37,081    38.00

600 Las Colinas

   Las Colinas, TX    510,841    72.29

Amoco Building

   New Orleans, LA    378,895    89.00

Browning Place (Park West I)

   Dallas, TX    627,312    100.00

Ergon Office Building

   Jackson, MS    26,000    0.00

Eton Square

   Tulsa, OK    225,566    71.23

Fenton Center (Park West II)

   Dallas, TX    696,458    74.39

Fruitland Park

   Fruitland, FL    6,722    100.00

Keller Springs Tech Center

   Carrollton, TX    80,000    100.00

One Hickory Center

   Dallas, TX    97,361    95.95

Parkway North

   Dallas, TX    69,009    72.41

Signature Building

   Dallas, TX    58,910    0.00

Stanford Center

   Dallas, TX    336,910    100.00

Teleport

   Las Colinas, TX    6,833    100.00

Two Hickory Center

   Dallas, TX    97,117    91.33

Westgrove Air Plaza

   Addison, TX    79,652    70.53
          
      4,281,210   
          

Industrial Warehouses

  

Location

   SqFt    Occupancy  

Addison Hanger I

   Addison, TX    25,102    100.00

Addison Hanger II

   Addison, TX    24,000    100.00

Alpenloan

   Dallas, TX    28,594    0.00

Clark Garage

   New Orleans, LA    6,869    0.00

Senlac (VHP)

   Dallas, TX    2,812    100.00

Thermalloy

   Farmers Branch, TX    177,805    100.00
          
      265,182   
          

 

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Shopping Centers

  

Location

   SqFt    Occupancy  

Bridgeview Plaza

   LaCrosse, WI    122,205    90.13

Dunes Plaza

   Michigan City, IN    220,461    28.58

Willowbrook Village

   Coldwater, MI    179,741    81.25
          
      522,407   
          
   Total Commercial Square Feet    5,068,799   
          

Apartments Held for Sale

  

Location

   Units    Occupancy  

Baywalk Apartments

   Galveston, TX    192    0.00
          
   Total Held for Sale    192   

Apartments Subject to Sales Contract

  

Location

   Units    Occupancy  

Limestone Canyon

   Austin, TX    260    90.00

Limestone Ranch

   Lewisville, TX    252    91.70

Sendero Ridge

   San Antonio, TX    384    91.90

Tivoli

   Dallas, TX    190    90.00
          
Total Subject to Sales Contract       1,086   

Lease expirations

The table below shows the lease expirations of the commercial properties over a ten-year period (dollars in thousands):

 

Year of Lease Expiration

   Rentable
Square Feet
Subject to
Expiring
Leases
   Current
Annualized(1)
Contractual
Rent Under
Expiring
Leases
   Current
Annualized(1)
Contractual
Rent Under
Expiring
Leases
(P.S.F.)
   Percentage
of Total
Square
Feet
    Percentage
of Gross
Rentals
 

2010

   406,687    $ 7,863,560    $ 19.34    8.0   13.3

2011

   676,328      10,942,024      16.18    13.3   18.5

2012

   524,472      10,823,665      20.64    10.3   18.3

2013

   618,441      6,881,905      11.13    12.2   11.7

2014

   270,391      7,716,042      28.54    5.3   13.1

2015

   63,389      1,734,771      27.37    1.3   2.9

2016

   106,481      3,020,107      28.36    2.1   5.1

2017

   385,072      6,977,105      18.12    7.6   11.8

2018

   42,042      841,567      20.02    0.8   1.4

2019

   107,707      2,300,147      21.36    2.1   3.9

Thereafter

   —        —        —      —        —     
                               

Total

   3,201,010    $ 59,100,893       63   100
                               

 

(1)

Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2009 multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.

 

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Land

  

Location

   Acres

1013 Common St

   New Orleans, LA    0.41

Ackerley Land

   Dallas, TX    1.31

Alliance Airport

   Tarrant County, TX    12.70

Alliance Centurion

   Tarrant County, TX    51.90

Alliance Hickman Bluestar

   Tarrant County, TX    8.00

Archon Land

   Irving, TX    24.14

Audubon

   Adams County, MS    48.20

Centura Land

   Dallas, TX    10.08

Circle C Land

   Austin, TX    1,092.00

Cooks Lane Land

   Fort Worth, TX    23.24

Copperridge

   Dallas, TX    3.90

Creekside

   Fort Worth, TX    30.07

Crowley

   Fort Worth, TX    24.90

Dedeaux

   Gulfport, MS    10.00

Denham Springs

   Denham Springs, LA    0.50

Denton (Andrew B)

   Denton, TX    22.90

Denton (Andrew C)

   Denton, TX    5.20

Denton Coonrod

   Denton, TX    82.80

Denton Land

   Denton, TX    15.65

Desoto Ranch

   Desoto, TX    8.02

Diplomat Drive

   Farmers Branch, TX    11.65

Dominion Tract

   Dallas, TX    10.59

Eagle Crest

   Dallas, TX    18.60

Ewing 8

   Addison, TX    16.79

Fortune Drive

   Irving, TX    14.88

Galleria East Center Retail

   Dallas, TX    15.00

Gautier

   Gautier, MS    40.06

Hines Meridian

   Las Colinas, TX    6.51

Hollywood Casino (Dominion)

   Farmers Branch, TX    18.56

Hollywood Casino Land

   Farmers Branch, TX    13.85

Hunter Equities Land

   Dallas, TX    2.56

Jackson Convention Center

   Jackson, MS    7.95

Kaufman-Adams

   Kaufman County, TX    193.73

Kaufman-Bridgewood

   Kaufman County, TX    5.04

Kaufman-Cogen

   Forney, TX    2,567.00

Kaufman-Stagliano

   Forney, TX    34.80

Kaufman-Taylor

   Forney, TX    31.00

Keller Springs Lofts

   Addison, TX    7.40

Kinwest Manor

   Irving, TX    7.98

Lacy Longhorn Land

   Farmers Branch, TX    17.12

LaDue Land

   Farmers Branch, TX    8.01

Lake Shore Villas

   Humble, TX    19.51

Lamar/Palmer Land

   Austin, TX    17.07

Las Colinas (Cigna)

   Las Colinas, TX    4.70

Las Colinas Station

   Las Colinas, TX    10.08

Las Colinas Village

   Las Colinas, TX    16.81

LCLLP (Kinwest/Hackberry)

   Las Colinas, TX    27.97

Limestone Canyon II

   Austin, TX    9.96

Lubbock Land

   Lubbock, TX    2.86

Luna (Carr)

   Farmers Branch, TX    2.60

Luna Ventures

   Farmers Branch, TX    26.74

 

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Land (continued)

 

Mandahl Bay Land

   US Virgin Islands    91.10

Manhattan Land

   Farmers Branch, TX    108.90

Mansfield Land

   Mansfield, TX    21.89

Marine Creek

   Fort Worth, TX    44.17

McKinney 36

   Collin County, TX    34.48

McKinney Corners II

   Collin County, TX    6.76

McKinney Ranch Land

   McKinney,TX    200.68

Nashville Land

   Nashville, TN    6.25

Nicholson-Croslin

   Dallas, TX    0.80

Nicholson-Mendoza

   Dallas, TX    0.35

Ocean Estates

   Gulfport, MS    12.00

Pac Trust Land

   Farmers Branch, TX    7.07

Pantaze Land

   Dallas, TX    6.00

Payne Land

   Las Colinas, TX    149.70

Pioneer Crossing

   Austin, TX    38.54

Polo Estates At Bent Tree

   Dallas, TX    5.87

Pulaski Land

   Pulaski County, AR    21.90

Ridgepoint Drive

   Irving, TX    0.60

Seminary West Land

   Fort Worth, TX    3.03

Senlac Land

   Farmers Branch, TX    11.94

Sheffield Village

   Grand Prairie, TX    13.90

Southwood Plantation 1394

   Tallahassee, FL    14.52

Stanley Tools

   Farmers Branch, TX    23.76

Temple Land

   Temple, TX    10.69

Three Hickory

   Dallas, TX    6.64

Travelers Land

   Farmers Branch, TX    193.17

Travis Ranch Land

   Kaufman County, TX    10.00

Travis Ranch Retail

   Kaufman County, TX    14.93

Union Pacific Railroad Land

   Dallas, TX    0.04

Valley Ranch Land

   Irving, TX    30.00

Valley View (Hutton/Senlac)

   Farmers Branch, TX    2.42

Valley View 34 (Mercer Crossing)

   Farmers Branch, TX    2.19

Valley View/Senlac

   Farmers Branch, TX    3.45

W Lofts

   Dallas, TX    7.19

W Hotel

   Dallas, TX    1.97

Waco 151 Land

   Waco,TX    151.40

Waco Swanson

   Waco, TX    350.70

Walker Land

   Farmers Branch, TX    82.59

West End Land

   Dallas, TX    5.50

Whorton Land

   Bentonville, AR    79.70

Willowick Land

   Pensacola, TX    39.78

Wilmer 88

   Dallas, TX    87.60

Windmill Farms-Harlan Land

   Kaufman County, TX    245.95
       

Total Land/Development

      6,813.42
       

 

ITEM 3.    LEGAL PROCEEDINGS

The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of Management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.

 

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During the fourth quarter of the fiscal year covered by this Report, no proceeding previously reported was terminated.

 

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders was held on December 10, 2009, at which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). There was no solicitation in opposition to management’s nominees listed in the Proxy Statement, all of which were elected. At the annual meeting, stockholders were asked to consider and vote upon the election of Directors and the ratification of the selection of the independent public accountants for TCI for the fiscal year ending December 31, 2009. With respect to each nominee for election as a director, the following table sets forth the number of votes cast for or withheld:

 

     Shares Voting

Director

   For    Withheld
Authority

Henry A. Butler

   6,962,572    26,749

Sharon Hunt

   6,917,502    71,819

Robert A. Jakuszewski

   6,917,325    71,996

Ted R. Munselle

   6,917,054    72,267

There were no abstentions or broker non-votes on the election of Directors. With respect to the ratification of the appointment of Farmer, Fuqua & Huff, P.C. as independent auditors of the Company for the fiscal year ending December 31, 2009, and any interim period, at least 6,978,249 votes were received in favor of such proposal, 2,420 votes were received against such proposal, and 8,652 votes abstained.

 

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PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

TCI’s Common Stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “TCI”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE for the quarters ended.

 

     2009    2008
     High    Low    High    Low

First Quarter

   $ 13.70    $ 8.04    $ 17.99    $ 13.88

Second Quarter

   $ 14.12    $ 10.55    $ 20.50    $ 14.69

Third Quarter

   $ 14.50    $ 10.16    $ 15.12    $ 10.25

Fourth Quarter

   $ 12.50    $ 10.23    $ 13.44    $ 9.15

On March 25, 2010, the closing price of TCI’s Common Stock as reported in the consolidated reporting system of the NYSE was $12.13 per share, and was held by approximately 4,200 holders of record.

 

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Performance Graph

The following performance graph compares the cumulative total stockholder return on TCI’s shares of Common Stock with the Dow Jones Industrial Average (“Dow Jones Industrial”) and the Real Estate Investment Index (“Real Estate Index”). The comparison assumes that $100 was invested on December 31, 2004, in TCI’s shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.

LOGO

$100 invested on 12/31/04 in stock or index-including reinvestment of dividends.

Fiscal year ending December 31.

 

     12/04    12/05    12/06    12/07    12/08    12/09

Transcontinental Realty Investors, Inc.

   $ 100.00    $ 116.84    $ 97.54    $ 108.49    $ 80.70    $ 83.58

Dow Jones Industrial

   $ 100.00    $ 109.01    $ 145.15    $ 116.33    $ 69.18    $ 85.32

Dow Jones US Real Estate

   $ 100.00    $ 99.39    $ 115.58    $ 123.02    $ 81.39    $ 96.71

 

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TCI paid no dividends on common stock in 2009, 2008 or 2007. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.

In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI’s Common Stock. In June 2000, the Board increased this authorization to 1,409,000 shares. The repurchase program has no termination date. The following table represents shares repurchased during each for the three months of the last quarter ended December 31, 2009:

 

Period

   Total Number of
Shares Purchased
   Average Price
Paid per share
   Total Number of
Shares Purchased as
Part of Publicly
Announced Program
   Maximum Number
of Shares that May
Yet be Purchased
Under the Program

Balance at September 30, 2009

         1,286,212    122,788

October 31, 2009

   —      —      1,286,212    122,788

November 30, 2009

   —      —      1,286,212    122,788

December 31, 2009

   —      —      1,286,212    122,788
             

Total

   —           
             

 

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ITEM 6.    SELECTED FINANCIAL DATA

 

     For the Years Ended December 31,  
     2009     2008     2007     2006     2005  
     (dollars in thousands, except share and per share amounts)  

EARNINGS DATA

          

Total operating revenues

   $ 151,647      $ 138,337      $ 123,704      $ 96,392      $ 75,216   

Total operating expenses

     179,664        140,444        118,317        90,997        71,845   
                                        

Operating (loss) income

     (28,017     (2,107     5,387        5,395        3,371   

Other expenses

     (61,214     (67,004     (24,532     (22,117     (30,866
                                        

Loss before gain on land sales, non-controlling interest, and income tax benefit

     (89,231     (69,111     (19,145     (16,722     (27,495

Gain on land sales

     6,296        4,798        11,956        11,421        7,702   

Income tax benefit (expense)

     1,180        33,441        8,186        5,265        9,715   
                                        

Net income (loss) from continuing operations

     (81,755     (30,872     997        (36     (10,078
                                        

Net income from discontinuing operations, net of non-controlling interest

     2,182        62,427        10,064        3,149        19,035   
                                        

Net income (loss)

     (79,573     31,555        11,061        3,113        8,957   

Net income (loss) attributable to non-controlling interest

     (125     654        50        393        112   
                                        

Net income (loss) attributable to Transcontinental Realty Investors, Inc.

     (79,698     32,209        11,111        3,506        9,069   

Preferred dividend requirement

     (1,023     (975     (925     (210     (210
                                        

Net income (loss) applicable to common shares

   $ (80,721   $ 31,234      $ 10,186      $ 3,296      $ 8,859   
                                        

PER SHARE DATA

          

Earnings per share—basic

          

Income (loss) from continuing operations

   $ (10.22   $ (3.86   $ 0.02      $ 0.02      $ (1.29

Discontinued operations

     0.27        7.72        1.26        0.40        2.41   
                                        

Net income (loss) applicable to common shares

   $ (9.95   $ 3.86      $ 1.28      $ 0.42      $ 1.12   
                                        

Weighted average common share used in computing earnings per share

     8,113,669        8,086,640        7,953,676        7,900,869        7,900,869   

Earnings per share—diluted

          

Income (loss) from continuing operations

   $ (10.22   $ (3.86   $ 0.01      $ 0.02      $ (1.29

Discontinued operations

     0.27        7.72        1.23        0.38        2.41   
                                        

Net income (loss) applicable to common shares

   $ (9.95   $ 3.86      $ 1.24      $ 0.40      $ 1.12   
                                        

Weighted average common share used in computing diluted earnings per share

     8,113,669        8,086,640        8,188,602        8,180,401        7,900,869   

BALANCE SHEET DATA

          

Real estate, net

   $ 1,447,184      $ 1,480,791      $ 1,364,426      $ 1,113,416      $ 943,069   

Notes and interest receivable, net

     45,247        39,120        32,699        39,566        64,818   

Total assets

     1,608,287        1,640,067        1,521,189        1,250,167        1,089,079   

Notes and interest payables

     1,188,625        1,168,015        1,177,586        901,464        770,161   

Shareholders’ equity

     245,416        324,696        287,102        282,095        252,418   

Book value per share

   $ 30.25      $ 40.15      $ 36.10      $ 35.70      $ 31.95   

 

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

potential liability for uninsured losses and environmental contamination;

 

   

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

 

   

the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.”

The risks included here are not exhaustive. Other sections of this report, including Part I Item 1A. “Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of

 

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all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

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. The Company’s portfolio of income-producing properties includes residential apartment communities, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. We acquire land primarily in in-fill locations or high-growth suburban markets. We are an active buyer and seller and during 2009 acquired over $24 million and sold over $72 million of land and income-producing properties. As of December 31, 2009, we owned 11,354 units in 57 residential apartment communities, 28 commercial properties comprising 5.1 million rentable square feet. In addition, we own over 6,813 acres of land held for development and have two apartment projects under construction. The Company currently owns income-producing properties and land in 11 states as well as in the U.S. Virgin Islands.

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. The Company will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates operating revenues primarily by leasing apartment units to residents; leasing office, retail and industrial space to commercial tenants.

TCI is advised by Prime under a contractual arrangement that is reviewed annually by our Board of Directors. Our commercial properties are managed by Regis Commercial. We currently contract with third-party companies to manage our apartment communities. Approximately 82.8% of our common stock is owned by ARL, our “Parent Company.”

Critical Accounting Policies

The company presents its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In June 2009, the Financial Accounting Standards Board (“FASB”) completed its accounting guidance codification project. The FASB Accounting Standards Codification (“ASC”) became effective for the Company’s financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, the company will no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, the Company will refer to the ASC Codification as the sole source of authoritative literature.

The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which the Company has a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable

 

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

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

For entities in which the Company has less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings or losses of these entities is included in consolidated net income. TCI’s investments in ARL and Garden Centura, LP are accounted for under the equity method.

Real Estate

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

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

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

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

 

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estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

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

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

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

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Capitalization of Interest” and ASC Topic 970 “Real Estate—General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We 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.

Investment in Unconsolidated Real Estate Ventures

Except for ownership interests in variable interest entities, TCI accounts for our investments in unconsolidated real estate ventures under the equity method of accounting because the Company exercises significant influence over, but does not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on the Company’s balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our

 

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recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, the Company consolidates those in which we are the primary beneficiary.

Recognition of Rental Income

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with ASC Topic 805, we recognize rental revenue of acquired in-place “above-”and “below-market” leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to the terms of the individual commercial lease agreements.

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.

Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Revenue Recognition on the Sale of Real Estate

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

Non-performing Notes Receivable

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

Interest Recognition on Notes Receivable

For notes other than surplus cash notes, we record interest income as earned in accordance with the terms of the related loan agreements. On cash flow notes where payments are based upon surplus cash from operations, accrued but unpaid interest income is only recognized to the extent cash is received.

Allowance for Estimated Losses

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 for details on our Notes Receivable.

 

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Fair Value of Financial Instruments

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

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

 

Level 1

    Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

Level 2

    Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3

    Unobservable inputs that are significant to the fair value measurement.

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

Results of Operations

The following discussion is based on our “Consolidated Statements of Operations—Years Ended December 31, 2009, 2008, and 2007” as included in Item 8. “Financial Statements and Supplementary Data”. The total property portfolio represents all income producing properties held as of December 31, for the year presented. Sales subsequent to year end represent properties that were previously included in continued operations, but subsequently sold or held for sale and reclassed to discontinued operations as of December 31, 2009. The number of properties included in continued operations for discussion purposes is shown below.

 

     2009    2008    2007

Continued operations

   85    79    60

Sales subsequent to year end

   —      4    29
              

Total property portfolio

   85    83    89
              

The discussion of our results of operations is based on management’s review of operations, which is based on our segments. Our segments consist of apartments, commercial buildings, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties, and developed properties in the lease-up phase. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared. Developed properties in the lease-up phase consist of completed projects that are being leased-up. As we complete each phase of the project, we lease up that phase and include those revenues in our continued operations. Once a developed property becomes leased up (80% or more) and is held the entire period for both years under comparison, it is considered to be included in the same property portfolio. Income producing properties that we have sold during the year are reclassified to discontinuing operations for all periods presented.

Results of operations for the year ended December 31, 2009 as compared to the same period ended 2008;

We had a net loss applicable to common shares of $80.7 million in 2009, which includes gain on land sales of $6.3 million and net income from discontinued operations, net of non-controlling interest of $2.2 million, as

 

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compared to prior year net income applicable to common shares of $31.2 million, which includes gain on land sales of $4.8 million and net income from discontinued operations, net of non-controlling interest of $62.4 million.

The majority of the $112.0 million decrease in our net income applicable to common shares is primarily due to our impairment on notes receivable and real estate assets of $42.5 million in the current period, as compared to $7.4 million in the prior period. There was also a significant amount of gain on the sales of assets recorded in 2008 due to sale of the Midland/Odessa Apartment complexes and the sale of three Chicago hotels where we recorded a gain of $65.5 million and $18.4 million, respectively. In the current year, we recorded gains of $3.5 million on the sale of income-producing properties and $6.3 million on the sale of land.

Revenues

Rental and other property revenues increased by $13.3 million, as compared to the prior year of which the apartment portfolio increased by $11.4 million, the commercial portfolio increased by $3.9 million and the land portfolio decreased $1.1 million with the remaining $0.9 million decrease in our other portfolios. There was an increase within the apartment portfolio of $12.7 million which was due to our developed properties in the lease up phase and reaching stabilization, $1.0 million of the increase was due to properties acquired in 2008 with a decrease of $2.3 million related to the properties damaged in Galveston, Texas by hurricane Ike. We have increased occupancies within our apartment portfolio and there is an overall increased demand for new apartments. The increase in the commercial portfolio was due to $2.9 million of lease term buyouts received and the remaining $1.0 million increase is due to properties acquired in late 2008 and 2009. The decrease in revenues from our land portfolio is due to oil and gas royalties received in the prior year that were not applicable in the current year.

Expenses

Property operating expenses decreased by $1.2 million as compared to the prior year of which the apartment portfolio increased $5.4 million, the commercial portfolio decreased by $2.6 million, the land portfolio decreased by $3.5 million and the other portfolios decreased by $0.5 million. There was an increase within the apartment portfolio of $5.8 million from our completed apartments in the lease up phase during 2008 and early 2009. Our properties, while they are being developed, are completed in phases. As a phase is completed, it is leased up while the remaining properties are still being completed. There was a decrease of $2.0 million in operating expenses related to the properties damaged in the Galveston, Texas by hurricane Ike. The remaining increase of $1.6 million was from properties acquired in 2008 and same properties. The commercial and land portfolio decrease was in the same properties due to lower overall operating expenses.

We had an increase in depreciation expense of $4.7 million as compared to prior year of which the apartment portfolio increased $3.4 million with the remainder due to the commercial portfolio. The increase in the apartment portfolio was from our completed projects in the lease up phase during 2008 and early 2009. Once the apartment complex is leased to 80%, the project is considered “stabilized” and we begin to depreciate the assets. The increase in the commercial portfolio was due to the newly acquired properties in 2008.

The provision on impairment of notes receivable, investment in real estate partnerships, and real estate assets increased by $35.1 million as compared to the prior year period. Impairment was recorded as an additional loss in the investment portfolio of $1.9 million in commercial properties we currently hold, $33.5 million in land we currently hold and $7.1 million in land that was sold in the third quarter for a loss.

Other Income Expense

Interest income increased by $2.2 million in the current period due to the receipt of interest payments due on our Unified Housing surplus cash flow notes. Interest is recognized when interest payments are received.

 

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Mortgage and loan interest decreased by $2.9 million which is due to an increase in the apartments of $1.8 million, a decrease in the commercial portfolio of $1.5 million, an increase in the land portfolio of $0.7 million and a decrease in the other portfolios of $3.9 million. Interest expense within the apartment portfolio increased from our developed properties in the lease up phase. Once an apartment is completed, the interest expense is no longer capitalized. The commercial and land portfolio decrease was in the same properties owned in 2008. The decrease in the other portfolios of $3.9 million was due to corporate loans paid off in 2008, thereby reducing the 2009 interest expense.

Gain on land sales decreased in the current year. This decrease is in part due to the overall economic environment which, among other issues, has resulted in the tightening of the credit markets, causing an inability of potential buyers to obtain financing. Thus, we have found it difficult to complete land transactions. In the current year, we sold 857.12 acres of land in seven separate transactions for an aggregate sales price of $36.7 million, receiving $9.5 million in cash and recorded a gain of $6.3 million. The average sales price was $42,818 per acre. In the prior year, we sold 91.7 acres of land in eight separate transactions for an aggregate sales price of $14.3 million, receiving $4.3 million in cash and recorded a gain on sale of $4.8 million. The average sales price was $156,000 per acre. Also included in the prior year gain on land sales is the sale of our mineral rights on 43.4 acres of land known as Marine Creek for $1.1 million.

Discontinued Operations

Discontinued operations relates to properties that were either sold or held for sale as of the respective year end. Included in discontinued operations are a total of seven and 25 income-producing properties as of 2009 and 2008, respectively. In 2009, we sold six properties, which consists of one apartment complex (Bridges on Kinsey) and five commercial buildings (Cullman Shopping Center, 5000 Space Center, 5360 Tulane, 2010 Valley View and Parkway Centre), and one property held for sale (Baywalk). In 2008, we sold 25 properties which consists of 18 apartment complexes (Arbor Pointe, Ashton Way, Autumn Chase, Courtyard, Coventry Pointe, Fairways, Forty-Four Hundred Apartments, Fountains at Waterford, Hunters Glen, SouthGate, Sunchase, Thornwood, Westwood Square, Woodview, Fairway View, Willow Creek, Fountain Lake, and Mountain Plaza), four hotels (City Suites, Majestic Inn, Willows, and Hotel Akademia), and three commercial buildings (Lexington Center, Executive Court, and Encon Warehouse). The gains on sale of the apartments sold in 2009 and 2008 are also included in the discontinued operations for those years (dollars in thousands).

 

     For Years Ended
December 31,
 
     2009     2008  

Revenue

    

Rental

   $ 4,500      $ 9,288   

Property operations

     2,373        4,268   
                
     2,127        5,020   

Expenses

    

Interest

     (1,711     (7,177

General and administration

     (27     (672

Depreciation

     (715     (851
                
     (2,453     (8,700
                

Net loss from discontinued operations before gains on sale of real estate, taxes and fees

     (326     (3,680

Gain on sale of discontinued operations

     3,524        104,411   

Equity in investee

     164        6,306   

Net sales fee to affiliate

     —          (3,041

Net income fee to affiliate

     —          (7,953
                

Income from discontinued operations

     3,362        96,043   

Tax expense

     (1,180     (33,616
                

Income from discontinued operations

   $ 2,182      $ 62,427   
                

 

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Results of operations for the year ended December 31, 2008 as compared to the same period ended 2007;

We had net income applicable to common shares of $31.2 million in 2008, which includes gains of land sales of $4.8 million, and net income from discontinued operations, net of non-controlling interest of $62.4 million, compared to net income applicable to common shares of $10.2 million in 2007, including gains on land sales totaling $12.0 million and net income from discontinued operations, net of non-controlling interest of $10.1 million.

Revenues

Rental and other property revenue increased $14.6 million, which by segment is an increase in the apartments of $13.1 million, an increase in commercial of $0.8 million and an increase in our land and other portfolios of $0.7 million. The change within the apartment portfolio comes from an increase in our same apartments of $2.5 million, of which $1.2 million is due to properties acquired in 2008 and $1.3 million is due to increases in the same properties held in 2007. There was an increase in our apartments in the lease up phase of $10.6 million. The increase within the commercial portfolio of $0.8 million is attributable to our new acquisitions. The increase in our land portfolio is due to an increase in oil and gas royalty revenues received in 2008 that were not applicable in 2007.

Expenses

Property operating expenses increased by $11.9 million, as compared to prior year, which is due to an increase in our apartment portfolio of $9.7 million, an increase in our commercial portfolio of $1.7 million, and an increase in our land and other portfolios of $0.5 million. The increases within the apartment portfolio were from increased operating costs and maintenance of $2.8 million in the same apartment portfolio. Our completed apartments in the lease up phase accounted for another $5.8 million of the increase. Our properties which are being developed are completed in phases. As a phase is completed, it is leased up while the remaining phases are still being completed. The remaining increase within the apartment portfolio of $1.1 million is from our properties acquired in the current year.

Depreciation and amortization expense increased by $3.3 million, as compared to prior year, which was due to an increase in our apartment portfolio of $2.9 million, an increase in our commercial portfolio of $0.6 million and a decrease in our land and other portfolios of $0.2 million. The increases within the apartment portfolio were from a $1.2 million increase in the same apartment portfolio, a $1.3 million increase in the apartments in the lease up phase and a $0.4 million increase due to apartments acquired in the current year.

The provision for allowance on notes receivable and impairment were due to posting an allowance against various investments within our portfolio. The prior year amount of $3.7 million in 2007 was related to the write down of three properties; Foxwood apartments, a 220 unit complex located in Memphis, Tennessee, for $1.7 million; Executive Court Office building, a 222,000 square foot commercial building located in Memphis, Tennessee, for $1.2 million; and the Encon Warehouse, a 256,000 square warehouse located in Fort Worth, Texas for $800,000.

Advisory fees to affiliate increased by $1.4 million. The increase was due to higher gross assets in 2008 as compared to 2007. Our advisory fee is based in part on gross assets.

Other Income Expense

Other income increased by $1.6 million. The majority of the increase is due to receiving a dividend distribution from our investment in Realty Korea CR-REIT Co., Ltd in 2008.

Mortgage and loan interest expense increased by $7.2 million, as compared to the prior year, which is due to a $6.8 million increase in our apartments, an increase of $0.9 million in our commercial portfolio and a decrease in our land and other portfolios of $0.5 million. Interest expense within the apartment portfolio increased $0.8 million from our new acquisitions and $6.0 million from our developed properties in the lease up phase. Once an apartment is completed, the interest expense is no longer capitalized. Within the commercial portfolio, we refinanced the existing loan on the Amoco building late last year pulling some of the equity out of the building and thus increasing interest expense.

 

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There were no gains or losses recorded for involuntary conversions in 2008, as compared to $34.8 million in 2007. In the prior year, we had a gain on involuntary conversion of $34.8 million. This was from the claims filed on our New Orleans property for damages resulting from hurricane Katrina in 2005.

In 2008, we sold 91.7 acres of land in eight separate transactions for an aggregate sales price of $14.3 million, receiving $4.3 million in cash and recorded a gain on sale of $4.8 million. The average sales price was $156,000 per acre. Also included in the prior year gain on land sales is the sale of our mineral rights on 43.4 acres of land known as Marine Creek for $1.1 million. In 2007, we sold 127.6 acres of land in nine separate transactions with an aggregate sales price of $20.8 million, receiving $8.4 million in cash and recording a gain on sale of $12.0 million. The average sales price was $163,000 per acre. The sales relate to the properties known as; Desoto Ranch (easement), 28.9 acres of McKinney Ranch land, 3.4 acres Mandahl Bay, 2.3 acres West End Land, 3.0 acres Miro Lago, 4.0 acres Hines Meridian, and 86 acres RB Land.

Discontinued Operations

Discontinued operations relates to properties that were either sold or held for sale. Included in discontinued operations are a total of 25 and 6 income-producing properties as of 2008 and 2007, respectively. The prior periods discontinued operations have been adjusted to reflect properties held during those years that were subsequently sold or held for sale as of December 31, 2009. In 2009, we sold six properties and had one property held for sale. These were reclassed to prior year discontinued operations, with the exception of the 2010 Valley View and Parkway Centre properties which were acquired in the IOT consolidation in 2009. In 2008, we sold 25 properties which consist of 18 apartment complexes (Arbor Pointe, Ashton Way, Autumn Chase, Courtyard, Coventry Pointe, Fairways, Forty-Four Hundred Apartments, Fountains at Waterford, Hunters Glen, SouthGate, Sunchase, Thornwood, Westwood Square, Woodview, Fairway View, Willow Creek, Fountain Lake, and Mountain Plaza), four hotels (City Suites, Majestic Inn, Willows, and Hotel Akademia), and three commercial buildings (Lexington Center, Executive Court, and Encon Warehouse). In 2007, we sold six properties which consist of five apartment complexes (Bluffs at Vista Ridge, Somerset, El Chaparral, Harpers Ferry, and Oak Park IV) and one commercial building (Forum OB).The gains on sale of the apartments sold in 2008 and 2007 are also included in the discontinued operations for those years (dollars in thousands).

 

     For Years Ended
December 31,
 
     2008     2007  

Revenue

    

Rental

   $ 9,288      $ 42,862   

Property operations

     4,268        28,374   
                
     5,020        14,488   

Expenses

    

Interest

     (7,177     (13,472

General and administration

     (672     (60

Depreciation

     (851     (4,341
                
     (8,700     (17,873
                

Net loss from discontinued operations before gains on sale of real estate, taxes and fees

     (3,680     (3,385

Gain on sale of discontinued operations

     104,411        20,919   

Equity in investee

     6,306        —     

Net income fee to affiliate

     (3,041     514   

Net sales fee to affiliate

     (7,953     (2,564
                

Income from discontinued operations

     96,043        15,484   

Tax expense

     (33,616     (5,420
                

Income from discontinued operations

   $ 62,427      $ 10,064   
                

 

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Liquidity and Capital Resources

General

Our principal liquidity needs are:

 

   

fund normal recurring expenses;

 

   

meet debt service and principal repayment obligations including balloon payments on maturing debt;

 

   

fund capital expenditures, including tenant improvements and leasing costs;

 

   

fund development costs not covered under construction loans; and

 

   

fund possible property acquisitions.

Our principal sources of cash have been and will continue to be:

 

   

property operations;

 

   

proceeds from land and income-producing property sales;

 

   

collection of mortgage notes receivable;

 

   

collections of receivables from affiliated companies;

 

   

refinancing of existing mortgage notes payable; and

 

   

additional borrowings, including mortgage notes payable, and lines of credit.

It is important to realize that the current status of the banking industry has had a significant effect on our industry. The banks willingness and/or ability to originate loans affects our ability to buy and sell property, and refinance existing debt. We are unable to foresee the extent and length of this down turn. A continued and extended decline could materially impact our cash flows. We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans, which are converted to traditional mortgages upon completion of the project.

Management anticipates that our cash as of December 31, 2009, along with cash that will be generated in 2010 from property operations, may not be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet its liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of the Company’s 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):

 

     2009     2008     Variance  

Net cash provided by (used in) operating activities

   $ (27,586   $ 20,407      $ (47,993

Net cash used in investing activities

   $ 41,922      $ (65,209   $ 107,131   

Net cash provided by financing activities

   $ (14,654   $ 39,546      $ (54,200

The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties. In addition, we had a significant receivable due from affiliated entities that we receive interest income from.

 

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Our primary cash outlays for investing activities are for construction and development, acquisition of land and income producing properties, and capital improvements to existing properties. We used $26.1 million on construction and development. This is a decrease of $104.0 million from prior year. We have discontinued certain projects and put some projects on hold, while continuing to development our apartment properties. We acquired approximately 5 tracts of land consisting of approximately 178 acres in 2009 for $11.8 million. We continue to make capital improvements on our existing properties but spent significantly less in 2009 than in the prior year. We acquired one commercial building in 2009 using $6.0 million, as compared to 2008 where we acquired five commercial buildings and two apartment complexes using $64.5 million. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income producing properties. We sold one apartment complex and five commercial buildings, providing over $34.6 million along with 857.12 acres of land sales of providing $36.3 million.

Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable. Proceeds from notes payable associated with the new loans and refinancing provided $55.5 million. We used $18.6 million to make recurring note payments, and $49.5 million for maturing notes.

Management reviews the carrying values of TCI’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The note receivable review includes an evaluation of the collateral property securing such note. The property review generally includes: (1) selective property inspections; (2) a review of the property’s current rents compared to market rents; (3) a review of the property’s expenses; (4) a review of maintenance requirements; (5) a review of the property’s cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area.

Contractual Obligations

We have contractual obligations and commitments primarily with regards to the payment of mortgages. The following table aggregates our expected contractual obligations and commitments and includes items not accrued, per Generally Accepted Accounting Principles, through the term of the obligation such as interest expense and operating leases. Our aggregate obligations subsequent to December 31, 2009 are shown in the table below (dollars in thousands);

 

     Total    2010    2011    2012-2014    Thereafter

Long-term debt obligation

   $ 2,021,557    $ 413,895    $ 200,312    $ 230,583    $ 1,176,767

Capital lease obligation

     —        —        —        —        —  

Operating lease obligation

     46,974      734      750      2,304      43,186

Purchase obligation

     —        —        —        —        —  

Other long-term debt liabilities reflected on the Registrant’s Balance Sheet under GAAP

     —        —        —        —        —  
                                  

Total

   $ 2,068,531    $ 414,629    $ 201,062    $ 232,887    $ 1,219,953
                                  

Environmental Matters

Under various federal, state and local environmental laws, ordinances and regulations, TCI 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.

 

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

Inflation

The effects of inflation on TCI’s 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, TCI’s earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

TCI’s primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates and maturing debt that has to be refinanced. TCI’s future operations, cash flow and fair values of financial instruments are also partially dependent on the then existing market interest rates and market equity prices.

As of December 31, 2009, our $1.2 billion debt portfolio consisted of approximately $791.7 million of fixed-rate debt, with interest rates ranging from 2.0% to 17.0% and approximately $391.5 million of variable-rate debt. Our overall weighted average interest rate at December 31, 2009 and 2008 was 5.91% and 7.00%, respectively.

TCI’s interest rate sensitivity position is managed by the capital markets department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. TCI’s earnings are affected as changes in short-term interest rates affect its cost of variable-rate debt and maturing fixed-rate debt.

If market interest rates for variable-rate debt average 100 basis points more in 2010 than they did during 2009, TCI’s interest expense would increase and net income would decrease by $3.9 million. This amount is determined by considering the impact of hypothetical interest rates on TCI’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI’s financial structure.

 

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The following table contains only those exposures that existed at December 31, 2009. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars in thousands).

 

    2010     2011     2012     2013     2014     Thereafter   Total

Assets

             

Market securities at fair value

              $ —  

Note receivable

             

Variable interest rate—fair value

              $ 2,775

Instrument’s maturities

  $ —        $ 2,775      $ —        $ —        $ —        $ —     $ 2,775

Instrument’s amortization

    —          —          —          —          —          —       —  

Interest

    146        121        —          —          —          —       267

Average rate

    5.25     5.25     0.00     0.00     0.00    

Fixed interest rate—fair value

              $ 44,491

Instrument’s maturities

  $ 22,052      $ —        $ 1,875      $ 20,564      $ —        $ —     $ 44,491

Instrument’s amortization

    —          —          —          —          —          —       —  

Interest

    4,907        2,556        2,556        2,468        —          —       12,487

Average rate

    11.0     11.4     11.4     12.0     0.0    
Notes Payable   2010     2011     2012     2013     2014     Thereafter   Total

Variable interest rate—fair value

              $ 391,486

Instrument’s maturities

  $ 284,140      $ 70,181      $ 7,846      $ 4,151      $ 5,796      $ 10,317   $ 382,431

Instrument’s amortization

    4,595        2,571        606        518        123        642     9,055

Interest

    7,336        3,389        1,087        968        652        3,390     16,822

Average rate

    5.12     5.02     6.21     6.36     6.48    

Fixed interest rate—fair value

              $ 791,736

Instrument’s maturities

  $ 64,034      $ 74,518      $ 3,627      $ 81,356      $ 338      $ 10,892   $ 234,765

Instrument’s amortization

    8,675        8,282        7,963        6,011        6,071        519,969     556,971

Interest

    45,115        41,371        37,637        33,512        32,321        631,557     821,513

Average rate

    6.34     6.24     6.11     6.10     6.13    

 

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

 

     Page

Financial Statements

  

Report of Independent Registered Public Accounting Firm

   41

Consolidated Balance Sheets—December 31, 2009 and 2008

   42

Consolidated Statements of Operations—Years Ended December 31, 2009, 2008 and 2007

   43

Consolidated Statements of Shareholders’ Equity—Years Ended December 31, 2009, 2008 and 2007

   44

Consolidated Statements of Cash Flows—Years Ended December 31, 2009, 2008 and 2007

   45

Statement of Consolidated Comprehensive Income (Loss)

   46

Notes to Financial Statements

   47

Financial Statement Schedules

  

Schedule III—Real Estate and Accumulated Depreciation

   71

Schedule IV—Mortgage Loans on Real Estate

   81

All other schedules are omitted because they are not required, are not applicable or the information required is included in the Financial Statements or the notes thereto.

 

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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

We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows each for each of the years in the three-year period ended December 31, 2009. Transcontinental Realty Investors, Inc’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 21, Transcontinental Realty Investors, Inc.’s management intends to sell land and income producing properties and refinance or extend debt secured by real estate to meet the Company’s liquidity needs.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transcontinental Realty Investors, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not a required part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly state, in all material respects, the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

FARMER, FUQUA & HUFF, PC

Plano, Texas

March 31, 2010

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

     December 31,
2009
    December 31,
2008
 
     (dollars in thousands, except
share and par value amounts)
 

Assets

    

Real estate, at cost

   $ 1,520,043      $ 1,526,016   

Real estate held for sale at cost, net of depreciation ($1,252 and $0 for 2009 and 2008)

     5,147        8,018   

Real estate subject to sales contracts at cost, net of depreciation ($13,985 for 2009 and $12,226 for 2008)

     59,048        60,807   

Less accumulated depreciation

     (137,054     (114,050
                

Total real estate

     1,447,184        1,480,791   

Notes and interest receivable

    

Performing (including $39,703 in 2009 and $17,323 in 2008 from affiliates and related parties)

     48,051        42,413   

Less allowance for estimated losses

     (2,804     (3,293
                

Total notes and interest receivable

     45,247        39,120   

Cash and cash equivalents

     5,665        5,983   

Investments in securities

     —          2,775   

Investments in unconsolidated subsidiaries and investees

     9,358        23,365   

Other assets (including $0 in 2009 and $1,077 in 2008 from affiliates and related parties)

     100,833        88,033   
                

Total assets

   $ 1,608,287      $ 1,640,067   
                

Liabilities and Shareholders’ Equity

    

Liabilities:

    

Notes and interest payable (including $0 in 2009 and $9,103 in 2008 to affiliates and related parties)

   $ 1,121,737      $ 1,100,852   

Notes related to assets held-for-sale

     5,002        4,191   

Notes related to subject to sales contracts

     61,886        62,972   

Affiliate payables

     50,163        62,367   

Accounts payable and other liabilities (including $35,903 in 2009 and $0 in 2008 from affiliates and related parties)

     124,083        84,989   
                
     1,362,871        1,315,371   

Commitments and contingencies:

    

Shareholders’ equity:

    

Preferred Stock, Series C: $.01 par value, authorized 10,000,000 shares, issued and outstanding 30,000 shares in 2009 and 2008 respectively (liquidation preference $100 per share). Series D: $.01 par value, authorized, issued and outstanding 100,000 shares in 2009 and 2008 respectively

     1        1   

Common Stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 8,113,669 for 2009 and 2008

     81        81   

Paid-in capital

     262,118        263,290   

Retained earnings

     (34,718     44,980   

Accumulated other comprehensive income

     —          2,575   
                

Total Transcontinental Realty Investors, Inc. shareholders’ equity

     227,482        310,927   

Non-controlling interest

     17,934        13,769   
                

Total equity

     245,416        324,696   
                

Total liabilities and equity

   $ 1,608,287      $ 1,640,067   
                

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

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Years Ended December 31,  
     2009     2008     2007  
    

(dollars in thousands, except share and

per share amounts)

 

Revenues:

      

Rental and other property revenues (including $3,115 and $2,753 and $2,211 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)

   $ 151,647      $ 138,337      $ 123,704   

Expenses:

      

Property operating expenses (including $2,081 and $1,938 and $1,939 for year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)

     85,087        86,237        74,294   

Depreciation and amortization

     29,098        24,377        21,118   

General and administrative (including $3,733 and $4,372 and $3,409 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)

     11,063        10,349        8,515   

Provision on impairment of notes receivable and real estate assets

     42,513        7,417        3,686   

Advisory fee to affiliate

     11,903        12,064        10,704   
                        

Total operating expenses

     179,664        140,444        118,317   
                        

Operating income (loss)

     (28,017     (2,107     5,387   

Other income (expense):

      

Interest income (including $4,265 and $1,052 and $3,600 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)

     5,407        3,227        2,730   

Other income

     3,631        3,918        2,278   

Mortgage and loan interest (including $2,566 and $2,729 and $603 for the year ended 2009 and 2008 and 2007 respectively from affiliates and related parties)

     (70,157     (73,053     (65,813

Earnings from unconsolidated subsidiaries and investees

     (451     (1,096     1,502   

Involuntary conversion

     —          —          34,771   

Litigation Settlement

     356        —          —     
                        

Total other expenses

     (61,214     (67,004     (24,532
                        

Loss before gain on land sales, non-controlling interest, and tax

     (89,231     (69,111     (19,145

Gain on land sales

     6,296        4,798        11,956   
                        

Loss from continuing operations before tax

     (82,935     (64,313     (7,189

Income tax benefit (expense)

     1,180        33,441        8,186   
                        

Net income (loss) from continuing operations

     (81,755     (30,872     997   
                        

Discontinued operations:

      

Loss from discontinued operations

     (162     (8,368     (5,435

Gain on sale of real estate from discontinued operations

     3,524        104,411        20,919   

Income tax expense from discontinued operations

     (1,180     (33,616     (5,420
                        

Net income (loss)

     (79,573     31,555        11,061   

Net income (loss) attributable to non-controlling interest

     (125     654        50   
                        

Net income (loss) attributable to Transcontinental Realty
Investors, Inc.

     (79,698     32,209        11,111   

Preferred dividend requirement

     (1,023     (975     (925
                        

Net income (loss) applicable to common shares

   $ (80,721   $ 31,234      $ 10,186   
                        

Earnings per share—basic

      

Gain (loss) from continuing operations

   $ (10.22   $ (3.86   $ 0.02   

Discontinued operations

     0.27        7.72        1.26   
                        

Net income (loss) applicable to common shares

   $ (9.95   $ 3.86      $ 1.28   
                        

Earnings per share—diluted

      

Gain (loss) from continuing operations

   $ (10.22   $ (3.86   $ 0.01   

Discontinued operations

     0.27        7.72        1.23   
                        

Net income (loss) applicable to common shares

   $ (9.95   $ 3.86      $ 1.24   
                        

Weighted average common share used in computing earnings per share

     8,113,669        8,086,640        7,953,676   

Weighted average common share used in computing diluted earnings per share

     8,113,669        8,086,640        8,188,602   

Amounts attributable to Transcontinental Realty Investors, Inc.

      

Income (loss) from continuing operations

   $ (81,755   $ (30,872   $ 997   

Income from discontinued operations

     2,182        62,427        10,064   
                        

Net income (loss)

   $ (79,573   $ 31,555      $ 11,061   
                        

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

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Years Ended December 31, 2009

 

    Total     Comprehensive
Income (Loss)
    Preferred
Stock
  Common Stock   Treasury
Stock
    Paid-in
Capital
    Retained
Earnings
    Accumulated
Other

Comprehensive
Income (Loss)
    Non-Controlling
Interest
 
        Shares   Amount          
    (dollars in thousands)  

Balance, December 31, 2006

  $ 282,095      $ —        $ 1     8,113,669   $ 81   $ (3,086   $ 266,206      $ 1,660      $ 1,067      $ 16,166   

Unrealized loss on foreign currency translation

    3,388        3,388                    3,388     

Unrealized gain on investment securities

    (5,983     (5,983     —       —       —       —          —          —          (5,983     —     

Series D preferred stock dividends (7% per year)

    (715     —          —       —       —       —          (715     —          —          —     

Series C preferred stock dividends

    (210     —          —       —       —       —          (210     —          —          —     

Net income (loss)

    11,061        11,061        —       —       —       —          —          11,111        —          (50

Changes in controlling interest

    —          —          —       —       —       —          —          —          —          —     

Changes in non-controlling interest

    (5,043     —          —       —       —       —          9,452        —          —          (14,495

Repurchase/sale of treasury shares, net

    2,509        —          —       —       —       2,509        —          —          —          —     
                                                                         

Balance, December 31, 2007

  $ 287,102      $ 8,466      $ 1     8,113,669   $ 81   $ (577   $ 274,733      $ 12,771      $ (1,528   $ 1,621   
                                                                         

Unrealized loss on foreign currency translation

    9,685        9,685                    9,685     

Unrealized gain on investment securities

    (5,582     (5,582     —       —       —       —          —          —          (5,582     —     

Series D preferred stock dividends (7% per year)

    (765     —          —       —       —       —          (765     —          —          —     

Series C preferred stock dividends

    (210     —          —       —       —       —          (210     —          —          —     

Net income (loss)

    31,555        31,555        —       —       —       —          —          32,209        —          (654

Changes in controlling interest

    —          —          —       —       —       —          —          —          —          —     

Changes in non-controlling interest

    2,334        —          —       —       —       —          (10,468     —          —          12,802   

Repurchase/sale of treasury shares, net

    577        —          —       —       —       577        —          —          —          —     
                                                                         

Balance, December 31, 2008

  $ 324,696      $ 35,658      $ 1   $ 8,113,669   $ 81   $ —        $ 263,290      $ 44,980      $ 2,575      $ 13,769   
                                                                         

Unrealized gain on investment securities

    (2,575     (2,575     —       —       —       —          —          —          (2,575  

Series D preferred stock dividends (7% per year)

    (813     —          —       —       —       —          (813     —          —          —     

Series C preferred stock dividends

    (210     —          —       —       —       —          (210     —          —          —     

Net income (loss)

    (79,573     (79,573     —       —       —       —          —          (79,698     —          125   

Changes in controlling interest

    (149     —          —       —       —       —          (149     —          —          —     

Changes in non-controlling interest

    4,040        —          —       —       —       —          —          —          —          4,040   
                                                                         

Balance, December 31, 2009

  $ 245,416      $ (82,148   $ 1   $ 8,113,669   $ 81   $ —        $ 262,118        $(34,718   $ —        $ 17,934   
                                                                         

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

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Years Ended December 31,  
     2009     2008     2007  
     (dollars in thousands)  

Cash Flow From Operating Activities:

      

Net (loss) income applicable to common shares

   $ (80,721   $ 31,234      $ 10,186   

Adjustments to reconcile net loss applicable to common shares to net cash used in operating activities:

      

Gain on sale of land

     (6,296     (4,798     (11,956

Depreciation and amortization

     29,813        25,228        25,459   

Provision on impairment of notes receivable and real estate assets

     42,513        7,417        1,317   

Amortization of deferred borrowing costs

     3,698        7,110        4,876   

Changes in non-controlling interest

     4,165        (654     (50

Earnings from unconsolidated subsidiaries and investees

     287        (5,210     (1,502

Gain on sale of income producing properties

     (3,524     (104,411     (20,919

(Increase) decrease in assets:

      

Accrued interest receivable

     2,018        (1,749     (420

Other assets

     (2,783     395        2,753   

Prepaid expense

     (494     (1,182     (2,496

Escrow

     (3,222     (21,758     (2,018

Earnest money

     (1,723     1,618        9,149   

Rent receivables

     (422     (819     (1,271

Increase (decrease) in liabilities:

      

Accrued interest payable

     (2,217     (2,983     (462

Cash invested with Advisor

     (12,204     62,367        (6,614

Other liabilities

     3,526        28,602        (6,150
                        

Net cash provided by (used in) operating activities

     (27,586     20,407        (118

Cash Flow From Investing Activities:

      

Proceeds from notes receivables ($3,940 in 2009, $0 in 2008 from affiliates)

     8,000        (4,487     13,812   

Acquisition of land held for development

     (11,844     (54,744     (24,940

Proceeds from sales of income producing properties

     34,647        162,859        40,458   

Proceeds from sale of land

     36,289        16,382        59,699   

Investment in unconsolidated real estate entities

     16,495        14,586        1,115   

Improvement of land held for development

     (10,115     (1,789     (2,859

Improvement of income producing properties

     (2,220     (15,547     (12,890

Acquisition of non-controlling interest

     —          12,148        2,884   

Investment in marketable equity securities

     2,775        —          —     

Acquisition of income producing properties

     (5,971     (64,466     (114,258

Construction and development of new properties

     (26,134     (130,151     (193,864
                        

Net cash provided by (used in) investing activities

     41,922        (65,209     (230,843

Cash Flow From Financing Activities:

      

Proceeds from notes payable

     55,508        190,444        431,168   

Recurring amortization of principal on notes payable

     (18,588     (17,111     —     

Payments on maturing notes payable

     (49,522     (140,202     (183,188

Deferred financing costs

     (2,052     5,838        (10,006

Repurchase of common stock

     —          577        (577
                        

Net cash provided by financing activities

     (14,654     39,546        237,397   
                        

Net decrease in cash and cash equivalents

     (318     (5,256     6,436   

Cash and cash equivalents, beginning of period

     5,983        11,239        4,803   
                        

Cash and cash equivalents, end of period

   $ 5,665      $ 5,983      $ 11,239   
                        

Supplemental disclosures of cash flow information:

      

Cash paid for interest

   $ 71,868      $ 77,247      $ 76,847   

Cash paid for income taxes, net of refunds

   $ —        $ —        $ —     

Schedule of noncash investing and financing activities:

      

Unrealized foreign currency translation gain

   $ —        $ 9,685      $ 3,388   

Unrealized loss on marketable securities

   $ (2,575   $ (5,582   $ (5,983

Note receivable allowance

   $ —        $ (1,500   $ —     

Notes receivable received from affiliate

   $ 2,341      $ —        $ 3,353   

Note paydown from right to build sale

   $ 1,500      $ —        $ (900

Acquisition of real estate to satisfy note receivable

   $ (7,748   $ —        $ —     

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

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

For the Years Ended December 31, 2009

 

     2009     2008     2007  

Net income (loss)

   $ (79,573   $ 31,555      $ 11,061   

Other comprehensive income (loss)

      

Unrealized loss on foreign currency translation

     —          9,685        3,388   

Unrealized gain on investment securities

     (2,575     (5,582     (5,983
                        

Total other comprehensive income (loss)

     (2,575     4,103        (2,595
                        

Comprehensive income (loss)

     (82,148     35,658        8,466   

Comprehensive income attributable to non-controlling interest

     (125     654        50   
                        

Comprehensive income (loss) attributable to Transcontinental Realty Investors, Inc.

   $ (82,273   $ 36,312      $ 8,516   
                        

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

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

The accompanying Consolidated Financial Statements of Transcontinental Realty Investors, Inc. and consolidated entities have been prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in Note 1. “Summary of Significant Accounting Policies.” The Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.

Certain balances for 2007 and 2008 have been reclassified to conform to the 2009 presentation.

 

NOTE 1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and business.    TCI, a Nevada corporation, is successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. Effective March 31, 2003, TCI financial results were consolidated in the ARL Form 10-K and related consolidated financial statements. TCI invests in real estate through direct ownership, leases and partnerships and it also invests in mortgage loans on real estate. At December 31, 2009, we owned 55 residential apartment communities comprising of 11,354 units, two apartment projects in development, 28 commercial properties comprising an aggregate of approximately 5.1 million square feet, and an investment in 6,813 acres of undeveloped and partially developed land.

The Company is headquartered in Dallas, Texas and its Common Stock trades on the New York Stock Exchange under the symbol (“NYSE: TCI”). Subsidiaries of American Realty Investors, Inc. own approximately 84% of the Company’s Common Stock (“NYSE: ARL”). Prime Income Asset Management, LLC (“Prime”) is the Company’s external advisor. Regis Realty I, LLC, an affiliate of Prime, manages the Company’s commercial properties. Regis Hotel I, LLC, another Prime affiliate, manages the Company’s hotel investments. TCI engages four third-party companies to lease and manage its apartment properties. TCI is a “C Corporation” for U.S. federal income tax purposes and files an annual consolidated income tax return with ARL.

On July 17, 2009, the Company acquired from Syntek West, Inc., (“SWI”), 2,518,934 shares of Common Stock, par value $0.01 per share of IOT at an aggregate price of $17,884,431 (approximately $7.10 per share), the full amount of which was paid by the Company through an assumption of an aggregate amount of indebtedness of $17,884,431 on the outstanding balance owed by SWI to IOT. The 2,518,934 shares of IOT Common Stock acquired by the Company constituted approximately 60.4% of the issued and outstanding Common Stock of IOT. The Company has owned for several years an aggregate of 1,037,184 shares of Common Stock of IOT (approximately 25% of the issued and outstanding). After giving effect to the transaction on July 17, 2009, the Company owns an aggregate of 3,556,118 shares of IOT Common Stock which constitutes approximately 85.3% of the shares of Common Stock of IOT outstanding (which is a total of 4,168,214 shares). Shares of IOT are traded on the American Stock Exchange.

With the Company’s acquisition of the additional shares on July 17, 2009, which increased the aggregate ownership to in excess of 80%, beginning in July 2009, IOT’s results of operations are now consolidated with those of the Company for tax and financial reporting purposes. At the time of the acquisition, the historical accounting value of IOT’s assets was $112 million and liabilities were $43 million. In that the shares of IOT acquired by TCI were from a related party, the values recorded by TCI are IOT’s historical accounting values at the date of transfer. The Company’s fair valuation of IOT assets and liabilities at the acquisition date approximated IOT’s book value. The net difference between the purchase price and historical accounting basis of the assets and liabilities acquired was $35 million and has been reflected by TCI as deferred income. The deferred income will be recognized upon the sale of the land that IOT held on its books as of the date of sale, to an independent third party.

 

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TRANSCONTINENTAL REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS—(Continued)

 

FASB Accounting Standards Codification.    The company presents its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In June 2009, the Financial Accounting Standards Board (“FASB”) completed its accounting guidance codification project. The FASB Accounting Standards Codification (“ASC”) became effective for the Company’s financial statements issued subsequent to June 30, 2009 and is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. As of the effective date, the company will no longer refer to the authoritative guidance dictating its accounting methodologies under the previous accounting standards hierarchy. Instead, the Company will refer to the ASC Codification as the sole source of authoritative literature.

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

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

For entities in which the Company has less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings or losses of these entities is included in consolidated net income. TCI’s investments in ARL and Garden Centura, LP are accounted for under the equity method.

Real estate, depreciation, and impairment.    Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements—20-40 years; furniture, fixtures and equipment—5-10 years). The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment,” Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated

 

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cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

Real estate held-for-sale.    The Company periodically classifies real estate assets as held for sale. An asset is classified as held for sale after the approval of the Company’s board of directors and after an active program to sell the asset has commenced. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying consolidated balance sheets. Upon a decision to no longer market as an asset for sale, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying statements of operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.

Cost Capitalization.    Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Properties in the Consolidated Balance Sheets. The Company capitalizes interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, the Company first uses the interest incurred on specific project debt, if any, and next uses the company’s weighted average interest rate of non-project specific debt.

The company capitalizes interest, real estate taxes and certain operating expenses on the unoccupied portion of recently completed properties from the date a project receives its certificate of occupancy to the date on which the project achieves 80% economic occupancy.

The company capitalizes leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. The company allocates these costs to individual tenant leases and amortizes them over the related lease term.

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

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

 

Level 1

    Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

Level 2

    Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3

    Unobservable inputs that are significant to the fair value measurement.

 

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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.

Recognition of Revenue.    Our revenues, which are composed largely of rental income, include rents reported on a straight-line basis over the lease term. In accordance with ASC 805 “Business Combinations”, the Company recognizes rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective 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.

Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible

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

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

Interest recognition on notes receivable.    For notes other than surplus cash notes, we record interest income as earned in accordance with the terms of the related loan agreements. On cash flow notes where payments are based upon surplus cash from operations, accrued but unpaid interest income is only recognized to the extent cash is received.

Allowance for estimated losses.    We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 for details on our Notes Receivable.

Cash equivalents.    For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

 

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Earnings per share.    Earnings per share “(EPS)” have been computed pursuant to the provisions of ASC 260 “Earnings Per Share”. The computation of basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding. As of December 31, 2009, we have 10,000 shares of stock options outstanding. These options are considered in the computation of diluted earnings per share if the effect of applying the treasury stock method is dilutive. We have 30,000 shares of Series C Cumulative Convertible Preferred Stock issued and outstanding. The stock has a liquidation preference of $100.00 per share. After September 30, 2006, the stock may be converted into Common Stock at 90% of the daily average closing price of the Common Stock for the prior five trading days. The effects of the Series C Cumulative Convertible Preferred Stock are included in the dilutive earnings per share if applying the if-converted method is dilutive. At December 31, 2009 and 2008, the preferred stock and the stock options were anti-dilutive and thus not included in the EPS calculation. At December 31, 2007, the preferred stock and stock options were dilutive and thus included in the EPS calculation.

Use of estimates.    In the preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, 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.

Income Taxes.    TCI is a “C Corporation” for U.S. federal income tax purposes. TCI files an annual consolidated income tax return with ARL and IOT and their subsidiaries. ARL is the common parent for the consolidated group. TCI is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOT and their subsidiaries that was entered into in July of 2009. Prior to 2009, ARL and TCI and their subsidiaries were in a tax sharing and compensating agreement with respect to federal income taxes and IOT was the parent company of its own consolidated filing group. The agreement 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.

Recent Accounting Pronouncements.    There were no recent accounting pronouncements that our company has not implemented that materially affect our financial statements. 

 

NOTE 2.    REAL ESTATE

A summary of our real estate owned as of the end of the year is listed below (dollars in thousands):

 

     2009     2008  

Apartments

   $ 712,149      $ 653,023   

Apartments under construction

     5,296        56,195   

Commercial properties

     409,301        406,798   

Land held for development

     393,297        410,000   

Real estate held for sale

     6,399        8,018   

Real estate subject to sales contract

     73,033        73,033   
                

Total real estate

     1,599,475        1,607,067   

Less accumulated deprecation

     (152,291     (126,276
                
   $ 1,447,184      $ 1,480,791   
                

The following is a brief description of the most significant property acquisitions and sales in 2009.

 

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In January 2009, we sold 9.3 acres of land known as Woodmont Schiff-Park Forest land located in Dallas, Texas for $7.7 million. We received $3.9 million in cash after paying off the existing debt of $3.2 million and closing costs of $0.6 million. In addition, we booked a $2.1 million receivable. There was no gain or loss recorded on the sale of the land parcel.

In April 2009, we sold the Cullman Shopping Center, a 92,500 square foot facility located in Cullman, Alabama for a sales price of $4.0 million. We received $3.0 million in cash after paying off the existing debt of $1.0 million. The project was sold to a related party; therefore the gain of $1.9 million was deferred and will be recorded upon sale to a third party.

In April 2009, we sold 3.02 acres of land known as West End land located in Dallas, Texas for a sales price of $8.5 million. We received $4.6 million in cash after paying off the existing debt of $3.4 million and closing costs of $0.5 million. We recorded a gain on sale of $4.9 million on the land parcel.

In April 2009, we sold 3.13 acres of land known as Verandas at City View land located in Fort Worth, Texas for a sales price of $1.3 million. We paid off the existing debt of $1.3 million and closing costs of $0.01. We recorded a gain on sale of $0.7 million on the land parcel.

In June 2009, we sold 3.96 acres of land known as Teleport land located in Irving, Texas for a sales price of $1.1 million. We received $1.0 million in cash after paying off the existing debt of $0.1 million and closing costs. We recorded a gain on sale of $0.4 million on the land parcel.

In July 2009, we sold 29.53 acres of Hines Meridian land located in Dallas, Texas and 807.90 acres of Travis Ranch land located in Kaufman County, Texas for $16.0 million. We paid off the existing debt of $13.5 million. We recorded no gain or loss on the land parcels.

In July 2009, we sold the 5000 Space Center, a 101,500 square foot facility located in San Antonio, Texas and the 5360 Tulane Commercial building, a 30,000 square foot facility located in Atlanta, Georgia for a sales price of $4.0 million. We received $2.7 million in cash after paying off the existing debt of $1.3 million. We recorded a gain on sale of $3.0 million on the properties.

In September 2009, we purchased 54.86 acres of Gautier land located at Gautier, Mississippi for $3.4 million.

In September 2009, we obtained a new $5.0 million loan with a commercial lender which was collateralized by 6.51 acres of Hines land located in Farmers Branch, Texas, 2.194 acres of Valley View 34 land located in Farmers Branch, Texas, and 15.066 acres of Travelers land located in Farmers Branch, Texas. We received cash of $2 million after paying off $2.6 million of existing debt and $0.4 million in closing costs.

In October 2009, we sold the 2010 Valley View office building; a 40,666 square foot facility located in Farmers Branch, Texas, for a sales price of $3.2 million. We received $1.2 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.0 million. The property was sold to a related party; therefore the gain of $0.8 million was deferred and will be recorded upon sale to a third party. We also sold the Parkway Centre retail shopping center; a 28,374 square foot facility located in Dallas, Texas, for a sales price of $4.0 million. We received $1.3 million in cash by way of an intercompany note receivable increase after paying off the existing debt of $2.6 million. The property was sold to a related party; therefore the gain of $0.6 million was deferred and will be recorded upon sale to a third party.

In November 2009, we acquired 27.192 acres of McKinney Ranch land located in McKinney, Texas in lieu of a note receivable payoff of $6.4 million and existing mortgage assumption of $5.3 million.

 

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In November 2009, we purchased the Keller Springs Technical Center, an 80,000 square foot commercial building located in Carrollton, Texas for $6.0 million. We assumed the current mortgage of $6.0 million.

In December 2009, we sold the Bridges on Kinsey Apartments, a 232-unit complex, located in Tyler, Texas for $20.5 million. We received $6.8 million in cash, and the buyer assumed the existing mortgage of $14.0 million secured by the property. The property was sold to a related party, therefore the gain of $5.2 million was deferred and will be recorded upon sale to a third party.

 

NOTE 3.    NOTES AND INTEREST RECEIVABLE

A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity. Our mortgage notes receivable consist of first, wraparound and junior mortgage loans (dollars in thousands).

 

Borrower

  Maturity
Date
    Interest
Rate
    Amount    

Security

Performing loans:

       

3334Z Apts, LP

  04/12      6.50   $ 1,875      100% Interest in 3334Z Apartments

Basic Capital Management(1)

  10/11      prime + 2     1,252      Industrial building, Arlington, TX

Basic Capital Management(1)

  10/11      prime + 2     1,523      Retail building, Cary, NC

Dallas Fund XVII LP

  10/09      9.00     1,116      Assignment of partnership interests

Garden Centura LP(1)

  N/A      7.00     2,210      Excess cash flow from partnership

Miscellaneous related party
notes
(1)

  Various      Various        1,233      Various secured interest

Miscellaneous non-related party notes

  Various      Various        454      Various secured interest

Ocean Beach Partners(1)

  12/09      7.00     3,279      Folsom Land (36 acres in Farmers Branch, TX)

Pioneer Austin Development

  10/08 (2)    18.00     2,407      33 acres undeveloped land, Austin, TX

Housing for Seniors of Humble, LLC(1)

  12/13      11.50     2,000      Unsecured

Housing for Seniors of Humble, LLC(1)

  12/13      11.50     6,363      Interest in Unified Housing Foundation Inc.

UHF Inc. (Marquis at Vista Ridge)(1)

  12/13      12.00     2,735      100% Interest in Housing for Seniors of Lewisville LLC

UHF Inc. (Echo Station)(1)

  12/13      12.00     1,668      100% Interest in UH of Temple LLC

UHF Inc. (Cliffs of El Dorado)(1)

  09/10      10.00     2,990      100% Interest in UH of McKinney LLC

UHF Inc. (Timbers of Terrell)(1)

  12/13      12.00     1,323      100% Interest in UH of Terrell LLC

UHF Inc. (Tivoli)(1)

  12/13      12.00     1,826      100% Interest in UH of Tivoli LLC

UHF Inc. (Parkside Crossing)(1)

  12/13      12.00     1,936      100% Interest in UH of Parkside Crossing

UHF Inc. (Sendero Ridge)(1)

  12/13      12.00     5,227      100% Interest in UH of Sendero Ridge LLC

UHF Inc. (Limestone Ranch)(1)

  12/13      12.00     2,250      100% Interest in UH of Vista Ridge LLC

UHF Inc. (Limestone Canyon)(1)

  12/13      12.00     3,080      100% Interest in UH of Austin LLC

Accrued interest

        1,304     

Allowance for estimated losses

        (2,804  
             

Total

      $ 45,247     
             

 

(1)

Related Party

(2)

Renegotiating note

 

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Junior Mortgage Loans.    We may invest in junior mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and personal guarantees by the borrower. The Board of Directors restricts investment in junior mortgage loans, excluding wraparound mortgage loans, to not more than 10.0% of our assets. At December 31, 2009, 2.8% of our assets were invested in junior and wraparound mortgage loans.

Interest income is recognized on performing notes receivable as it becomes due. Effective 2009, interest income is recorded on cash flow notes receivable when cash is received. No accrued interest income is recorded on non-performing notes receivable.

As of December 31, 2009, the obligors on $39.7 million or 82.6% of the mortgage notes receivable portfolio were due from affiliated entities. At December 31, 2009, 2.8% of our assets were invested in notes and interest receivable.

Related Party

In 2009, TCI paid Prime, its affiliates and related parties $11.9 million in advisory fees, $0.1 million incentive and net income fees, $0.6 million in mortgage brokerage and equity refinancing fees, $2.1 million in property and construction management, and leasing commissions, $0.1 million in property acquisition fees, $1.1 million in real estate brokerage commissions, $0.9 million in construction supervision fees. In addition, as provided in the Advisory Agreement, Prime received cost reimbursements of $3.7 million.

 

NOTE 4.    ALLOWANCE FOR ESTIMATED LOSSES

The allowance account was reviewed and increased in 2007 and 2008. There were no additional allowances for receivables in 2009; our allowance decreased in the current year due to a loan pay off that had an allowance, as shown below (dollars in thousands).

 

     2009     2008    2007

Balance January 1,

   $ 3,293      $ 1,978    $ —  

(Decrease) Increase in provision

     (489     1,315      1,978
                     

Balance December 31,

   $ 2,804      $ 3,293    $ 1,978
                     

 

NOTE 5.    INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES AND INVESTEES

Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting. ARL is our parent company. Income Opportunity Investors, Inc. (“IOT”) is a related entity and as of July, 2009 is now a fully consolidated subsidiary. Both ARL and IOT are considered unconsolidated subsidiaries for 2008, but only ARL is considered an unconsolidated subsidiary for 2009.

 

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Investments accounted for via the equity method consists of the following:

 

     Percent ownership  

Investee

   2009    2008  

American Realty Investors, Inc.(1)

   3%    3

Income Opportunity Investors, Inc.(3)

   N/A    25

Garden Centura, LP(2)

   5%    5

 

(1)

Unconsolidated subsidiary

(2)

Other investees

(3)

Consolidated subsidiary as of 7/09

Our interest in the common stock of ARL and our partnership interest in Garden Centura, LP, in the amount of 3% and 5% respectively, are accounted for under the equity method because we exercise significant influence over the operations and financial activities. Accordingly, the investments are carried at cost, adjusted for the companies’ proportionate share of earnings or losses.

The market values, other than unconsolidated subsidiaries, as of the year ended December 31, 2009 and 2008 were not determinable as there were no readily traded markets for these entities.

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

 

2009

   Unconsolidated
Subsidiaries
    Other
Investees
    Total  

Real estate, net of accumulated depreciation

   $ 236,413      $ 77,043      $ 313,456   

Notes receivable

     41,176        —          41,176   

Other assets

     174,038        6,466        180,504   

Notes payable

     (233,490     (48,261     (281,751

Other liabilities

     (111,780     (2,625     (114,405

Shareholders equity/partners capital

   $ (106,357   $ (32,623   $ (138,980
                        

Rents and interest and other income

   $ 38,180      $ 9,819      $ 47,999   

Depreciation

     (2,593     (3,215     (5,808

Operating expenses

     (35,029     (3,912     (38,941

Gain on land sales

     5,309        —          5,309   

Interest expense

     (18,000     (3,157     (21,157
                        

Income from continuing operations

     (12,133     (465     (12,598

Income from discontinued operations

     —          —          —     
                        

Net income

   $ (12,133   $ (465   $ (12,598
                        

Companys proportionate share of earnings

   $ (298   $ (23   $ (321
                        

 

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2008

   Unconsolidated
Subsidiaries
    Other
Investees
    Total  

Real estate, net of accumulated depreciation

   $ 274,242      $ 79,436      $ 353,678   

Notes receivable

     82,840        —          82,840   

Other assets

     229,081        6,841        235,922   

Notes payable

     (272,328     (50,723     (323,051

Other liabilities