10-K 1 tci-10k_123117.htm ANNUAL REPORT tci-10k_123117.htm

 

 

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 


 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2017

 

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)

   

1603 LBJ Freeway, 

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   ☒

 

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   ☒

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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   ☐

 

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.    ☒

 

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        ☐ (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   ☒

 

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 December 31, 2017 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $13,555,912 based upon a total of 1,361,049 shares held as of December 31, 2017 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 30, 2018, there were 8,717,767 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

 

 

 

 

 

 

INDEX TO 

ANNUAL REPORT ON FORM 10-K

 

     
   

Page 

  PART I  
Item 1. Business 3
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 13
Item 2. Properties 14
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosures 16
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6. Selected Financial Data 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28
Item 8. Consolidated Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 62
Item 9A. Controls and Procedures 62
Item 9B. Other Information 62
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 63
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and Management 69
Item 13. Certain Relationships and Related Transactions, and Director Independence 70
Item 14. Principal Accounting Fees and Services 72
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 73
Signatures 75

 

2  

 

 

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 “TCI”, “the Company”, “We”, “Our”, or “Us” refer to Transcontinental Realty Investors, Inc. a Nevada corporation which was formed in 1984. The Company is headquartered in Dallas, Texas and its common stock is listed and trades on the New York Stock Exchange (“NYSE”) under the symbol “TCI”.

 

TCI is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with American Realty Investors, Inc. (“ARL”), whose common stock is traded on the NYSE under the symbol “ARL”. Subsidiaries and affiliates of ARL own in excess of 80% of the Company’s common stock. ARL and one of its subsidiaries own 77.63% and the parent of ARL owns 3.49% of the company. Accordingly, TCI’s financial results are consolidated with those of ARL’s on Form 10-K and related Consolidated Financial Statements. ARL’s common stock is listed and trades on the New York Stock Exchange under the symbol “ARL”. We have no employees.

 

On July 17, 2009, the Company acquired an additional 2,518,934 shares of common stock of Income Opportunity Realty Investors, Inc. (“IOR”), and in doing so, increased its ownership from approximately 25% to over 80% of the shares of common stock of IOR outstanding. Upon acquisition of the additional shares in 2009, IOR’s results of operations began to be consolidated with those of the Company for tax and financial reporting purposes. As of December 31, 2017, TCI owned 81.25% of the outstanding IOR common shares. Shares of IOR common stock are listed and traded on the NYSE American under the symbol “IOR”.

 

At the time of the acquisition, the historical accounting value of IOR’s assets was $112 million and liabilities were $43 million. In that the shares of IOR acquired by TCI were from a related party, the values recorded by TCI are IOR’s historical accounting values at the date of transfer. The Company’s fair valuation of IOR’s assets and liabilities at the acquisition date approximated IOR’s book value. The net difference between the purchase price and historical accounting basis of the assets and liabilities acquired is $25.6 million and has been reflected by TCI as deferred income. The deferred income will be recognized upon the sale of the land that IOR held on its books as of the date of sale, to an independent third party.

 

TCI’s Board of Directors are responsible for directing the overall affairs of TCI and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by TCI’s Board of Directors. The directors of TCI are also directors of ARL and IOR. The Chairman of the Board of Directors of TCI also serves as the Chairman of the Board of Directors of ARL and IOR. The officers of TCI also serve as officers of ARL, IOR and Pillar.

 

Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc.), effective August 7, 2014), a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to ARI and IOR.  As the contractual advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  TCI has no employees. Employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement. 

 

Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), manages our commercial properties and provides brokerage services. Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”.   TCI engages third-party companies to lease and manage its apartment properties.

 

Southern Properties Capital Ltd. (“Southern”) is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures that cannot be converted into shares on the Tel-Aviv Stock Exchange. Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI.

 

On January 1, 2012, the Company entered into a development agreement with Unified Housing Foundation, Inc. “UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

 

3  

 

 

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, 2017, our income-producing properties consisted of:

 

Seven commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7 million square feet;

 

A golf course comprising approximately 96.09 acres; and

 

Fifty-one residential apartment communities comprising 8,427 units, excluding apartments being developed.

 

The following table sets forth the location of our real estate held for investment (income-producing properties only) by asset type as of December 31, 2017:

 

    Apartments     Commercial  
Location   No.     Units     No.     SF  
Alabama     1       168                  
Arkansas     5       938                  
Colorado     2       260                  
Florida     3       198       1       6,722  
Georgia     1       222                  
Louisiana     2       384                  
Mississippi     9       924                  
North Carolina     1       201                  
Tennessee     4       708                  
Texas-Greater Dallas-Ft Worth     11       1,962       4       1,473,634  
Texas-Greater Houston     2       416       1       95,329  
Texas-San Antonio     2       468                  
Texas-Other     8       1.578                  
Wisconsin                     1       122,205  
Total     51       8,427       7       1,697,890  

 

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 some of our properties.

 

We join with third-party development companies to construct residential apartment communities. At December 31, 2017, we had fourteen apartment projects in development. 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, initial lease-up 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.

 

4  

 

 

At December 31, 2017, our apartment projects in development included (dollars in thousands):

 

                    Total  
                    Projected  
Property   Location   No. of Units     Costs to Date (1)     Costs (1)  
Terra Lago   Rowlett, TX     447     $ 42,136     $ 66,375  
Parc at Bentonville   Bentonville, AR     216     $ 85     $ 27,710  
Lakeside Lofts   Farmers Branch, TX     494     $ 5,079     $ 78,550  
Eagle Crossing   Dallas, TX     153     $ 81     $ 20,670  
Parc at Garland   Garland, TX     198     $ 81     $ 26,007  
Parc at Wylie   Wylie, TX     198     $ 195     $ 28,212  
Apalache Point   Tallahassee, FL     200     $ 149     $ 30,251  
Overlook at Allensville Square Phase II   Sevierville, TN     144     $ 525     $ 20,244  
McKinney Point   McKinney, TX     198     $ 137     $ 29,846  
Dominion at Mercer Crossing   Farmers Branch, TX     256     $ 2,995     $ 46,115  
Abode Red Rock Properties   Las Vegas, NV     308     $ 28,095     $ 58,880  
Oak Hollow Phase II   Seguin, TX     96     $ 5,535     $ 10,723  
Sawgrass Phase II   New Point Richey, FL     80     $ 3,772     $ 20,719  
Forest Pines   Bryan, TX     240     $ 269     $ 31,535  
Total         3,228     $ 89,134     $ 495,837  

 

(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.

 

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

 

At December 31, 2017, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands):

 

    Date(s)           Primary
Location   Acquired   Acres   Cost   Intended Use
                 
McKinney, TX     1997-2008       10     $ 777     Mixed use
Dallas, TX     1996-2013       94   $ 15,765     Mixed use
Farmers Branch, TX     2008-2016       269     $ 43,519     Mixed use
Kaufman County, TX     2011       2,849     $ 43,809     Mixed use
Various     1990-2008       244     $ 10,669     Various
Total Land Holdings             3,466       114,539      

 

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Significant Real Estate Acquisitions/Dispositions and Financings

 

A summary of some of the significant transactions for the year ended December 31, 2017, are discussed below:

 

Purchases

 

During the year ended December 31, 2017, the Company acquired one income-producing apartment property from a third party in the state of North Carolina, increasing the total number of units by 201, for a combined purchase price of $36.7 million. In addition, we acquired one land parcel for future development for a total purchase price of $5.4 million, adding 18.5 acres to the development portfolio.

 

Sales

  

As of December 31, 2017, the Company has approximately 66.7 acres of land, at various locations that were sold to related parties in multiple transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets. Due to the related party nature of the transactions, TCI has deferred the recording of the sales in accordance with ASC 360-20.

 

We continue to invest in the development of apartment projects. During the year ended December 31, 2017, we have expended $69.8 million related to the construction or predevelopment of various apartment complexes and capitalized $2.4 million of interest costs.

 

6  

 

 

Business Plan and Investment Policy

 

Our business objective is to maximize long-term value for our stockholders by investing in residential and 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 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 of 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.

 

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”.

 

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To the extent that TCI seeks to sell any 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 and IOR. Both ARL and IOR have business objectives similar to those of TCI. TCI’s officers and directors owe fiduciary duties to both IOR and ARL as well as to TCI under applicable law. In determining whether a particular investment opportunity will be allocated to TCI, IOR, 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 related parties of Pillar 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, Pillar 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 the Company.

 

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 shareholders.

 

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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.

 

 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.

 

9  

 

 

Our ability to achieve growth in operating income depends in part on our 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.

 

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, 2017 of approximately $1,025.5 million. 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.

 

10  

 

 

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.

 

 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. 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 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.

 

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

 

Because of the lack of liquidity of real estate investments, our ability to respond to changing circumstances may be limited and generally real estate investments 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.

 

11  

 

 

We intend 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;

 

we 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;  

 

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.

 

12  

 

 

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 we 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.

 

13  

 

 

ITEM 2. PROPERTIES

 

On December 31, 2017, our portfolio consisted of sixty-one income-producing properties consisting of fifty-three apartment complexes totaling 8,606 units, seven commercial properties consisting of five office buildings and two retail centers; and a golf course. In addition, we own or control approximately 3,466 acres of improved and unimproved land for future development or sale. The average annual rental and other property revenue dollar per square foot is $11.83 for the Company’s residential apartment portfolio and $18.55 for the commercial portfolio. The table below shows information relating to those properties in which we own or have an ownership interest:

 

Transcontinental Realty Investors, Inc
Annual Reports
Item 2 Properties List
For The Twelve Months Ending December 31, 2017
             
             
Residential Apartments   Location     Units       Occupancy  
Anderson Estates   Oxford, MS     48       91.70 %
Blue Lake Villas I   Waxahachie, TX     186       98.90 %
Blue Lake Villas II   Waxahachie, TX     70       98.60 %
Breakwater Bay   Beaumont, TX     176       90.90 %
Bridgewood Ranch   Kaufman, TX     106       97.20 %
Capitol Hill   Little Rock, AR     156       92.90 %
Centennial Village   Oak Ridge TN     252       99.20 %
Crossing at Opelika   Opelika AL     168       98.20 %
Curtis Moore Estates   Greenwood, MS     104       77.90 %
Dakota Arms   Lubbock, TX     208       95.20 %
David Jordan Phase II   Greenwood, MS     32       78.10 %
David Jordan Phase III   Greenwood, MS     40       87.50 %
Desoto Ranch   DeSoto, TX     248       97.20 %
Falcon Lakes   Arlington, TX     248       98.00 %
Heather Creek   Mesquite, TX     200       98.50 %
Lake Forest   Houston, TX     240       95.80 %
Legacy at Pleasant Grove   Texarkana, TX     208       93.30 %
Lodge at Pecan Creek   Denton, TX     192       94.80 %
Lofts at Reynolds Village   Asheville, NC     201       97.50 %
Mansions of Mansfield   Mansfield, TX     208       97.60 %
Metropolitan   Little Rock, AR     260       87.30 %
Mission Oaks   San Antonio, TX     228       96.10 %
Monticello Estate   Monticello, AR     32       90.60 %
Northside on Travis   Sherman, TX     200       97.00 %
Oak Hollow   Seguin TX     160       94.40 %
Oceanaire   Biloxi, MS     196       94.40 %
Overlook at Allensville   Sevierville TN     144       96.50 %
Parc at Clarksville   Clarksville, TN     168       96.40 %
Parc at Denham Springs   Denham Springs, LA     224       94.60 %
Parc at Maumelle   Little Rock, AR     240       93.80 %
Parc at Metro Center   Nashville, TN     144       98.60 %
Parc at Rogers   Rogers, AR     250       96.40 %
Preserve at Pecan Creek   Denton, TX     192       94.30 %
Preserve at Prairie Point   Lubbock, TX     184       97.80 %
Residences at Holland Lake   Weatherford TX     208       97.60 %
Riverwalk Phase I   Greenville, MS     32       96.90 %
Riverwalk Phase II   Greenville, MS     72       91.70 %
Sawgrass Creek   New Port Richey, FL     45       95.56 %
Sonoma Court   Rockwall, TX     124       99.20 %
Sugar Mill   Baton Rouge, LA     160       100.00 %
Tattersall Village   Hinesville, GA     222       96.40 %
Toulon   Gautier, MS     240       92.10 %
Tradewinds   Midland TX     214       97.70 %
Villager   Fort Walton FL     33       97.00 %
Villas at Park West I   Pueblo, CO     148       100.00 %
Villas at Park West II   Pueblo, CO     112       100.00 %
Vista Ridge   Tupelo MS     160       96.90 %
Vistas of Vance Jackson   San Antonio, TX     240       97.10 %
Waterford at Summer Park   Rosenberg TX     196       92.30 %
Westwood   Mary Ester FL     120       98.30 %
Windsong   Fort Worth, TX     188       98.40 %
                     
51   Total Apartment Units     8,427       95.18 %
                     
                     
Office Buildings   Location     SqFt       Occupancy  
600 Las Colinas   Las Colinas, TX     512,210       92.36 %
770 South Post Oak   Houston, TX     95,329       86.43 %
Browning Place (Park West I)   Farmers Branch, TX     625,378       77.53 %
Senlac (VHP)   Farmers Branch, TX     2,812       100.00 %
Stanford Center   Dallas, TX     333,234       97.79 %
5   Total Office Buildings     1,568,963          
                     
Retail Centers   Location     SqFt       Occupancy  
Bridgeview Plaza   LaCrosse, WI     122,205       87.36 %
Fruitland Park   Fruitland Park, FL     6,722       100.00 %
2   Total Retail Centers     128,927          
                     
    Total Commercial     1,697,890          
                     
                     
Golf Course   Location     Acres          
Mahogany Run Golf Course   St. Thomas, US Virgin Islands     96.09          
1   Total Golf Course     96.09          
                     
 Golf course had 96.09 acres, but it suffered extensive damage in a hurricane and is no longer operating.

 

 

 

Lease Expirations

 

The table below shows the lease expirations of the commercial properties over a nine-year period and thereafter:

 

                  Current              
                    Annualized(1)                  
      Rentable Square           Contractual                  
      Feet     Current Annualized (1)     Rent Under     Percentage of     Percentage  
Year of Lease     Subject to     Contractual Rent Under     Expiring     Total     of Gross  
Expiration     Expiring Leases     Expiring Leases     Leases (P.S.F.)     Square Feet     Rentals  
                                           
2018       172,297       3,647,957     $ 21.17       10.1 %     13.4 %
2019       298,377       5,299,974     $ 17.76       17.6 %     19.6 %
2020       119,770       2,523,397     $ 21.07       7.1 %     9.3 %
2021       125,086       2,561,127     $ 20.47       7.4 %     9.4 %
2022       236,901       5,118,961     $ 21.61       14.0 %     18.9 %
2023       172,346       2,344,412     $ 13.60       10.2 %     8.7 %
2024       61,044       996,807     $ 16.33       3.6 %     3.7 %
2025       113,829       2,604,020     $ 22.88       6.7 %     9.6 %
2026       14,445       375,570     $ 26.00       0.9 %     1.4 %
Thereafter       80,074       1,627,426     $ 20.32       4.7 %     6.0 %
Total       1,394,169     $ 27,099,651               82.3 %     100 %

 

(1) Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2017, multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.

 

14  

 

 

The table below shows information related to the land parcels we own as of December 31, 2017:

 

Land   Location   Acres  
2427 Valley View Ln   Farmers Branch, TX     0.31  
Audubon   Adams County, MS     48.20  
Bonneau Land   Farmers Branch, TX     8.39  
Cooks Lane   Fort Worth, TX     23.24  
Dedeaux   Gulfport, MS     10.00  
Denham Springs   Denham Springs, LA     4.38  
Dominion Mercer   Farmers Branch, TX     5.29  
Gautier   Gautier, MS     3.46  
Hollywood Casino Tract II   Farmers Branch, TX     11.36  
Lacy Longhorn   Farmers Branch, TX     5.08  
Lake Shore Villas   Humble, TX     19.51  
Lubbock   Lubbock, TX     2.86  
Manhattan Land   Farmers Branch, TX     8.79  
McKinney 36   Collin County, TX     9.58  
Minivest   Dallas, TX     0.23  
Nashville   Nashville, TN     6.25  
Nicholson Croslin   Dallas, TX     0.80  
Nicholson Mendoza   Dallas, TX     0.35  
Ocean Estates   Gulfport, MS     12.00  
Senlac   Farmers Branch, TX     8.49  
Texas Plaza   Irving, TX     10.33  
Travis Ranch   Kaufman County, TX     8.66  
Travis Ranch Retail   Kaufman County, TX     8.13  
Union Pacific Railroad   Dallas, TX     0.04  
Valley View 34 (Mercer Crossing)   Farmers Branch, TX     2.19  
Willowick   Pensacola, FL     39.78  
Windmills Farms   Kaufman County, TX     2,831.87  
    Total Land/Development     3,089.57  
             
             
Land Subject to Sales Contract   Location     Acres  
Dominion Tract   Dallas, TX     10.59  
Hollywood Casino Tract I   Farmers Branch, TX     10.96  
LaDue   Farmers Branch, TX     8.01  
Three Hickory   Farmers Branch, TX     6.60  
Travelers   Farmers Branch, TX     193.17  
Walker/Cummings   Dallas County, TX     82.59  
Whorton   Bentonville, AR     64.44  
    Total Land Subject to Sales Contract     376.36  
    Total Land     3,465.93  

 

15  

 

 

ITEM 3.     LEGAL PROCEEDINGS

 

Dynex Capital, Inc.

 

On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).

 

An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015. 

 

The Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic $0.256 million in damages, plus pre-judgment interest of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amo unt of $24.8 million. The Judgment awarded TCI $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages are paid. Lastly, the Judgement awarded Basic, ART, and TCI $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc. 

 

The Company is working with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as explore possible additional claims, if any, against Dynex Capital, Inc. 

 

Litigation. 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.

 

ITEM 4.     MINE SAFETY DISCLOSURES

 

Not applicable. 

 

16  

 

 

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 NYSE American 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 American for the quarters ended:

 

    2017     2016  
    High     Low     High     Low  
First Quarter   $ 21.50     $ 11.94     $ 11.62     $ 8.35  
Second Quarter   $ 27.64     $ 16.50     $ 12.84     $ 8.38  
Third Quarter   $ 29.69     $ 20.37     $ 11.90     $ 9.10  
Fourth Quarter   $ 35.00     $ 26.39     $ 12.66     $ 9.41  

 

On March 20, 2018, the closing price of TCI’s common stock as reported on the NYSE American was $40.46 per share, and was held by approximately 3,700 holders of record.

 

TCI’s Board of Directors established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. In accordance with that policy, the board determined not to pay any dividends on common stock in 2017, 2016 or 2015. Future distributions to common stockholders 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.

 

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 1,387,000 shares. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which resulted in a total authorization under the repurchase program for up to 1,637,000 shares of our common stock. This repurchase program has no termination date. There were no shares repurchased for the year ended December 31, 2017.

 

17  

 

 

ITEM 6. SELECTED FINANCIAL DATA

 

    For the Years Ended December 31,
    2017   2016   2015   2014   2013
    (dollars in thousands, except share and per share amounts)
EARNINGS DATA                                        
Total operating revenues   $ 125,233     $ 118,471     $ 102,220     $ 75,858     $ 77,351  
Total operating expenses     105,128       100,824       92,919       75,087       82,722  
Operating income (loss)     20,105       17,647       9,301       771       (5,371 )
Other expenses     (49,967 )     (36,628 )     (36,095 )     (17,613 )     (36,626 )
Loss before gain on sales, non-controlling interest, and taxes     (29,862 )     (18,981 )     (26,794 )     (16,842 )     (41,997 )
Gain (loss) on land sales     4,884       3,121       18,911       561       (1,073 )
Gain on sale of income-producing properties     9,842       16,207       —         —         —    
Income tax benefit (expense)     (180)       (24 )     (517 )     20,390       40,949  
Net income (loss) from continuing operations     (15.316 )     323       (8,400 )     4,109       (2,121 )
Net income (loss) from discontinued operations             (1 )     896       37,868       61,630  
Net income (loss)     (15,316 )     322       (7,504 )     41,977       59,509  
Net income attributable to non-controlling interest     (499 )     (285 )     (132 )     (399 )     (979 )
Net income (loss) attributable to Transcontinental Realty Investors, Inc.     (15,815 )     37       (7,636 )     41,578       58,530  
Preferred dividend requirement     (900 )     (900 )     (900 )     (1,005 )     (1,110 )
Net income (loss) applicable to common shares   $ (16,715 )   $ (863 )   $ (8,536 )   $ 40,573     $ 57,420  
                                         
PER SHARE DATA                                        
Earnings per share - basic                                        
Income (loss) from continuing operations   $ (1.92 )   $ (0.10 )   $ (1.08 )   $ 0.32     $ (0.50 )
Income (loss) from discontinued operations     0.00       0.00       0.10       4.42       7.33  
Net income (loss) applicable to common shares   $ (1.92 )   $ (0.10 )   $ (0.98 )   $ 4.74     $ 6.83  
Weighted average common share used in computing earnings per share     8,717,767       8,717,767       8,717,767       8,559,370       8,413,469  
                                         
Earnings per share - diluted                                        
Income (loss) from continuing operations   $ (1.92 )   $ (0.10 )   $ (1.08 )   $ 0.32     $ (0.50 )
Income (loss) from discontinued operations     —         (0.00 )     0.10       4.42       7.33  
Net income (loss) applicable to common shares   $ (1.92 )   $ (0.10 )   $ (0.98 )   $ 4.74     $ 6.83  
Weighted average common share used in computing diluted earnings per share     8,717,767       8,717,767       8,717,767       8,559,370       8,413,469  
                                         
                                         
BALANCE SHEET DATA                                        
Real estate, net   $ 979,870     $ 891,173     $ 844,019     $ 689,121     $ 695,802  
Notes and interest receivable, net     70,166       79,308       69,551       83,457       67,907  
Total assets     1,313,422       1,185,914       1,110,204       930,405       897,671  
Notes and interest payables     1,007,529       841,516       779,434       608,917       602,845  
Stockholders' equity     208,261       224,477       225,055       233,448       191,570  
Book value per share     23.89       25.75       25.82       27.27       22.77  

 

 

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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 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 of real estate and during 2017 we acquired $41.7 million and sold $11.2 million of land and income-producing properties. As of December 31, 2017, we owned 8,427 units in fifty-one residential apartment communities, seven commercial properties comprising approximately 1.7 million rentable square feet, and a golf course. In addition, we own 3,466 acres of land held for development. The Company currently owns income-producing properties and land in eleven states as well as in the U.S. Virgin Islands.

 

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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 some 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 and leasing office, retail and industrial space to commercial tenants.

 

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

 

Since April 30, 2011, Pillar is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for TCI’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to ARL and IOR. As the contractual Advisor, Pillar is compensated by TCI under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. TCI has no employees. Employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement.

 

Effective since January 1, 2011, Regis manages our commercial properties and provides brokerage services.  Regis is entitled to receive a fee for its property management and brokerage services. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage.”  The Company contracts with third-party companies to lease and manage our apartment communities. 

 

Critical Accounting Policies

 

We present our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).

 

The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest.

 

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities are included in consolidated net income. TCI’s investment in ARL is accounted for under the equity method.

 

In accordance with the VIE guidance in ASC 810 “Consolidations,” the Company consolidated fifty-one multifamily residential properties at December 31, 2017 and fifty at December 31, 2016, located throughout the United States ranging from 32 units to 260 units.  Assets totaling approximately $484 million and approximately $442 million at December 31, 2017 and 2016, respectively, are consolidated and included in “Real estate, at cost” on the balance sheet and are all collateral for their respective mortgage notes payable, none of which are recourse to the partnership in which they are in or to the Company. 

 

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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 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.

 

Transfers to or from our parent, ARL, or other related parties reflect a basis equal to the cost basis in the asset at the time of the sale. 

 

Depreciation and Impairment

 

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 direct project costs incurred during the period of development.

 

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 “Interest - 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.

 

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. Fair value is determined by a recent appraisal, comparable based upon prices for similar assets, executed sales contract, a present value and/or a valuation technique based upon a multiple of earnings or revenue. 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.

 

Real Estate Assets Held for Sale

 

We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 2017 or 2016.

 

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Effective as of January 1, 2015, we adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after January 1, 2015, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.

 

Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”

 

Investment in Unconsolidated Real Estate Ventures

 

Except for ownership interests in variable interest entities, we account 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 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, we defer some or all of the gain recognition and account 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

 

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

 

Interest Recognition on Notes Receivable

 

We record interest income as earned in accordance with the terms of the related loan agreements.

 

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Allowance for Estimated Losses

 

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

 

Fair Value of Financial Instruments

 

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

 

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

       
  Level 1  —  Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
       
  Level 2  —  Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
       
  Level 3      —  Unobservable inputs that are significant to the fair value measurement.

 

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

 

Related parties

 

We apply ASC Topic 805, “Business Combination”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

 

Results of Operations

 

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 discontinued operations for all periods presented. The other segment consists of revenue and operating expenses related to the notes receivable and corporate entities.

 

The following discussion is based on our Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015 as included in Item 8. “Consolidated Financial Statements and Supplementary Data”. The prior year’s property portfolios have been adjusted for subsequent sales. Continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years.

 

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At December 31, 2017, 2016 and 2015, we owned or had interests in a portfolio of fifty-nine, fifty-eight and fifty-seven income-producing properties, respectively. 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 held as of year-end for the years presented, but sold in subsequent years. Continued operations represents all properties that have not been reclassed to discontinued operations as of December 31, 2017 for the year presented. The table below shows the number of income-producing properties held by year:

 

    2017     2016     2015  
Continuing operations     59       58       57  
Held for sale/subsequent sales                  
Total property portfolio     59       58       57  

 

Comparison of the year ended December 31, 2017 to the year ended December 31, 2016:

 

For the year ended December 31, 2017, we reported net loss applicable to common shares of $16.7 million or ($1.92) per diluted earnings per share compared to a net loss applicable to common shares of $0.9 million or ($0.10) per diluted earnings per share for the year ended December 31, 2016. The current year net loss applicable to common shares of $16.7 million included gain on sale of income-producing properties of $9.8 million and gain on land sales of $4.9 million compared to the prior year net loss applicable to common shares of $0.9 million which included gain on land sales of $3.1 million.

 

Revenues  

Rental and other property revenues were $125.2 million for the year ended December 31, 2017. This represents an increase of $6.7 million, as compared to the prior year revenues of $118.5 million. The change by segment is an increase in the apartment portfolio of $6.2 million and an increase in the commercial portfolio of approximately $0.5 million. We purchased four apartment communities during the year ended December 31, 2016, which produced rental revenue of $8.3 million and $2.0 million during the years ended December 31, 2017 and 2016, respectively, for a net increase of $6.3 million. In addition, we purchased one apartment property during 2017 that produced revenues of $0.8 million in rental revenues. 

  

Expenses

 

Property operating expenses were $63.1 million for the year ended December 31, 2017. This represents an increase of $1.2 million, as compared to the prior year operating expenses of $61.9 million. The growth in our apartment portfolio resulted in a $2.9 million increase in property operating expenses. The Company added a net 723 units during 2016 and 201 units during 2017. Property operating expenses for our commercial portfolio decreased $1.8 million.  In addition, we had a decrease in property operating expenses for our land portfolio of $1.0 million.

 

Depreciation and amortization expenses were $25.6 million for the year ended December 31, 2017. This represents an increase of $1.9 million as compared to prior year depreciation of $23.7 million. The increase is primarily due to the growth in our apartment portfolio which had an increase of $1.6 million year-over-year.

 

General and administrative expenses were $6.3 million for the year ended December 31, 2017. This represents an increase of $0.8 million, as compared to the prior year expenses of $5.5 million.

   

Net income fee remained constant at $0.3 million for the year ended December 31, 2017 and 2016. The net income fee paid to Pillar is calculated at 7.5% of net income.

 

Advisory fees were $10.0 million for the year ended December 31, 2017. This represents an increase of $0.5 million compared to the prior year advisory fees of $9.5 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

Other income (expense)  

 

Interest income was $13.9 million for the year ending December 31, 2017 compared to $14.7 million for the year ended December 31, 2016 for a decrease of $0.8 million.  This decrease was primarily due to a decrease of $2.3 in interest on notes receivable, partially offset by a $1.3 million increase in interest on receivable owed from Advisor.

 

Mortgage and loan interest expense was $59.9 million for the year ended December 31, 2017. This represents an increase of $6.8 million compared to the prior year expense of $53.1 million . The change by segment is an increase in the other portfolio of $9.7 million, an increase in the commercial portfolio of $0.4 million, partially offset by a decrease in the apartment portfolio of $3.0 million and a decrease in the land portfolio of $0.2 million . Within the other portfolio, the increase is due to incurring new mezzanine debt obligations. Within the apartment portfolio, the majority of the increase is due to the acquisition of a new property, partially offset by the refinancing of six loans during 2017 at lower rates.

 

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The gain on sale of income-producing properties $9.8 million was attributable to recognition of deferred gains for the year ended December 31, 2017. During 2016, the Company sold one apartment community located in Irving, Texas to an independent third party for a total sales price of $8.1 million and one apartment community located in Topeka, Kansas to an independent third party for a total sales price of $12.3 million. We recorded an aggregate gain of $16.2 million from the sale of these two properties. The Company also sold an industrial warehouse consisting of approximately 177,805 square feet. The sale resulted in a loss of approximately $0.2 million.

 

Gain on land sales was $4.9 million and $3.1 million for the years ended December 31, 2017 and 2016, respectively. During 2016, we sold a combined 129.7 acres of land located in Forney, Texas, McKinney, Texas, Farmers Branch, Texas and Nashville, Tennessee to independent third parties for a total sales price of $29.1 million. We recorded an aggregate $3.1 million gain from the land sales. During 2015, we sold 578.8 acres of land in six transactions for a sales price of $102.9 million and recorded a gain of $18.9 million.

 

Comparison of the year ended December 31, 2016 to the year ended December 31, 2015:

 

For the year ended December 31, 2016, we reported net loss applicable to common shares of $0.9 million or ($0.10) per diluted earnings per share compared to a net income applicable to common shares of $8.5 million or ($0.98) per diluted earnings per share for the same period ended 2015. The net loss applicable to common shares of $0.9 million for the year ended December 31, 2016 included gain on sale of income-producing properties of $16.2 million and gain on land sales of $3.1 million compared to the prior year net loss applicable to common shares of $8.5 million which included gain on land sales of $18.9 million and net income from discontinued operations of $0.9 million.

 

Revenues

 

Rental and other property revenues were $118.5 million for the year ended December 31, 2016. This represents an increase of $16.3 million compared to the prior year revenues of $102.2 million. The change by segment is an increase in the apartment portfolio of $13.8 million and an increase in the commercial portfolio of $2.5 million. We purchased 12 apartment communities during the year ended December 31, 2015, which produced rental revenue of $21.7 million and $10.2 million during the years ended December 31, 2016 and 2015, respectively, for a net increase of $11.5 million. In addition, we purchased four apartment properties during 2016 that produced revenues of $2.0 million and we had a decrease in rental revenue of approximately $0.9 million for two apartment communities sold during 2016. The $2.5 million increase in revenues for the commercial portfolio was primarily due to the acquisition of a commercial building in Houston, Texas late in the second quarter of 2015.

 

Expenses

 

Property operating expenses were $61.9 million for the year ended December 31, 2016. This represents an increase of $9.6 million compared to the prior year operating expenses of $52.3 million. The growth in our apartment portfolio resulted in a $6.3 million increase in property operating expenses. The Company added a net 2,145 units during 2015 and 723 units during 2016. Property operating expenses for our commercial portfolio increased $2.6 million due to the acquisition of an office building in Houston, Texas late in the second quarter of 2015. In addition, we had an increase in property operating expenses for our land portfolio of $0.9 million.

 

Depreciation and amortization expenses were $23.7 million for the year ended December 31, 2016. This represents an increase of $2.4 million compared to depreciation of $21.3 million for the year ended December 31, 2015. The increase is primarily due to the growth in our apartment portfolio which had an increase of $2.3 million year-over-year.

 

General and administrative expenses remained constant at $5.5 million for the years ended December 31, 2016 and 2015.

 

There was no provision for impairment of real estate assets for the year ended December 31, 2016 compared to the prior year provision of $5.3 million, related to the golf course and related assets located in the U.S. Virgin Islands.

 

Net income fee was $0.3 million for the year ended December 31, 2016. This represents an increase of $0.1 million compared to the net income fee of $0.2 million for the year ended December 31, 2015. The net income fee paid to Pillar is calculated at 7.5% of net income.

 

Advisory fees were $9.5 million for the year ended December 31, 2016. This represents an increase of $1.1 million compared to the advisory fees of $8.4 million for the year ended December 31, 2015. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

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Other income (expense)

 

Interest income was $14.7 million for the year ending December 31, 2016 compared to $10.7 million for the year ended December 31, 2015 for an increase of $4.0 million. This increase was primarily due to an increase in amount receivable owed from our Advisor .

 

Mortgage and loan interest expense was $53.1 million for the year ended December 31, 2016. This represents an increase of $6.6 million compared to the prior year expense of $46.5 million. The change by segment is an increase in the other portfolio of $6.9 million, an increase in the apartment portfolio of $1.9 million and an increase in the commercial portfolio of $0.3 million, partially offset by a decrease in the land portfolio of $2.5 million . Within the other portfolio, the increase is due to incurring new mezzanine debt obligations. Within the apartment portfolio, the majority of the increase is due to the acquisition of new properties, partially offset by the refinancing of five loans during 2016 at lower rates.

 

Gain on sale of income-producing properties was $16.2 million for the year ended December 31, 2016. During 2016, the Company sold one apartment community located in Irving, Texas to an independent third party for a total sales price of $8.1 million and one apartment community located in Topeka, Kansas to an independent third party for a total sales price of $12.3 million. We recorded an aggregate gain of $16.2 million from the sale of these two properties. The Company also sold an industrial warehouse consisting of approximately 177,805 square feet. The sale resulted in a loss of approximately $0.2 million.

 

Gain on land sales was $3.1 million and $18.9 million for the years ended December 31, 2016 and 2015, respectively. During 2016, we sold a combined acres of land located in Forney, Texas, McKinney, Texas, Farmers Branch, Texas and Nashville, Tennessee to independent third parties for a total sales price of $29.1 million. We recorded an aggregate $3.1 million gain from the land sales. During 2015, we sold 578.8 acres land in six transactions for a sales price of $102.9 million and recorded a gain of $18.9 million.

 

Discontinued Operations

 

Prior to January 1, 2015, we applied the provisions of ASC 360, “Property, Plant and Equipment”, which required that long-lived assets that are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it required that one accounting model be used for long-lived assets to be disposed of by sale and broadened the presentation of discontinued operations to include more disposal transactions. 

 

There were no sales of income-producing properties during 2017 or 2016 that met the criteria for discontinued operations. Amounts included in discontinued operations represent the residual amounts from sales classified as discontinued operations prior to January 1, 2015. The following table summarizes revenue and expense information for the properties sold that qualified as discontinued operations (dollars in thousands):

  

    For the Years Ended December 31,  
    2016     2015  
Revenues:            
Rental and other property revenues   $     $ 355  
            355  
Expenses:                
Property operating expenses     2       (345 )
Depreciation            
General and administrative           99  
Total operating expenses     2       (246 )
                 
Other income (expense):                
Other income (expense)           45  
Mortgage and loan interest           (2 )
Loan charges and prepayment penalties            
Earnings from unconsolidated subsidiaries and investees            
Litigation settlement            
Total other expenses           43