x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
Nevada
|
94-6565852
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
(I.R.S. Employer
Identification No.)
|
Large accelerated filer ¨
|
Accelerated filer
|
¨
|
|
Non-accelerated filer ¨ (do not check if a smaller reporting company)
|
Smaller reporting company
|
x
|
Common Stock, $.01 par value
|
8,413,469
|
(Class)
|
(Outstanding at May 5, 2013)
|
PAGE
|
||||
PART I.
|
FINANCIAL INFORMATION
|
|||
Item 1.
|
Financial Statements
|
|||
Consolidated Balance Sheets at March 31, 2013 (unaudited) and December 31, 2012
|
3
|
|||
Consolidated Statements of Operations for the three months ended March 31, 2013 (unaudited) and 2012
|
4
|
|||
Consolidated Statement of Shareholders’ Equity for the three months ended March 31, 2013 (unaudited)
|
5
|
|||
Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 (unaudited) and 2012
|
6
|
|||
Consolidated Statements of Cash Flows for the three months ended March 31, 2013 (unaudited) and 2012
|
7
|
|||
Notes to Consolidated Financial Statements
|
8
|
|||
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
21
|
||
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risks
|
30
|
||
Item 4.
|
Controls and Procedures
|
30
|
||
PART II.
|
OTHER INFORMATION
|
|||
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
31
|
||
Item 6.
|
Exhibits
|
32
|
||
SIGNATURES
|
33
|
ITEM 1.
|
FINANCIAL STATEMENTS
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||||||||
CONSOLIDATED BALANCE SHEETS
|
||||||||
(unaudited)
|
||||||||
March 31,
|
December 31,
|
|||||||
2013
|
2012
|
|||||||
(dollars in thousands, except
share and par value amounts)
|
||||||||
Assets
|
||||||||
Real estate, at cost
|
$ | 948,504 | $ | 978,781 | ||||
Real estate held for sale at cost, net of depreciation ($11,164 for 2013 and $4,658 for 2012)
|
20,237 | 18,077 | ||||||
Real estate subject to sales contracts at cost, net of depreciation ($16,688 for 2013 and $16,412 for 2012)
|
42,874 | 45,706 | ||||||
Less accumulated depreciation
|
(139,345 | ) | (145,614 | ) | ||||
Total real estate
|
872,270 | 896,950 | ||||||
Notes and interest receivable
|
||||||||
Performing (including $55,937 in 2013 and $58,007 in 2012 from related parties)
|
58,750 | 60,637 | ||||||
Non-performing
|
737 | 723 | ||||||
Less allowance for estimated losses (including $2,097 in 2013 and 2012 from related parties)
|
(2,262 | ) | (2,262 | ) | ||||
Total notes and interest receivable
|
57,225 | 59,098 | ||||||
Cash and cash equivalents
|
7,836 | 16,620 | ||||||
Related party receivables
|
2,279 | - | ||||||
Investments in unconsolidated subsidiaries and investees
|
5,415 | 5,439 | ||||||
Other assets
|
54,586 | 67,237 | ||||||
Total assets
|
$ | 999,611 | $ | 1,045,344 | ||||
Liabilities and Shareholders’ Equity
|
||||||||
Liabilities:
|
||||||||
Notes and interest payable
|
$ | 712,855 | $ | 730,931 | ||||
Notes related to assets held for sale
|
18,183 | 18,915 | ||||||
Notes related to subject to sales contracts
|
53,838 | 55,976 | ||||||
Stock-secured notes payable
|
2,212 | 2,221 | ||||||
Related party payables
|
- | 10,057 | ||||||
Deferred gain (from sales to related parties)
|
53,096 | 53,096 | ||||||
Accounts payable and other liabilities (including $4,261 in 2013 and $4,282 in 2012 to related parties)
|
29,570 | 41,019 | ||||||
869,754 | 912,215 | |||||||
Shareholders’ equity:
|
||||||||
Preferred stock, Series C: $.01 par value, authorized 10,000,000 shares, issued and outstanding 30,000
shares in 2013 and 2012 respectively (liquidation preference $100 per share) Series D: $.01 par value,
authorized, issued and outstanding 100,000 shares in 2013 and 2012 respectively
|
1 | 1 | ||||||
Common stock, $.01 par value, authorized 10,000,000 shares; issued 8,413,669 shares in 2013 and 2012,
and outstanding 8,413,469 shares in 2013 and 2012
|
84 | 84 | ||||||
Treasury stock at cost; 200 shares in 2013 and 2012
|
(2 | ) | (2 | ) | ||||
Paid-in capital
|
272,500 | 272,774 | ||||||
Retained earnings
|
(159,668 | ) | (156,559 | ) | ||||
Total Transcontinental Realty Investors, Inc. shareholders' equity
|
112,915 | 116,298 | ||||||
Non-controlling interest
|
16,942 | 16,831 | ||||||
Total equity
|
129,857 | 133,129 | ||||||
Total liabilities and equity
|
$ | 999,611 | $ | 1,045,344 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||||||||
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||
(unaudited)
|
||||||||
For the Three Months Ended
|
||||||||
2013
|
2012
|
|||||||
(dollars in thousands, except
share and per share amounts)
|
||||||||
Revenues:
|
||||||||
Rental and other property revenues (including $165 and $167 for the three months ended 2013 and
2012 respectively from related parties)
|
$ | 27,277 | $ | 27,215 | ||||
Expenses:
|
||||||||
Property operating expenses (including $259 and $291 for the three months ended 2013 and 2012
respectively from related parties)
|
13,319 | 13,020 | ||||||
Depreciation and amortization
|
5,021 | 5,157 | ||||||
General and administrative (including $704 and $666 for the three months ended 2013 and 2012
respectively from related parties)
|
1,837 | 2,463 | ||||||
Provision on impairment of notes receivable and real estate assets
|
- | - | ||||||
Advisory fee to related party
|
2,138 | 2,303 | ||||||
Total operating expenses
|
22,315 | 22,943 | ||||||
Operating income
|
4,962 | 4,272 | ||||||
Other income (expense):
|
||||||||
Interest income (including $2,139 and $3,225 for the three months ended 2013 and 2012 respectively
from related parties)
|
2,176 | 3,229 | ||||||
Other income (including $0 and $1,500 for the three months ended 2013 and 2012 respectively from
related parties)
|
36 | 1,611 | ||||||
Mortgage and loan interest (including $487 and $754 for the three months ended 2013 and 2012
respectively from related parties)
|
(9,987 | ) | (12,477 | ) | ||||
Deferred borrowing costs amortization
|
(2,433 | ) | (896 | ) | ||||
Loan charges and prepayment penalties
|
(3,982 | ) | (2,392 | ) | ||||
Earnings (losses) from unconsolidated subsidiaries and investees
|
8 | (73 | ) | |||||
Total other expenses
|
(14,182 | ) | (10,998 | ) | ||||
Loss before gain on land sales, non-controlling interest, and taxes
|
(9,220 | ) | (6,726 | ) | ||||
Gain (loss) on land sales
|
(48 | ) | 423 | |||||
Loss from continuing operations before tax
|
(9,268 | ) | (6,303 | ) | ||||
Income tax benefit
|
2,195 | 761 | ||||||
Net loss from continuing operations
|
(7,073 | ) | (5,542 | ) | ||||
Discontinued operations:
|
||||||||
Income (loss) from discontinued operations
|
80 | (1,413 | ) | |||||
Gain on sale of real estate from discontinued operations
|
6,190 | 3,588 | ||||||
Income tax expense from discontinued operations
|
(2,195 | ) | (761 | ) | ||||
Net income from discontinued operations
|
4,075 | 1,414 | ||||||
Net loss
|
(2,998 | ) | (4,128 | ) | ||||
Net income attributable to non-controlling interest
|
(111 | ) | (79 | ) | ||||
Net loss attributable to Transcontinental Realty Investors, Inc.
|
(3,109 | ) | (4,207 | ) | ||||
Preferred dividend requirement
|
(274 | ) | (277 | ) | ||||
Net loss applicable to common shares
|
$ | (3,383 | ) | $ | (4,484 | ) | ||
Earnings per share - basic
|
||||||||
Loss from continuing operations
|
$ | (0.89 | ) | $ | (0.70 | ) | ||
Income from discontinued operations
|
0.48 | 0.17 | ||||||
Net loss applicable to common shares
|
$ | (0.41 | ) | $ | (0.53 | ) | ||
Earnings per share - diluted
|
||||||||
Loss from continuing operations
|
$ | (0.89 | ) | $ | (0.70 | ) | ||
Income from discontinued operations
|
0.48 | 0.17 | ||||||
Net loss applicable to common shares
|
$ | (0.41 | ) | $ | (0.53 | ) | ||
Weighted average common share used in computing earnings per share
|
8,413,469 | 8,413,469 | ||||||
Weighted average common share used in computing diluted earnings per share
|
8,413,469 | 8,413,469 | ||||||
Amounts attributable to Transcontinental Realty Investors, Inc.
|
||||||||
Loss from continuing operations
|
$ | (7,184 | ) | $ | (5,621 | ) | ||
Income from discontinued operations
|
4,075 | 1,414 | ||||||
Net loss
|
$ | (3,109 | ) | $ | (4,207 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||||||||||||||||||||||||||||||||||||||||
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||||||
For the Three Months Ended March 31, 2013
|
||||||||||||||||||||||||||||||||||||||||
(unaudited)
|
||||||||||||||||||||||||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||
Total
|
Comprehensive
|
Preferred
|
Common Stock
|
Treasury
|
Paid-in
|
Retained
|
Accumulated
Other |
Non-Controlling
|
||||||||||||||||||||||||||||||||
Equity
|
Loss
|
Stock
|
Shares
|
Amount
|
Stock
|
Capital
|
Earnings
|
Income (Loss)
|
Interest
|
|||||||||||||||||||||||||||||||
Balance, December 31, 2012
|
$ | 133,129 | $ | (159,156 | ) | $ | 1 | 8,413,669 | $ | 84 | $ | (2 | ) | $ | 272,774 | $ | (156,559 | ) | $ | - | $ | 16,831 | ||||||||||||||||||
Series C preferred stock dividends
(7.0% per year)
|
(52 | ) | - | - | - | - | - | (52 | ) | - | - | - | ||||||||||||||||||||||||||||
Series D preferred stock dividends
(8.5% per year)
|
(222 | ) | - | - | - | - | - | (222 | ) | - | - | - | ||||||||||||||||||||||||||||
Net income (loss)
|
(2,998 | ) | (2,998 | ) | - | - | - | - | - | (3,109 | ) | - | 111 | |||||||||||||||||||||||||||
Purchase of controlling interest
|
- | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Sale of controlling interest
|
- | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Distributions to non-controlling
interests
|
- | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Balance, March 31, 2013
|
$ | 129,857 | $ | (162,154 | ) | $ | 1 | 8,413,669 | $ | 84 | $ | (2 | ) | $ | 272,500 | $ | (159,668 | ) | $ | - | $ | 16,942 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
||||||||
(unaudited)
|
||||||||
For the Three Months Ended
|
||||||||
March 31,
|
||||||||
2013
|
2012
|
|||||||
(dollars in thousands)
|
||||||||
Net loss
|
$ | (2,998 | ) | $ | (4,128 | ) | ||
Other comprehensive income (loss)
|
- | - | ||||||
Total comprehensive loss
|
(2,998 | ) | (4,128 | ) | ||||
Comprehensive income attributable to non-controlling interest
|
(111 | ) | (79 | ) | ||||
Comprehensive loss attributable to Transcontinental Realty Investors, Inc.
|
$ | (3,109 | ) | $ | (4,207 | ) | ||
The accompanying notes are an integral part of these consolidated financial statements.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(unaudited)
|
||||||||
For the Three Months Ended
|
||||||||
March 31,
|
||||||||
2013
|
2012
|
|||||||
(dollars in thousands)
|
||||||||
Cash Flow From Operating Activities:
|
||||||||
Net loss
|
$ | (2,998 | ) | $ | (4,128 | ) | ||
Adjustments to reconcile net loss applicable to common
shares to net cash used in operating activities:
|
||||||||
Gain (loss) on sale of land
|
48 | (423 | ) | |||||
Gain on sale of income-producing properties
|
(6,190 | ) | (3,588 | ) | ||||
Depreciation and amortization
|
5,166 | 5,737 | ||||||
Provision on impairment of notes receivable and real estate assets
|
- | - | ||||||
Amortization of deferred borrowing costs
|
2,435 | 898 | ||||||
(Earnings) losses from unconsolidated subsidiaries and investees
|
(8 | ) | 73 | |||||
(Increase) decrease in assets:
|
||||||||
Accrued interest receivable
|
2,018 | (2,824 | ) | |||||
Other assets
|
- | - | ||||||
Prepaid expense
|
(613 | ) | 7 | |||||
Escrow
|
11,513 | 7,591 | ||||||
Earnest money
|
375 | - | ||||||
Rent receivables
|
813 | (785 | ) | |||||
Related party receivables
|
- | - | ||||||
Increase (decrease) in liabilities:
|
||||||||
Accrued interest payable
|
(240 | ) | (1,500 | ) | ||||
Related party payables
|
(12,336 | ) | 8,450 | |||||
Other liabilities
|
(11,824 | ) | (17,440 | ) | ||||
Net cash used in operating activities
|
(11,841 | ) | (7,932 | ) | ||||
Cash Flow From Investing Activities:
|
||||||||
Proceeds from notes receivable
|
- | 8,714 | ||||||
Originations or advances on notes receivable
|
(145 | ) | (6,000 | ) | ||||
Acquisition of land held for development
|
- | (10,445 | ) | |||||
Acquisition of income-producing properties
|
- | - | ||||||
Proceeds from sale of income-producing properties
|
24,267 | 5,363 | ||||||
Proceeds from sale of land
|
2,537 | 6,034 | ||||||
Proceeds from sale of investment in unconsolidated real estate entities
|
- | - | ||||||
Proceeds from sale of investments
|
- | 114 | ||||||
Investment in unconsolidated real estate entities
|
32 | (55 | ) | |||||
Improvement of land held for development
|
(70 | ) | (136 | ) | ||||
Improvement of income-producing properties
|
(964 | ) | (394 | ) | ||||
Acquisition of non-controlling interest
|
- | (69 | ) | |||||
Sales of controlling interest
|
- | 113 | ||||||
Construction and development of new properties
|
(115 | ) | (3,111 | ) | ||||
Net cash provided by investing activities
|
25,542 | 128 | ||||||
Cash Flow From Financing Activities:
|
||||||||
Proceeds from notes payable
|
78,345 | 60,830 | ||||||
Recurring amortization of principal on notes payable
|
(4,335 | ) | (5,596 | ) | ||||
Payments on maturing notes payable
|
(94,725 | ) | (57,668 | ) | ||||
Debt assumption by buyer
|
- | - | ||||||
Deferred financing costs
|
(1,496 | ) | (1,654 | ) | ||||
Contributions (distributions) to non-controlling interests
|
- | - | ||||||
Common stock issuance
|
- | - | ||||||
Preferred stock dividends - Series C
|
(52 | ) | (53 | ) | ||||
Preferred stock dividends - Series D
|
(222 | ) | (224 | ) | ||||
Net cash used in financing activities
|
(22,485 | ) | (4,365 | ) | ||||
Net decrease in cash and cash equivalents
|
(8,784 | ) | (12,169 | ) | ||||
Cash and cash equivalents, beginning of period
|
16,620 | 19,991 | ||||||
Cash and cash equivalents, end of period
|
$ | 7,836 | $ | 7,822 | ||||
Supplemental disclosures of cash flow information:
|
||||||||
Cash paid for interest
|
$ | 10,205 | $ | 12,563 | ||||
Schedule of noncash investing and financing activities:
|
||||||||
Notes receivable received from related party
|
$ | - | $ | 6,000 | ||||
Related party payable/receivable for ARL cost basis sales adjustment
|
$ | - | $ | 10,445 | ||||
Acquisition of land for ARL cost basis sales adjustment
|
$ | - | $ | (10,445 | ) | |||
Sale of income-producing properties at cost basis to Parent
|
$ | - | $ | (7,814 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
|
|
•
|
13 commercial buildings consisting of 10 office buildings, one industrial warehouse and two retail centers comprising in aggregate approximately 3.4 million rentable square feet;
|
|
•
|
46 apartment communities totaling 8,239 units; excluding apartments being developed; and
|
|
•
|
4,105 acres of developed and undeveloped land.
|
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.
|
2013
|
||||
Apartments
|
$ | 587,867 | ||
Commercial properties
|
207,223 | |||
Land held for development
|
153,414 | |||
Real estate held for sale
|
31,401 | |||
Real estate subject to sales contract
|
59,562 | |||
Total real estate
|
1,039,467 | |||
Less accumulated depreciation
|
(167,197 | ) | ||
Total real estate, net of depreciation
|
$ | 872,270 |
Maturity
|
Interest
|
||||||||
Borrower
|
Date
|
Rate
|
Amount
|
Security
|
|||||
Performing loans:
|
|||||||||
Miscellaneous related party notes (1)
|
Various
|
Various
|
665
|
Various secured interest
|
|||||
Summer Breeze I-V, LLC
|
09/13
|
5.00%
|
2,735
|
6% Class A and 25% Class B Limited Partner Interests
|
|||||
Unified Housing Foundation, Inc. (Echo Station) (1)
|
12/32
|
12.00%
|
1,481
|
100% Interest in Unified Housing of Temple, LLC
|
|||||
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)
|
12/32
|
12.00%
|
2,000
|
Unsecured
|
|||||
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)
|
12/32
|
12.00%
|
6,363
|
Membership interest in Housing for Seniors of Humble, LLC
|
|||||
Unified Housing Foundation, Inc. (Limestone Canyon) (1)
|
12/32
|
12.00%
|
4,663
|
100% Interest in Unified Housing of Austin, LLC
|
|||||
Unified Housing Foundation, Inc. (Limestone Canyon) (1)
|
12/32
|
12.00%
|
3,057
|
100% Interest in Unified Housing of Austin, LLC
|
|||||
Unified Housing Foundation, Inc. (Limestone Ranch) (1)
|
12/32
|
12.00%
|
6,000
|
100% Interest in Unified Housing of Vista Ridge, LLC
|
|||||
Unified Housing Foundation, Inc. (Limestone Ranch) (1)
|
12/32
|
12.00%
|
2,250
|
100% Interest in Unified Housing of Vista Ridge, LLC
|
|||||
Unified Housing Foundation, Inc. (Parkside Crossing) (1)
|
12/32
|
12.00%
|
1,936
|
100% Interest in Unified Housing of Parkside Crossing, LLC
|
|||||
Unified Housing Foundation, Inc. (Sendero Ridge) (1)
|
12/32
|
12.00%
|
4,812
|
100% Interest in Unified Housing of Sendero Ridge, LLC
|
|||||
Unified Housing Foundation, Inc. (Sendero Ridge) (1)
|
12/32
|
12.00%
|
5,174
|
100% Interest in Unified Housing of Sendero Ridge, LLC
|
|||||
Unified Housing Foundation, Inc. (Timbers of Terrell) (1)
|
12/32
|
12.00%
|
1,323
|
100% Interest in Unified Housing of Terrell, LLC
|
|||||
Unified Housing Foundation, Inc. (Tivoli) (1)
|
12/32
|
12.00%
|
7,965
|
100% Interest in Unified Housing of Tivoli, LLC
|
|||||
Unified Housing Foundation, Inc. (1)
|
12/13
|
5.00%
|
6,000
|
Unsecured
|
|||||
Accrued interest
|
2,326
|
||||||||
Total Performing
|
$ 58,750
|
||||||||
Non-Performing loans:
|
|||||||||
Miscellaneous non-related party notes
|
Various
|
Various
|
640
|
Various secured and unsecured interest
|
|||||
Accrued interest
|
97
|
||||||||
$ 737
|
|||||||||
|
Allowance for estimated losses
|
(2,262)
|
|||||||
Total
|
$ 57,225
|
||||||||
(1) Related party notes
|
Percentage ownership as of
|
||||||||||||
March 31, 2013
|
March 31, 2012
|
|||||||||||
American Realty Investors, Inc.
|
(1) | 1.99 | % | 2.03 | % |
(1)
|
Unconsolidated Investment in Parent Company
|
For the three months ended March 31,
|
2013
|
2012
|
||||||
Real estate, net of accumulated depreciation
|
$ | 44,951 | $ | 45,917 | ||||
Notes receivable
|
44,472 | 23,106 | ||||||
Other assets
|
132,397 | 153,627 | ||||||
Notes payable
|
(61,442 | ) | (63,821 | ) | ||||
Other liabilities
|
(85,195 | ) | (86,475 | ) | ||||
Shareholders equity/partners capital
|
(75,183 | ) | (72,354 | ) | ||||
Rents and interest and other income
|
$ | 4,709 | $ | 965 | ||||
Depreciation
|
(81 | ) | (63 | ) | ||||
Operating expenses
|
(1,230 | ) | (1,302 | ) | ||||
Gain (loss) on land sales
|
12 | (1,444 | ) | |||||
Loss on sale of investment
|
- | (361 | ) | |||||
Interest expense
|
(1,511 | ) | (1,253 | ) | ||||
Income (loss) from continuing operations
|
1,899 | (3,458 | ) | |||||
Loss from discontinued operations
|
- | (134 | ) | |||||
Net Income (loss)
|
$ | 1,899 | $ | (3,592 | ) | |||
Companys proportionate share of earnings
|
$ | 38 | $ | (73 | ) |
Notes
Payable
|
Stock Loans
|
Accrued
Interest
|
Total Debt
|
|||||||||||||
Apartments
|
$ | 493,836 | $ | - | $ | 1,651 | $ | 495,487 | ||||||||
Commercial
|
107,389 | - | 247 | 107,636 | ||||||||||||
Land
|
99,079 | - | 1,999 | 101,078 | ||||||||||||
Real estate held for sale
|
18,139 | 44 | 18,183 | |||||||||||||
Real estate subject to sales contract
|
49,642 | 4,196 | 53,838 | |||||||||||||
Other
|
8,568 | 2,212 | 86 | 10,866 | ||||||||||||
Total
|
$ | 776,653 | $ | 2,212 | $ | 8,223 | $ | 787,088 |
Pillar
|
ARI
|
Total
|
||||||||||
Related party payable, December 31, 2012
|
$ | - | $ | (10,057 | ) | $ | (10,057 | ) | ||||
Cash transfers
|
18,644 | - | 18,644 | |||||||||
Advisory fees
|
(2,138 | ) | - | (2,138 | ) | |||||||
Net income fee
|
(56 | ) | - | (56 | ) | |||||||
Fees and commissions
|
(1,516 | ) | - | (1,516 | ) | |||||||
Cost reimbursements
|
(603 | ) | - | (603 | ) | |||||||
Interest expense
|
- | (79 | ) | (79 | ) | |||||||
POA fees
|
(31 | ) | - | (31 | ) | |||||||
Expenses paid by advisor
|
(2,008 | ) | - | (2,008 | ) | |||||||
Financing (mortgage payments)
|
123 | - | 123 | |||||||||
Purchase of obligations
|
(12,415 | ) | 12,336 | (79 | ) | |||||||
Related party receivable, March 31, 2013
|
$ | - | $ | 2,200 | $ | 2,200 |
Commercial
|
||||||||||||||||||||
For the Three Months Ended March 31, 2013
|
Properties
|
Apartments
|
Land
|
Other
|
Total
|
|||||||||||||||
Operating revenue
|
$ | 7,273 | $ | 19,970 | $ | 34 | $ | - | $ | 27,277 | ||||||||||
Operating expenses
|
4,656 | 8,385 | 301 | (23 | ) | 13,319 | ||||||||||||||
Depreciation and amortization
|
1,454 | 3,567 | - | - | 5,021 | |||||||||||||||
Mortgage and loan interest
|
1,804 | 6,070 | 1,401 | 712 | 9,987 | |||||||||||||||
Deferred borrowing costs
|
22 | 2,354 | 55 | 2 | 2,433 | |||||||||||||||
Loan charges & prepayment penalites
|
- | 3,982 | - | - | 3,982 | |||||||||||||||
Interest income
|
- | - | - | 2,176 | 2,176 | |||||||||||||||
Gain on land sales
|
- | - | (48 | ) | - | (48 | ) | |||||||||||||
Segment operating income (loss)
|
$ | (663 | ) | $ | (4,388 | ) | $ | (1,771 | ) | $ | 1,485 | $ | (5,337 | ) | ||||||
Capital expenditures
|
824 | 31 | 53 | - | 908 | |||||||||||||||
Assets
|
162,857 | 518,557 | 170,619 | - | 852,033 | |||||||||||||||
Property Sales
|
||||||||||||||||||||
Sales price
|
$ | - | $ | 25,300 | $ | 2,250 | $ | - | $ | 27,550 | ||||||||||
Cost of sale
|
- | 19,110 | 2,298 | - | 21,408 | |||||||||||||||
Deferred current gain
|
- | - | - | - | - | |||||||||||||||
Recognized prior deferred gain
|
- | - | - | - | - | |||||||||||||||
Gain (loss) on sale
|
$ | - | $ | 6,190 | $ | (48 | ) | $ | - | $ | 6,142 | |||||||||
Commercial
|
||||||||||||||||||||
For the Three Months Ended March 31, 2012
|
Properties
|
Apartments
|
Land
|
Other
|
Total
|
|||||||||||||||
Operating revenue
|
$ | 8,587 | $ | 18,587 | $ | - | $ | 41 | $ | 27,215 | ||||||||||
Operating expenses
|
4,863 | 7,591 | 255 | 311 | 13,020 | |||||||||||||||
Depreciation and amortization
|
1,590 | 3,567 | - | - | 5,157 | |||||||||||||||
Mortgage and loan interest
|
2,815 | 6,998 | 1,573 | 1,091 | 12,477 | |||||||||||||||
Deferred borrowing costs
|
22 | 858 | 16 | - | 896 | |||||||||||||||
Loan charges & prepayment penalites
|
- | 2,387 | 5 | - | 2,392 | |||||||||||||||
Interest income
|
- | - | - | 3,229 | 3,229 | |||||||||||||||
Gain on land sales
|
- | - | 423 | - | 423 | |||||||||||||||
Segment operating income (loss)
|
$ | (703 | ) | $ | (2,814 | ) | $ | (1,426 | ) | $ | 1,868 | $ | (3,075 | ) | ||||||
Capital expenditures
|
447 | 198 | 5 | - | 650 | |||||||||||||||
Assets
|
169,054 | 530,054 | 190,146 | - | 889,254 | |||||||||||||||
Property Sales
|
||||||||||||||||||||
Sales price
|
$ | - | $ | 21,146 | $ | 6,330 | $ | - | $ | 27,476 | ||||||||||
Cost of sale
|
- | 17,558 | 5,907 | - | 23,465 | |||||||||||||||
Deferred current gain
|
- | - | - | - | - | |||||||||||||||
Recognized prior deferred gain
|
- | - | - | - | - | |||||||||||||||
Gain (loss) on sale
|
$ | - | $ | 3,588 | $ | 423 | $ | - | $ | 4,011 |
For Three Months Ended
|
||||||||
|
March 31, | |||||||
2013
|
2012
|
|||||||
Segment operating loss
|
$ | (5,337 | ) | $ | (3,075 | ) | ||
Other non-segment items of income (expense)
|
||||||||
General and administrative
|
(1,837 | ) | (2,463 | ) | ||||
Advisory fees
|
(2,138 | ) | (2,303 | ) | ||||
Other income
|
36 | 1,611 | ||||||
Equity in earnings of investees
|
8 | (73 | ) | |||||
Income tax benefit
|
2,195 | 761 | ||||||
Loss from continuing operations
|
$ | (7,073 | ) | $ | (5,542 | ) |
March 31,
|
||||||||
2013
|
2012
|
|||||||
Segment assets
|
$ | 852,033 | $ | 889,254 | ||||
Investments in real estate partnerships
|
5,415 | 6,230 | ||||||
Other assets
|
121,926 | 149,684 | ||||||
Assets held for sale
|
20,237 | 69,891 | ||||||
Total assets
|
$ | 999,611 | $ | 1,115,059 |
For the Three Months Ended
March 31,
|
||||||||
2013
|
2012
|
|||||||
Revenue
|
||||||||
Rental
|
$ | 1,178 | $ | 2,978 | ||||
Property operations
|
526 | 1,912 | ||||||
652 | 1,066 | |||||||
Expenses
|
||||||||
Other income
|
- | 2 | ||||||
Interest expense
|
(219 | ) | (1,758 | ) | ||||
General and administration
|
(208 | ) | (143 | ) | ||||
Depreciation and amortization
|
(145 | ) | (580 | ) | ||||
Provision on impairment of real estate assets
|
- | - | ||||||
$ | (572 | ) | $ | (2,479 | ) | |||
Income (loss) from discontinued operations before gains
on sale of real estate, taxes, and fees
|
80 | (1,413 | ) | |||||
Gain on sale of discontinued operations
|
6,190 | 3,588 | ||||||
Income from discontinued operations
|
$ | 6,270 | $ | 2,175 | ||||
Income tax expense
|
(2,195 | ) | (761 | ) | ||||
Net income from discontinued operations
|
$ | 4,075 | $ | 1,414 |
|
•
|
general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);
|
|
•
|
risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments;
|
|
•
|
demand for apartments and commercial properties in the Company’s markets and the effect on occupancy and rental rates;
|
|
•
|
the Company’s ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties;
|
|
•
|
risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;
|
|
•
|
failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;
|
|
•
|
risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);
|
|
•
|
risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;
|
|
•
|
costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;
|
|
•
|
potential liability for uninsured losses and environmental contamination;
|
|
•
|
risks associated with our dependence on key personnel whose continued service is not guaranteed; and
|
|
•
|
the other risk factors identified in this Form 10-Q, including those described under the caption “Risk Factors.”
|
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.
|
March 31,
|
||||||||
2013
|
2012
|
|||||||
Continuing operations
|
57 | 57 | ||||||
Held for sale/subsequent sales
|
2 | 7 | ||||||
Total property portfolio
|
59 | 64 |
For the Three Months Ended
March 31,
|
||||||||
2013
|
2012
|
|||||||
Revenue
|
||||||||
Rental
|
$ | 1,178 | $ | 2,978 | ||||
Property operations
|
526 | 1,912 | ||||||
652 | 1,066 | |||||||
Expenses
|
||||||||
Other income
|
- | 2 | ||||||
Interest expense
|
(219 | ) | (1,758 | ) | ||||
General and administration
|
(208 | ) | (143 | ) | ||||
Depreciation and amortization
|
(145 | ) | (580 | ) | ||||
Provision on impairment of real estate assets
|
- | - | ||||||
$ | (572 | ) | $ | (2,479 | ) | |||
Income (loss) from discontinued operations before gains on sale of real estate, taxes, and fees
|
80 | (1,413 | ) | |||||
Gain on sale of discontinued operations
|
6,190 | 3,588 | ||||||
Income from discontinued operations
|
$ | 6,270 | $ | 2,175 | ||||
Income tax expense
|
(2,195 | ) | (761 | ) | ||||
Net income from discontinued operations
|
$ | 4,075 | $ | 1,414 |
|
•
|
fund normal recurring expenses;
|
|
•
|
meet debt service and principal repayment obligations including balloon payments on maturing debt;
|
|
•
|
fund capital expenditures, including tenant improvements and leasing costs;
|
|
•
|
fund development costs not covered under construction loans; and
|
|
•
|
fund possible property acquisitions.
|
|
•
|
property operations;
|
|
•
|
proceeds from land and income-producing property sales;
|
|
•
|
collection of mortgage notes receivable;
|
|
•
|
collection of receivables from related party companies;
|
|
•
|
refinancing of existing debt; and
|
|
•
|
additional borrowing, including mortgage notes payable and lines of credit.
|
March 31,
|
||||||||||||
2013
|
2012
|
Variance
|
||||||||||
Net cash used in operating activities
|
$ | (11,841 | ) | $ | (7,932 | ) | $ | (3,909 | ) | |||
Net cash provided by investing activities
|
$ | 25,542 | $ | 128 | $ | 25,414 | ||||||
Net cash used in financing activities
|
$ | (22,485 | ) | $ | (4,365 | ) | $ | (18,120 | ) |
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
Weighted
|
Effect of 1%
|
|||||||||||
Average
|
Increase In
|
|||||||||||
Balance
|
Interest Rate
|
Base Rates
|
||||||||||
Notes payable:
|
||||||||||||
Variable rate
|
$ | 133,821 | 4.56 | % | $ | 1,338 | ||||||
Total decrease in TCI’s annual net income
|
1,338 | |||||||||||
Per share
|
$ | 0.16 |
ITEM 4.
|
CONTROLS AND PROCEDURES
|
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Total Number of
|
Maximum Number of
|
|||||||||||||||
Shares Purchased
|
Shares that May
|
|||||||||||||||
Total Number of
|
Average Price
|
as Part of Publicly
|
Yet be Purchased
|
|||||||||||||
Period
|
Shares Purchased
|
Paid per share
|
Announced Program
|
Under the Program
|
||||||||||||
Balance at December 31, 2012
|
1,230,535 | 406,465 | ||||||||||||||
January 31, 2013
|
- | $ | - | 1,230,535 | 406,465 | |||||||||||
February 28, 2013
|
- | $ | - | 1,230,535 | 406,465 | |||||||||||
March 31, 2013
|
- | $ | - | 1,230,535 | 406,465 | |||||||||||
Total
|
- |
ITEM 6.
|
EXHIBITS
|
Exhibit
Number
|
Description
|
|
3.0
|
Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
|
|
3.1
|
Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).
|
|
3.2
|
Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
3.3
|
Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
|
|
3.4
|
Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).
|
|
3.5
|
Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
|
|
3.6
|
Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).
|
|
3.7
|
By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).
|
|
3.8
|
Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrant’s Current Report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof).
|
|
10.1
|
Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc., and Pillar Income Asset Management, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K for event occurring May 2, 2011).
|
|
31.1*
|
Certification of the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|
|
31.2*
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|
|
32.1*
|
Certification pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101 | Interactive data files pursuant to Rule 405 of Regulation S-T. |
*
|
Filed herewith.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||
Date: May 10, 2013
|
By:
|
/s/ Daniel J. Moos
|
Daniel J. Moos
|
||
President and Chief Executive Officer
(Principal Executive Officer)
|
||
Date: May 10, 2013
|
By:
|
/s/ Gene S. Bertcher
|
Gene S. Bertcher
|
||
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
Exhibit
Number
|
Description of Exhibits
|
|
31.1*
|
Certification by the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|
|
31.2*
|
Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
|
|
32.1*
|
Certification pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Filed herewith
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Transcontinental Realty Investors, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officers(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and
|
|
(d)
|
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: May 10, 2013
|
/s/ Daniel J. Moos
|
Daniel J. Moos
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
1.
|
I have reviewed this quarterly report on Form 10-Q of Transcontinental Realty Investors, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
4.
|
The registrant’s other certifying officers(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
(b)
|
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and
|
|
(d)
|
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
5.
|
The registrant’s other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
|
|
(a)
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
|
|
(b)
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: May 10, 2013
|
/s/ Gene S. Bertcher
|
Gene S. Bertcher
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
(i)
|
The Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
|
|
(ii)
|
The information contained in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2013, fairly presents in all material respects, the financial condition and results of operations of the Company, at and for the periods indicated.
|
TRANSCONTINENTAL REALTY INVESTORS, INC.
|
||
Date: May 10, 2013
|
By:
|
/s/ Daniel J. Moos
|
Daniel J. Moos
|
||
President and Chief Executive Officer
(Principal Executive Officer)
|
||
Date: May 10, 2013
|
By:
|
/s/ Gene S. Bertcher
|
Gene S. Bertcher
|
||
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
|
3 Months Ended |
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Mar. 31, 2013
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COMMITMENTS AND CONTINGENCIES AND LIQUIDITY | |
COMMITMENTS AND CONTINGENCIES AND LIQUIDITY | NOTE 9. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
Dynex Commercial, Inc. and Dynex Capital, Inc.
On February 13, 2013, the Court of Appeals, Fifth District of Texas at Dallas (the Fifth Court of Appeals) rendered an opinion involving Transcontinental Realty Investors, Inc. (the Issuer or TCI) in Case No. 05-04-01358-CV 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. and Dynex Capital, Inc. The case was on appeal from the 68th Judicial District Court of Dallas County, Texas, had previously been appealed to the Fifth Court of Appeals and further appealed to the Supreme Court of the State of Texas which had remanded the instant case back to the Fifth Court of Appeals to address certain issues. The case 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, $160,000,000 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 to a jury resulted in the jury awarding significant damages to Basic for lost opportunity, awarding damages in increased costs and lost opportunity damages to American Realty Trust, Inc. (ART) and damages of $960,646.28 in increased costs and $11,161,520 for lost opportunity damages in favor of TCI and its subsidiaries (a total of $12,122,166.28). The original Trial Court ignored the jurys findings and entered a Judgment Notwithstanding the Verdict (JNOV) in Dynexs favor; the Fifth Court of Appeals has now ruled that the JNOV was improper because there was sufficient evidence to support the jurys findings. As a result, the Fifth Court of Appeals ordered the Trial Court to enter a new judgment consistent with the jurys original findings.
The Fifth Court of Appeals also determined that TCI was entitled to damages for lost opportunities relating to tenant improvements and awarded TCI an additional $252,577. Issues relating to attorneys fees were also addressed with the Fifth Court of Appeals ordering the Trial Court to re-try the issue of attorneys fees to determine the amount of fees to which TCI would be entitled on a breach of commitment claim. In addition, as a result of the changes in amounts awarded and passage of time, the Fifth Court of Appeals also ordered the Trial Court to recalculate the correct amounts of pre and post-judgment interest owed to Appellants.
While the fifteen year old controversy is not yet fully resolved, the Fifth Court of Appeals opinion is favorable to TCI, but TCI expects continued challenges by Dynex to the Fifth Court of Appeals opinion and any ultimate award of damages by the Trial Court.
Petra CRE CDO 2007-1, Ltd..
On May 8, 2013, a Satisfaction of Consent Judgment was entered in Civil Action No. 2011-141, United States District Court, Eastern District of Louisiana, styled Petra CRE CDO 2007-1, Ltd. v. TCI Amoco Property, LLC and Transcontinental Realty Investors, Inc. (the Proceeding). TCI resolved such Proceeding by the issuance to the Plaintiff therein of a $5.0 million Promissory Note maturing March 5, 2015 secured by certain collateral. The recordation of the Satisfaction of Consent Judgment closed the Proceeding.
Liquidity. Management believes that TCI will generate excess cash from property operations in 2013; such excess, however, will not be sufficient to discharge all of TCIs obligations as they become due. Management intends to sell land and income-producing real estate, refinance real estate and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.
Partnership Buyouts. TCI is the limited partner in various partnerships related to the construction of residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buy out the non-affiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements.
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 Companys financial condition, results of operation or liquidity.
The Company is involved in and vigorously defending against, a number of deficiency claims with respect to assets that have been foreclosed by various lenders. Such claims are generally against a consolidated subsidiary as the borrower or the Company as a guarantor of indebtedness or performance. Some of these proceedings may ultimately result in an unfavorable determination for the Company and/or one of its consolidated subsidiaries. While we cannot predict the final result of such proceedings, Management believes that the maximum exposure to the Company and its consolidated subsidiaries, if any, will not exceed approximately $20 million in the aggregate and will occur, if at all, in future years. |
REAL ESTATE ACTIVITY
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Mar. 31, 2013
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REAL ESTATE ACTIVITY | NOTE 2. REAL ESTATE ACTIVITY
Below is a summary of the real estate owned as of March 31, 2013 (dollars in thousands):
The highlights of our significant real estate transactions for the three months ended March 31, 2013 are listed below:
On January 8, 2013, 14.52 acres of land known as Southwood located in Tallahassee, Florida was sold at a foreclosure auction to an independent third party for $0.5 million. This land parcel was previously sold, on December 31, 2012, to One Realco Corporation, a related party, for a sales price of $0.6 million. The Company did not recognize or record the sale in accordance with ASC 360-20 due to our continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyers inadequate initial investment and the Companys questionable recovery of investment cost. The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20. A sale to an independent third party, that met the requirements of ASC 360-20, took place on January 8, 2013, when the property was sold to a third party and sales proceeds were credited against the outstanding debt. There was no gain or loss on the land parcel sale.
On January 28, 2013, we sold a 314unit apartment complex known as Verandas at City View located in Fort Worth, Texas for a sales price of $25.3 million to an independent third party. The buyer assumed the existing debt of $18.2 million secured by the property. We recorded a gain of $6.2 million on the sale.
On March 14, 2013, 13.90 acres of land known as Sheffield located in Grand Prairie, Texas was sold to an independent third party for a sales price of $2.3 million. The proceeds from the sale were used to pay off the multi-tract collateral debt, secured by the property. We recorded a nominal loss on the sale of the property.
In December 2010, there were various commercial and land holdings sold to FRE Real Estate, Inc., a related party. During the first three months of 2011, many of these transactions were rescinded as of the original transaction date and were subsequently sold to related parties under the same ownership as FRE Real Estate, Inc. As of March 31, 2013, there is one commercial building, Thermalloy, that remains in FRE Real Estate, Inc. The Company did not recognize or record the sale in accordance with ASC 360-20 due to our continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyers inadequate initial investment and the Companys questionable recovery of investment cost. The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.
As of March 31, 2013, there remains one apartment complex, three commercial buildings (including the Thermalloy building) and 212 acres of land that we have sold to a related party and have deferred the recognition of the sale are treated as subject to sales contract on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis. The Company did not recognize or record the sale in accordance with ASC 360-20 due to our continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyers inadequate initial investment and the Companys questionable recovery of investment cost. The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20. The buyers received no compensation for the facilitation of the bankruptcy or debt restructuring process.
We continue to invest in the development of apartment projects. During the three months ended March 31, 2013, we have expended $0.1 million related to the construction or predevelopment of various apartment complexes.
We have two income-producing properties held for sale as of March 31, 2013, Laguna Vista, a 206-unit apartment complex located in Farmers Branch, Texas and 225 Baronne, a 422,037 square foot office building in New Orleans, Louisiana. |
Scheduled principal payments of notes payable (Tables)
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Scheduled principal payments of notes payable | Below is a summary of our notes and interest payable as of March 31, 2013 (dollars in thousands):
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EARNINGS PER SHARE
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Mar. 31, 2013
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EARNINGS PER SHARE | |
EARNINGS PER SHARE | NOTE 10. EARNINGS PER SHARE
Earnings per share (EPS) have been computed pursuant to the provisions of ASC Topic 260 Earnings Per Share. The computation of basic EPS is calculated by dividing income available to common shareholders from continuing operations, adjusted for preferred dividends, by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding. As of March 31, 2013, we have 5,000 shares of stock options outstanding, which will expire on January 1, 2015 if not exercised. These options are considered in the computation of diluted earnings per share if the effect of applying the treasury stock method is dilutive. We have 30,000 shares of Series C Cumulative Convertible Preferred Stock issued and outstanding. The stock has a liquidation preference of $100.00 per share. After September 30, 2006, the stock may be converted into common stock at 90% of the daily average closing price of the common stock for the prior five trading days. The effects of the Series C Cumulative Convertible Preferred Stock are included in the dilutive earnings per share if applying the if-converted method is dilutive. As of March 31, 2013, the preferred stock and the stock options were anti-dilutive and thus not included in the EPS calculation. |
Summary of discontinued operations (Details) (USD $)
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Mar. 31, 2013
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Mar. 31, 2012
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Rental | $ 1,178 | $ 2,978 |
Property operations. | 526 | 1,912 |
Total revenue. | 652 | 1,066 |
Other income, | 0 | 2 |
Interest expense, | (219) | (1,758) |
General and administration, | (208) | (143) |
Depreciation and amortization., | (145) | (580) |
Provision on impairment of real estate assets details | 0 | 0 |
Total expenses. | (572) | (2,479) |
Income (loss) from discontinued operations before gains on sale of real estate, taxes, and fees | 80 | (1,413) |
Gain on sale of discontinued operations., | 6,190 | 3,588 |
Income from discontinued operations | 6,270 | 2,175 |
Income tax expense, | (2,195) | (761) |
Net income from discontinued operations | $ 4,075 | $ 1,414 |
DISCONTINUED OPERATIONS (Tables)
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Mar. 31, 2013
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Summary of revenue and expense information for the properties sold and held for sale | The following table summarizes revenue and expense information for the properties sold and held for sale (dollars in thousands):
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OPERATING SEGMENTS (Tables)
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Segments operating income including segment assets and expenditures | Presented below is our reportable segments operating income for the three months ended March 31, 2013 and 2012, including segment assets and expenditures (dollars in thousands):
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Segment information to the corresponding amounts in Statements of Operations | The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:
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Segment information to amounts in the Balance Sheets | The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:
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Mortagage on real estate (Details) (USD $)
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Breakwater Bay apartments
USD ($)
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Northside on Travis apartments
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Capitol Hill apartments
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Toulon
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Mansions of Mansfield
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Preserve at Pecan Creek
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Parc at Clarksville
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Balance of mortagage at Dec. 31, 2012 | $ 0 | ||||||
No of units in apartments | 176 | 200 | 156 | 240 | 208 | 192 | 168 |
Amortization schedule in years. | 40 | 40 | 40 | 40 | 40 | 40 | 40 |
Balance of mortagage. at Mar. 31, 2013 | $ 0 | ||||||
Accrued interest (Percentage) at Mar. 31, 2013 | 2.50% | 2.50% | 2.50% | 5.37% | 2.50% | 2.50% | 2.50% |
New mortagage (Millions) at Mar. 31, 2013 | 9.8 | 13.9 | 9.4 | 17 | 16.3 | 15.1 | 13.4 |
paid off amt on existing mortagage (Millions) at Mar. 31, 2013 | 9.1 | 13.5 | 8.8 | 15.8 | 14.6 | 13.0 | |
closing costs (Millions) at Mar. 31, 2013 | 0.3 | 1.3 | 0.3 | 1.2 | 1.1 | 0.7 |
Stock options and preferred stock (Details) (USD $)
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Mar. 31, 2013
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Shares of stock options outstanding | 5,000 |
Shares of Series C Cumulative Convertible Preferred Stock issued and outstanding | 30,000 |
Liquidation preference of stock per share | $ 100.00 |
Stock conversion percentage into common stock at of the daily average closing price of the common stock for the prior five trading days | 90.00% |
RELATED PARTY TRANSACTIONS (Tables)
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Mar. 31, 2013
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RELATED PARTY TRANSACTIONS (Tables) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reconciliation of accounts receivable and accounts payable to related parties | The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of March 31, 2013 (dollars in thousands):
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CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (Unaudited) (USD $)
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Total Equity
USD ($)
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Comprehensive Loss
USD ($)
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Preferred Stock
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Common Stock Shares
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Amount
USD ($)
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Treasury Stock
USD ($)
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Paid-in Capital
USD ($)
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Retained Earnings
USD ($)
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Accumulated Other Comprehensive Income (Loss)
USD ($)
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Non-Controlling Interest
USD ($)
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Balance at Dec. 31, 2012 | 133,129 | (159,156) | 1 | 8,413,669 | 84 | (2) | 272,774 | (156,559) | 0 | 16,831 |
Series C preferred stock dividends (7.0% per year) | $ (52) | $ 0 | $ 0 | $ 0 | $ (52) | $ 0 | $ 0 | $ 0 | ||
Series D preferred stock dividends (8.5% per year) | (222) | 0 | 0 | 0 | (222) | 0 | 0 | 0 | ||
Net income (loss) | (2,998) | (2,998) | 0 | 0 | (3,109) | 0 | 111 | |||
Purchase of controlling interest | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||
Sale of controlling interest | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||
Distributions to non-controlling interests | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | $ 0 | |||
Balance, at Mar. 31, 2013 | 129,857 | (162,154) | 1 | 8,413,669 | 84 | (2) | 272,500 | (159,668) | 0 | 16,942 |
NOTES AND INTEREST RECEIVABLE
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Mar. 31, 2013
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NOTES AND INTEREST RECEIVABLE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES AND INTEREST RECEIVABLE | NOTE 3. NOTES AND INTEREST RECEIVABLE
A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity.
Our mortgage notes receivable consist of first, wraparound and junior mortgage loans (dollars in thousands):
The company has various notes receivable from Unified Housing Foundation, Inc. (UHF). UHF is determined to be a related party to the company due to our significant investment in the performance of the collateral secured under the notes receivable and its consulting agreement with TCI.
Payments are due from surplus cash flow of operations, sale or refinance of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. The allowance on the UHF notes was a purchase allowance that was netted against the notes when acquired. These notes are cross-collateralized to the extent that any surplus cash available from the sale or refinancing of the underlying properties.
As of January 1, 2013, the Company agreed to extend the maturity on the surplus cash flow notes receivable from UHF for an additional term of five years in exchange for the early termination of the preferred interest rate. The original notes gave a five-year period of preferred interest rate at 5.25%, before returning to the original note rate of 12.0%. |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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3 Months Ended | |||||||||||||||
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Mar. 31, 2013
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ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES {2} | ||||||||||||||||
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
As used herein, the terms TCI, the Company, we, our or us refer to Transcontinental Realty Investors, Inc., a Nevada corporation. TCI is the successor to a California business trust which was organized on September 6, 1983, and commenced operations on January 31, 1984. Effective March 31, 2003, TCIs financial results were consolidated in American Realty Investors, Inc. (ARL) Form 10-K and related consolidated financial statements.
The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (NYSE) under the symbol (TCI). Subsidiaries of ARL own approximately 83.8% of the Companys common stock. TCI is a C corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with ARL, whose common stock trades on the New York Stock Exchange under the symbol (ARL).
TCI owns approximately 81.1% of the common stock of Income Opportunity Realty Investors, Inc. (IOT). Effective July 17, 2009, IOTs financial results were consolidated with those of ARL and TCI and their subsidiaries. Shares of IOT are traded on the New York Stock Exchange Euronext (NYSE MKT) under the symbol (IOT).
TCI invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar Income Asset Management, Inc. (Pillar) is the Companys external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing the affairs of TCI, and for setting the policies which guide it, the day-to-day operations of TCI are performed by Pillar, as the contractual advisor, under the supervision of the Board. Pillars duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCIs business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to ARL and IOT. We have no employees.
Regis Realty Prime, LLC (Regis) manages our commercial properties and provides brokerage services for our real estate portfolio. TCI engages third-party companies to lease and manage its apartment properties. TCI also has 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. We have no employees.
Properties
We own or had interests in a total property portfolio of 59 income-producing properties as of March 31, 2013. The properties consisted of:
We join with various third-party development companies to construct residential apartment communities. We are in the predevelopment process on several residential apartment communities but have not yet begun construction. At March 31, 2013, we had no apartment projects in development. The third-party developer typically holds a general partner, as well as a majority limited partner interest in a limited partnership formed for the purpose of building a single property while we generally take a minority limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developers partnership interests in exchange for any remaining unpaid developer fees.
Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
The year-end Consolidated Balance Sheet at December 31, 2012 was derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements. For further information, refer to the financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2012. Certain 2012 financial statement amounts have been reclassified to conform to the 2013 presentation, including adjustments for discontinued operations.
Principles of consolidation
The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810 Consolidation, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (EITF) Issue 04-5, Investors Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (EITF 04-5). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entitys financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.
For entities in which 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 is included in consolidated net income. Our investment in ARL is accounted for under the equity method. Our investment in Garden Centura, L.P. was accounted for under the equity method until December 28, 2011, when it was sold to a third party.
Real estate, depreciation, and impairment
Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements 10-40 years; furniture, fixtures and equipment 5-10 years). The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, Property, Plant and Equipment. Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the assets net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.
Real estate held for sale
We periodically classify real estate assets as held for sale. An asset is classified as held for sale after the approval of our board of directors, after an active program to sell the asset has commenced and if the sale is probable. One of the deciding factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is probable within the year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified as an operating asset and depreciation expense is reinstated. The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. This classification of operating results as discontinued operations applies retroactively for all periods presented. Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.
Cost capitalization
Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. We capitalize interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average interest rate of non-project specific debt. We capitalize interest, real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready for its intended use, but no later than one year from the cessation of major construction activity.
We capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.
Fair value measurement
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 entitys 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:
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related parties
We apply ASC Topic 805, Business Combinations, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
Newly issued accounting pronouncements
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated statements, including that which we have not yet adopted. We do not believe that any such guidance will have a material effect on our financial position or results of operations. |
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