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, 20162017

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)

 

Nevada94-6565852

(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 ClassName of each exchange on which registered
Common Stock, $0.01 par valueNew 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(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)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 June 30, 2016December 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 June 30, 2016December 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 31, 2017,30, 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.Business3
Item 1A.Risk Factors89
Item 1B.Unresolved Staff Comments12
Item 2.Properties13
Item 2.Properties14
Item 3.Legal Proceedings16
Item 4.Mine Safety Disclosures16
   
 PART II 
   
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities17
Item 6.Selected Financial Data18
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operation19
Item 7A.Quantitative and Qualitative Disclosures About Market Risk28
Item 8.Consolidated Financial Statements and Supplementary Data30
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure62
Item 9A.Controls and Procedures62
Item 9B.Other Information62
   
 PART III 
   
Item 10.Directors, Executive Officers and Corporate Governance63
Item 11.Executive Compensation6869
Item 12.Security Ownership of Certain Beneficial Owners and Management69
Item 13.Certain Relationships and Related Transactions, and Director Independence70
Item 14.Principal Accounting Fees and Services72
   
 PART IV 
   
Item 15.Exhibits, Financial Statement Schedules7473
Signatures7675

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”.

 

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”)“ARL”. Subsidiaries and affiliates of ARL own approximately 77.6%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”)“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. (“IOT”IOR”), and in doing so, increased its ownership from approximately 25% to over 80% of the shares of common stock of IOTIOR outstanding. Upon acquisition of the additional shares in 2009, IOT’sIOR’s results of operations began consolidatingto be consolidated with those of the Company for tax and financial reporting purposes. As of December 31, 2016,2017, TCI owned 81.1%81.25% of the outstanding IOTIOR common shares. Shares of IOTIOR common stock are listed and traded on the NYSE MKTAmerican under the symbol (“IOT”)“IOR”.

 

At the time of the acquisition, the historical accounting value of IOT’sIOR’s assets was $112 million and liabilities were $43 million. In that the shares of IOTIOR acquired by TCI were from a related party, the values recorded by TCI are IOT’sIOR’s historical accounting values at the date of transfer. The Company’s fair valuation of IOT’sIOR’s assets and liabilities at the acquisition date approximated IOT’sIOR’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 IOTIOR held on its books as of the date of sale, to an independent third party.

 

TCI’s Board of Directors isare 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 IOT.IOR. The Chairman of the Board of Directors of TCI also serves as the Chairman of the Board of Directors of ARL and IOT.IOR. The officers of TCI also serve as officers of ARL, IOTIOR 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. “RAMI”), 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 IOT.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”)“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, 2016,2017, 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

 

●50Fifty-one residential apartment communities comprising 8,2268,427 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, 2016:2017:

 

 Apartments Commercial  Apartments Commercial 
Location No. Units No. SF  No. Units No. SF 
Alabama  1   168   —   —   1   168         
Arkansas  5   938   —   —   5   938         
Colorado  2   260   —   —   2   260         
Florida  3   198   1   6,722   3   198   1   6,722 
Georgia  1   222   —   —   1   222         
Louisiana  2   384   —   —   2   384         
Mississippi  9   924   —   —   9   924         
North Carolina  1   201         
Tennessee  4   708   —   —   4   708         
Texas-Greater Dallas-Ft Worth  12   2,061   4   1,473,457   11   1,962   4   1,473,634 
Texas-Greater Houston  2   416   1   94,792   2   416   1   95,329 
Texas-San Antonio  2   468   —   —   2   468         
Texas-Other  7   1,479   —   —   8   1.578         
Wisconsin  —   —   1   122,205           1   122,205 
Total  50   8,226   7   1,697,176   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 certainsome of our properties.

 

We join with third-party development companies to construct residential apartment communities .communities. At December 31, 2016,2017, we had threefourteen 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, 2016,2017, our apartment projects in development included (dollars in thousands):

 

       Total 
       Projected 
Property Location No. of Units  Costs to Date (1) Total
Projected
Costs (1)		  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  $1,744  $78,000  Farmers Branch, TX  494  $5,079  $78,550 
Overlook at Allensville Square II Sevierville, TN  144   2,114   18,400 
Terra Lago Rowlett, TX  447   21,429   66,360 
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  1,085  $25,287  $162,760   3,228  $89,134  $495,837 

 

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

(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, 2016,2017, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands):

 

Location Date(s)
Acquired		  Acres  Cost  Primary
Intended Use
            
McKinney, TX  1997-2008   10  $792  Mixed use
Dallas, TX  1996-2013   95   15,765  Mixed use
Kaufman County, TX  2008   25   2,548  Multi-family residential
Farmers Branch, TX  2008   294   43,656  Mixed use
Kaufman County, TX  2011   2,852   43,268  Mixed use
Various  1990-2008   243   12,021  Various
Total Land Holdings      3,519   118,050   

  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   

Significant Real Estate Acquisitions/Dispositions and Financings

 

A summary of some of the significant transactions for the year ended December 31, 2016,2017, are discussed below:

 

Purchases

 

During the year ended December 31, 2016,2017, the Company acquired fourone income-producing apartment propertiesproperty from a third partiesparty in the statesstate of Arkansas, Florida, Georgia and Mississippi,North Carolina, increasing the total number of units by 723,201, for a combined purchase price of $79.7$36.7 million. In addition, we acquired fourone land parcelsparcel for future development for a total purchase price of $12.5$5.4 million, adding 36.318.5 acres to the development portfolio.

 

Sales

  

For the year ended December 31, 2016, TCI 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. In addition, 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.

As of December 31, 2016,2017, the Company has approximately 9166.7 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, 2016,2017, we have expended $20.3$69.8 million related to the construction or predevelopment of various apartment complexes and capitalized $0.9$2.4 million of interest costs.

5


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”.

6


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 IOT.IOR. Both ARL and IOTIOR have business objectives similar to those of TCI. TCI’s officers and directors owe fiduciary duties to both IOTIOR and ARL as well as to TCI under applicable law. In determining whether a particular investment opportunity will be allocated to TCI, IOT,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.

7


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

 

●inability to retain existing tenants and attract new tenants;
inability to retain existing tenants and attract new tenants;

 

●oversupply of or reduced demand for space and changes in market rental rates;
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;
defaults by tenants or failure to pay rent on a timely basis;

 

●the need to periodically renovate and repair marketable space;
the need to periodically renovate and repair marketable space;

 

●physical damage to properties;
physical damage to properties;

 

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

 

●potential risk of functional obsolescence of properties over time.
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.


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.

 

8

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 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;
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;
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 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 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
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.
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;
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;
acquired properties may fail to perform as expected;

 

●the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;
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
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 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, 20162017 of approximately $858.1$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.


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;
general economic conditions affecting these markets;

 

●our own financial structure and performance;
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 in general; and

 

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

9

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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


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

 

●construction costs may materially exceed original estimates;
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;
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 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 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.

10

 

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;
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;
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;
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;
changes in real estate and zoning laws;

 

●increases in real estate taxes and insurance costs;
increases in real estate taxes and insurance costs;

 

●federal or local economic or rent control;
federal or local economic or rent control;

 

●acts of terrorism; and
acts of terrorism; and

 

●hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.
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);
downturns in the national, regional and local economic conditions (particularly increases in unemployment);

 

●competition from other office and commercial buildings;
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;
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;
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;
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;
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;
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;
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
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.

decreases in the underlying value of our real estate.

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

 

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

 

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

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

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

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

 

11

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;

 

●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.
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.


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.

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

 

None.

12

LandLocationAcres 

2427 Valley View LnFarmers Branch, TX0.31ITEM 2.PROPERTIES

On December 31, 2016, our portfolio consisted of 58 income-producing properties consisting of 50 apartment complexes totaling 8,226 units, seven commercial properties consisting of 5 office buildings and 2 retail centers; and a golf course. In addition, we own or control approximately 3,519 acres of improved and unimproved land for future development or sale. The average annual rental and other property revenue dollar per square foot is $11.19 for the Company’s residential apartment portfolio and $16.91 for the commercial portfolio. The table below shows information relating to those properties in which we own or have an ownership interest:

Residential Apartments Location Units  Occupancy 
Anderson Estates Oxford, MS  48   87.5%
Blue Lake Villas I Waxahachie, TX  186   89.2%
Blue Lake Villas II Waxahachie, TX  70   90.0%
Breakwater Bay Beaumont, TX  176   90.9%
Bridgewood Ranch Kaufman, TX  106   98.1%
Capitol Hill Little Rock, AR  156   93.3%
Centennial Village Oak Ridge TN  252   95.6%
Crossing at Opelika Opelika AL  168   98.8%
Curtis Moore Estates Greenwood, MS  104   90.4%
Dakota Arms Lubbock, TX  208   89.4%
David Jordan Phase II Greenwood, MS  32   90.6%
David Jordan Phase III Greenwood, MS  40   87.5%
Desoto Ranch DeSoto, TX  248   89.1%
Falcon Lakes Arlington, TX  248   96.0%
Heather Creek Mesquite, TX  200   93.5%
Lake Forest Houston, TX  240   89.2%
Legacy at Pleasant Grove Texarkana, TX  208   88.9%
Lodge at Pecan Creek Denton, TX  192   92.7%
Mansions of Mansfield Mansfield, TX  208   95.2%
Metropolitan Little Rock, AR  260   81.2%
Mission Oaks San Antonio, TX  228   96.5%
Monticello Estate Monticello, AR  32   87.5%
Northside on Travis Sherman, TX  200   96.0%
Oak Hollow Seguin TX  160   91.3%
Oceanaire Biloxi, MS  196   91.3%
Overlook @ Allensville Sevierville TN  144   97.9%
Parc at Clarksville Clarksville, TN  168   92.3%
Parc at Denham Springs Denham Springs, LA  224   71.8%
Parc at Maumelle Little Rock, AR  240   92.5%
Parc at Metro Center Nashville, TN  144   97.9%
Parc at Rogers Rogers, AR  250   98.0%
Residences at Holland Lake Weatherford TX  208   95.2%
Preserve at Pecan Creek Denton, TX  192   93.8%
Preserve at Prairie Point Lubbock, TX  184   95.1%
Riverwalk Phase I Greenville, MS  32   87.5%
Riverwalk Phase II Greenville, MS  72   86.1%
Sawgrass Creek New Port Richey, FL  45   95.6%
Sonoma Court Rockwall, TX  124   91.1%
Sugar Mill Baton Rouge, LA  160   95.0%
Tattersall Village Hinesville, GA  222   95.0%
Toulon Gautier, MS  240   97.9%
Tradewinds Midland TX  214   90.2%
Villager Apts Fort Walton FL  33   97.0%
Villas at Park West I Pueblo, CO  148   93.9%
Villas at Park West II Pueblo, CO  112   92.0%
Vista Ridge Tupelo MS  160   91.3%
Vistas of Vance Jackson San Antonio, TX  240   90.4%
Waterford at Summer Park Rosenberg TX  196   91.3%
Westwood Apts Mary Ester FL  120   98.3%
Windsong Fort Worth, TX  188   96.8%
           
  Total Apartment Units  8,226   
 


13  

 

Office Buildings Location SqFt  Occupancy 
600 Las Colinas Las Colinas, TX  512,033   87.1%
770 South Post Oak Houston, TX  94,792   97.2%
Browning Place (Park West I) Farmers Branch, TX  625,378   66.6%
Senlac (VHP) Farmers Branch, TX  2,812   100.0%
Stanford Center Dallas, TX  333,234   97.8%
  Total Office Buildings  1,568,249     

Retail Centers Location SqFt  Occupancy 
Bridgeview Plaza LaCrosse, WI  122,205   90.9%
Fruitland Park Fruitland Park, FL  6,722   100.0%
  Total Retail Centers  128,927     
           
  Total Commercial  1,697,176     

AudubonAdams County, MS48.20
Bonneau LandFarmers Branch, TX8.39
Cooks LaneFort Worth, TX23.24
DedeauxGulfport, MS10.00
Denham SpringsDenham Springs, LA4.38
Dominion MercerFarmers Branch, TX5.29
GautierGautier, MS3.46
Hollywood Casino Tract IIFarmers Branch, TX11.36
Lacy LonghornFarmers Branch, TX5.08
Lake Shore VillasHumble, TX19.51
LubbockLubbock, TX2.86
Manhattan LandFarmers Branch, TX8.79
McKinney 36Collin County, TX9.58
MinivestDallas, TX0.23
NashvilleNashville, TN6.25
Nicholson CroslinDallas, TX0.80
Nicholson MendozaDallas, TX0.35
Ocean EstatesGulfport, MS12.00
SenlacFarmers Branch, TX8.49
Texas PlazaIrving, TX10.33
Travis RanchKaufman County, TX8.66
Travis Ranch RetailKaufman County, TX8.13
Union Pacific RailroadDallas, TX0.04
Valley View 34 (Mercer Crossing)Farmers Branch, TX2.19
WillowickPensacola, FL39.78
Windmills FarmsKaufman County, TX2,831.87
Total Land/Development3,089.57
Golf CourseLocationAcres  
Mahogany Run Golf CourseSt. Thomas, US Virgin Islands96.09     

Lease ExpirationsLand Subject to Sales ContractLocationAcresDominion TractDallas, TX10.59Hollywood Casino Tract IFarmers Branch, TX10.96LaDueFarmers Branch, TX8.01Three HickoryFarmers Branch, TX6.60TravelersFarmers Branch, TX193.17Walker/CummingsDallas County, TX82.59WhortonBentonville, AR64.44Total Land Subject to Sales Contract376.36Total Land3,465.93


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. 


PART II

 

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


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 


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:

 

Year of Lease
Expiration		 Rentable Square
Feet
Subject to
Expiring Leases		  Current Annualized (1)
Contractual Rent Under
Expiring Leases		  Current
Annualized(1)
Contractual
Rent Under
Expiring
Leases (P.S.F.)		  Percentage of
Total
Square Feet		  Percentage
of Gross
Rentals		 
           
2017  88,333   1,659,694  $18.79   4.4%  6.2%
2018  164,732   3,514,309   21.33   8.2%  13.0%
2019  299,597   5,364,350   17.91   14.9%  19.9%
2020  109,502   2,268,391   20.72   5.5%  8.4%
2021  120,934   2,447,251   20.24   6.0%  9.1%
2022  206,039   4,419,876   21.45   10.3%  16.4%
2023  172,346   2,344,412   13.60   8.6%  8.7%
2024  68,738   1,211,100   17.62   3.4%  4.5%
2025  113,829   2,604,020   22.88   5.7%  9.7%
Thereafter  66,425   1,110,013   16.71   3.3%  4.1%
Total  1,410,475  $26,943,416       70.3%  100%

(1)Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2016, multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.
●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);

 

14  

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

 

The table below shows information related
●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 land parcels we own asnational and local economies, increases in interest rates, and volatility in the securities markets;

●costs of December 31, 2016:

LandLocationAcrescompliance with the Americans with Disabilities Act and other similar laws and regulations;
2427 Valley View LnFarmers Branch, TX0.31

●potential liability for uninsured losses and environmental contamination;
AudubonAdams County, MS48.20

●risks associated with our dependence on key personnel whose continued service is not guaranteed; and
Bonneau LandFarmers Branch, TX8.39
Cooks LaneFort Worth, TX23.24
DedeauxGulfport, MS10.00
Denham SpringsDenham Springs, LA4.38
Dominion MercerFarmers Branch, TX5.29
GautierGautier, MS3.46
Hollywood Casino Tract IIFarmers Branch, TX13.85
Lacy LonghornFarmers Branch, TX5.08
Lake Shore VillasHumble, TX19.51
LubbockLubbock, TX2.86
Luna VenturesFarmers Branch, TX26.71
McKinney 36Collin County, TX9.77
MinivestDallas, TX0.23
NashvilleNashville, TN6.25
Nicholson CroslinDallas, TX0.80
Nicholson MendozaDallas, TX0.35
Ocean EstatesGulfport, MS12.00
SenlacFarmers Branch, TX8.49
Texas PlazaIrving, TX10.33
Travis RanchKaufman County, TX16.80
Travis Ranch RetailKaufman County, TX8.13
Union Pacific RailroadDallas, TX0.04
Valley View 34 (Mercer Crossing)Farmers Branch, TX2.19
WillowickPensacola, FL39.78
Windmills FarmKaufman County, TX2,852.07
Total Land/Development3,138.51

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

 

Land Subject to Sales ContractLocationAcres
Dominion TractDallas, TX10.59
Hollywood Casino Tract IFarmers Branch, TX15.52
LaDueFarmers Branch, TX8.01
Three HickoryFarmers Branch, TX6.60
TravelersFarmers Branch, TX193.17
Walker/CummingsDallas County, TX82.59
WhortonBentonville, AR64.44
Total Land Subject to Sales Contract380.92
Total Land3,519.43

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.

15  

 

ITEM 3.LEGAL PROCEEDINGS

Liquidity.     Management believes that TCI will generate excess cash from property operations in 2017; such excess, however, will not be sufficient to discharge all of TCI’s obligations as they become due. Management intends to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.

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.


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. 

 

Partnership Buyouts.    TCI is the limited partner in various partnerships related 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 nonaffiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements.

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 amount 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.

Guarantees. The Company is the primary guarantor on a $60.4 million mezzanine loan between UHF and a lender. In addition, ARI and an officer of the Company are limited recourse guarantors of the loan. As of December 31, 2016, UHF was in compliance with the covenants to the loan agreement.

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 under the symbol “TCI”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE for the quarters ended:

  2016  2015 
  High  Low  High  Low 
First Quarter $11.62  $8.35  $12.12  $9.50 
Second Quarter $12.84  $8.38  $12.60  $9.50 
Third Quarter $11.90  $9.10  $14.75  $9.85 
Fourth Quarter $12.66  $9.41  $13.47  $8.05 

On March 10, 2017, the closing price of TCI’s common stock as reported on the NYSE was $19.95 per share, and was held by approximately 3,555 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 2016, 2015 or 2014. 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 results 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, 2016.

17  

ITEM 6.SELECTED FINANCIAL DATA

  For the Years Ended December 31, 
  2016  2015  2014  2013  2012 
  (dollars in thousands, except share and per share amounts) 
EARNINGS DATA                    
Total operating revenues $118,471  $102,220  $75,858  $77,351  $78,378 
Total operating expenses  100,824   92,919   75,087   82,722   69,157 
Operating income (loss)  17,647   9,301   771   (5,371)  9,221 
Other expenses  (36,628)  (36,095)  (17,613)  (36,626)  (20,661)
Loss before gain on sales, non-controlling interest, and taxes  (18,981)  (26,794)  (16,842)  (41,997)  (11,440)
Gain (loss) on land sales  3,121   18,911   561   (1,073)  6,935 
Gain on sale of income-producing properties  16,207   —   —   —   — 
Income tax benefit (expense)  (24)  (517)  20,390   40,949   (1,260)
Net income (loss) from continuing operations  323   (8,400)  4,109   (2,121)  (5,765)
Net income (loss) from discontinued operations  (1)  896   37,868   61,630   (2,339)
Net income (loss)  322   (7,504)  41,977   59,509   (8,104)
Net income attributable to non-controlling interest  (285)  (132)  (399)  (979)  (220)
Net income (loss) attributable to Transcontinental Realty Investors, Inc.  37   (7,636)  41,578   58,530   (8,324)
Preferred dividend requirement  (900)  (900)  (1,005)  (1,110)  (1,112)
Net income (loss) applicable to common shares $(863) $(8,536) $40,573  $57,420  $(9,436)
                     
PER SHARE DATA                    
Earnings per share - basic                    
Income (loss) from continuing operations $(0.10) $(1.08) $0.32  $(0.50) $(0.84)
Income (loss) from discontinued operations  —   0.10   4.42   7.33   (0.28)
Net income (loss) applicable to common shares $(0.10) $(0.98) $4.74  $6.83  $(1.12)
Weighted average common share used in computing earnings per share  8,717,767   8,717,767   8,559,370   8,413,469   8,413,469 
                     
Earnings per share - diluted                    
Income (loss) from continuing operations $(0.10) $(1.08) $0.32  $(0.50) $(0.84)
Income (loss) from discontinued operations  —  0.10   4.42   7.33   (0.28)
Net income (loss) applicable to common shares $(0.10) $(0.98) $4.74  $6.83  $(1.12)
Weighted average common share used in computing diluted earnings per share  8,717,767   8,717,767   8,559,370   8,413,469   8,413,469 
                     
BALANCE SHEET DATA                    
Real estate, net $891,173  $844,019  $689,121  $695,802  $896,950 
Notes and interest receivable, net  79,308   69,551   83,457   67,907   59,098 
Total assets  1,185,914   1,110,204   930,405   897,671   1,045,344 
Notes and interest payables  841,516   779,434   608,917   602,845   808,043 
Stockholders’ equity  224,477   225,055   233,448   191,570   133,129 
Book value per share  25.75   25.82   27.27   22.77   15.82 

18  

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 2016 we acquired $92.2 million and sold $51.0 million of land and income-producing properties. As of December 31, 2016, we owned 8,226 units in 50 residential apartment communities, 7 commercial properties comprising approximately 1.7 million rentable square feet, and a golf course. In addition, we own 3,519 acres of land held for development. The Company currently owns income-producing properties and land in ten 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 certain of its wholly-owned properties. When the Company sells assets, it may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. The Company generates operating revenues primarily by leasing apartment units to residents 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 IOT. 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. 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, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

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

 

For entities in which 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 50fifty-one multifamily residential properties at December 31, 20162017 and 48fifty at December 2015,31, 2016, located throughout the United States ranging from 32 units to 260 units.  Assets totaling approximately $442$484 million and approximately $457$442 million at December 31, 20162017 and 2015,2016, 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, 20162017 or 2015.2016.


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.”

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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.


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.

22

 

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, 2015, and 20142015 as included in Item 8. “Financial“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.


At December 31, 2017, 2016 2015 and 2014,2015, we owned or had interests in a portfolio of 58, 57fifty-nine, fifty-eight and 45fifty-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, 20162017 for the year presented. The table below shows the number of income-producing properties held by year:

 

  2016 2015 2014
       
Continued operations 58 57 44
Sales subsequent to year end — — 1
Total property portfolio 58 57 45
  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.


23The 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 lossincome applicable to common shares of $8.5 million or ($0.98) per diluted earnings per share for the yearsame period ended December 31, 2015. The current year 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 includesincluded 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 as 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 approximately $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$61.9 million for the year ended December 31, 2016. This represents an increase of $9.6 million as 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 as compared to prior year depreciation of $21.3 million.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 notes receivable, investment in real estate partnerships and real estate assets for the year ended December 31, 2016 as 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 prior year net income fee of $0.2 million.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 prior year advisory fees of $8.4 million.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.


Other income (expense)

 

Interes tInterest 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.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.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 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.

 

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Comparison of the year ended December 31, 2015 to the year ended December 31, 2014:

For the year ended December 31, 2015, we reported net loss applicable to common shares of $8.5 million or ($0.98) per diluted earnings per share compared to a net income applicable to common shares of $40.6 million or $4.74 per diluted earnings per share for the same period ended 2014. The net loss applicable to common shares of $8.5 million for the year ended December 31, 2015 included gain on land sales of $18.9 million and net income from discontinued operations of $0.9 million compared to the prior year net income applicable to common shares of $40.6 million which included gain on land sales of $0.6 million and net income from discontinued operations of $37.9 million.

Revenues

Rental and other property revenues were $102.2 million for the year ended December 31, 2015. This represents an increase of $26.3 million compared to the prior year revenues of $75.9 million. This increase in revenues is mainly due to the addition of several properties to the apartment portfolio and the commercial portfolio. The change by segment is an increase in the apartment portfolio of $16.1 million and an increase in the commercial portfolio of $10.2 million. Our apartment portfolio continued to excel with occupancies averaging over 94% and increasing rental rates. The increase in the commercial segment is due to an increase in the occupancy rate of the commercial complexes. In 2015, the average occupancy rate was over 86%. The Company has been successful in attracting high-quality tenants and expects to continue to see the benefits of those new leases in the future.

Expenses

Property operating expenses were $52.3 million for the year ended December 31, 2015. This represents an increase of $12.9 million compared to the prior year operating expenses of $39.4 million. The change, by segment, is an increase in the apartment portfolio of $8.3 million and an increase in the commercial portfolio of $4.6 million. Within the apartment portfolio there was an increase of $5.9 million in the acquired properties portfolio and an increase of $2.4 million in the same property portfolio. Within the commercial portfolio there was an increase of $3.6 million in the acquired properties portfolio and an increase of $1.0 million in the same store properties. The increase in the apartment portfolio was due to the acquisition of new properties throughout the year. The increase in the commercial portfolio was due to an acquisition of a property within the year and an increase in real estate taxes.

Depreciation and amortization expenses were $21.3 million for the year ended December 31, 2015. This represents an increase of $3.9 million compared to depreciation of $17.4 million for the year ended December 31, 2014. Within the apartment and commercial portfolios, the majority of this change is due to the acquisition of new properties and an increase in tenant improvements and repairs projects.

General and administrative expenses were $5.5 million for the year ended December 31, 2015. This represents a decrease of $1.7 million compared to the prior year general and administrative expenses of $7.2 million. This change is mainly due to a decrease in the other portfolio of $1.6 million resulting from a decrease in franchise taxes.

The provision for impairment of real estate assets was $5.3 million for the year ended December 31, 2015. There was no provision for impairment expense in 2014. During 2015, the Company recorded an impairment of $5.3 million for the golf course and related assets located in the U.S. Virgin Islands. This impairment was due to the decision to sell the development parcels in the U.S. Virgin Islands which resulted in a decrease in the estimated fair value of the remaining assets.

Net income fee was $0.2 million for the year ended December 31, 2015. This represents a decrease of $3.5 million compared to net income fee of $3.7 million for the year ended December 31, 2014. The net income fee paid to Pillar is calculated at 7.5% of net income.

Advisory fees were $8.4 million for the year ended December 31, 2015. This represents an increase of $1.0 million compared to the advisory fees of $7.4 million for the year ended December 31, 2014. 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 $10.7 million for the year ending December 31, 2015. This represents a decrease of $1.5 million compared to interest income of $12.2 million for the year ended December 31, 2014. This decrease was due to the recognition of uncollectable interest on a note receivable in the prior year.

Mortgage and loan interest expense was $46.5 million for the year ended December 31, 2015. This represents an increase of $12.8 million compared to the prior year expense of $33.7 million. The change by segment is an increase in the other portfolio of $7.3 million, an apartment portfolio of $4.6 million and an increase in the commercial portfolio of $1 million. Within the apartment and commercial portfolios, the majority of the increase is due to the acquisition of new properties, partially offset by loans refinanced at lower rates. Within the other portfolio, the increase is due to incurring two new mezzanine debt obligations in 2015.

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Litigation settlement expenses were $0.4 million for the year ended December 31, 2015. This represents an increase of $3.9 million, as compared to the prior year credit of $3.6 million. This variance is due to the settlement of a debt resulting in a gain of $3.5 million in the prior year.

Gain on land sales was $18.9 million for the year ended December 31, 2015. During 2015, we sold 578.8 acres land in six transactions for an aggregate sales price of $102.9 million and recorded a gain of $18.9 million. During the year ended December 31, 2014 we had gain on land sales of $0.6 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.

Effective January 1, 2015, the Company adopted the provisions of ASU 2014-08, which changed the criteria of ASC 360 related to determining which disposals qualify to be accounted for as discontinued operations and modified related reporting and disclosure requirements. Disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results will be presented as discontinued operations.

 

There were no sales of income-producing properties during 20162017 or 20152016 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  2014 
Revenues:         
Rental and other property revenues $—  $355  $5,612 
   —   355   5,612 
Expenses:            
Property operating expenses  2   (345)  2,350 
Depreciation  —   —   751 
General and administrative  —   99   515 
Total operating expenses  2   (246)  3,616 
             
Other income (expense):            
Other income (expense)  —   45   (508)
Mortgage and loan interest  —   (2)  (3,204)
Loan charges and prepayment penalties  —   —   (1,656)
Earnings from unconsolidated subsidiaries and investees  —   —   1 
Litigation settlement  —   —   (250)
Total other expenses  —   43   (5,617)
             
Income (loss) from discontinued operations before gain on sale of real estate and taxes  (2)  644   (3,621)
Gain on sale of real estate from discontinued operations  —   735   61,879 
Income tax expense  1   (483)  (20,390)
Income from discontinued operations $(1) $896  $37,868 

  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 
         
Income (loss) from discontinued operations before gain on sale of real estate and taxes  (2)  644 
Gain on sale of real estate from discontinued operations  —   735 
Income tax expense  1   (483)
Income from discontinued operations $(1) $896 

26


Liquidity and Capital Resources

 

General

 

Our principal liquidity needs are:

 

●fund normal recurring expenses;

 

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

 

●fund capital expenditures, including tenant improvements and leasing costs;

 

●fund development costs not covered under construction loans; and

 

●fund possible property acquisitions.

 

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

 

●property operations;

 

●proceeds from land and income-producing property sales;

 

●collection of mortgage notes receivable;

 

●collections of receivables from related companies;

 

●refinancing of existing mortgage notes payable; and

 

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

 

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

 

We may also issue additional equity securities, including common stock and preferred stock. Management anticipates that our cash as of December 31, 2016,2017, along with cash that will be generated in 20172018 from property operations, may notnotes and interest receivables, will be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet its liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of the Company’s current maturity obligations.

 

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

 

Cash Flow Summary

 

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):

 

  2016  2015  Variance 
          
Net cash provided by (used in) operating activities $8,038  $(50,919) $58,957 
Net cash used in investing activities  (66,866)   (139,823)  72,957 
Net cash provided by financing activities  61,163   193,712   (132,549)
  2017  2016  Variance 
          
Net cash provided by (used in) operating activities $(32,484) $8,038  $(40,522)
Net cash provided by (used in) investing activities  (98,312)  (66,866)  (31,446)
Net cash provided by (used in) financing activities  155,995   61,163   94,832

 

The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties.

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Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the year ended December 31, 2016,2017, we acquired 4one apartment propertiesproperty and 4one developmental land properties.property.

 

Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.

 

Equity Investments    

 

TCI has from time to time purchased shares of IOTIOR and ARL. The Company may purchase additional equity securities of IOTIOR and ARL through open market and negotiated transactions to the extent TCI’s liquidity permits.

 

Equity securities of ARL and IOTIOR held by TCI may be deemed “restricted securities” under Rule 144 of the Securities Act of 1933 (“Securities Act”). Accordingly, TCI may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under the Securities Act for a one-year period after they are acquired. Such restrictions may reduce TCI’s ability to realize the full fair value of such investments if TCI attempted to dispose of such securities in a short period of time.

 

Contractual Obligations

 

We have contractual obligations and commitments primarily with regards to the payment of mortgages. The following table aggregates our expected contractual obligations and commitments and includes items not accrued, per GAAP, through the term of the obligation such as interest expense and operating leases. Our aggregate obligations subsequent to December 31, 2016,2017, are shown in the table below (dollars in thousands):

 

 Total 2017 2018 2019-2021 Thereafter  Total 2018 2019 2020 2021-2022 Thereafter
Long-term debt obligation (1) $1,323,048  $170,374  $91,162  $215,058  $846,454  $910,157  $79,838  $101,134  $64,254  $60,010  $604,921 
Capital lease obligation  —   —     1   —     —     —   
Operating lease obligation  30,181   482   492   1,535   27,672   30,941   504   514   524   1,603   27,796 
Total $1,353,229  $170,856  $91,654  $216,593  $874,126  $941,098  $80,342  $101,649  $64,778  $61,613  $632,717 

 

(1)TCI’s long-term debt may contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the note to become due immediately.

  

Environmental Matters

 

Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.  

 

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

 

Inflation

 

The effects of inflation on TCI’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI’s earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.

 

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

As of December 31, 2016,2017, our $858.1$910.2 million debt portfolio consisted of approximately $820.5$844.9 million of fixed-rate debt and approximately $37.6$63.3 million of variable-rate debt with interest rates ranging from 1.00% to 12.0%. Our overall weighted average interest rate at December 31, 2017 and 2016 was 5.5% and 2015 was 4.79% and 4.54%, respectively.

 

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


If market interest rates for variable-rate debt average 100 basis points more in 2017 than they did during 2016, TCI’s interest expense would increase and net income would decrease by $0.4$0.8 million. This amount is determined by considering the impact of hypothetical interest rates on TCI’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in TCI’s financial structure.

 

28  

The following table contains only those exposures that existed at December 31, 2016.2017. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars in thousands):

 

 2017 2018 2019 2020 2021 Thereafter Total  2018 2019 2020 2021 2022 Thereafter Total
Assets                             
Market securities at fair value                             Market securities at fair value              
Note Receivable                            
Notes Receivable                            
Fixed interest rate - fair value                         $75,654                          $65,165 
Instruments’ maturities $6,409  $11,645  $5,896  $5,907  $174  $45,623   75,654 
Instruments’ amortization  —   —   —   —   —   —   — 
Instruments' maturities $12,169  $11,519  $8,412  $174  $—    $32,892  $65,165 
Interest  8,855   8,228   6,894   5,520   5,489   65,697   100,683   7,962   6,509   4,938   3,956   3,942   47,305   74,612 
Average Rate  11.70%  11.88%  11.97%  10.68%  11.98%  12.00%      10.35%  10.77%  11.12%  11.98%  12.00%  12.00%    
                            
 2017 2018 2019 2020 2021  Thereafter   Total  
Notes Payable                            
Variable interest rate - fair value                         $37,645 
Instruments’ maturities $7  $—  $—  $—  $—  $—   7 
Instruments’ amortization  36,056   211   224   238   157   752   37,638 
Interest  376   95   81   67   54   110   783 
Average Rate  5.76%  6.39%  6.42%  6.46%  6.50%  0.91%    
                            
Fixed interest rate - fair value                          820,466 
Instruments’ maturities  4,268   2,477   18,649   15,990   0   33,729   75,113 
Instruments’ amortization  90,184   53,568   51,262   35,388   15,673   499,278   745,353 
Interest  39,484   34,811   29,938   24,622   22,715   312,585   464,155 
Average Rate  6.87%  6.54%  6.03%  5.46%  5.23%  4.17%    

  2018 2019 2020 2021 2022 Thereafter Total
Notes Payable                            
Variable interest rate-fair value                         $40,035 
                            
         Instrument's maturities  —   30,816   —   —   —   —   30,816 
         Instrument's amortization  7,444   620   231   241   159   524   9,219 
     Interest  1,878   1,725   74   59   46   60  3,842 
    Average rate  5.44%  5.37%  6.44%  6.47%  6.50%  6.50%    
                             
Fixed interest rate-fair value                         $870,122 
                             
Fixed interest rate notes                            
       Instrument's maturities  4,151   231   3,637   35,920      10,418   54,357 
       Instrument's amortization  68,244   69,467   60,386   12,644   11,045   593,979   815,765 
   Interest  32,167   26,600   21,259   19,617   17,635   779,749   897,027 
  Average rate  5.91%  5.19%  4.10%  3.80%  3.67%  3.57%    

 

29  


ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

  
 

Page #

Financial Statements 
Report of Independent Registered Public Accounting Firm31
Consolidated Balance Sheets—December 31, 20162017 and 2015201632
Consolidated Statements of Operations—Years Ended December 31, 2017, 2016 2015 and 2014201533
Consolidated Statements of Shareholders’ Equity—Years Ended December 31, 2017, 2016 2015 and 2014201534
Consolidated Statements of Cash Flows—Years Ended December 31, 2017, 2016 2015 and 2014201535
Statements of Consolidated Comprehensive Income (Loss) – Years Ended December 31, 2017, 2016 2015 and 2014201536
Notes to Consolidated Financial Statements37
  
Financial Statement Schedules 
Schedule III—Real Estate and Accumulated Depreciation56
Schedule IV—Mortgage Loans on Real Estate60

 

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

30  


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of and

Stockholders of Transcontinental Realty Investors, Inc.

Dallas, Texas

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Transcontinental Realty Investors, Inc. and Subsidiaries as of December 31, 20162017 and 2015,2016, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016.2017, and the related notes and schedules collectively referred to as the “consolidated financial statements.” In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Transcontinental Realty Investors, Inc.’s management is responsible as of December 31, 2017 and 2016 and the results of its operations and its cash flows for theseeach of the three years in the period ended December 31, 2017 in conformity with U.S. generally accepted accounting principles.

Basis of Opinion

These consolidated financial statements.statements are the responsibility of Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

 

Emphasis of Liquidity

As described in the Note 16,14, Transcontinental Realty Investors, Inc.’s management intends to sell land and income-producing properties and refinance or extend debt secured by real estate to meet the Company’s liquidity needs.

Supplemental Information

The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the consolidated financial statements referred to above presentsupplemental information is fairly stated, in all material respects, the financial position of Transcontinental Realty Investors, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

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

 

Farmer, FuquaFARMER, FUQUA & Huff, PcHUFF, PC

 

Richardson, Texas

March 31, 201730, 2018

 

We have served as the Company’s auditor since 2004.

31  


TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

 December 31, December 31,  December 31,
2017		  December 31,
2016		 
 2016 2015  (dollars in thousands, except share and par value amounts) 
 (dollars in thousands, except share and par value amounts)         
Assets                
Real estate, at cost $998,498  $935,635  $1,112,721  $998,498 
Real estate subject to sales contracts at cost, net of depreciation ($0 in 2016 and $0 in 2015)  46,956   47,192 
Real estate subject to sales contracts at cost, net of depreciation ($0 in 2017 and $0 in 2016)  45,739   46,956 
Less accumulated depreciation  (154,281)  (138,808)  (178,590)  (154,281)
Total real estate  891,173   844,019   979,870   891,173 
Notes and interest receivable                
Performing (including $67,912 in 2016 and $64,181 in 2015 from related parties)  81,133   71,376 
Less allowance for estimated losses (including $1,825 in 2016 and $1,825 in 2015 from related parties)  (1,825)  (1,825)
Performing (including $45,155 in 2017 and $66,066 in 2016 from related parties)  70,166   79,308 
Total notes and interest receivable  79,308   69,551   70,166   79,308 
Cash and cash equivalents  17,506   15,171   42,705   17,506 
Restricted cash  38,227   44,060   45,637   38,227 
Investments in unconsolidated subsidiaries and investees  2,446   5,243   2,472   2,446 
Receivable from related party  101,649   90,515   111,665   101,649 
Other assets  55,605   41,645   60,907   55,605 
Total assets $1,185,914  $1,110,204  $1,313,422  $1,185,914 
                
Liabilities and Shareholders’ Equity                
Liabilities:                
Notes and interest payable $835,528  $772,636  $892,149  $835,528 
Notes related to assets held for sale  376   376   376   376 
Notes related to subject to sales contracts  5,612   6,422   1,957   5,612 
Deferred revenue (including $50,689 in 2016 and $50,645 in 2015 from related parties)  71,065   71,021 
Accounts payable and other liabilities (including $6,487 in 2016 and $3,060 in 2015 from related parties)  48,856   34,694 
Bond and bond interest payable  113,047   — 
Deferred revenue (including $40,574 in 2017 and $50,689 in 2016 from related parties)  60,949   71,065 
Accounts payable and other liabilities (including $7,236 in 2017 and $6,487 in 2016 from related parties)  36,683   48,856 
  961,437   885,149   1,105,161   961,437 
                
Shareholders’ equity:                
Preferred stock, Series C: $0.01 par value, authorized 10,000,000 shares, issued and outstanding zero shares in 2016 and 2015 (liquidation preference $100 per share). Series D: $0.01 par value, authorized, issued and outstanding 100,000 shares in 2016 and 2015 (liquidation preference $100 per share)  1   1 
Common Stock, $0.01 par value, authorized 10,000,000 shares, issued 8,717,967 shares in 2016 and 2015 and outstanding 8,717,767 in 2016 and 2015  87   87 
Treasury stock at cost, 200 shares in 2016 and 2015  (2)  (2)
Preferred stock, Series C: $0.01 par value, authorized 10,000,000 shares, issued and outstanding zero shares in 2017 and 2016 (liquidation preference $100 per share). Series D: $0.01 par value, authorized, issued and outstanding 100,000 shares in 2017 and 2016 (liquidation preference $100 per share)  1   1 
Common Stock, $0.01 par value, authorized 10,000,000 shares, issued 8,717,967 shares in 2017 and 2016 and outstanding 8,717,767 in 2017 and 2016  87   87 
Treasury stock at cost, 200 shares in 2017 and 2016  (2)  (2)
Paid-in capital  269,849   270,749   268,949   269,849 
Retained earnings  (64,050)  (64,087)  (79,865)  (64,050)
Total Transcontinental Realty Investors, Inc. shareholders’ equity  205,885   206,748   189,170   205,885 
Non-controlling interest  18,592   18,307   19,091   18,592 
Total shareholders’ equity  224,477   225,055   208,261   224,477 
Total liabilities and shareholders’ equity $1,185,914  $1,110,204  $1,313,422  $1,185,914 

 

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

32


TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 For the Years Ended December 31,  For the Years Ended December 31, 
 2016 2015 2014  2017 2016 2015 
 (dollars in thousands, except per share amounts)   (dollars in thousands, except per share amounts) 
Revenues:               
Rental and other property revenues (including $708, $726 and $701 for the year ended 2016, 2015 and 2014, respectively, from related parties) $118,471  $102,220  $75,858 
Rental and other property revenues (including $839, $708 and $726 for the year ended 2017, 2016 and 2015, respectively, from related parties) $125,233  $118,471  $102,220 
                        
Expenses:                        
Property operating expenses (including $865, $740 and $606 for the year ended 2016, 2015 and 2014, respectively, from related parties)  61,918   52,257   39,484 
Property operating expenses (including $929, $865 and $740 for the year ended 2017, 2016 and 2015, respectively, from related parties)  63,056   61,918   52,257 
Depreciation and amortization  23,683   21,299   17,398   25,558   23,683   21,299 
General and administrative (including $3,574, $3,105 and $2,802 for the year ended 2016, 2015 and 2014, respectively, from related parties)  5,476   5,508   7,163 
General and administrative (including $3,120, $3,574 and $3,105 for the year ended 2017, 2016 and 2015, respectively, from related parties)  6,269   5,476   5,508 
Provision on impairment of real estate assets  —   5,300   —   —   —   5,300 
Net income fee to related party  257   187   3,669   250   257   187 
Advisory fee to related party  9,490   8,368   7,373   9,995   9,490   8,368 
Total operating expenses  100,824   92,919   75,087   105,128   100,824   92,919 
Net operating income  17,647   9,301   771   20,105   17,647   9,301 
            
Other income (expense):                        
Interest income (including $13,348, $10,071 and $11,469 for the year ended 2016, 2015 and 2014, respectively, from related parties)  14,670   10,687   12,194 
Interest income (including $11,485, $13,348 and $10,071 for the year ended 2017, 2016 and 2015, respectively, from related parties)  13,862   14,670   10,687 
Other income  1,816   71   403   625   1,816   71 
Mortgage and loan interest (including $568, $0, and $31 for the year ended 2016, 2015 and 2014, respectively, from related parties)  (53,088)  (46,541)  (33,681)
Loss on the sale of investments  —   (1)  (92)
Mortgage and loan interest (including $0, $568, and $0 for the year ended 2017, 2016 and 2015, respectively, from related parties)  (59,944)  (53,088)  (46,541)
Foreign currency translation loss  (4,536)  —   (1)
Income (loss) from unconsolidated joint ventures and investees  (26)  41   (28)  26   (26)  41 
Litigation settlement  —   (352)  3,591   —   —   (352)
Total other expenses  (36,628)  (36,095)  (17,613)  (49,967)  (36,628)  (36,095)
Loss before gain on sales, non-controlling interest and taxes  (18,981)  (26,794)  (16,842)  (29,862)  (18,981)  (26,794)
Gain on sale of income-producing properties  16,207   —   — 
Gain on sale of income-producing properties (including recognition of $9,842, $0, and $0 previously deferred
gains in 2017, 2016, 2015, respectively)		  9,842   16,207   — 
Gain on land sales  3,121   18,911   561   4,884   3,121   18,911 
Net income (loss) from continuing operations before taxes  347   (7,883)  (16,281)  (15,136)  347   (7,883)
Income tax benefit (expense)  (24)  (517)  20,390   (180)   (24)  (517)
Net income (loss) from continuing operations  323   (8,400)  4,109   (15,316)  323   (8,400)
Discontinued operations:                        
Net income (loss) from discontinued operations  (2)  644   (3,621)  —   (2)  644 
Gain on sale of real estate from discontinued operations  —   735   61,879   —   —   735 
Income tax expense from discontinued operations  1   (483)  (20,390)  —   1   (483)
Net income from discontinued operations  (1)  896   37,868   —   (1)  896 
Net income (loss)  322   (7,504)  41,977   (15,316)  322   (7,504)
Net income attributable to non-controlling interest  (285)  (132)  (399)  (499)  (285)  (132)
Net income (loss) attributable to Transcontinental Realty Investors, Inc.  37   (7,636)  41,578   (15,815)  37   (7,636)
Preferred dividend requirement  (900)  (900)  (1,005)  (900)  (900)  (900)
Net income (loss) applicable to common shares $(863) $(8,536) $40,573  $(16,715) $(863) $(8,536)
                        
Earnings per share - basic                        
Net income (loss) from continuing operations $(0.10) $(1.08) $0.32  $(1.92) $(0.10) $(1.08)
Net income from discontinued operations  —   0.10   4.42   —   —   0.10 
Net income (loss) applicable to common shares $(0.10) $(0.98) $4.74  $(1.92) $(0.10) $(0.98)
                        
Earnings per share - diluted                        
Net income (loss) from continuing operations $(0.10) $(1.08) $0.32  $(1.92) $(0.10) $(1.08)
Net income from discontinued operations  —   0.10   4.42   —   —   0.10 
Net income (loss) applicable to common shares $(0.10) $(0.98) $4.74  $(1.92) $(0.10) $(0.98)
                        
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,559,370   8,717,767   8,717,767   8,717,767 
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,559,370   8,717,767   8,717,767   8,717,767 
                        
Amounts attributable to Transcontinental Realty Investors, Inc.                        
Net income (loss) from continuing operations $38  $(8,532) $3,710  $(15,815) $38  $(8,532)
Net income (loss) from discontinued operations  (1)  896   37,868   —   (1)  896 
Net income (loss) $37  $(7,636) $41,578  $(15,815) $37  $(7,636)

 

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

33


TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Years Ended December 31, 20162017

(dollars in thousands)

                            
                           Non - 
      Comprehensive  Preferred  Common Stock  Treasury  Paid-in  Retained  Controlling 
  Total  Income (Loss)  Stock  Shares  Amount  Stock  Capital  Earnings  Interest 
Balance, December 31, 2013 $191,570  $(99,647) $1   8,413,669  $84  $(2) $271,720  $(98,029) $17,796 
Series C preferred stock dividends (7.0% per year)  (106)  —   —   —   —   —   (106)  —   — 
Series D preferred stock dividends (9.0% per year)  (899)  —   —   —   —   —   (899)  —   — 
Net income  41,977   41,977   —   —   —   —   —   41,578   399 
Issuance of common stock  937   —   —   304,298   3   —   934   —   — 
Distributions to non-controlling interests  (31)  —   —   —   —   —   —   —   (31)
Balance, December 31, 2014 $233,448  $(57,670) $1  $8,717,967  $87  $(2) $271,649  $(56,451) $18,164 
Series D preferred stock dividends (9.0% per year)  (900)  —   —   —   —   —   (900)  —   — 
Net income (loss)  (7,504)  (7,504)  —   —   —   —   —   (7,636)  132 
Contributions from non-controlling interests  11   —   —   —   —   —   —   —   11 
Balance, December 31, 2015 $225,055  $(65,174) $1   8,717,967  $87  $(2) $270,749  $(64,087) $18,307 
Series D preferred stock dividends (9.0% per year)  (900)  —   —   —   —   —   (900)  —   — 
Net income  322   322   —   —   —   —   —   37   285 
Balance, December 31, 2016 $224,477  $(64,852) $1   8,717,967  $87  $(2) $269,849  $(64,050) $18,592 

                                  Non - 
      Comprehensive  Preferred  Common Stock  Treasury  Paid-in  Retained  Controlling 
  Total  Income (Loss)  Stock  Shares  Amount  Stock  Capital  Earnings  Interest 
Balance, December 31, 2014 $233,448  $(57,670) $1  8,717,967  $87  $(2) $271,649  $(56,451) $18,164 
Series D preferred stock dividends (9.0% per year)  (900)  —   —   —   —   —   (900)  —   — 
Net income (loss)  (7,504)  (7,504)  —   —   —   —   —   (7,636)  132 
Contributions from non-controlling interests  11   —   —   —   —   —   —   —   11 
Repurchase/sale of treasury shares, net  —   —   —   —   —   —   —   —   — 
Balance, December 31, 2015 $225,055  $(65,174) $1   8,717,967  $87  $(2) $270,749  $(64,087) $18,307 
Series D preferred stock dividends (9.0% per year)  (900)  —   —   —   —   —   (900)  —   — 
Net income  322   322   —   —   —   —   —   37   285 
Balance, December 31, 2016 $224,477  $(64,852) $1   8,717,967  $87  $(2) $269,849  $(64,050) $18,592 
Series D preferred stock dividends (9.0% per year)  (900)  —   —   —   —   —   (900)  —   — 
Net income (loss)  (15,316)  (15,316)  —   —   —   —   —   (15,815)  499 
Balance, December 31, 2017 $208,261  $(80,168) $1  8,717,967  $87  $(2) $268,949  $(79,865) $19,091 

 

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

34


TRANSCONTINENTAL REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 For the Years Ended December 31,  For the Years Ended December 31, 
 2016 2015 2014  2017 2016 2015 
 (dollars in thousands)  (dollars in thousands) 
Cash Flow From Operating Activities:                        
Net income (loss) $322  $(7,504) $41,977  $(15,316) $322  $(7,504)
Adjustments to reconcile net income (loss) applicable to common shares to net cash provided by (used in) operating activities:            
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:            
(Gain) loss on sale of land  (3,121)  (18,911)  (561)  (4,884)  (3,121)  (18,911)
Gain on sale of income producing properties  (16,207)  (735)  (61,879)  (9,842)  (16,207)  (735)
Depreciation and amortization  23,683   21,299   18,150   25,558   23,683   21,299 
Provision on impairment of notes receivable and real estate assets  —   5,300   —   —    —   5,300 
Amortization of deferred borrowing costs  4,314   2,684   3,970   3,574   4,314   2,684 
Amortization of Series A bonds issuance costs  971   —   — 
Earnings from unconsolidated subsidiaries and investees  (26)  (132)  298   (26)  (26)  (132)
(Increase) decrease in assets:                        
Accrued interest receivable  (922)  586   7,648   (668)  (922)  586 
Other assets  (2,388)  4,204   2,784   (1,433)  (2,388)  4,204 
Prepaid expense  (9,238)  (13,615)  (1,995)  (5,661)  (9,238)  (13,615)
Escrow  7,584   2,684   (16,733)  (8,584)  7,584   2,684 
Earnest money  (571)  (905)  (420)  856   (571)  (905)
Rent receivables  2,840   2,104   (1,486)  543   2,840   2,104 
Related party receivables  (11,134)  (40,153)  (6,024)  (9,972)  (11,134)  (40,153)
Increase (decrease) in liabilities:                        
Accrued interest payable  20   (710)  104   4,573   20   (710)
Other liabilities  12,882   (7,115)  (15,215)  (12,173)  12,882   (7,115)
Net cash provided by (used in) operating activities  8,038   (50,919)  (29,382)  (32,484)  8,038   (50,919)
                        
Cash Flow From Investing Activities:                        
Proceeds from notes receivables  2,867   10,669   12,504   26,230   2,867   10,669 
Originations of notes receivables  (11,703)  (18,055)  (35,430)  (16,420)  (11,703)  (18,055)
Acquisition of land held for development  (12,508)  —   (2,604)  —   (12,508)  — 
Acquisition of income producing properties  (79,736)  (207,313)  (78,557)  (37,044)  (79,736)  (207,313)
Proceeds from sales of income producing properties  21,850       135,074   —   21,850   — 
Proceeds from sale of land  29,128   107,299   8,777   6,301   29,128   107,299 
Investment in unconsolidated real estate entities  2,797   (596)  (144)  —   2,797   (596)
Improvement of land held for development  (3,023)  (6,158)  (3,137)  —   (3,023)  (6,158)
Improvement of income producing properties  (5,702)  (8,952)  (4,563)  (64,443)  (5,702)  (8,952)
Construction and development of new properties  (10,836)  (16,717)  (3,016)  (12,936)  (10,836)  (16,717)
Net cash provided by (used in) investing activities  (66,866)  (139,823)  28,904   (98,312)  (66,866)  (139,823)
                        
Cash Flow From Financing Activities:                        
Proceeds from Series A bonds payable  115,335   —   — 
Proceeds from notes payable  242,215   403,309   178,514   135,116   242,215   403,309 
Recurring amortization of principal on notes payable  (20,205)  (15,545)  (21,352)  (83,070)  (20,205)  (15,545)
Payments on maturing notes payable  (160,745)  (186,128)  (153,595)  —   (160,745)  (186,128)
Deferred financing costs  798   (7,035)  (6,875)  (3,599)  798   (7,035)
Distributions to non-controlling interests  —   11   (31)  —   —   11 
Common stock issuance  —   —   937   —   —   — 
Preferred stock dividends - Series C  —   —   (106)  —   —   — 
Bond issuance costs  (6,887)  —   — 
Preferred stock dividends - Series D  (900)  (900)  (899)  (900)  (900)  (900)
Net cash provided by (used in) financing activities  61,163   193,712   (3,407)  155,995  61,163   193,712 
                        
Net increase (decrease) in cash and cash equivalents  2,335   2,970   (3,885)  25,199   2,335   2,970 
Cash and cash equivalents, beginning of period  15,171   12,201   16,086   17,506   15,171   12,201 
Cash and cash equivalents, end of period $17,506  $15,171  $12,201  $42,705  $17,506  $15,171 
                        
            
Supplemental disclosures of cash flow information:                        
Cash paid for interest $43,986  $38,787  $30,110   $49,791  $43,986  $38,787 
Cash paid for taxes  $—   $—   $—  

 

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

35


TRANSCONTINENTAL REALTY INVESTORS, INC.

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

For the Three Years Ended December 31,

 

 2016 2015 2014  2017 2016 2015 
 (dollars in thousands)  (dollars in thousands) 
              
Net income (loss) $322  $(7,504) $41,977  $(15,316) $322  $(7,504)
Comprehensive income attributable to non-controlling interest  (285)  (132)  (399)  (499)  (285)  (132)
Comprehensive income (loss) attributable to Transcontinental Realty Investors, Inc. $37  $(7,636) $41,578  $(15,815) $37  $(7,636)

 

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

36


TRANSCONTINENTAL REALTY INVESTORS, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

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

 

Certain balances for 20152016 and 20142015 have been reclassified to conform to the 20162017 presentation.

 

NOTE 1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and business.  TCI, a Nevada corporation, is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE”NYSE American”) under the symbol (“TCI”)“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”)“ARL”, whose common stock is traded on the NYSE American under the symbol (“ARL”)“ARL”. Subsidiaries of ARL own approximately 77.6%77.68% of the Company’s common stock.

 

In 2009, the Company acquired an additional 2,518,934 shares of common stock of Income Opportunity Realty Investors, Inc. (“IOT”)“IOR”, and in doing so, increased its ownership from approximately 25% to over 80% of the shares of common stock of IOTIOR outstanding. Upon acquisition of the additional shares in 2009, IOT’sIOR’s results of operations began consolidating with those of the Company for tax and financial reporting purposes. As of December 31, 2016,2017, TCI owned 81.1%81.25% of the outstanding IOTIOR common shares. Shares of IOTIOR are traded on the New York Exchange (“NYSE MKT”American”) under the symbol (“IOT”)“IOR”.

 

At the time of the acquisition, the historical accounting value of IOT’sIOR’s assets was $112 million and liabilities were $43 million. In that the shares of IOTIOR acquired by TCI were from a related party, the values recorded by TCI are IOT’sIOR’s historical accounting values at the date of transfer. The Company’s fair valuation of IOT’sIOR’s assets and liabilities at the acquisition date approximated IOT’sIOR’s book value. The net difference between the purchase price and historical accounting basis of the assets and liabilities acquired was $25.9 million and has been reflected by TCI as deferred income. The deferred income will be recognized upon the sale of the land that IOTIOR held on its books as of the date of sale, to an independent third party.

 

TCI’s Board of Directors is 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 IOT.IOR. The Chairman of the Board of Directors of TCI also serves as the Chairman of the Board of Directors of ARL and IOT.IOR. The officers of TCI also serve as officers of ARL, IOTIOR 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”)“RAI”, a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc. “RAMI”, 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 ARL and IOT.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 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”)“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.

 

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, 2016,2017, we owned 50fifty-three residential apartment communities comprising of 8,2268,427 units, 7seven commercial properties comprising an aggregate of approximately 1.7 million rentable square feet, an investment in 3,1393,466 acres of undeveloped and partially developed land, and a golf course comprising of approximately 96.1 acres.

37


Basis of presentation.    The Company presents its 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. 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, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

 

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

 

For entities in which we have less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, 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.

 

The Company in accordance with the VIE guidance in ASC 810 “Consolidations” consolidates 50fifty-one and 48fifty multifamily residential properties located throughout the United States at December 31, 20162017 and December 31, 2015,2016, respectively, with total units of 8,2268,427 and 7,983 units,8226, respectively.  Assets totaling approximately $442$483.7 million and approximately $457$442 million at December 31, 20162017 and 2015,2016, 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. 

 

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). We continually evaluate 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 asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

 

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. For sales transactions where the guidance reflects a sale did not occur, the asset involved in the transaction, including the debt, if applicable, and property operations, remain on the books of the Company. We continue to charge depreciation to expense as a period cost 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.”

 

Real estate 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, 20162017 or 2015.2016.


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“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.”

38

 

Cost capitalization.     The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to planning, developing, initial leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. 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.

 

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 entity’s own data.

 

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

 

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

 

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

 

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

 

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


Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.

 

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

 

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

 

39

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.

 

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.

 

Cash equivalents.    For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Restricted cash consists of cash reserved primarily for specific uses such as insurance, property taxes and replacement reserves.

 

Restricted cash. Restricted cash is comprised primarily of cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable.

Concentration of credit risk.    The Company maintains its cash balances at commercial banks and through investment companies, the deposits of which are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 20162017 and 2015,2016, the Company maintained balances in excess of the insured amount.

 

 Earnings per share.    Income (loss) per share is presented in accordance with ASC 620 “Earnings per Share” and is computed based upon the weighted average number of shares of common stock outstanding during each year.

 

Use of estimates.    In the preparation of Consolidated Financial Statements in conformity with GAAP, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.

 

Income taxes.    The Company is a “C” corporation” for U.S. federal income tax purposes. The Company and the rest of the ARL group are included in the MRHI, consolidated group for tax purposes. TCI is a member of a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.

 

Recent accounting pronouncements.    

 

In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this guidance has on its financial position and results of operations, if any.

 

In February 2016, Accounting Standards Update No. 2016-02 (“ASU 2016-02”), “Leases” was issued. This new guidance establishes a new model for accounting for leases and provides for enhanced disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of this guidance, if any, on its financial position and results of operations.

40


NOTE 2.    REAL ESTATE

 

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

  2016  2015 
       
Apartments $697,732  $626,141 
Apartments under construction  25,288   18,229 
Commercial properties  204,384   201,567 
Land held for development  71,094   89,697 
Real estate subject to sales contract  46,956   47,192 
Total real estate, at cost, less impairment  1,045,454   982,827 
Less accumulated deprecation  (154,281)  (138,808)
Total real estate, net of depreciation $891,173  $844,019 

  2017  2016 
       
Apartments $737,661  $697,732 
Apartments under construction  104,791   25,288 
Commercial properties  200,803   204,384 
Land held for development  69,466   71,094 
Real estate subject to sales contract  45,739   46,956 
Total real estate, at cost, less impairment  1,158,460   1,045,454 
Less accumulated deprecation  (178,590)  (154,281)
Total real estate, net of depreciation $979,870  $891,173 

 

Expenditures for repairs and maintenance are charged to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.

 

Depreciation is computed on a straight line basis over the estimated useful lives of the assets as follows:

 

Land improvements25 to 40 years
        
Buildings and improvements10 to 40 years
        
Tenant improvementsShorter of useful life or terms of related lease
        
Furniture, fixtures and equipment3 to 7 years

 

Provision for Impairment

During the year ended December 31, 2015, the Company recorded an impairment of $5.3 million for the golf course and related assets located in the U.S. Virgin Islands. This impairment relates to the decision to sell the development parcels in the U.S. Virgin Islands and the resultant decrease in the estimated fair value of the remaining assets. There was no provision for impairment for the years ended December 31, 2016 and 2014.

Fair Value Measurement

 

The Company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. The Company is required to assess the fair value of its consolidated real estate assets with indicators of impairment. The value of impaired real estate assets is determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flow of each asset, as well as the income capitalization approach, which considers prevailing market capitalization rates, analyses of recent comparable sales transactions, information from actual sales negotiations and bona fide purchase offers received from third parties. The methods used to measure fair value may produce an amount that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

The fair value measurements used in these evaluations are considered to be Level 2 and 3 valuations within the fair value hierarchy in the accounting rules, as there are significant observable (Level 2) and unobservable inputs (Level 3). Examples of Level 2 inputs the Company utilizes in its fair value calculations are appraisals and bona fide purchase offers from third parties. Examples of Level 3 inputs the Company utilizes in its fair value calculations are discount rates, market capitalization rates, expected lease rental rates, timing of new leases, an estimate of future sales prices and comparable sales prices of similar assets, if available.

 

      Fair Value Measurements Using (dollars in thousands): 
December 31, 2015  Fair Value  Level 1  Level 2  Level 3 
              
Commercial  $3,000  $—  $—  $3,000 

   

During 2015, our golf course, with a carrying value of approximately $8.3 million was written down to its fair value of $3.0 million resulting in an impairment charge of $5.3 million. The method used to determine fair value was an analysis of the discounted cash flow of the asset.

There was no provision for impairment during the years ended December 31, 20162017 and 2014.

2016.

41  


The highlights of our significant real estate transactions for the year ended December 31, 2016,2017, are discussed below.

 

Purchases

 

During the year ended December 31, 2016,2017, the Company acquired fourone income-producing apartment propertiesproperty from a third partiesparty in the statesstate of Arkansas, Florida, Georgia and Mississippi,North Carolina, increasing the total number of units by 723,201, for a combined purchase price of $79.7$36.7 million. In addition, we acquired threeone land parcelsparcel for future development for a total purchase price of $12.5$5.4 million, adding 36.318.5 acres to the development portfolio.

 

Sales

For the year ended December 31, 2016, TCI 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. In addition, 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.

   

As of December 31, 2016,2017, the Company has approximately 9166.7 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, 2016,2017, we have expended $20.3$69.8 million related to the construction or predevelopment of various apartment complexes and capitalized $0.9$2.4 million of interest costs.

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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 (dollars in thousands).

 

As of December 31, 2016,2017, the obligors on $67.7$45.1 million or 85%64.3% of the mortgage notes receivable portfolio were due from related entities. The Company recognized $14.2$3.7 million of interest income from these related party notes receivables.

 

As of December 31, 2016,2017, none of the mortgage notes receivable portfolio were non-performing.

 

The Company has various notes receivable from Unified Housing foundation, Inc. (“UHF”)“UHF”. UHF is determined to be a related party due to our significant investment in the performance of the collateral secured under the notes receivable. Payments are due from surplus cash flow from operations, sale or refinancing of the underlying properties. These notes are cross collateralized to the extent that any surplus cash available from any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. Furthermore, any surplus cash available from any of the properties UHF owns, besides the properties underlying these notes, can be used to repay outstanding interest and principal for these notes. The allowance on the notes was a purchase allowance that was netted against the notes when acquired.

 

Borrower Maturity
Date		  Interest
Rate		  Amount   Security 
Performing loans:                
     H198, LLC (Las Vegas Land)  01 /20  12.00% $5,907   Secured 
     Oulan-Chikh Family Trust  03 /21  8.00%  174   Secured 
     Unified Housing Foundation, Inc. (Echo Station) (1)  12 /32  12.00%  1,481   Secured 
     Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12 /32  12.00%  2,000   Secured 
     Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12 /32  12.00%  6,368   Secured 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)  12 /32  12.00%  4,640   Secured 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)  12 /32  12.00%  2,653   Secured 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12 /32  12.00%  6,000   Secured 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12 /32  12.00%  1,953   Secured 
     Unified Housing Foundation, Inc. (Parkside Crossing) (1)  12 /32  12.00%  1,936   Secured 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)  12 /32  12.00%  4,812   Secured 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)  12 /32  12.00%  4,491   Secured 
     Unified Housing Foundation, Inc. (Timbers of Terrell) (1)  12 /32  12.00%  1,323   Secured 
     Unified Housing Foundation, Inc. (Tivoli) (1)  12 /32  12.00%  7,966   Secured 
     Unified Housing Foundation, Inc. (1)  12 /17  12.00%  1,207   Unsecured 
     Unified Housing Foundation, Inc. (1)  12 /18  12.00%  3,994   Unsecured 
     Unified Housing Foundation, Inc. (1)  12 /18  12.00%  6,407   Unsecured 
     Unified Housing Foundation, Inc. (1)  06 /19  12.00%  5,400   Unsecured 
     Other related party notes (1)  Various  Various   1,404   Various unsecured interests 
     Other non-related party notes  Various  Various   796   Various secured interests 
     Other non-related party notes  Various  Various   4,742   Various unsecured interests 
     Accrued interest          5,479     
Total Performing         $81,133     
                 
      Allowance for estimated losses          (1,825)    
Total         $79,308     

  Maturity  Interest      
Borrower Date  Rate  Amount  Security
Performing loans:              
H198, LLC (Las Vegas Land)  01/20   12.00% $5,907  Secured
H198, LLC (McKinney Ranch Land)  09/18   6.00%  4,290  Secured
Oulan-Chikh Family Trust  03/21   8.00%  174  Secured
Spyglass Apartments of Ennis  11/19   5.00%  4,522  Secured
Bellwether Ridge  05/20   5.00%  2,954  Secured
Parc at Windmill Farms  05/20   5.00%  2,505  Secured
Unified Housing Foundation, Inc. (Echo Station) (1)  12/32   12.00%  1,481  Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12/32   12.00%  2,000  Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)  12/32   12.00%  6,368  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12/32   12.00%  6,000  Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)  12/32   12.00%  1,953  Secured
Unified Housing Foundation, Inc. (Timbers of Terrell) (1)  12/32   12.00%  1,323  Secured
Unified Housing Foundation, Inc. (Tivoli) (1)  12/32   12.00%  6,138  Secured
Unified Housing Foundation, Inc. (1)  12/18   12.00%  3,994  Unsecured
Unified Housing Foundation, Inc. (1)  12/18   12.00%  6,407  Unsecured
Unified Housing Foundation, Inc. (1)  06/20   12.00%  5,760  Unsecured
Other related party notes (1)  Various   Various   465  Various unsecured interests
Other non-related party notes  Various   Various   796  Various secured interests
Other non-related party notes  Various   Various   983  Various unsecured interests
Accrued interest          6,146   
Total Performing         $70,166   

 

(1) Related Party notes

43  


NOTE 4.ALLOWANCE FOR ESTIMATED LOSSES

The allowance account was reviewed and remained the same in 2016. The decrease in 2015 was due to a fully reserved note that was written off. The table below shows our allowance for estimated losses (dollars in thousands):

  2016  2015  2014 
          
Balance January 1, $1,825  $1,990  $2262 
Decrease in provision  —   (165)  (272) 
Balance December 31, $1,825  $1,825  $1,990 

NOTE 5.     INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES

 

Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting. ARL is our parent company and is considered as an unconsolidated joint venture.

 

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

 

  Percentage ownership as of December 31, 
  2016  2015  2014 
American Realty Investors, Inc. (1)  0.90%  0.90%  1.00%

  Percentage ownership as of December 31,
  2017 2016 2015
American Realty Investors, Inc. (1) 0.90% 0.90% 0.90%
(1)Unconsolidated investment in parent company

 

Our interest in the common stock of ARL in the amount of 0.90% is accounted for under the equity method. Accordingly, the investment is carried at cost, adjusted for the company’s proportionate share of earnings or losses.

 

The following is a summary of the financial position and results of operations of ARL (dollars in thousands):

 

 For the Twelve Months Ended December 31,  For the Twelve Months Ended December 31, 
Unconsolidated Subsidiaries 2016 2015 2014  2017 2016 2015 
Real estate, net of accumulated depreciation $14,504  $14,232  $15,460  $12,349  $14,504  $14,232 
Notes Receivable  47,257   50,692   50,909   41,928   47,257   50,692 
Other assets  127,001   127,497   128,635   126,238   127,001   127,497 
Notes payable  (9,485)  (25,233)  (50,048)  (6,507)  (9,485)  (25,233)
Other liabilities  (111,707)  (98,440)  (80,904)  (102,014)  (111,707)  (98,440)
Shareholders’ equity/partners’ capital  (67,570)  (68,748)  (64,052)  (71,994)  (67,570)  (68,748)
                        
            
Rents and interest and other income $7,251  $11,990  $12,427  $9,193  $7,251  $11,990 
Depreciation  (175)  (192)  (285)  (157)  (175)  (192)
Operating expenses  (3,633)  (4,414)  (6,983)  (3,149)  (3,633)  (4,414)
Gain on land sales  —   2,737   —   4,765   —   2,737 
Interest expense  (6,274)  (5,936)  (7,144)  (6,228)  (6,274)  (5,936)
Income (loss) from continuing operations  (2,831)  4,185   (1,985)  4,424   (2,831)  4,185 
Income (loss) from discontinued operations  —   1   64 
Income from discontinued operations  —   —   1 
Net income (loss) $(2,831) $4,186  $(1,921) $4,424  $(2,831) $4,186 
                        
Company’s proportionate share of income (loss) (1) $(25) $38  $(19) $40  $(25) $38 

 

(1)Income (loss) represents continued and discontinued operations

44  


NOTE 6.5.     NOTES AND INTEREST PAYABLE

 

Below is a summary of our notes and interest payable as of December 31, 20162017 (dollars in thousands):

 

 Notes Payable Accrued Interest Total Debt  Notes Payable Accrued Interest Total Debt 
Apartments $553,509  $1,500  $555,009  $566,576  $1,585  $568,161 
Apartments under Construction $16,576   —  $16,576 
Apartments under construction $78,683   113  $78,796 
Commercial $108,725  $528  $109,253  $126,955  $622  $127,577 
Land $30,811  $117  $30,928  $16,705  $200  $16,905 
Real estate subject to sales contract $5,142  $470  $5,612  $1,449  $508  $1,957 
Mezzanine financing $119,923   —  $119,923  $110,172  $453  $110,625 
Other $23,425   —  $23,425  $9,617  $78  $9,695 
            
Total  858,111   2,615   860,726  $910,157  $3,559  $913,716 
                        
Unamortized deferred borrowing costs  (19,210)  —   (19,210)  (19,234)  —   (19,234)
 $838,901  $2,615  $841,516  $890,923  $3,559  $894,482 

 

The schedulefollowing table summarizes our contractual obligations for principal payments as of our notes payable over the next five years and thereafter are due as followsDecember 31, 2017 (dollars in thousands):

 

Year Amount  Amount 
2017  $130,515 
2018   56,255   $79,838 
2019   70,136    101,134 
2020   51,616    64,255 
2021   15,831    48,806 
2022   11,205 
Thereafter   533,757    604,919 
Total  $858,111   $910,157 

   

Interest payable at December 31, 20162017 was $2.6$3.6 million. Our debt has interest rates ranging from 2.5% to 12.0% per annum with maturity dates between 20172018 and 2055. The mortgages were collateralized by deeds of trust on real estate having a net carrying value of $891$980.0 million.

 

During the year 20162017 the Company refinanced or modified fivesix loans with a total principal balance of $78.9$84.9 million. The refinancing resulted in lower interest rates and the extension of the term of the loan. The modifications resulted in lower interest rates. The transactions provide for lower monthly payments over the term of loans.

 

There are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note due to expiration of the loan. We are in constant contact with these lenders, working together in order to modify the terms of these loans and we anticipate a timely resolution that is similar to the existing agreement or subsequent modification.

 

In conjunction with the development of various apartment projects and other developments, we drew down $13$63 million in construction loans during the year ended December 31, 2016.2017.

   

NOTE 6.     BONDS AND BONDS INTEREST PAYABLE

In August 2016 Southern Properties Capital LTD (“Southern”), a British Virgin Islands corporation was incorporated for the purpose of raising funds by issuing Bonds to be traded on the Tel Aviv Stock Exchange (“TASE”).  The Company transferred certain residential and commercial properties located in the United States to Southern, its wholly owned subsidiary.  On February 13, 2017, Southern filed a final prospectus with the TASE for an offering and sale of nonconvertible Series A Bonds to be issued by Southern. The bonds are unsecured obligations of Southern.  During 2017 on three separate occasions Southern issued nonconvertible Series A Bonds which in total amounted to approximately NIS400 million New Israeli Shekels (“NIS”) which converted to approximately $115 million dollars.  The Series A Bonds have a stated interest rate of 7.3%.  At December 31, 2017 the effective interest rate is 9.17%. The bonds require semi-annual equal installments on January 31 and July 31 of each year from 2019 to 2023 (inclusive). The interest will be repaid on January 31 and July 31 of each of the years 2018 to 2023 (inclusive), first payment commenced on July 31, 2017.

a.Consisting of the following:

  December 31,
  2017 2016
     
Bonds (Series A) $115,336   —   
Less; deferred issuance expense, net  (5,916)  —   
Accrued Interest  3,627   —   
  $113,047   —   

b.Aggregate maturities are as follows:

  December 31,
  2017 2016
     
2018 $—    —  
2019  23,067   —  
2020  23,067   —  
2021  23,067   —  
2022  23,067   —  
Thereafter  23,068   —  
  $115,336   —  

The funds were used principally for the acquisition and development of additional real estate operations in the United States. The funds were raised and will be repaid in NIS however the funds raised have been converted to US dollars. The Company records unrealized gains or losses each quarter based upon the relative exchange values of the US dollar and the NIS; however, no gain or loss will be realized until a conversion from US dollars to NIS actually occurs in the future. The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment of principal and interest on the bonds is made. For 2017 the Company reflected an unrealized foreign currency loss of $4.5 million related to debenture transactions. 

NOTE 7.    RELATED PARTY TRANSACTIONS AND FEES

 

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.

 

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, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, 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 TCI and IOT.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

45  

 

Effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, 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. 

 

Below is a description of the related party transactions and fees between Pillar and Regis:

 

Fees, expenses and revenue paid to and/or received from our advisor:

 

 2016 2015 2014  2017 2016  2015 
 (dollars in thousands)  (dollars in thousands) 
Fees:              
Advisory $9,490  $8,368  $7,373  $9,995  $9,490  $8,368 
Mortgage brokerage and equity refinancing  775   1,524   1,152   1,551   775   1,524 
Net income  257   187   3,669   250   257   187 
Property acquisition  —   921   145   —   —   921 
 $10,522  $11,000  $12,339  $11,796  $10,522  $11,000 
Other Expense:                        
Cost reimbursements $3,228  $2,925  $2,622  $2,895  $3,228  $2,925 
Interest paid (received)  (4,216)  (3,352)  (2,795)  (4,859)  (4,216)  (3,352)
 $(988) $(427) $(173) $(1,964) $(988) $(427)
Revenue:                        
Rental $708  $726  $701  $783  $708  $726 

 

Fees paid to Regis and related parties:

 

 2016 2015 2014  2017 2016  2015 
 (dollars in thousands)  (dollars in thousands) 
Fees:                   
Property acquisition $10,776  $1,932  $348  $9,819  $10,776  $1,932 
Property management, construction management and leasing commissions  888   682   544   963   888   682 
Real estate brokerage  787   1,105   2,752   1,369   787   1,105 
 $12,451  $3,719  $3,644  $12,151  $12,451  $3,719 

 

The Company received rental revenue of $0.7$0.8 million in each of the three years ended December 31, 20162017 from Pillar and its related parties for properties owned by the Company.

 

As of  December 31, 2016,2017, the Company had notes and interest receivables net of allowances,interest receivable of $62.2$45.1 million and $3.9 million, respectively, due from UHF, a related party. During the current period, the Company recognized interest income of $8.6$6.5 million, originated $5.4$5.8 million, received principal payments of $4.1$26.1 million and received interest payments of $9.0$5.3 million from these related party notes receivables.

 

On January 1, 2012, the Company entered into a development agreement with 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.

 

The Company is the primary guarantor, on a $60.4$39.1 million mezzanine loan between UHF and a lender. In addition, ARI, and an officer of the Company are limited recourse guarantors of the loan. As of December 31, 20162017 UHF was in compliance with the covenants to the loan agreement.


The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and IOTIOR and their subsidiaries that was entered into in July of 2009. That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOTIOR and MRHI for the remainder of 2012 and subsequent years. The expense (benefit) in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 35%21%.

46  

 

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of December 31, 20162017 (dollars in thousands):

 

 Pillar ARL Total  Pillar ARL Total
               
Related party receivable, December 31, 2015 $—  $90,515  $90,515 
Related party receivable, December 31, 2016 $—  $101,649  $101,649
Cash transfers  43,246   —   43,246   36,175   —  36,175
Advisory fees  (9,490)  —   (9,490)  (9,995)  —  (9,995)
Net income fee  (257)  —   (257)  (250)  —  (250)
Fees and commissions  (1,551)  —   (1,551)  (2,921)  —  (2,921)
Cost reimbursements  (3,228)  —   (3,228)  (2,895)  —  (2,895)
Interest income  —   4,216   4,216   —   4,859  4,859
Notes receivable purchased  (5,356)      (5,356)  (447)     (447)
Expenses paid by advisor  (8,389)  —   (8,389)  (36)  —  (36)
Financing (mortgage payments)  2,719   —   2,719   (4,656)  —  (4,656)
Sales/Purchases transactions  (10,776)  —   (10,776)  (9,818)  —  (9,818)
Series K preferred stock acquisition  —   —   — 
Income tax expense  (1,096)  1,096   —   5,593   —  5,593
Purchase of obligations  (12,925)  12,925   — 
Related party receivable, December 31, 2016 $(7,103) $108,752  $101,649 
Related party receivable, December 31, 2017 $10,750  $106,508  $117,258

 

As of December 31, 2016,2017, the Company has approximately 9166.7 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.

 

NOTE 8.    DIVIDENDS

 

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, no dividends on TCI’s common stock were declared for 2017, 2016, 2015, or 2014.2015. 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.

 


NOTE 9.    PREFERRED STOCKINCOME TAXES

 

Prior to July 9, 2014, TCI had 30,000 sharesWe account for income taxes under the asset and liability method, which requires the recognition of Series C cumulative convertible preferred stock issueddeferred tax assets and outstanding. These 30,000 shares were owned by RAI, a related party, and had accrued dividends unpaid of $0.9 million. The stock had a liquidation preference of $100.00 per share and could be converted into common stock at 90% of the daily average closing price of the common stockliabilities for the prior five trading days. On July 9, 2014, RAI converted all 30,000 shares into the requisite numberexpected future tax consequences of shares of common stock. The conversion resulted in the issuance of 304,298 new shares of common stock. The effects of the Series C Cumulative Convertible Preferred Stock are no longerevents that have been included in the dilutive earnings per share calculationfinancial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the current period, butyear in which the differences are consideredexpected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the calculation forperiod that includes the prior periods if applying the if-converted method is dilutive.

In November 2006, TCI issued 100,000 shares of Series D Preferred Stock with a liquidation preference of $100 per share.  The preferred stock is not convertible into any other security and requires dividends payable from the initial rate of 7% annuallyenactment date. We recognize deferred tax assets to the current rateextent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of 9%. The shares canexisting taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be redeemed at any point after September 30, 2011.  Ofable to realize our deferred tax assets in the 100,000 shares, 89,500 shares are owned by RAI, a related party, and 10,500 shares are owned by Pillar, a related party. RAI’s 89,500 shares have accrued dividends unpaidfuture in excess of approximately $4.0 million. Pillar’s 10,500 shares have accrued dividends unpaid of approximately $0.5 million.

NOTE 10.    STOCK OPTIONS

In October 2000, TCI’s stockholders approved the Director’s Stock Option Plan (the “Director’s Plan”) which provides for options to purchase up to 140,000 shares of TCI’s common stock. Options granted pursuanttheir net recorded amount, we would make an adjustment to the Director’s Plan are immediately exercisable and expiredeferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the earlierbasis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the first anniversarytechnical merits of the date on which a Director ceasesposition and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be a Director or 10 years fromrealized upon ultimate settlement with the date of grant. Effective December 15, 2005 the plan was terminated. At December 31, 2014, there were 5,000 stock options outstanding which were exercisable at $14.25 per share. These options expired unexercised January 1, 2015.

47  

NOTE 11.    TCI INCOME TAXES

related tax authority.

For 2016, TCI had taxable loss for federal taxfinancial reporting purposes, while it had taxable income for 2015 and a loss for 2014. For 2016, MRHI, ARL, TCI and IOT had a combined net taxable income. For 2015, MRHI, ARL, TCI and IOT had a combined net taxable income and TCI recorded no current tax benefit or expense. For 2014, TCI, with the consolidation of IOT, had a net taxable loss and the remainder of the group had net taxable income resulting in a tax benefit to TCI. The expense benefit in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory rate of 35%.

Current expense (benefit) is attributable to (dollars in thousands):

  2016  2015  2014 
          
Income (loss) from continuing operations $24  $517  $(20,390)
Income (loss) from discontinued operations  (1)   483   20,390 
Tax expense (benefit) $23  $1,000  $— 

The Federal income tax expense differs from the amount computed by applying the corporate tax rate of 35% to the income before income taxes as follows (dollars in thousands):were:

  Years Ended December 31
  2017 2016 2015
  (in thousands)
TOTAL $(15,136) $345  $(7,239)

The expense (benefit) for income taxes consists of:

 

  2016  2015  2014 
          
Computed “expected” income tax (benefit) expense $121  $2,276  $14,762 
Book to tax differences for partnerships not consolidated for tax purposes  93   5,152   (23,900)
Book to tax differences of depreciation and amortization  (477)  (160)  1,461 
Book to tax differences in gains on sale of property  (2,757)  (4,073)  (2,350)
Book provision for loss  —   1,855   — 
Partial valuation allowance against current net operating loss benefit  (69)  (9,596)  7,069 
Other  3,112   5,546   2,958 
Total $23  $1,000  $— 
             
Alternative minimum tax $—  $—  $— 

  Years Ended December 31
  2017 2016 2015
  (in thousands)
Current:    
Federal $(5,603) $121  $(2,534)
State 10   —    —  
             
Deferred and other:            
Federal 5,603  (98) 3,534 
State 170   —    —  
             
Total Tax Expense$180 $23 $1,000


 

DeferredThe reconciliation between the Company’s effective tax rate on income taxes reflectfrom continuing operations and the statutory rate is as follows:

  Years Ended December 31
  2017 2016 2015
  (in thousands)
Income tax expense (benefit) at federal statutory rate $(5,603) $121  $(2,759)
State and local income taxes net of federal tax benefit 10   —     —   
Repricing of deferred assets due to change in future rates (19,871)  —     —   
             
Change in valuation allowance 25,644  (97) 3,276 
Calculated income tax (benefit) expense 18024  517
Effective Tax Rate  N/A   6.9%N/A 

The company is subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2017, the Company’s tax years for 2016, 2015, and 2014 are subject to examination by the tax effects of temporary timing differences between carrying amounts of assets and liabilities reflected on the financial statements and the amounts used for income tax purposes. TCI’s tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales and depreciation on owned properties. The tax effects of temporary differences and net operating loss carry forwards that give rise to the deferred tax assets are presented below (amounts in thousands):

  2016  2015  2014 
          
Net operating losses $42,585  $46,497  $56,897 
AMT credits  1,591   1,900   1,374 
Basis difference of:            
   Real estate holdings  (7,580)  (17,912)  876 
   Notes receivable  5,432   694   757 
   Investments  (4,328)  (4,709)  (4,693)
   Notes payable  2,315   2,792   6,932 
   Deferred gains  14,200   11,984   10,146 
Total $54,215  $41,246  $72,289 
Deferred tax valuation allowance  (54,215)  (41,246)  (72,289)
Net deferred tax asset $—  $—  $— 

 There is no assurance that TCI will generate earnings in future years. Therefore, TCI has established a valuation allowance for deferred tax assets of approximately $54.2 million, $41.2 million and $72.3 millionauthorities. With few exceptions, as of December 31, 2015, 20142017, the Company is no longer subject to U.S federal, state, local, or foreign examinations by tax authorities for the years before 2014.

The 2017 effective tax rate is driven primarily by the passing of the Tax Cuts and 2013, respectively.Jobs Act by congress. This act has reduced the statutory tax rate for corporations from 35% to 21% starting in 2018. As a result, the tax assets of TCI had to be re-priced to reflect the new rate for future years with the impact impacting the 2017 provision for income taxes.

Components of the Net Deferred Tax Asset or Liability

  Years Ended December 31
  2017 2016
  (in thousands)
Allowance for losses on notes $383  $639 
Installment note on land sale 2,876  4,793 
Deferred gain 6,814  14,537 
Net operating loss carryforward 46,709  66,015 
Subtotal 56,782  85,984 
Less:  valuation allowance (29,806) (48,926)
Total net deferred tax assets 26,976  37,058 
         
Basis differences for fixed assets 26,976  37,058 
Total deferred tax liability 26,976  37,058 
         
Net deferred tax asset (liability)  —     —   
         
Current net deferred tax asset 26,976  37,058 
Long-term net deferred tax liability $26,976  $37,058 
Net deferred tax asset (liability)  —     —   

 

TCI hasOperating Loss and Tax Credit Carryforwards

We have federal income tax net operating lossNOL carryforwards related to our domestic operations of approximately $122.0$189 million expiring throughon a standalone basis, which have an indefinite life. We also have state NOLs in many of the year 2033. The alternative minimumvarious states in which we operate.

Valuation Allowance

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax credit balance increasedassets. At December 31, 2017, 2016 and 2015 TCI had a net deferred tax asset due to tax deductions available to it in 2016 to approximately $1.59 million. The credit has no expiration date.future years. However, as management could not determine that it was more likely than not that TCI would realize the benefit of the deferred tax asset, a valuation allowance was established.

48  


NOTE 12.10.    FUTURE MINIMUM RENTAL INCOME UNDER OPERATING LEASES

 

TCI’S real estate operations include the leasing of commercial properties (office buildings, industrial warehouses and retail centers). The leases thereon expire at various dates through 2025. The following is a schedule of minimum future rents on non-cancelable operating leases at December 31, 20162017 (dollars in thousands):

 

Year Amount  Amount 
2017   24,491 
2018   22,696    $25,042 
2019   17,261    19,828 
2020   13,326    15,869 
2021   11,364    13,643 
2022   10,634 
Thereafter   19,353    16,686 
Total  $108,491   $101,702 

  

NOTE 13.11.    OPERATING SEGMENTS

 

Our segments are based on management’s method of internal reporting which classifies its operations by property type. The segments are commercial, apartments, land and other. Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow.

 

Items of income that are not reflected in the segments are interest, other income, equity in partnerships and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.

 

The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.

 

Presented below is the Company’s reportable segments’ operating income including segment assets and expenditures for the years 2017, 2016 2015 and 20142015 (dollars in thousands):

 

For the Year Ended December 31, 2016 Commercial
Properties		 Apartments Land Other Total 
 Commercial         
For the Year Ended December 31, 2017 Properties Apartments Land Other Total 
Rental and other property revenues $31,864  $86,603  $—  $4  $118,471  $32,323  $92,807  $87  $16  $125,233 
Property operating expenses  (19,476)  (40,786)  (1,634)  (22) $(61,918)  (17,724)  (43,677)  (667)  (988)  (63,056)
Depreciation  (8,924)  (14,759)  —   —   (23,683)  (9,200)  (16,354)  —   (4)  (25,558)
Mortgage and loan interest  (7,167)  (25,381)  (1,746)  (18,794)  (53,088)  (7,528)  (22,346)  (1,588)  (28,482)  (59,944)
Interest income  —   —   —   14,670   14,670   —   —   —   13,862   13,862 
Gain (loss) on sale of income producing properties  (238)  16,445   —   —   16,207 
Recognition of deferred gain on sale of income producing properties  —   9,842   —   —   9,842 
Gain on land sales  —   —   3,121   —   3,121   —   —   4,884   —   4,884 
Segment operating income (loss) $(3,941) $22,122  $(259) $(4,142) $13,780  $(2,129) $20,272  $2,716  $(15,596) $5,263 
Capital expenditures $4,577  $863  $269  $—  $5,709  $3,157  $1,402  $609  $—  $5,168 
Assets $148,689  $624,433  $118,051  $—  $891,173  $137,157  $726,852  $115,205  $656  $979,870 
                                        
Property Sales                                        
Sales price $1,500  $20,350  $29,128  $—  $50,978  $—  $—  $11,177  $—  $11,177 
Less: Cost of sale  (1,738)  (3,905)  (26,007)  —   (31,650)  —   —   (6,293)  —   (6,293)
Gain (loss) on sale $(238) $16,445  $3,121  $—  $19,328 
Recognized prior deferred gain  —   9,842   —   —   9,842 
Gain on sale $—  $9,842  $4,884  $—  $14,726 

  Commercial             
For the Year Ended December 31, 2016 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $31,864  $86,603  $—  $4  $118,471 
Property operating expenses  (19,476)  (40,786)  (1,634)  (22)  (61,918)
Depreciation  (8,924)  (14,759)  —   —   (23,683)
Mortgage and loan interest  (7,167)  (25,381)  (1,746)  (18,794)  (53,088)
Interest income  —   —   —   14,670   14,670 
Gain (loss) on sale of income producing properties  (238)  16,445   —   —   16,207 
Gain on land sales  —   —   3,121   —   3,121 
Segment operating income (loss) $(3,941) $22,122  $(259) $(4,142) $13,780 
Capital expenditures $4,577  $863  $269  $—  $5,709 
Assets $148,689  $624,433  $118,051  $—  $891,173 
                     
Property Sales                    
Sales price $1,500  $20,350  $29,128  $—  $50,978 
Less: Cost of sale  (1,738)  (3,905)  (26,007)  —   (31,650)
Gain (loss) on sale $(238) $16,445  $3,121  $—  $19,328 

 

49  

  Commercial             
For the Year Ended December 31, 2015 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $29,308  $72,809  $—  $103  $102,220 
Property operating expenses  (16,838)  (34,437)  (712)  (270)  (52,257)
Depreciation  (8,861)  (12,438)  —   —   (21,299)
Mortgage and loan interest  (6,891)  (23,506)  (4,214)  (11,930)  (46,541)
Interest income  —   —   —   10,687   10,687 
Gain on land sales  —   —   18,911   —   18,911 
Segment operating income (loss) $(3,282) $2,428 $13,985 $(1,410) $11,721 
Capital expenditures $8,118  $1,780  $2,621  $—  $12,519 
Assets $153,270  $553,860  $136,889  $—  $844,019 
                     
Property Sales               
Sales price $—  $11,129  $102,898  $—  $114,027 
Less: Cost of sale  —   (10,394)  (83,987)  —   (94,381)
Gain on sale $—  $735  $18,911  $—  $19,646 
                     
  Commercial                 
For the Year Ended December 31, 2014 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $19,129  $56,685  $1  $43  $75,858 
Property operating expenses  (12,238)  (26,065)  (1,169)  (12)  (39,484)
Depreciation  (7,310)  (10,088)  —   —   (17,398)
Mortgage and loan interest  (5,812)  (18,946)  (4,334)  (4,589)  (33,681)
Interest income  —   —   —   12,194   12,194 
Loss on land sales  —   —   561   —   561 
Segment operating income (loss) $(6,231) $1,586  $(4,941) $7,636  $(1,950)
Capital expenditures $4,418  $320  $2,435  $—  $7,173 
Assets $140,131  $391,767  $157,223  $—  $689,121 
                     
Property Sales                    
Sales price $19,182  $115,273  $8,091  $—  $142,546 
Less: Cost of sale  (9,168)  (63,408)  (7,530)  —   (80,106)
Gain (loss) on sale $10,014  $51,865  $561 $—  $62,440 

50  

  Commercial             
For the Year Ended December 31, 2015 Properties  Apartments  Land  Other  Total 
Rental and other property revenues $29,308  $72,809  $—  $103  $102,220 
Property operating expenses  (16,838)  (34,437)  (712)  (270)  (52,257)
Depreciation  (8,861)  (12,438)  —   —   (21,299)
Mortgage and loan interest  (6,891)  (23,506)  (4,214)  (11,930)  (46,541)
Interest income  —   —   —   10,687   10,687 
Gain on land sales  —   —   18,911   —   18,911 
Segment operating income (loss) $(3,282) $2,428  $13,985  $(1,410) $11,721 
Capital expenditures $8,118  $1,780  $2,621  $—  $12,519 
Assets $153,270  $553,860  $136,889  $—  $844,019 
                     
Property Sales                    
Sales price $—  $11,129  $102,898  $—  $114,027 
Less: Cost of sale  —   (10,394)  (83,987)  —   (94,381)
Gain on sale $—  $735  $18,911  $—  $19,646 

 

The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations (dollars in thousands):

 

  For the Years Ended December 31, 
  2016  2015  2014 
Segment operating income (loss) $13,780  $11,721  $(1,950)
Other non-segment items of income (expense)            
General and administrative  (5,476)  (5,508)  (7,163)
Provision on impairment of real estate assets  —   (5,300)  — 
Net income fee to related party  (257)  (187)  (3,669)
Advisory fee to related party  (9,490)  (8,368)  (7,373)
Other income  1,816   71   403 
Gain (loss) on the sale of investments  —   (1)  (92)
Loss from unconsolidated joint ventures and investees  (26)  41   (28)
Litigation settlement  —   (352)  3,591 
Income tax benefit (expense)  (24)  (517)  20,390 
Net income (loss) from continuing operations $323  $(8,400) $4,109 

  For the Years Ended December 31, 
  2017  2016  2015 
Segment operating income $5,263  $13,780  $11,721 
Other non-segment items of income (expense)            
General and administrative  (6,269)  (5,476)  (5,508)
Provision on impairment of real estate assets  —   —   (5,300)
Net income fee to related party  (250)  (257)  (187)
Advisory fee to related party  (9,995)  (9,490)  (8,368)
Other income  (3,911)  1,816   70 
Loss from unconsolidated joint ventures and investees  26   (26)  41 
Litigation settlement  —   —   (352)
Income tax benefit (expense)  5,252   (24)  (517)
Net income (loss) from continuing operations $(9,884) $323  $(8,400)

The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):

 

  For the Years Ended December 31, 
  2016  2015  2014 
Segment assets $891,173  $844,019  $689,121 
Investments in real estate partnerships  2,446   5,243   1,543 
Notes and interest receivable  79,308   69,551   83,457 
Other assets  212,987   191,391   156,284 
Total assets $1,185,914  $1,110,204  $930,405 

51  

  For the Years Ended December 31, 
  2017  2016  2015 
Segment assets $979,870  $891,173  $844,019 
Investments in real estate partnerships  2,472   2,446   5,243 
Notes and interest receivable  70,166   79,308   69,551 
Other assets  266,166   212,987   191,391 
Total assets $1,318,674  $1,185,914  $1,110,204 

 

NOTE 14.12.    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. 

 

Effective January 1, 2015, the Company adopted the provisions of ASU 2014-08, which changed the criteria of ASC 360 related to determining which disposals qualifyquality to be accounted for as discontinued operations and modified related reporting and disclosure requirements. Disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results will be presented as discontinued operations.

 

There were no sales of income-producing properties during 20162017 or 20152016 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(d ollars in thousands):

 

  For the Years Ended December 31, 
  2016  2015  2014 
Revenues:         
     Rental and other property revenues $—  $355  $5,612 
   —   355   5,612 
Expenses:            
     Property operating expenses  2   (345)  2,350 
     Depreciation  —   —   751 
     General and administrative  —   99   515 
          Total operating expenses  2   (246)  3,616 
             
Other income (expense):            
     Other income (expense)  —   45   (508)
     Mortgage and loan interest  —   (2)  (3,204)
     Loan charges and prepayment penalties  —   —   (1,656)
     Earnings from unconsolidated subsidiaries and investees  —   —   1 
     Litigation settlement  —   —   (250)
          Total other expenses  —   43   (5,617)
             
Income (loss) from discontinued operations before gain on sale of            
  real estate and taxes  (2)  644   (3,621)
     Gain on sale of real estate from discontinued operations  —   735   61,879 
     Income tax expense  1   (483)  (20,390)
Income from discontinued operations $(1) $896  $37,868 

  For the Years Ended December 31, 
  2017  2016  2015 
Revenues:         
     Rental and other property revenues $—  $—  $355 
   —   —   355 
Expenses:            
     Property operating expenses  —   —   (345)
     General and administrative  —   2   99 
          Total operating expenses  —   2   (246)
             
Other income (expense):            
     Other income (expense)  —   —   45 
     Mortgage and loan interest  —   —   (2)
          Total other expenses  —   —   43 
             
Loss from discontinued operations before gain on sale of real estate and taxes  —   (2)  644 
     Gain on sale of real estate from discontinued operations  —   —   735 
     Income tax benefit (expense)  —   1   (483)
Income (loss) from discontinued operations $—  $(1) $896 

52  


NOTE 15.    13.QUARTERLY RESULTS OF OPERATIONS

 

The following is a tabulation of TCI’s quarterly results of operations for the years 2017, 2016 2015 and 2014.2015. Quarterly results presented may differ from those previously reported in TCI’s Form 10-Q due to the reclassification of the operations of properties sold or held for sale to discontinued operations in accordance with ASC topic 360:

 

  For the Three Months Ended 2016 
  March 31,  June 30,  September 30,  December 31, 
  (dollars in thousands, except share and per share amounts) 
2016            
Revenue and other property revenues $28,903  $30,521  $29,776  $29,271 
Total operating expenses  24,823   24,751   25,429   25,821 
Operating income (loss)  4,080   5,770   4,347   3,450 
Other expenses  (9,054)  (7,901)  (9,309)  (10,364)
Loss before gain on land sales, non-controlling interest, and taxes  (4,974)  (2,131)  (4,962)  (6,914)
Gain (loss) on sale of income-producing properties  (244)  5,168   —   11,283 
Gain (loss) on land sales  1,652   1,719   555   (805)
Income tax benefit  1   —   (25)  — 
Net income (loss) from continuing operations  (3,565)  4,756   (4,432)  3,564 
Net income from discontinued operations  2   —   —   (3)
Net income (loss)  (3,563)  4,756   (4,432)  3,561 
Net (loss) attributable to non-controlling interest  23   (97)  (114)  (97)
Preferred dividend requirement  (222)  (224)  (227)  (227)
Net income (loss) applicable to common shares $(3,762) $4,435  $(4,773) $3,237 
                 
PER SHARE DATA                
Earnings per share - basic                
Income (loss) from continuing operations $(0.43) $0.51  $(0.55) $0.37 
Loss from discontinued operations  —   —   —   — 
Net income (loss) applicable to common shares $(0.43) $0.51  $(0.55) $0.37 
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
Income (loss) from continuing operations $(0.43) $0.51  $(0.55) $0.37 
Loss from discontinued operations  —   —   —   — 
Net income (loss) applicable to common shares $(0.43) $0.51  $(0.55) $0.37 
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
             
  For the Three Months Ended 2015 
  March 31,  June 30,  September 30,  December 31, 
  (dollars in thousands, except share and per share amounts) 
2015            
Revenue and other property revenues $22,304  $23,756  $27,539  $28,621 
Total operating expenses  19,264   19,310   24,613   29,732 
Operating income (loss)  3,040   4,446   2,926   (1,111)
Other expenses  (6,398)  (5,243)  (11,211)  (13,243)
Loss before gain on land sales, non-controlling interest, and taxes  (3,358)  (797)  (8,285)  (14,354)
Gain (loss) on land sales  2,876   1,250   997   13,788 
Income tax benefit  102   (12)  274   (881)
Net income (loss) from continuing operations  (380)  441   (7,014)  (1,447)
Net income from discontinuing operations  190   (22)  508   220 
Net income (loss)  (190)  419   (6,506)  (1,227)
Net (loss) attributable to non-controlling interest  295   (281)  (95)  (51)
Preferred dividend requirement  (222)  (224)  (227)  (227)
Net income (loss) applicable to common shares $(117) $(86) $(6,828) $(1,505)
                 
PER SHARE DATA                
Earnings per share - basic                
Income (loss) from continuing operations $(0.04) $(0.01) $(0.84) $(0.19)
Income from discontinued operations  0.02   —   0.06   0.02 
Net income (loss) applicable to common shares $(0.02) $(0.01) $(0.78) $(0.17)
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
Income (loss) from continuing operations $(0.04) $(0.01) $(0.84) $(0.19)
Income from discontinued operations  0.02   —   0.06   0.02 
Net income (loss) applicable to common shares $(0.02) $(0.01) $(0.78) $(0.17)
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

53  

 For the Three Months Ended 2014  For the Three Months Ended 2017 
 March 31, June 30, September 30, December 31,  March 31, June 30, September 30, December 31, 
 (dollars in thousands, except share and per share amounts)  (dollars in thousands, except share and per share amounts) 
2014         
2017         
Revenue and other property revenues $18,303  $18,511  $18,466  $20,578  $31,535  $31,302  $31,491  $30,905 
Total operating expenses  17,376   18,388   17,264   22,059   26,337   25,460   25,725   27,606 
Operating income (loss)  927   123   1,202   (1,481)
Operating income  5,198   5,842   5,766   3,299 
Other expenses  (2,899)  (3,718)  (5,754)  (5,242)  (10,658)  (15,613)  (8,967)  (14,729)
Loss before gain on land sales, non-controlling interest, and taxes  (1,972)  (3,595)  (4,552)  (6,723)  (5,460)  (9,771)  (3,201)  (11,430)
Loss on land sales  753   (159)  40   (73)
Gain on sale of income-producing properties  —   —   9,841   1 
Gain (loss) on land sales  445   (476)  530   4,385 
Income tax benefit  2,049   2,195   786   15,360   —   —   —   (180) 
Net income (loss) from continuing operations  830   (1,559)  (3,726)  8,564 
Net income from discontinuing operations  3,805   4,076   1,461   28,526 
Net income (loss)  4,635   2,517   (2,265)  37,090   (5,015)  (10,247)  7,170   (7,224)
Net loss attributable to non-controlling interest  (84)  (127)  (81)  (107)
Net (loss) attributable to non-controlling interest  (119)  (163)  (96)  (121)
Preferred dividend requirement  (274)  (277)  (227)  (227)  (222)  (224)  (224)  (230)
Net income (loss) applicable to common shares $4,277  $2,113  $(2,573) $36,756  $(5,356) $(10,634) $6,850  $(7,575)
                                
PER SHARE DATA                                
Earnings per share - basic                                
Income (loss) from continuing operations $0.06  $(0.23) $(0.46) $0.94  $(0.61) $(1.22) $0.79  $(0.88)
Income from discontinued operations  0.45   0.48   0.17   3.27 
Loss from discontinued operations  —   —   —   — 
Net income (loss) applicable to common shares $0.51  $0.25  $(0.29) $4.21  $(0.61) $(1.22) $0.79  $(0.88)
Weighted average common shares used in computing earnings per share  8,413,469   8,413,469   8,688,018   8,717,767   8,717,767   8,717,767   8,717,767   8,717,767 
                                
Earnings per share - diluted                                
Income (loss) from continuing operations $0.05  $(0.23) $(0.46) $0.94  $(0.61) $(1.22) $0.79  $(0.88)
Income from discontinued operations  0.44   0.48   0.17   3.27 
Loss from discontinued operations  —   —   —   — 
Net income (loss) applicable to common shares $0.49  $0.25  $(0.29) $4.21  $(0.61) $(1.22) $0.79  $(0.88)
Weighted average common shares used in computing diluted earnings per share  8,639,679   8,413,469   8,688,018   8,717,767   8,717,767   8,717,767   8,717,767   8,717,767 

 

  For the Three Months Ended 2016 
  March 31,  June 30,  September 30,  December 31, 
  (dollars in thousands, except share and per share amounts) 
2016            
Revenue and other property revenues $28,903  $30,521  $29,776  $29,271 
Total operating expenses  24,823   24,751   25,429   25,821 
Operating income  4,080   5,770   4,347   3,450 
Other expenses  (9,054)  (7,901)  (9,309)  (10,364)
Loss before gain on land sales, non-controlling interest, and taxes  (4,974)  (2,131)  (4,962)  (6,914)
Gain (loss) on sale of income-producing properties  (244)  5,168   —   11,283 
Gain (loss) on land sales  1,652   1,719   555   (805)
Income tax benefit (expense)  1   —   (25)  — 
Net income (loss) from continuing operations  (3,565)  4,756   (4,432)  3,564 
Net income (loss) from discontinued operations  2   —   —   (3)
Net income (loss)  (3,563)  4,756   (4,432)  3,561 
Net income (loss) attributable to non-controlling interest  23   (97)  (114)  (97)
Preferred dividend requirement  (222)  (224)  (227)  (227)
Net income (loss) applicable to common shares $(3,762) $4,435  $(4,773) $3,237 
                 
PER SHARE DATA                
Earnings per share - basic                
Net income (loss) applicable to common shares $(0.43) $0.51  $(0.55) $0.37 
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
Net income (loss) applicable to common shares $(0.43) $0.51  $(0.55) $0.37 
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

  For the Three Months Ended 2015 
  March 31,  June 30,  September 30,  December 31, 
  (dollars in thousands, except share and per share amounts) 
2015            
Revenue and other property revenues $22,304  $23,756  $27,539  $28,621 
Total operating expenses  19,264   19,310   24,613   29,732 
Operating income (loss)  3,040   4,446   2,926   (1,111)
Other expenses  (6,398)  (5,243)  (11,211)  (13,243)
Loss before gain on land sales, non-controlling interest, and taxes  (3,358)  (797)  (8,285)  (14,354)
Gain on land sales  2,876   1,250   997   13,788 
Income tax benefit (expense)  102   (12)  274   (881)
Net income (loss) from continuing operations  (380)  441   (7,014)  (1,447)
Net income (loss) from discontinuing operations  190   (22)  508   220 
Net income (loss)  (190)  419   (6,506)  (1,227)
Net (loss) attributable to non-controlling interest  295   (281)  (95)  (51)
Preferred dividend requirement  (222)  (224)  (227)  (227)
Net income (loss) applicable to common shares $(117) $(86) $(6,828) $(1,505)
                 
PER SHARE DATA                
Earnings per share - basic                
Loss from continuing operations $(0.04) $(0.01) $(0.84) $(0.19)
Income from discontinued operations  0.02   —   0.06   0.02 
Net loss applicable to common shares $(0.02) $(0.01) $(0.78) $(0.17)
Weighted average common shares used in computing earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 
                 
Earnings per share - diluted                
Loss from continuing operations $(0.04) $(0.01) $(0.84) $(0.19)
Income from discontinued operations  0.02   —   0.06   0.02 
Net loss applicable to common shares $(0.02) $(0.01) $(0.78) $(0.17)
Weighted average common shares used in computing diluted earnings per share  8,717,767   8,717,767   8,717,767   8,717,767 

NOTE 16.    14.COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

 

Liquidity.    Management believes that TCI will generate excess cash from property operations in 2017;2018; such excess, however, will not be sufficient to discharge all of TCI’s obligations as they become due. Management intends to sell income-producing assets, 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 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 nonaffiliated partners are limited to development fees earned by the non-affiliated partners, and are set forth in the respective partnership agreements.

 

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 amount 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.

54  

 

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.

 

Guarantees.The Company is the primary guarantor on a $60.4$39.1 million mezzanine loan between UHF and a lender. In addition, ARI and an officer of the Company are limited recourse guarantors of the loan. As of December 31, 2016,2017, UHF was in compliance with the covenants to the loan agreement.

 

NOTE 17.    15.EARNINGS PER SHARE

 

Earnings per share.Earnings per share (“EPS”) have been computed pursuant to the provisions of ASC 260 “Earnings per Share.” Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding.

 

Prior to July 9, 2014, TCI had 30,000 shares of Series C cumulative convertible preferred stock issued and outstanding. These 30,000 shares were owned by RAI, a related party, and had accrued dividends unpaid of $0.9 million. The stock had a liquidation preference of $100.00 per share and could be converted into common stock at 90% of the daily average closing price of the common stock for the prior five trading days. On July 9, 2014, RAI converted all 30,000 shares into the requisite number of shares of common stock. The conversion resulted in the issuance of 304,298 new shares of common stock. The effects of the Series C Cumulative Convertible Preferred Stock are no longer included in the dilutive earnings per share calculation for the current period, but are considered in the calculation for the prior periods if applying the if-converted method is dilutive.

 

As of  December 31, 2016,2017, there are no preferred stock or stock options that are required to be included in the calculation of EPS.EPS.

 

NOTE 18.    16.SUBSEQUENT EVENTS

 

The date to which events occurring after December 31, 2016,2017, the date of the most recent balance sheet, have been evaluated for possible adjustmentadjustments to the financial statements or disclosure is March 31, 2017,30, 2018, which is the date onof which the financial statements were available to be issued. There are no subsequent events that would require an adjustment to the financial statements.

 

On February 13, 2017,15, 2018, Southern Properties Capital LTD, a British Virgin Islands corporation (“Southern”), filed a final prospectus with the Tel Aviv Stock Exchange LTD (the “TASE”) for an offering and sale of nonconvertibleissued Series A Bonds (the “Debentures”), to be issued by Southern, which is an indirect subsidiary of TCI.  Southern, in turn, wholly owns interest in other entities, which, in turn, are the principal owners of various residential and commercial properties locatedB bonds in the south and southwestern portionsamount of the United States.NIS 137.7 million par value (approximately $39.4 million as of February 15, 2018). The DebenturesSeries B bonds are unsecured obligations of Southern.  On February 14, 2017, Southern commenced the institutional tender of the Debentures and has accepted application for 276 million Israeli, new Shekels (approximately $73,651,065 USD, basedregistered on the exchange rate of 3.7474 Shekels to the U.S. Dollar effective February 14, 2017)TASE. The bonds are reported in both institutionalNIS and public tenders, at anbear stated annual interest rate averaging approximately 7.38%of 6.8%. Interest shall be repaid January 31 and July 31 of each of the years 2019 to 2023 (inclusive), first payment commencing on July 31, 2018. The principal shall be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). The total bond issuance cost incurred is $1.4 million. 

In March 2018, the Company and a substantial financial institution (“Macquarie”) entered into an agreement to form a special purpose entity (“Joint Venture”) that would principally own and operate the existing TCI Class A multifamily residential portfolio that is currently owned 100% by Company’s subsidiaries.  The Joint Venture would also actively participate in the development and/or acquisitions of additional Class A assets. It is anticipated that the Southern and Macquarie would each have a 49% ownership interest and a 50% voting interest in the Joint Venture.  The remaining 2% ownership interest would be allotted to Daniel J. Moos, the current President and Chief Executive Officer of TCI and Abode Properties The completion of agreement is subject to the approval of certain regulators.


55  Schedule III

 

Schedule III
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 20162017
                         
    Initial Cost Cost Capitalized
Subsequent to
Acquisition		 Asset
Impairment		 Gross Amounts of Which
Carried at End of Year		       Life on Which
Depreciation
                        In Latest
                        Statement
          Asset   Building &   Accumulated Date of Date of Operation
Property/Location Encumbrances Land Buildings Improvements Impairment Land Improvements Total Depreciation Construction Acquired is Computed
  (dollars in thousands)      
Properties Held for Investment Apartments                                   
Anderson Estates, Oxford, MS  769  378  2,683  313  —  378  2,996  3,374  799  2003  01/06 40 years
Blue Lake Villas I, Waxahachie, TX  10,448  526  11,057  19  —  526  11,076  11,602  4,088  2003  01/02 40 years
Blue Lake Villas II, Waxahachie, TX  3,769  287  4,451  45  —  287  4,496  4,783  1,139  2004  01/04 40 years
Breakwater Bay, Beaumont, TX  9,112  740  10,435  63  —  740  10,498  11,238  3,390  2004  05/03 40 years
Bridgewood Ranch, Kaufman, TX  6,233  762  6,856  57  —  762  6,913  7,675  1,730  2007  04/08 40 years
Capitol Hill, Little Rock, AR  8,740  1,860  7,948  55  —  1,860  8,003  9,863  2,713  2003  03/03 40 years
Centennial, Oak Ridge, TN  20,518  2,570  22,589  —  —  2,570  22,589  25,159  1,365  2011  07/14 40 years
Curtis Moore Estates, Greenwood, MS  14,498  847  5,733  285  —  847  6,018  6,865  628  2003  01/06 40 years
Crossing at Opelika, Opelika, AL  1,399  1,606  14,451  —  —  1,606  14,451  16,057  1,939  2015  12/15 40 years
Dakota Arms, Lubbock, TX  12,194  921  12,644  358  —  921  13,002  13,923  4,195  2004  01/04 40 years
David Jordan Phase II, Greenwood, MS  551  277  1,521  70  —  277  1,591  1,868  506  1999  01/06 40 years
David Jordan Phase III, Greenwood, MS  556  439  2,115  64  —  439  2,179  2,618  649  2003  01/06 40 years
Desoto Ranch, DeSoto, TX  14,877  1,472  17,856  65  —  1,472  17,921  19,393  6,225  2002  05/02 40 years
Falcon Lakes, Arlington, TX  13,352  1,437  15,095  449  —  1,437  15,544  16,981  5,946  2001  10/01 40 years
Heather Creek, Mesquite, TX  10,976  1,345  12,015  141  —  1,345  12,156  13,501  3,934  2003  03/03 40 years
Holland Lake, Weatherford, TX  11,510  1,450  14,612  342  —  1,450  14,954  16,404  976  2004  05/14 40 years
Lake Forest, Houston, TX  11,808  927  12,267  1,361  —  927  13,628  14,555  4,282  2004  01/04 40 years
Legacy at Pleasant Grove, Texarkana, TX  14,495  2,005  17,892  217  —  2,005  18,109  20,114  1,384  2006  12/14 40 years
Lodge at Pecan Creek, Denton, TX  15,959  1,349  16,180  —  —  1,349  16,180  17,529  2,494  2011  10/05 40 years
Lofts at Reynolds Village, Asheville, NC  28,230  3,704  34,000  —  —  3,704  34,000  37,704  212  2012  10/17 40 years
Mansions of Mansfield, Mansfield, TX  15,084  977  17,799  75  —  977  17,874  18,851  3,916  2009  09/05 40 years
Metropolitan Apartments, North Little Rock, AR  25,233  3,323  29,857  —  —  3,323  29,857  33,180  1,109  2010  06/16 40 years
Mission Oaks, San Antonio, TX  14,433  1,266  16,627  212  —  1,266  16,839  18,105  4,495  2005  05/05 40 years
Monticello Estate, Monticello, AR  431  285  1,493  15  —  285  1,508  1,793  460  2001  01/06 40 years
Northside on Travis, Sherman, TX  12,873  1,300  14,560  27  —  1,300  14,587  15,887  3,038  2009  10/07 40 years
Oak Hollow, Sequin, TX  11,680  1,435  12,403  —  —  1,435  12,403  13,838  775  2011  07/14 40 years
Oceanaire Apartments, Biloxi, MS  10,791  1,384  12,575  —  —  1,384  12,575  13,959  318  2009  12/16 40 years
Overlook at Allensville, Sevierville, TN  12,079  1,228  12,296  —  —  1,228  12,296  13,524  881  2012  10/15 40 years
Parc at Clarksville, Clarksville, TN  12,441  587  14,300  103  —  587  14,403  14,990  3,385  2007  06/02 40 years
Parc at Denham Springs, Denham Springs, LA  18,249  1,022  20,188  100  —  1,022  20,288  21,310  3,517  2011  07/07 40 years
Parc at Maumelle, Little Rock, AR  15,438  1,710  17,688  218  —  1,710  17,906  19,616  5,248  2006  12/04 40 years
Parc at Metro Center, Nashville, TN  10,148  1,044  12,226  472  —  1,044  12,698  13,742  3,672  2006  05/05 40 years
Parc at Rogers, Rogers, AR  20,004  1,482  22,993  450  (3,180) 1,482  20,263  21,745  4,836  2007  04/04 40 years
Preserve at Pecan Creek, Denton, TX  14,006  902  16,626  42  —  902  16,668  17,570  3,893  2008  10/05 40 years
Preserve at Prairie Pointe, Lubbock, TX  9,928  1,074  10,604  178  —  1,074  10,782  11,856  748  2005  04/15 40 years
Riverwalk Phase I, Greenville, MS  272  199  1,537  5  —  199  1,542  1,741  503  2003  01/06 40 years
Riverwalk Phase II, Greenville, MS  1,053  297  4,007  163  —  297  4,170  4,467  1,572  2003  01/06 40 years
Sawgrass Creek, New Port Richey, FL  —  784  7,056  —  —  784  7,056  7,840  249  2008  08/16 40 years
Sonoma Court, Rockwall, TX  10,456  941  11,074  62  —  941  11,136  12,077  1,779  2011  07/10 40 years
Sugar Mill, Baton Rouge, LA  11,031  1,437  13,367  205  —  1,437  13,572  15,009  2,838  2009  08/08 40 years
Tattersall Village, Hinesville, GA  20,025  2,670  23,766  —  —  2,670  23,766  26,436  594  2010  12/16 40 years
Toulon, Gautier, MS  20,104  1,993  20,107  —  —  1,993  20,107  22,100  3,267  2011  09/09 40 years
Tradewinds, Midland, TX  13,882  3,313  20,073  —  —  3,313  20,073  23,386  1,250  2015  06/15 40 years
Villager, Ft. Walton, FL  713  141  1,267  —  —  141  1,267  1,408  85  1972  06/15 40 years
Villas at Park West I, Pueblo, CO  10,250  1,171  10,453  —  —  1,171  10,453  11,624  806  2005  12/14 40 years
Villas at Park West II, Pueblo, CO  9,278  1,463  13,060  —  —  1,463  13,060  14,523  1,007  2010  12/14 40 years
Vista Ridge, Tupelo, MS  10,530  1,339  13,398  —  —  1,339  13,398  14,737  1,197  2009  10/15 40 years
Vistas of Vance Jackson, San Antonio, TX  14,834  1,327  16,540  279  —  1,327  16,819  18,146  5,159  2004  01/04 40 years
Waterford, Roseberg, TX  16,940  2,341  20,880  47  —  2,341  20,927  23,268  1,305  2013  06/14 40 years
Westwood, Mary Ester, FL  3,938  693  6,650  0  —  693  6,650  7,343  429  1972  06/15 40 years
Windsong, Fort Worth, TX  10,459  790  11,526  69  —  790  11,595  12,385  4,019  2002  07/03 40 years
Total Apartments Held for Investment $566,577 $64,820 $669,395 $6,626 $(3,180)$64,820 $672,841 $737,661 $114,944        

           Cost Capitalized                        
           Subsequent to  Asset  Gross Amounts of Which           Life on Which
     Initial Cost  Acquisition  Impairment  Carried at End of Year           Depreciation
                                   In Latest
                                   Statement
              Asset     Building &     Accumulated  Date of  Date  of Operation
Property/Location Encumbrances  Land  Buildings  Improvements  Impairment  Land  Improvements  Total  Depreciation  Construction  Acquired  is Computed
  (dollars in thousands)         
Properties Held for Investment                                              
Apartments                                              
Anderson Estates, Oxford, MS  796   378   2,683   313   —   378   2,996   3,373   732   2003   01/06 40 years
Blue Lake Villas I, Waxahachie, TX  10,589   526   11,057   19   —   526   11,076   11,602   3,809   2003   01/02 40 years
Blue Lake Villas II, Waxahachie, TX  3,832   287   4,451   45   —   287   4,496   4,783   1,023   2004   01/04 40 years
Breakwater Bay, Beaumont, TX  9,271   740   10,435   63   —   740   10,498   11,238   3,123   2004   05/03 40 years
Bridgewood Ranch, Kaufman, TX  6,340   762   6,856   57   —   762   6,913   7,675   1,553   2007   04/08 40 years
Capitol Hill, Little Rock, AR  8,893   1,860   7,948   55   —   1,860   8,003   9,862   2,506   2003   03/03 40 years
Centennial, Oak Ridge, TN  20,794   2,570   22,589   —   —   2,570   22,589   25,159   800   2011   07/14 40 years
Curtis Moore Estates, Greenwood, MS  1,444   847   5,733   285   —   847   6,018   6,864   1,772   2003   01/06 40 years
Crossing at Opelika, Opelika, AL  14,700   1,590   14,314   —   —   1,590   14,314   15,904   267   2015   12/15 40 years
Dakota Arms, Lubbock, TX  12,356   921   12,644   358   —   921   13,002   13,923   3,860   2004   01/04 40 years
David Jordan Phase II, Greenwood, MS  563   277   1,521   70   —   277   1,591   1,868   461   1999   01/06 40 years
David Jordan Phase III, Greenwood, MS  573   439   2,115   64   —   439   2,179   2,618   590   2003   01/06 40 years
Desoto Ranch, DeSoto, TX  15,119   1,472   17,854   65   —   1,472   17,919   19,391   5,772   2002   05/02 40 years
Falcon Lakes, Arlington, TX  13,530   1,437   15,095   449   —   1,437   15,544   16,981   5,566   2001   10/01 40 years
Heather Creek, Mesquite, TX  11,162   1,345   12,015   50   —   1,345   12,065   13,410   3,626   2003   03/03 40 years
Holland Lake, Weatherford, TX  11,669   1,450   14,611   —   —   1,450   14,611   16,061   609   2004   05/14 40 years
Lake Forest, Houston, TX  12,007   927   12,267   1,023   —   927   13,290   14,217   3,919   2004   01/04 40 years
Legacy at Pleasant Grove, Texarkana, TX  14,757   2,005   17,892   —   —   2,005   17,892   19,897   932   2006   12/14 40 years
Lodge at Pecan Creek, Denton, TX  16,174   1,349   16,180   —   —   1,349   16,180   17,529   2,090   2011   10/05 40 years
Mansions of Mansfield, Mansfield, TX  15,347   977   17,799   75   —   977   17,874   18,851   3,465   2009   09/05 40 years
Metropolitan Apartments, North Little Rock, AR  24,303   3,229   29,004   —   —   3,229   29,004   32,233   363   2010   06/16 40 years
Mission Oaks, San Antonio, TX  14,670   1,266   16,627   212   —   1,266   16,839   18,105   4,077   2005   05/05 40 years
Monticello Estate, Monticello, AR  445   285   1,493   15   —   285   1,508   1,793   422   2001   01/06 40 years
Northside on Travis, Sherman, TX  13,099   1,300   14,560   27   —   1,300   14,587   15,887   2,671   2009   10/07 40 years
Oak Hollow, Sequin, TX  11,832   1,435   12,406   —   —   1,435   12,406   13,841   465   2011   07/14 40 years
Oceanaire Apartments, Biloxi, MS  11,374   1,397   12,575   —   —   1,397   12,575   13,972   567   2009   12/16 40 years
Overlook at Allensville, Sevierville, TN  13,607   1,228   12,296   —   —   1,228   12,296   13,524   —   2012   10/15 40 years
Parc at Clarksville, Clarksville, TN  12,658   587   14,300   103   —   587   14,403   14,990   3,022   2007   06/02 40 years
Parc at Denham Springs, Denham Springs, LA  18,520   1,022   20,188   8   —   1,022   20,196   21,218   3,012   2011   07/07 40 years
Parc at Maumelle, Little Rock, AR  15,694   1,710   17,688   218   —   1,710   17,906   19,617   4,759   2006   12/04 40 years
Parc at Metro Center, Nashville, TN  10,316   1,044   12,226   476   —   1,044   12,702   13,746   3,359   2006   05/05 40 years
Parc at Rogers, Rogers, AR  20,382   1,482   22,995   449   (3,180)  1,482   20,264   21,746   4,321   2007   04/04 40 years
Preserve at Pecan Creek, Denton, TX  14,251   902   16,626   42   —   902   16,668   17,570   3,473   2008   10/05 40 years
Preserve at Prairie Pointe, Lubbock, TX  10,057   1,074   10,604   178   —   1,074   10,782   11,856   462   2005   04/15 40 years
Riverwalk Phase I, Greenville, MS  282   198   1,537   5   —   198   1,542   1,740   464   2003   01/06 40 years
Riverwalk Phase II, Greenville, MS  1,089   297   4,007   163   —   297   4,170   4,467   1,467   2003   01/06 40 years
Sawgrass Creek, New Port Richey, FL  —   784   7,056   —   —   784   7,056   7,840   73   2008   08/16 40 years
Sonoma Court, Rockwall, TX  10,616   941   11,072   1   —   941   11,073   12,014   1,500   2011   07/10 40 years
Sugar Mill, Baton Rouge, LA  11,216   1,437   13,367   204   —   1,437   13,571   15,008   2,500   2009   08/08 40 years
Tattersall Village, Hinesville, GA  26,121   2,691   23,961   —   —   2,691   23,961   26,652   —   2010   12/16 40 years
Toulon, Gautier, MS  20,356   1,993   20,107   —   —   1,993   20,107   22,100   2,765   2011   09/09 40 years
Tradewinds, Midland, TX  14,477   3,300   20,073   —   —   3,300   20,073   23,373   748   2015   06/15 40 years
Villager, Ft. Walton, FL  733   141   1,268   —   —   141   1,268   1,409   53   1972   06/15 40 years
Villas at Park West I, Pueblo, CO  10,410   1,171   10,453   —   —   1,171   10,453   11,624   544   2005   12/14 40 years
Villas at Park West II, Pueblo, CO  9,418   1,463   13,060   —   —   1,463   13,060   14,523   680   2010   12/14 40 years
Vista Ridge, Tupelo, MS  10,661   1,339   13,398   —   —   1,339   13,398   14,737   848   2009   10/15 40 years
Vistas of Vance Jackson, San Antonio, TX  15,076   1,327   16,539   127   —   1,327   16,666   17,993   4,728   2004   01/04 40 years
Waterford, Roseberg, TX  17,167   2,341   20,880   0   —   2,341   20,880   23,221   783   2013   06/14 40 years
Westwood, Mary Ester, FL  4,167   692   6,650   0   —   692   6,650   7,342   263   1972   06/15 40 years
Windsong, Fort Worth, TX  10,599   790   11,526   69   —   790   11,596   12,386   3,724   2002   07/03 40 years
Total Apartments Held for Investment $553,512  $61,025  $634,601  $5,288  $(3,180) $61,025  $636,709  $697,733  $98,588           

Schedule III

56  

(Continued)

 TRANSCONTINENTAL REALTY INVESTORS, INC.
 Schedule III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 20162017

 

           Cost Capitalized                         
           Subsequent to  Asset  Gross Amounts of Which           Life on Which 
     Initial Cost  Acquisition  Impairment  Carried at End of Year           Depreciation 
                                              In Latest 
                                              Statement 
                    Asset          Building &         Accumulated    Date of   Date  of Operation 
Property/Location  Encumbrances   Land   Buildings   Improvements   Impairment   Land   Improvements   Total   Depreciation   Construction   Acquired  is Computed 
(dollars in thousands) 
Apartments Under Construction                                                
Lakeside Lofts, Farmers Branch, TX  0   0   —   1,744   —   —   1,744   1,744   —   —   12/14  — 
Terra Lago, Rowlett, TX  13,005   6,023   —   15,406   —   6,024   15,406   21,430   —   —   11/15  — 
Overlook at Allensville Square II, Sevierville, TN  0   1,843   —   271   —   1,843   271   2,114   —   —   11/15  — 
Total Apartments Under Construction $13,005  $7,866  $—  $17,421  $—  $7,867  $17,421  $25,288  $—             
                                                 
Commercial                                                
600 Las Colinas, Las Colinas, TX  39,237   5,751   51,759   16,941   —   5,751   68,700   74,451   23,728   1984   08/05  40 years 
770 South Post Oak, Houston, TX  12,700   1,763   15,834   165       1,763   15,999   17,762   660   1970   07/15  40 years 
Bridgeview Plaza, LaCrosse, WI  5,218   —   —   1,008   —   —   1,008   1,008   521   1979   03/03  40 years 
Browning Place (Park West I), Farmers Branch, TX  23,193   5,096   45,868   14,355   —   5,096   60,223   65,319   21,301   1984   04/05  40 years 
Mahogany Run Golf Course, US Virgin Islands  —   7,168   6,031   142   (5,300)  7,168   873   8,041   323   1981   11/14  40 years 
Fruitland Plaza, Fruitland Park, FL  —   23   —   83   —   23   83   106   46   —   05/92  40 years 
Senlac VHP,  Farmers Branch, TX  —   622   —   142   —   622   142   764   134   —   08/05  40 years 
Stanford Center, Dallas, TX  28,000   3,878   34,862   7,793   (9,600)  3,878   33,055   36,933   8,980   —   06/08  40 years 
Total Commercial Held for Investment $108,348  $24,301  $154,354  $40,629  $(14,900) $24,301  $180,083  $204,384  $55,693             
                                                 
Land                                                
Dominion Mercer, Farmers Branch, TX  3,572   3,688  $—   —   —   3,688   —   3,688   —   —   10/16  — 
2427 Valley View Ln, Farmers Branch, TX  —   76       —   —   76   —   76   —   —   07/12  — 
Audubon, Adams County, MS  —   519   —   297   —   816   —   816   —   —   03/07  — 
Bonneau Land, Farmers Branch, TX  —   1,309   —   —   —   1,309   —   1,309   —   —   12/14  — 
Cooks Lane, Fort Worth, TX  394   1,094   —   —   —   1,094   —   1,094   —   —   06/04  — 
Dedeaux, Gulfport, MS  —   1,612   —   46   (38)  1,620   —   1,620   —   —   10/06  — 
Denham Springs, Denham Springs, LA  153   714   —   —   —   714   —   714   —   —   08/08  — 
Gautier Land, Gautier, MS  —   202   —   —   —   202   —   202   —   —   07/98  — 
Hollywood Casino Tract II, Farmers Branch, TX  2,645   6,940   —   1,292   (3,747)  4,485  $—   4,485   —   —   06/02  — 
Lacy Longhorn Land, Farmers Branch, TX  —   1,169   —   —   (760)  409   —   409   —   —   06/04  — 
Lake Shore Villas, Humble, TX  —   81   —   3   —   84   —   84   —   —   03/02  — 
Lubbock Land, Lubbock, TX  —   234   —   —   —   234   —   234   —   —   01/04  — 
Luna Ventures, Farmers Branch TX  —   2,934   —   —   —   2,934   —   2,934   —   —   04/08  — 
Mandahl Bay Land  —   667   —   —   —   667   —   667   —   —   01/05  — 
McKinney 36, Collin County, TX  1,415   647   —   164   (19)  792   —   792   —   —   01/98  — 
Minivest Land, Dallas, TX  —   7   —   —   —   7   —   7   —   —   04/13  — 
Mira Lago,  Farmers Branch, TX  —   59   —   15   —   74   —   74   —   —   05/01  — 
Nakash, Malden, MO  —   114   —   —   —   114   —   114   —   —   01/93  — 
Nashville, Nashville, TN  —   662   —   61   —   723   —   723   —   —   06/02  — 
Nicholson Croslin, Dallas, TX  —   184   —   —   (118)  66   —   66   —   —   10/98  — 
Nicholson Mendoza, Dallas, TX  —   80   —   —   (51)  29   —   29   —   —   10/98  — 
Ocean Estates, Gulfport, MS  —   1,418   —   390   —   1,808   —   1,808   —   —   10/07  — 
Senlac Land Tract II, Farmers Branch, TX  —   656   —   —   —   656   —   656   —   —   08/05  — 
Sugar Mill Land, Baton Rouge, LA  116   445   —   242   —   687   —   687   —   —   08/13  — 
Texas Plaza Land, Irving, TX  —   1,738   —   —   (238)  1,500   —   1,500   —   —   12/06  — 
Travis Ranch Land, Kaufman County, TX  757   1,030   —   —   —   1,030   —   1,030   —   —   08/08  — 
Travis Ranch Retail, Kaufman City, TX  —   1,517   —   —   —   1,517   —   1,517   —   —   08/08  — 
Union Pacific Railroad Land, Dallas, TX  —   130   —   —   —   130   —   130   —   —   03/04  — 
Valley View 34 (Mercer Crossing), Farmers Branch, TX  —   1,173   —   —   (945)  228   —   228   —   —   08/08  — 
Willowick Land, Pensacola, FL  —   137   —   —   —   137   —   137   —   —   01/95  — 
Windmill Farms Land, Kaufman County, TX  25,332   48,822   —   15,007   (20,564)  43,265   —   43,265   —   —   11/11  — 
Total Land Held for Investment $34,384  $80,058  $—  $17,517  $(26,480) $71,095  $—  $71,095  $—             

        Cost Capitalized                 
        Subsequent to Asset Gross Amounts of Which       Life on Which 
    Initial Cost Acquisition Impairment Carried at End of Year       Depreciation 
                                   In Latest 
                                   Statement 
               Asset     Building &     Accumulated Date of Date of Operation 
Property/Location Encumbrances Land Buildings Improvements Impairment Land Improvements Total Depreciation Construction Acquired is Computed 
                                     
Apartments Under Construction                                    
Abode Red Rock  22,945  6,039  —  28,095  —  6,039  28,095  34,134  —  —  01/17 — 
Apalache Point  —  —  —  150  —  —  150  150  —  —    — 
Eagle Crossing  —  —  —  81  —  —  81  81  —  —    — 
Forest Pines  —  5,040  —  269  —  5,040  269  5,309  —  —  06/17 — 
Lakeside Lofts, Farmers Branch, TX  1  —  —  5,079  —  —  5,079  5,079  —  —  08/17 — 
McKinney Point  —  —  —  138  —  —  138  138  —  —  10/17 — 
Parc at Bentonville  —  —  —  86  —  —  86  86  —  —  08/17 — 
Parc at Garland  —  —  —  81  —  —  81  81  —  —  08/17 — 
Parc at Wylie  —  —  —  195  —  —  195  195  —  —  08/17 — 
Oak Hollow II  5,475  1,046  —  4,622  —  1,046  4,622  5,668  —  —  04/17 — 
Overlook at Allensville Square II, Sevierville, TN  —  1,843  —  530  —  1,843  530  2,373  —  —  11/15 — 
Sawgrass II  1,007  —  —  3,772  —  —  3,772  3,772  —  —  06/17 — 
Terra Lago, Rowlett, TX  39,042  5,588  —  42,137  —  5,588  42,137  47,725  —  —  11/15 — 
                                     
Total Apartments Under Construction $68,470 $19,556 $— $85,235 $— $19,556 $85,235 $104,791 $—         
                                     
Commercial                                    
600 Las Colinas, Las Colinas, TX  38,600  5,751  51,759  18,573  —  5,751  70,332  76,083  26,899  1984  08/05 40 years 
770 South Post Oak, Houston, TX  12,600  1,763  15,834  270     1,763  16,104  17,867  1,122  1970  07/15 40 years 
Bridgeview Plaza, LaCrosse, WI  4,906  —  —  1,134  —  —  1,134  1,134  616  1979  03/03 40 years 
Browning Place (Park West I), Farmers Branch, TX  42,473  5,096  45,868  15,571  —  5,096  61,439  66,535  23,746  1984  04/05 40 years 
Mahogany Run Golf Course, US Virgin Islands  —  418  6,037  148  (5,300) 418  885  1,303  502  1981  11/14 40 years 
Fruitland Plaza, Fruitland Park, FL  —  23  —  83  —  23  83  106  54  —  05/92 40 years 
Senlac VHP, Farmers Branch, TX  —  622  —  142  —  622  142  764  140  —  08/05 40 years 
Stanford Center, Dallas, TX  28,000  3,878  34,862  7,871  (9,600) 3,878  33,133  37,011  10,567  —  06/08 40 years 
Total Commercial Held for Investment $126,579 $17,551 $154,360 $43,792 $(14,900) $17,551 $183,252 $200,803 $63,646         
                                     
Land                                    
Dominion Mercer, Farmers Branch, TX  11,125  4,040     3,609  —  4,040  3,609  7,649  —  —  10/16 — 
2427 Valley View Ln, Farmers Branch, TX  —  76  —   —  —  76  —  76  —  —  07/12 — 
Audubon, Adams County, MS  —  519  —  296  —  519  296  815  —  —  03/07 — 
Bonneau Land, Farmers Branch, TX  —  1,309  —  —  —  1,309  —  1,309  —  —  12/14 — 
Cooks Lane, Fort Worth, TX  157  1,094  —  —  —  1,094  —  1,094  —  —  06/04 — 
Dedeaux, Gulfport, MS  —  1,612  —  46  (38) 1,612  8  1,620  —  —  10/06 — 
Denham Springs, Denham Springs, LA  61  714  —  —  —  714  —  714  —  —  08/08 — 
Gautier Land, Gautier, MS  —  202  —  —  —  202  —  202  —  —  07/98 — 
Hollywood Casino Land Tract II, Farmers Branch, TX  —  6,940  —  1,346  (3,747) 6,940  (2,401) 4,539  —  —  03/08 — 
Lacy Longhorn Land, Farmers Branch, TX  —  1,169  —  —  (760) 1,169  (760) 409  —  —  06/04 — 
Lake Shore Villas, Humble, TX  —  81  —  3  —  81  3  84  —  —  03/02 — 
Lubbock Land, Lubbock, TX  —  234  —  —  —  234  —  234  —  —  01/04 — 
Mandahl Bay Land  —  667  —  —  —  667  —  667  —  —  01/05 — 
McKinney 36, Collin County, TX  1,211  635  —  161  (19) 635  142  777  —  —  01/98 — 
Minivest Land, Dallas, TX  —  7  —  —  —  7  —  7  —  —  04/13 — 
Mira Lago, Farmers Branch, TX  —  59  —  15  —  59  15  74  —  —  05/01 — 
Nakash, Malden, MO  —  113  —  —  —  113  —  113  —  —  01/93 — 
Nashville, Nashville, TN  —  662  —  59  —  662  59  721  —  —  06/02 — 
Nicholson Croslin, Dallas, TX  —  184  —  —  (118) 184  (118) 66  —  —  10/98 — 
Nicholson Mendoza, Dallas, TX  —  80  —  —  (51) 80  (51) 29  —  —  10/98 — 
Ocean Estates, Gulfport, MS  —  1,418  —  390  —  1,418  390  1,808  —  —  10/07 — 
Senlac Land Tract II, Farmers Branch, TX  —  656  —  —  —  656  —  656  —  —  08/05 — 
Texas Plaza Land, Irving, TX  —  1,738  —  —  (238) 1,738  (238) 1,500  —  —  12/06 — 
Travis Ranch Land, Kaufman County, TX  307  80  —  —  —  80  —  80  —  —  08/08 — 
Travis Ranch Retail, Kaufman City, TX  —  1,517  —  —  —  1,517  —  1,517  —  —  08/08 — 
Union Pacific Railroad Land, Dallas, TX  —  130  —  —  —  130  —  130  —  —  03/04 — 
Valley View 34 (Mercer Crossing), Farmers Branch, TX  —  1,173  —  —  (945) 1,173  (945) 228  —  —  08/08 — 
Willowick Land, Pensacola, FL  —  137  —  —  —  137  —  137  —  —  01/95 — 
Windmill Farms Land, Kaufman County, TX  14,922  48,378  —  14,209  (20,376) 48,378  (6,167) 42,211  —  —  11/11 — 
Total Land Held for Investment $27,783 $75,624 $— $20,134 $(26,292)$75,624 $(6,158)$69,466 $—         

57  


Schedule III

(Continued)

 TRANSCONTINENTAL REALTY INVESTORS, INC.
 Schedule III
(Continued)
TRANSCONTINENTAL REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 20162017

 

       Cost Capitalized                           Cost Capitalized                 
        Subsequent to Asset Gross Amounts of Which         Life on Which        Subsequent to Asset Gross Amounts of Which       Life on Which 
   Initial Cost Acquisition Impairment Carried at End of Year         Depreciation    Initial Cost Acquisition Impairment Carried at End of Year       Depreciation 
                                             In Latest    In Latest 
      Statement    Statement 
      Asset      Building &   Accumulated  Date of Date of Operation   Asset   Building &    Accumulated Date of Date of Operation 
Property/Location  Encumbrances  Land  Buildings  Improvements  Impairment  Land  Improvements  Total  Depreciation  Construction  Acquired is Computed  Encumbrances Land Buildings Improvements Impairment Land Improvements Total Depreciation Construction Acquired is Computed 
(dollars in thousands) 
                           
Corporate Departments/Investments/Misc.                                                                           
TCI - Corporate  162,232   —   —   —   —   —   —   —   —               119,786  —  —  —  —  —  —  —  —  —  —  — 
Total Corporate Departments/Investments/Misc. $162,232  $—  $—  $—  $—  $—  $—  $—  $—              $119,786 $— $— $— $— $— $— $— $—        
                                                       ��                             
Total Properties Held for Investment $871,481  $173,247  $788,954  $80,855  $(44,561) $164,285  $834,213  $998,498  $154,281              $909,195 $177,551 $823,755 $155,787 $(44,372)$177,551 $935,170 $1,112,721 $178,590          
                                                                           
Properties Held for Sale                                                                           
Commercial                                                                           
Dunes Plaza, Michigan City, IN  376   —   —   —   —   —   —   —   —   1978   03/92  40 years   376 — — — — — —  — — 1978 03/92 40 years 
Total Commercial Held for Sale $376  $—  $—  $—  $—  $—  $—  $—  $—              $376 $— $— $— $— $— $— $— $—        
                                                                                     
Total Properties Held for Sale $376  $—  $—  $—  $—  $—  $—  $—  $—              $376 $— $— $— $— $— $— $— $—          
                                                                           
Properties Subject to Sales Contract                                                                           
Apartments                                                                           
                      —   —   —                                  —  —  —             
Total Aparments Subject to Sales Contract $—  $—  $—  $—  $—  $—  $—  $—  $—              $— $— $— $— $— $— $— $— $—        
                                                                           
Commercial                                                                           
              —                                            —                 —       
Total Commercial Subject to Sales Contract $—  $—  $—  $—  $—  $—  $—  $—  $—              $— $— $— $— $— $— $— $— $—        
                                                                           
Land                                                                           
Dominion Tract, Dallas, TX $3,360  $3,931  $—  $53   (1,624)  2,360  $—   2,360  $—   —   03/99  —  $1,079 $3,931 $— $53 (1,624) 2,360 $—  2,360 $— — 03/99 — 
Hollywood Casino Land Tract I, Farmers Branch, TX  1,410   8,470   —   147   (5,297)  3,320   —   3,320   —   —   03/08  — 
Hollywood Casino Tract I, Farmers Branch, TX  420 5,281 — 124 (3,302) 2,103 $—  2,103 — — 06/02 — 
LaDue Land, Farmers Branch, TX  —   1,900   —   —   (55)  1,845  $—   1,845   —   —   07/98  —   — 1,900 — — (55) 1,845 $—  1,845 — — 07/98 — 
Three Hickory Land, Farmers Branch, TX  —   1,202   —   —   —   1,202  $—   1,202   —   —   03/14  —   — 1,202 — — — 1,202 $—  1,202 — — 03/14 — 
Travelers Land, Farmers Branch, TX  —   21,511   —   4   —   21,515  $—   21,515   —   —   11/06  —   — 21,511 — 4 — 21,515 $—  21,515 — — 11/06 — 
Travelers Land, Farmers Branch, TX  —   6,891   —   —   (4,978)  1,913  $—   1,913   —   —   11/06  —   — 6,891 — — (4,978) 1,913 $—  1,913 — — 11/06 — 
Walker Land, Dallas County, TX  —   19,728   —   71   (6,624)  13,175  $—   13,175   —   —   09/06  —   — 19,728 — 71 (6,624) 13,175 $—  13,175 — — 09/06 — 
Whorton Land, Bentonville, AR  372   3,510   —   567   (2,451)  1,626  $—   1,626   —   —   06/05  —   —  3,510  —  567  (2,451) 1,626 $—  1,626  —  —  06/05  — 
Total Land Subject to Sales Contract $5,142  $67,143  $—  $842  $(21,029) $46,956  $—  $46,956  $—              $1,499 $63,954 $— $819 $(19,034)$45,739 $— $45,739 $—        
                                                                                     
Total Properties Subject to Sales Contract $5,142  $67,143  $—  $842  $(21,029) $46,956  $—  $46,956  $—              $1,499 $63,954 $— $819 $(19,034)$45,739 $— $45,739 $—          
                                                                           
Land Sold                                                                           
 $—  $—  $—  $—   —  $—  $—  $—  $—              $— $— $— $—  — $— $— $— $—  —  —  — 
Total Land Sold $—  $—  $—  $—  $—  $—  $—  $—  $—              $— $— $— $—$—$— $— $— $— $— $— $— 
                                                                                     
TOTAL: Real Estate $876,999  $240,390  $788,954  $81,697  $(65,590) $211,241  $834,213  $1,045,454  $154,281              $911,070 $241,505 $823,755 $156,606 $(63,406)  $223,290 $935,170 $1,158,460 $178,590          

REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2017
SCHEDULE III
(Continued)

 

  2017  2016  2015 
  (dollars in thousansds) 
Reconciliation of Real Estate            
Balance at January 1, $1,045,454  $982,827  $804,489 
Additions            
Acquisitions, improvements and construction  119,925   112,763   222,423 
Deductions            
Sale of real estate  (6,919)  (50,136)  (38,785)
Asset impairments  —   —   (5,300)
Balance at December 31, $1,158,460  $1,045,454  $982,827 
             
Reconciliation of Accumulated Depreciation            
Balance at January 1, $154,281  $138,808  $115,368 
Additions            
Depreciation  24,309   22,180   25,565 
Deductions            
Sale of real estate  —   (6,707)  (2,125)
Balance at December 31, $178,590  $154,281  $138,808 

58  


SCHEDULE IV
 
TRANSCONTINENTAL REALTY INVESTORS, INC.
MORTGAGE LOANS
December 31, 2017

 

REAL ESTATE AND ACCUMULATED DEPRECIATION

As of December 31, 2016

SCHEDULE III

(Continued)

  2016  2015  2014 
  (dollars in thousands) 
Reconciliation of Real Estate            
Balance at January 1, $982,827  $804,489  $828,093 
Additions            
Acquisitions, improvements and construction  112,763   222,423   71,423 
Deductions            
Sale of real estate  (50,136)   (38,785)  (95,027)
Asset impairments  —   (5,300)  — 
Balance at December 31,  1,045,454  $982,827  $804,489 
             
Reconciliation of Accumulated Depreciation            
Balance at January 1, $138,808  $115,368  $132,291 
Additions            
Depreciation  22,180   25,565   17,145 
Deductions            
Sale of real estate  (6,707)   (2,125)  (34,068)
Balance at December 31, $154,281  $138,808  $115,368 

Description Interest
Rate		 Final
Maturity
Date		  Periodic Payment
Terms		 Prior
Liens		  Face Amount of
Mortgate		  Carrying
Amount of
Mortgage		  Principal
Amounts of
Loans
Subject To
Delinquent
Principal or
Interest		 
         (dollars in thousands) 
H198, LLC 12.00% 01/20     —   5,907   5,907   — 
Las Vegas Land                       
H198, LLC 12.00% 01/20             4,290   — 
McKinney Ranch Land                       
Spyglass Apartments of Ennis 5.00% 11/19             4,522   — 
Bellwether Ridge 5.00% 05/20             2,954   — 
Parc at Windmill Farms 5.00% 05/20             2,505   — 
Oulan-Chikh Family Trust 8.00% 3/21  Excess cash flow  —   174   174   — 
Unified Housing Foundation, Inc. (Echo Station) 12.00% 12/32  Excess cash flow  9,719   1,809   1,481   — 
100% Interest in UH of Temple, LLC                       
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble, LLC) (31.5% of cash flow) 12.00% 12/32  Excess cash flow  15,756   8,836   6,368   — 
Interest in Unified Housing Foundation Inc.                       
Unified Housing Foundation, Inc. (Limestone Ranch) 12.00% 12/32  Excess cash flow  18,641   12,335   7,953   — 
100% Interest in UH of Vista Ridge, LLC                       
Unified Housing Foundation, Inc. (Timbers of Terrell) 12.00% 12/32  Excess cash flow  7,294   1,702   1,323   — 
100% Interest in UH of Terrell, LLC                       
Unified Housing Foundation, Inc. (Tivoli) 12.00% 12/32  Excess cash flow  10,398   12,761   6,139   — 
100% Interest in UH of Tivoli, LLC                       
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble, LLC) (68.5% of cash flow) 12.00% 12/32  Excess cash flow  15,756   2,189   2,000   — 
Unified Housing Foundation, Inc (2017 Advisory Fee) 12.00% 06/20  Excess cash flow  —   1,261   5,760   — 
Unified Housing Foundation, Inc. 12.00% 12/18  Excess cash flow  —   3,994   3,994   — 
Unified Housing Foundation, Inc. 12.00% 12/18  Excess cash flow  —   6,407   6,407   — 
Various related party notes various various  Excess cash flow  —   1,420   465   — 
Various non-related party notes various various     —   496   796   — 
Various non-related party notes various various     —   4,742   981   — 
                 $64,019     
              Accrued interest   6,147     
                 $70,166     

59


SCHEDULE IV
(Continued)

SCHEDULE IV

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS

December 31, 2016

Description Interest Rate Final Maturity Date Periodic Payment Terms Prior Liens Face Amount of
Mortgate		  Carrying Amount of Mortgage Principal Amounts of Loans Subject To Delinquent Principal or Interest
          (dollars in thousands)  
H198, LLC 12.00% 01/20    —  5,907  5,907  —
Las Vegas Land              
Oulan-Chikh Family Trust 8.00% 3/21 Excess cash flow  —  174  174  —
Unified Housing Foundation, Inc. (Echo Station) 12.00% 12/32 Excess cash flow  9,719  1,809  1,481  —
100% Interest in UH of Temple, LLC              
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble,LLC) (31.5% of cash flow) 12.00% 12/32 Excess cash flow  15,756  8,836  6,368  —
Interest in Unified Housing Foundation Inc.              
Unified Housing Foundation, Inc. (Limestone Canyon) 12.00% 12/32 Excess cash flow  13,621  9,216  7,293  —
100% Interest in UH of Austin, LLC              
Unified Housing Foundation, Inc. (Limestone Ranch) 12.00% 12/32 Excess cash flow  18,641  12,335  7,953  —
100% Interest in UH of Vista Ridge, LLC              
Unified Housing Foundation, Inc. (Parkside Crossing) 12.00% 12/32 Excess cash flow  11,544  2,409  1,936  —
100% Interest in UH of Parkside Crossing, LLC              
Unified Housing Foundation, Inc. (Sendero Ridge) 12.00% 12/32 Excess cash flow  22,984  12,663  9,303  —
100% Interest in UH of Sendero Ridge, LLC              
Unified Housing Foundation, Inc. (Timbers of Terrell) 12.00% 12/32 Excess cash flow  7,294  1,702  1,323  —
100% Interest in UH of Terrell, LLC              
Unified Housing Foundation, Inc. (Tivoli) 12.00% 12/32 Excess cash flow  10,398  12,761  7,966  —
100% Interest in UH of Tivoli, LLC              
Various non-related party notes various various    —  496  796  —
Unified Housing Foundation, Inc. (Lakeshore Villas/HFS of Humble,LLC) (68.5% of cash flow) 12.00% 12/32 Excess cash flow  15,756  2,189  2,000  —
Unified Housing Foundation, Inc (2016 Advisory Fee) 12.00% 06/19 Excess cash flow  —  1,261  5,400  —
Unified Housing Foundation, Inc. 12.00% 12/17 Excess cash flow  —  1,207  1,207  —
Unified Housing Foundation, Inc. 12.00% 12/18 Excess cash flow  —  3,994  3,994  —
Unified Housing Foundation, Inc. 12.00% 12/18 Excess cash flow  —  6,407  6,407  —
Various related party notes various various Excess cash flow  —  1,420  1,404  —
Various non-related party notes various various    —  4,742  4,742  —
             $    75,654  
           Accrued interest  5,479  
         Allowance for estimated losses  (1,825) 
             $     79,308  

60

SCHEDULE IV

(Continued)

TRANSCONTINENTAL REALTY INVESTORS, INC.

MORTGAGE LOANS

As of December 31,

  2016  2015  2014 
  (dollars in thousands) 
          
Balance at January 1, $71,376  $85,447  $70,169 
Additions            
New mortgage loans  11,703   18,055   32,380 
Funding of existing loans  —   —   — 
Increase (decrease) of interest receivable on mortgage loans  9,878   6,994   (7,650)
Deductions            
Amounts received  (11,824)  (12,475)  (9,180)
Non-cash reduction  —   (26,645)  (272)
Cost of mortgages sold  —   —   — 
Balance at December 31, $81,133  $71,376  $85,447 

61

 

TRANSCONTINENTAL REALTY INVESTORS, INC.
ITEM 9.MORTGAGE LOANS
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREAs of December 31,

  2017  2016  2015 
  (dollars in thousands) 
          
Balance at January 1, $79,308  $71,376  $85,447 
Additions            
New mortgage loans  16,422   11,703   18,055 
Funding of existing loans  —   —   — 
Increase (decrease) of interest receivable on mortgage loans  668   9,878   6,994 
Deductions            
Amounts received  (26,230)  (11,824)  (12,475)
Non-cash reduction(*)  (2)  (1,825)  (26,645)
Cost of mortgages sold  —   —   — 
Balance at December 31, $70,166  $79,308  $71,376 

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.CONTROLS AND PROCEDURES

ITEM 9A.    CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Principal Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention of overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.2017. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessments and those criteria, management has concluded that Company’s internal control over financial reporting was effective as of December 31, 2016.2017.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial report. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

In preparation for management’s report on internal control over financial reporting, we documented and tested the design and operating effectiveness of our internal control over financial reporting. There were no changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 20162017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.     OTHER INFORMATION

 

Not applicable.


PART III

62

 

PART IIIITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

 

The affairs of TCI are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved.

 

It is the Board’s objective that a majority of the Board consists of independent directors. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with TCI. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in TCI’s “Corporate Governance Guidelines”. The text of this document has been posted on TCI’s internet website at (http://www.transconrealty-invest.com) and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independence determination.

 

TCI has adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address at (http://www.transconrealty-invest.com.www.transconrealty-invest.com). We will post any amendments to the code of conduct, as well as any waivers that are required to be disclosed by the rules of the SEC or the New York Stock Exchange on our website.

 

Our Board of Directors has adopted charters for our Audit, Compensation and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address at (http://www.transconrealty-invest.com.www.transconrealty-invest.com). You may also obtain a printed copy of the materials referred to by contacting us at the following address:

Transcontinental Realty Investors, Inc.

Attn: Investor Relations

1603 LBJ Freeway, Suite 800

Dallas, Texas 75234

Telephone: 469-522-4200

 

All members of the Audit Committee and Nominating and Corporate Governance Committees must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any consulting, advisory, or compensatory fee from TCI or any of its subsidiaries other than their director’s compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the Audit Committee may be an “affiliated person” of TCI or any of its subsidiaries, as defined by the Securities and Exchange Commission.

 

The current directors of TCI are listed below, together with their ages, terms of service, all positions and offices with TCI and its current advisor, Pillar, their principal occupations, business experience and directorships with other companies during the last five years or more. The designation “affiliated”, when used below with respect to a director, means that the director is an officer, director or employee of Pillar, an officer of the Company, or an officer or director of a related party of the Company. The designation “independent”, when used below with respect to a Director, means that the Director is neither an officer of the Company nor a director, officer or employee of Pillar (but may be a director of the Company, although the Company may have certain business or professional relationships with such Director as discussed in Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

HENRY A. BUTLER, age 66,67, Director, Affiliated, since February 2011 and Chairman of the Board since May 2011

 

Mr. Butler has served as Vice President Land Sales for Pillar Income Asset Management, LLC since April 2011, and its predecessor, Prime Income Asset Management, LLC from July 2003 to April 2011. Mr. Butler has been a Director of the Company since February 2011 and Chairman of the Board since May 2011. He has also served as Chairman of the Board since May 2009 and as a Director since July 2003 of ARL and Chairman of the Board since May 2009 and a Director since December 2001 of TCI.

 

ROBERT A. JAKUSZEWSKI, age 54,55, Director, Independent, since March 2004.

 

Mr. Jakuszewski is currently has served as a Territory Manager for Artesa Labs since April 2015. He was a Medical Specialist from January 2014 to April 2015 for VAYA Pharma, Inc., Senior Medical Liaison from January 2013 to July 2013 for Vein Clinics of America, and the Vice President of Sales and Marketing from September 1998 to December 2012 for New Horizons Communications, Inc. Mr. Jakuszewski has been a Director of the Company since March 2004. He has also been a Director of ARL since November 2005 and a Director of TCI since November 2005.

63


TED R. MUNSELLE, age 61,62, Director, Independent, since May 2009

 

Mr. Munselle has been Vice President and Chief Financial Officer of Landmark Nurseries, Inc. since October 1998. On February 17, 2012, he was appointed as a member of the Board of Directors for Spindletop Oil & Gas Company and as Chairman of their Audit Committee. Spindletop’s stock is traded on the Over-the-Counter (OTC) market. Mr. Munselle has been a Director of the Company since May 2009. He has also served as Director of ARL since February 2004 and Director of TCI since February 2004. Mr. Munselle is qualified as an Audit Committee financial expert within the meaning of SEC regulations and the Board of Directors of IOTIOR has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the NYSE MKT.American. Mr. Munselle is a Certified Public Accountant.

 

RAYMOND R.D. ROBERTS, SR., age 84,86, Director, Independent, since June 2016

 

Mr. Roberts is currently retired. Mr. Roberts has served as Director of the Company since June 2, 2016. He has also served as Director of ARL and TCI since June 2, 2016. For more than five years prior to December 31, 2014, he was Director of Aviation of Steller Aviation, Inc., a privately held corporation engaged in the business of aircraft (Boeing 737) and logistical management.

 

Board Meetings and Committees

 

The Board of Directors held eight meetings during 2016.2017. For such year, no incumbent director attended fewer than 88%75% of the aggregate of (1) the total number of meetings held by the Board during the period for which he or she had been a director and (2) the total number of meetings held by all committees of the Board on which he or she served during the period that he served. Under TCI’s Corporate Governance Guidelines, each Director is expected to dedicate sufficient time, energy and attention to ensure the diligent performance of his or her duties, including by attending meetings of the stockholders of the Company, the Board and Committees of which he is a member. The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees.

 

Audit Committee.    The current Audit Committee was formed on February 19, 2004, and its function is to review TCI’s operating and accounting procedures. A charter of the Audit Committee has also been adopted by the Board. The charter of the Audit Committee was adopted on February 19, 2004, and is available on the Company’s Investor Relations website (www.transconrealty-invest.com). The Audit Committee is an “audit committee” for purposes of Section 3(a)(58) of the Securities Exchange Act of 1934. The current members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the New York Stock Exchange, Inc. and TCI’s Corporate Governance Guidelines, are Messrs. Jakuszewski, Munselle (Chairman) and Roberts. Mr. Ted R. Munselle, a member of the Committee, is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the New York Stock Exchange, Inc. All of the members of the Audit Committee meet the experience requirements of the listing standards of the New York Stock Exchange. The Audit Committee met five times during 2016.2017.

 

Governance and Nominating Committee.    The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of TCI’s Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004 and is available on the Company’s Investor Relations website (www.transconrealty-invest.com). The current members of the Committee are Messrs. Munselle and Jakuszewski (Chairman) and Roberts. The Governance and Nominating Committee met twice during 2016.2017.

 

Compensation Committee.    The Compensation Committee is responsible for overseeing the policies of the Company relating to compensation to be paid by the Company to the Company’s principal executive officer and any other officers designated by the Board and make recommendations to the Board with respect to such policies, produce necessary reports and executive compensation for inclusion in the Company’s Proxy Statement in accordance with applicable rules and regulations and to monitor the development and implementation of succession plans for the principal executive officers and other key executives and make recommendations to the Board with respect to such plans. The charter of the Compensation Committee was adopted on March 22, 2004, and is available on the Company’s Investor Relations website (www.transconrealty-invest.com). The current members of the Compensation Committee are Messrs. Roberts (Chairman) and Jakuszewski and Munselle. All of the members of the Compensation Committee are independent within the meaning of the listing standards of the NYSE American and the Company’s Corporate Governance Guidelines. The Compensation Committee is to be comprised of at least two directors who are independent of Management and the Company. The Compensation Committee met twice during 2016.

2017.

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The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:

 

 Audit Committee Governance and Nominating
Committee		 Compensation Committee
Robert A. JakuszewskiX Chair X
Ted R. MunselleChair X X
Raymond R.D. Roberts. Sr.SrX X Chair
Henry A. Butler    

 

Presiding Director

 

In March 2004, the Board created a new position of presiding director, whose primary responsibility is to preside over periodic executive sessions of the Board in which Management directors and other members of Management do not participate. The presiding director also advises the Chairman of the Board and, as appropriate, Committee Chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the selection of Committee Chairs and performs other duties that the Board may from time to time delegate to assist the Board in fulfillment of its responsibilities.

 

The day following the annual meeting of stockholders held December 7, 201613, 2017 representing all stockholders of record dated November 2, 2016,2017, the full Board met and re-appointed Ted R. Munselle as Presiding Director, to serve in such position until the Company’s next annual meeting of stockholders to be held subsequently in 2017.2018. 

 

Determination of Director’s Independence

 

In February 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during that year by the New York Stock Exchange. The full text of the Guidelines can be found on the Company’s Investor Relations website (www.transcontrealty-invest.com).

 

Pursuant to the Guidelines, the Board undertook its annual review of director independence in March 8, 2016May, 2017 and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and TCI and its subsidiaries and related parties, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationship between directors or their related parties and members of TCI’s senior management or their related parties. As provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.

 

As a result of this review, the Board affirmatively determined of the then directors, Messrs. Munselle, Jakuszewski and Roberts are each independent of the Company and its Management under the standards set forth in the Corporate Governance Guidelines.

 

Executive Officers

 

Executive officers of the Company are listed below, all of whom are employed by Pillar. Mr. Bertcher is employed by New Concept Energy, Inc (“NCE”)“NCE”. None of the executive officers receive any direct remuneration from the Company nor do any hold any options granted by the Company. Their positions with the Company are not subject to a vote of stockholders. In addition to the following executive officers, the Company has several vice presidents and assistant secretaries who are not listed herein. The ages, terms of service and all positions and offices with the Company, Pillar, other related entities, other principal occupations, business experience and directorships with other publicly-held companies during the last five years or more are set forth below. No family relationships exist among any of the executive officers or directors of the Company.

 

DANIEL J. MOOS, 6667

 

Mr. Moos has served as President since April 2007 and Chief Executive Officer since March 2010 of IOT,IOR, ARL and TCI. Mr. Moos has also served as Prime’s President since April 2007, Secretary since June 2011 and Treasurer since October 2013. He has also served as a Director since December 2016, President since December 2010, Chief Executive Officer since March 2011 and Treasurer since October 2013 of Pillar.

 

GENE S. BERTCHER, 6869

 

Mr. Bertcher has served as Executive Vice President since February 2008, Chief Financial Officer since May 2008 and Treasurer since October 2013 of IOT,IOR, ARL and TCI. Mr. Bertcher has also served in the following capacities for New Concept Energy, Inc. (“NCE”)“NCE”, a Nevada corporation which has its common stock listed on the NYSE:NYSE American: Director since June 1999, Chairman of the Board since December 2006, Chief Executive Officer since December 2006, President since November 2004, Chief Financial Officer since November 1989, Treasurer since November 1989 and Secretary since October 2012. Mr. Bertcher has been employed by NCE since November 1989. He is a Certified Public Accountant.

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LOUIS J. CORNA, 6970

 

Mr. Corna has served as Executive Vice President, General Counsel/Tax Counsel and Secretary since February 2004 of IOT,IOR, ARL and TCI. He has also been Executive Vice President-Tax since April 2011 and Secretary since December 2010 of Pillar. Mr. Corna was also a Director and Vice President from June 2004 to December 2010 and Secretary from January 2005 to December 2010 of First Equity Properties, Inc., a Nevada corporation with securities registered under Section 12(g) of the Exchange Act.

 

Code of Ethics

 

TCI has adopted a code of ethics entitled “Code of Business Conduct and Ethics” that applies to all directors, officers, and employees (including those of the contractual Advisor to TCI). In addition, TCI has adopted a code of ethics entitled “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller. The text of these documents has been posted on TCI’s internet website at http://(www.transconrealty-invest.com) and are available in print to any stockholder who requests them.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Under the securities laws of the United States, the directors, executive officers, and any persons holding more than 10% of TCI’s shares of Common stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the “Commission”). Specific due dates for these reports have been established and TCI is required to report any failure to file by these dates. All of these filing requirements were satisfied by TCI’s directors, executive officers, and 10% holders during the fiscal year ending December 31, 2015.2017. In making these statements, TCI has relied on the written representations of its incumbent directors and executive officers and its 10% holders and copies of the reports they have filed with the Commission.

 

The Advisor

 

Pillar has been TCI’s Advisor and Cash Manager since April 30, 2011.  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.  Pillar’s 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 TCI’s business plan and investment policy.  Pillar also serves as an Advisor and Cash Manager to ARL and IOT.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 and as such, employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement.

 

Pillar is a Nevada corporation, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust.  

 

The May Trust is a Trust, the beneficiaries of which are the children of Gene E. Phillips. Mr. Phillips is not an officer, manager or Director of Pillar, Realty Advisors, LLC, RAI, MRHI or ARL, nor is he a Trustee of the May Trust.

 

Under the Advisory Agreement, Pillar is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments. Pillar is required to report quarterly to the Board on TCI’s performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Pillar by the Board.

 

The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Pillar shall be deemed to be in a fiduciary relationship to the TCI stockholders; contains a broad standard governing Pillar’s liability for losses incurred by TCI; and contains guidelines for Pillar’s allocation of investment opportunities as among itself, TCI and other entities it advises. Pillar is a company of which Messrs. Moos, Bertcher, Corna, and Crozier serve as executive officers.

 

The Advisory Agreement provides for Pillar to be responsible for the day-to-day operations of TCI and to receive, as compensation for basic management and advisory services, a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves).

 

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In addition to base compensation, Pillar receives the following forms of additional compensation:

 

(1)an annual net income fee equal to 7.5% of TCI’s net income as an incentive for successful investment and management of the Company’s assets;

 

(2)an annual incentive sales fee to encourage periodic sales of appreciated real property at optimum value equal to 10.0% of the amount, if any, by which the aggregate sales consideration for all real estate sold by TCI during such fiscal year exceeds the sum of:


(a)the cost of each such property as originally recorded in TCI’s books for tax purposes (without deduction for depreciation, amortization or reserve for losses);

 

(b)capital improvements made to such assets during the period owned; and

 

(c)all closing costs (including real estate commissions) incurred in the sale of such real estate; provided however, no incentive fee shall be paid unless (a) such real estate sold in such fiscal year, in the aggregate, has produced an 8.0% simple annual return on the net investment including capital improvements, calculated over the holding period before depreciation and inclusive of operating income and sales consideration, and (b) the aggregate net operating income from all real estate owned for each of the prior and current fiscal years shall be at least 5.0% higher in the current fiscal year than in the prior fiscal year;

 

(3)an acquisition commission, from an unaffiliated party of any existing mortgage or loan, for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of:

 

(a)up to 1.0% of the cost of acquisition, inclusive of commissions, if any, paid to non-affiliated brokers; or

 

(b)the compensation customarily charged in arm’s-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property’s appraised value at acquisition;

 

(4)a construction fee equal to 6.0% of the so-called “hard costs” only of any costs of construction on a completed basis, based upon amounts set forth as approved on any architect’s certificate issued in connection with such construction, which fee is payable at such time as the applicable architect certifies other costs for payment to third parties. The phrase “hard costs” means all actual costs of construction paid to contractors, subcontractors and third parties for materials or labor performed as part of the construction but does not include items generally regarded as “soft costs,” which are consulting fees, attorneys’ fees, architectural fees, permit fees and fees of other professionals; and

 

(5)reimbursement of certain expenses incurred by the advisor in the performance of advisory services.

 

The Advisory Agreement also provides that Pillar receive the following forms of compensation:

 

(1)a mortgage or loan acquisition fee with respect to the acquisition or purchase from an unaffiliated party of any existing mortgage loan by TCI equal to the lesser of:

 

(a)1.0% of the amount of the mortgage or loan purchased; or

 

(b)a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by TCI; and

 

(2)a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of:

 

(a)1.0% of the amount of the loan or the amount refinanced; or

 

(b)a brokerage or refinancing fee which is reasonable and fair under the circumstances; provided, however, that no such fee shall be paid on loans from Pillar, or a related party of Pillar, without the approval of TCI’s Board of Directors. No fee shall be paid on loan extensions.

 

Under the Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the operating expenses of TCI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value and net income of TCI during the fiscal year.

 

The Advisory Agreement requires Pillar to pay to TCI, one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by TCI; provided, however, that the compensation retained by Pillar, or any affiliate of Pillar, shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.

 

The TCI Advisory Agreement further provides that Pillar shall bear the cost of certain expenses of its employees, excluding fees paid to TCI’s Directors; rent and other office expenses of both Pillar and TCI (unless TCI maintains office space separate from that of Pillar); costs not directly identifiable to TCI’s assets, liabilities, operations, business or financial affairs; and miscellaneous administrative expenses relating to the performance by Pillar of its duties under the Advisory Agreement.

 

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If and to the extent that TCI shall request Pillar, or any director, officer, partner, or employee of Pillar, to render services for TCI other than those required to be rendered by the Advisory Agreement, Pillar separately would be compensated for such additional services on terms to be agreed upon between such party and TCI from time to time. As discussed below, under “Property Management and Real Estate Brokerage,” effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services under similar terms as the previous agreements with Triad and Regis Realty I.


TCI entered into a Cash Management Agreement with Pillar on April 30, 2011 to further define the administration of the Company’s day-to-day investment operations, relationship contacts, flow of funds and deposit and borrowing of funds. Under the Cash Management Agreement, all funds of the Company are delivered to Pillar which has a deposit liability to the Company and is responsible for payment of all payables and investment of all excess funds which earn interest at the Wall Street Journal prime rate plus 1.0% per annum, as set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest rate. The term of the Cash Management Agreement is coterminous with the Advisory Agreement, and is automatically renewed each year unless terminated with the Advisory Agreement. TCI’s management believes that the terms of the Advisory Agreement are at least as fair as could be obtained from unaffiliated third parties.

 

Situations may develop in which the interests of TCI are in conflict with those of one or more directors or officers in their individual capacities, or of Pillar, or of their respective related parties. In addition to services performed for TCI, as described above, Pillar actively provides similar services as agent for, and advisor to, other real estate enterprises, including persons and entities involved in real estate development and financing, including ARL and IOT.IOR. The Advisory Agreement provides that Pillar may also serve as advisor to other entities.

 

As advisor, Pillar is a fiduciary of TCI’s public investors. In determining to which entity a particular investment opportunity will be allocated, Pillar will consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each such entity’s existing mortgage note and real estate portfolios and business plan. To the extent any particular investment opportunity is appropriate to more than one such entity, such investment opportunity will be allocated to the entity that has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among various entities. See Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence”.

 

Pillar may assign the Advisory Agreement only with the prior consent of TCI.

 

The principal executive officers and directors of Pillar are set forth below:

 

NameDirectors/Officer(s)
Daniel J. Moos President, Chief Executive Officer, Treasurer, Director
Gene S. Bertcher Executive Vice President, Chief Accounting Officer
Louis J. Corna Executive Vice President, Secretary, Tax Counsel, General Legal Counsel

 

Property Management

 

Since January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.

 

TCI engages third-party companies to lease and manage our apartment properties for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under their management.

 

Real Estate Brokerage

 

Regis provides real estate brokerage services to TCI on a non-exclusive basis, and is entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid:

 

(1)maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% is to be paid to Regis;

 

(2)maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3.0% is to be paid to Regis;

 

(3)maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2.0% is to be paid to Regis; and

 

(4)maximum fee of 2.0% on transaction amounts in excess of $10.0 million of which no more than 1.5% is to be paid to Regis.

ITEM 11.     EXECUTIVE COMPENSATION

 

TCI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of TCI, who are also officers or employees of Pillar, TCI’s advisor, are compensated by Pillar. Such executive officers perform a variety of services for Pillar and the amount of their compensation is determined solely by Pillar. Pillar does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See Item 10. “Directors, Executive Officers and Corporate Governance” for a more detailed discussion of the compensation payable to Pillar by TCI.

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The only remuneration paid by TCI is to the directors who are not officers or employees of Pillar or its related companies. The Independent Directors (1) review the business plan of TCI to determine that it is in the best interest of TCI’s stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of the total fees and expenses of TCI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired.

 

Effective February, 2011, each non-affiliated Director is entitled to receive an annual retainer of $12,000, with the Chairman of the Audit Committee to receive a one-time annual fee of $500. Directors who are also employees of the Company or its advisor receive no additional compensation for service as a Director.

 

During 2016, $40,4562017, $36,500 was paid to non-employee Directors in total Directors’ fees. The fees paid to the directors are as follows: Sharon Hunt, a director who resigned in May 2016, $10,000, Robert A. Jakuszewski, $12,000; Ted R. Munselle, $12,500; and, Raymond D. Roberts, Sr., $5,956.$12,000.

Director’s Stock Option Plan

 

TCI established a Director’s Stock Option Plan (“Director’s Plan”) for the purpose of attracting and retaining Directors who are not officers or employees of TCI or Pillar. The Director’s Plan provides for the grant of options that are exercisable at fair market value of TCI’s Common stock on the date of grant. The Director’s Plan was approved by stockholders at their annual meeting on October 10, 2000, following which each then-serving Independent Director was granted options to purchase 5,000 shares of Common stock of TCI. On January 1 of each year, each Independent Director receives options to purchase 5,000 shares of Common stock. The options are immediately exercisable and expire on the earlier of the first anniversary of the date on which a Director ceases to be a Director or 10 years from the date of grant. The Director’s Plan was terminated by the Board of Directors on December 15, 2005. As of December 31, 2015, there were 5,000 shares of stock options outstanding which were exercisable at $14.25 per share.  These options expired unexercised January 1, 2016.

 

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth the ownership of TCI’s Common stock, both beneficially and of record, both individually and in the aggregate, for those persons or entities known to be beneficial owners of more than 5.0% of the outstanding shares of Common stock as of the close of business on March 31, 2017.30, 2018.

 

 Amount and
Nature
of Beneficial
Ownership*		 Approximate
Percent of
Class**		  Amount and    
American Realty Investors, Inc. (1)(2)(3)  7,052,420   80.90%
 Nature Approximate 
 of Beneficial Percent of 
 Ownership* Class** 
American Realty Investors, Inc.(1)(2)  6,767,420   77.63%
1603 LBJ Freeway, Suite 800                
Dallas, Texas 75234                
                
Transcontinental Realty Acquisition Corporation (3)  1,383,226   15.87%
Transcontinental Realty Acquisition Corporation(2)  1,383,226   15.87%
1603 LBJ Freeway, Suite 800                
Dallas, Texas 75234                

  

 
*“Beneficial Ownership” means the sole or shared power to vote, or to direct the voting of, a security or investment power with respect to a security, or any combination thereof.
**Percentage is based upon 8,717,767 shares of Common stock outstanding at March 31, 2017.20, 2018.
(1)Includes 5,669,1945,384,194 shares (67.38%(61.76%) directly owned by American Realty Investors, Inc. (“ARL”)“ARL” directly, over which the directors al ARL may be deemed to be beneficial owners by virtue of their positions as directors of ARL. The directors of ARL disclaim beneficial ownership of such shares.
(2)Includes 1,383,226 shares1,383,226shares owned by Transcontinental Realty Acquisition Corporation (“TRAC”), which is a wholly owned subsidiary of ARL, over which each of the directors of TRAC, Daniel J. Moos and Gene S. Bertcher may be deemed to be beneficial owners by virtue of their positions as directors of TRAC. The directors of TRAC disclaim beneficial ownership of such shares.
(3)Each of the directors of ARL, Henry A. Butler, Raymond D. Roberts, Sr., Robert A. Jakuszewski and Ted R. Munselle may be deemed to be the beneficial owners by virtue of their positions as current directors of ARL. The directors of ARL disclaim such beneficial ownership.

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Security Ownership of Management.

 

The following table sets forth the ownership of TCI’s Common stock, both beneficially and of record, both individually and in the aggregate, for the directors and executive officers of TCI as of the close of business on March 18, 2016.30, 2018.

 

Name of Beneficial Owner Amount and
Nature of
Beneficial
Ownership*		  Approximate
Percent of Class**		  Amount and
Nature of
Beneficial Ownership*		 Approximate Percent of Class ** 
     
Gene S. Bertcher  7,052,420(2)  77.6%  6,767,420(1)  77.6%
Henry A. Butler  7,052,420(2)  77.6%  6,767,420(1)  77.6%
Louis J. Corna  7,052,420(2)  77.6%  6,767,420(1)  77.6%
Robert A. Jakuszewski  7,052,420(2)  77.6%  6,767,420(1)  77.6%
Daniel J. Moos  7,342,420(1)(2)(3)  84.2%  7,057,420(1)  84.2%
Ted Munselle  7,052,420(1)(2)  77.6%
Ted R. Munselle  6,767,420(1)  77.6%
Raymond D. Roberts, Sr.  7,052,420(1)(2)  77.6%  6,767,420(1)  77.6%
All Directors and Executive Officers as a group (7 individuals)  7,057,420(1)(2)(3)  77.6%  6,767,420(1)  77.6%

 

 
*“Beneficial Ownership” means the sole or shared power to vote, or to direct the voting of, a security or investment power with respect to a security, or any combination thereof.
**Percentages are based upon 8,717,767 shares of Common stock outstanding at March 31, 2017.30, 2018.
(1)Sharon Hunt and Ted R. Munselle each had options to purchase 5,000 shares of Common Stock, which expired January 1, 2015, unexercised.
(2)Includes 5,669,194 shares owned by ARL and 1,383,226 shares owned by TRAC, over which the executive officers and members of the Board of Directors of ARL may be deemed to be the beneficial owners by virtue of their positions as executive officers and members of the Board of Directors of ARL. The executive officers and current members of the Board of Directors of ARL disclaim beneficial ownership of such shares.
(3)Daniel J. Moos owns 290,000 shares of Common Stock.


ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Policies with Respect to Certain Activities

 

Article 14 of TCI’s Articles of Incorporation provides that TCI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of TCI, (2) any director, officer or employee of the advisor, (3) the advisor, or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by TCI’s Board of Directors or the appropriate committee thereof and (b) TCI’s Board of Directors or committee thereof determines that such contract or transaction is fair to TCI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of TCI entitled to vote thereon.

 

Article 14 defines an “Independent Director” (for purposes of that Article) as one who is neither an officer or employee of TCI, nor a director, officer or employee of TCI’s advisor.

 

TCI’s policy is to have such contracts or transactions approved or ratified by a majority of the disinterested Directors with full knowledge of the character of such transactions, as being fair and reasonable to the stockholders at the time of such approval or ratification under the circumstances then prevailing. Such Directors also consider the fairness of such transactions to TCI. Management believes that, to date, such transactions have represented the best investments available at the time and they were at least as advantageous to TCI as other investments that could have been obtained.

 

TCI may enter into future transactions with entities, the officers, directors, or stockholders of which are also officers, directors, or stockholders of TCI, if such transactions would be beneficial to the operations of TCI and consistent with TCI’s then-current investment objectives and policies, subject to approval by a majority of disinterested Directors as discussed above.

 

TCI does not prohibit its officers, directors, stockholders, or related parties from engaging in business activities of the types conducted by TCI.

 

Certain Business Relationships

 

Pillar has been TCI’s Advisor and Cash Manager since April 30, 2011.  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.  Pillar’s 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 TCI’s business plan and investment policy.  Pillar also serves as an Advisor and Cash Manager to ARL and IOT.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 and as such, employees of Pillar render services to TCI in accordance with the terms of the Advisory Agreement.

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Pillar is a Nevada corporation, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust.  

 

All of TCI’s directors also serve as Directors of ARL and IOT.IOR. The executive officers of TCI also serve as executive officers of ARL and IOT.IOR. As such, they owe fiduciary duties to that entity as well as to Pillar under applicable law. ARL has the same relationship with Pillar, as does TCI. Mr. Bertcher is an officer, director and employee of NCE and as such also owes fiduciary duties to NCE as well as ARL, TCI and IOTIOR under applicable law.

 

Effective since January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.

 

At December 31, 2016,2017, TCI owned approximately 81.1%81.25% of the outstanding common shares of IOT.IOR.

 

The Company is part of a tax sharing and compensating agreement with respect to federal income taxes betweenamong ARL, TCI and IOTIOR and their subsidiaries. That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOTIOR and MRHI for the remainder of 2012 and subsequent years. The expense (benefit) in each year was calculated based on the amount of losses absorbed by taxable income multiplied by the maximum statutory tax rate of 35%21%.

 

The Company has a development agreement with Unified Housing Foundation, Inc. (“UHF”)“UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. 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.

 

Related Party Transactions

 

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 the best interest of our company.

 

In 2016,2017, the Company paid advisory fees of $9.5$10.0 million, net income fees of $0.3 million, mortgage brokerage and equity refinancing fees of $0.8$1.6 million, cost reimbursements of $3.2$2.9 million, and received interest income of $4.2$4.9 million from Pillar.

 

The Company paid property management fees, construction management fees and leasing commissions of $0.6$1.0 million to RegisRegis in 2015.2017.

 

As of December 31, 2016,2017, the Company had notes and interest receivables, net of allowances, of $81.1$70.2 million and $79.3$70.2 million, respectively, due from related parties. See Part 2, Item 8. Note 3. “Notes and Interest Receivable”. During the current period, the Company recognized interest income of $4.2$4.9 million, originated $18.1$28.8 million, received principal payments of $10.7$6.9 million and received interest payments of $5.5$4.8 million from these related party notes receivables.

 

The Company is the primary guarantor on a $60.4an $39.1 million mezzanine loan between UHF and a lender. In addition, TCI, ARL, and an officer of the Company are limited recourse guarantors of the loan. As of December 31, 20162017 UHF was in compliance with the covenants to the loan agreement.

 

Below are transactions that involve a related party:

 

As of December 31, 2016,2017, the Company had 9166.7 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.

 

Operating Relationships

 

The Company received rental revenue of $0.8 million in 2017, $0.7 million in 2016, $0.7 million in 2015, and $0.7 million in 20142015 from Pillar and its related parties for properties owned by the Company.


Advances and Loans

 

From time to time, TCI and its related parties have made advances to each other, which generally have not had specific repayment terms, did not bear interest, are unsecured, and have been reflected in TCI’s financial statements as other assets or other liabilities. TCI and the advisor charge interest on the outstanding balance of funds advanced to or from TCI. The interest rate, set at the beginning of each quarter, is the prime rate plus 1.0% on the average daily cash balances advanced. At December 31, 2016,2017, TCI oweshas a receivable from ARL $101.6in the amount of $111.7 million.

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ITEM 14.    PRINCIPAL ACCOUNTINGFEES AND SERVICES

 

The following table sets for the aggregate fees for professional services rendered to or for TCI for the years 20162017 and 20152016 by TCI’s principal accounting firms, Farmer, Fuqua and Huff, L.P. and Swalm and Associates, P.C.:

 

 2016  2015  2017 2016 
 Farmer, Fuqua Swalm & Farmer, Fuqua Swalm &  Farmer, Fuqua Swalm & Farmer, Fuqua Swalm & 
Type of Fee & Huff Associates & Huff Associates  & Huff Associates & Huff Associates 
Audit Fees $575,563  $60,551(1) $552,663  $54,263(1) $597,447 $72,136(1) $575,563  $60,551(1)
Tax Fees  36,725   —   50,141   —   39,760  —   36,725   — 
Total $612,288  $60,551  $602,804  $54,263  $637,207 $72,136  $612,288  $60,551 

 

(1)All IOT

 

The audit fees for 20162017 and 20152016 were for professional services rendered for the audits and reviews of the consolidated financial statements of TCI and its subsidiaries. Tax fees for 20162017 and 20152016 were for services related to federal and state tax compliance and advice.

 

All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid to the principal auditors for the services described in the above table fall under the categories listed below:

 

Audit Fees.    These are fees for professional services performed by the principal auditor for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filing or engagements.engagement.

 

Audit-Related Fees.    These are fees for assurance and related services performed by the principal auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements. These services include attestations by the principal auditor that are not required by statute or regulation and consulting on financial accounting/reporting standards. As of December 31, 2017 the Company incurred $0.3 million of audit related fees in connection to assurance and related services of subsidiary.

 

Tax Fees.    These are fees for professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries.

 

All Other Fees.    These are fees for other permissible work performed by the principal auditor that do not meet the above category descriptions.

 

These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditor’s core work, which is the audit of the Company’s consolidated financial statements.

 

The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate TCI’s independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All fees for 20162017 and 20152016 were pre-approved by the Audit Committee or were within the pre-approved guidelines for permitted non-audit services and fees established by the Audit Committee, and there were no instances of waiver of approved requirements or guidelines during the same periods.

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Under the Sarbanes-Oxley Act of 2002 (the “SOX Act”), and the rules of the Securities and Exchange Commission (the “SEC”), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SOX Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SOX Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee’s administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. Accordingly, the Audit Committee has adopted a pre-approval policy of audit and non-audit services (the “Policy”), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers Pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and will approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.

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PART IV

 

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(a)The following documents are filed as part of this Report:

 

1.Financial Statements

 

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets—December 31, 2016 and 2015

Consolidated Statements of Operations—Years Ended December 31, 2016, 2015, and 2014

Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2016, 2015, and 2014

Consolidated Statements of Cash Flows—Years Ended December 31, 2016, 2015, and 2014

Statements of Consolidated Comprehensive Income (Loss) – Years Ended December 31, 2016, 2015, and 2014

Notes to Financial Statements

Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets—December 31, 2017 and 2016
Consolidated Statements of Operations—Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows—Years Ended December 31, 2017, 2016, and 2015
Statements of Consolidated Comprehensive Income (Loss) – Years Ended December 31, 2017, 2016, and 2015
Notes to Financial Statements

 

2.Financial Statement Schedules

 

Schedule III—Real Estate and Accumulated Depreciation

Schedule IV—Mortgage Loan Receivables on Real Estate

Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loan Receivables on Real Estate

 

All other schedules are omitted because they are not applicable or because the required information is shown in the Consolidated Financial Statements or the Notes thereto.

 

3.Incorporated Financial Statements

 

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (incorporated by reference to Item 8 of Income Opportunity Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016.2017.

 

Consolidated Financial Statements of American Realty Investors, Inc. (incorporated by reference to Item 8 of American Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016)2017).

 

(b)Exhibits

 

The following documents are filed as Exhibits to this Report:

 

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, Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation 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 for 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 Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

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Exhibit

Number

 

Description

10.0 Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc. and Pillar Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring April 30, 2011).
10.1 Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.0 Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
21.0* Subsidiaries of the Registrant.
31.1* Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 as amended of Principal Executive Officer.
31.2* Certification Pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934 as amended of Principal Financial and Accounting Officer.
32.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

 

 

*Filed herewith.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  Transcontinental Realty Investors, Inc.
   
Dated: March 31, 201730, 2018By:

/s/  Gene S Bertcher

  

Gene S. Bertcher

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

Signature Title 

Signature

Title

Date

     

/s/ HENRY A. BUTLER 

/ sHenry A. Butler/ henry a. butler

 Chairman of the Board and Director March 31, 2017
Henry A. Butler30, 2018
     

/s/ RAYMOND D. ROBERTS, SR.

/ sRaymond D. Roberts, Sr./ raymond r. roberts, sr.

 Director March 31, 2017
Raymond R. Roberts, Sr.30, 2018
     

/s/ ROBERT A. JAKUSZEWSKI

/ sRobert A. Jakuszewski/ robert a. jakuszewski

 Director March 31, 2017
Robert A. Jakuszewski30, 2018
     

/s/ TED R. MUNSELLE 

/ sTed R. Munselle/ ted r. munselle

 Director March 31, 2017
Ted R. Munselle30, 2018
     

/s/ DANIEL J. MOOS 

/ sDaniel J. Moos / daniel j. moos

 President and Chief Executive Officer (Principal Executive Officer) March 31, 2017
Daniel J. Moos30, 2018
     

/s/ GENE S. BERTCHER 

/ sGene S. Bertcher / gene s. bertcher

 Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 31, 2017
Gene S. Bertcher30, 2018

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ANNUAL REPORT ON FORM 10-K

EXHIBIT INDEX

For the Year Ended December 31, 20162017

 

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, Preferences, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporation 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 for 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 Registrants current report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof.)
10.0 Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc. and Pillar Income Asset Management LLC (incorporated by reference to Exhibit 10.0 to the Registrant’s Current Report on Form 8-K for event occurring April 30, 2011).
10.1 Leman Development Ltd. and Kaufman Land Partners, Ltd. (incorporated by reference to Registrant’s current report in Form 8-K dated November 21, 2006 at Exhibit 10.1 thereof.
14.014 .0 Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.0 to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
21.1* Subsidiaries of the Registrant.
31.1* Certification Pursuant to Rule 13a-14(a) and 15d-14 under the Securities Exchange Act of 1934, as amended of Principal Executive Officer.
31.2* Certification Pursuant to Rule 13a-14(a) and 15d-14 under the Securities Exchange Act of 1934, as amended of Principal Financial and Accounting Officer
32.1* Certification pursuant to 18 U.S.C. Section 1350.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

*Filed herewith.


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