UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 20212022

or

or 

For the transition period from to ________ to________

Commission File Number 001-14784

INCOME OPPORTUNITY REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)

1603 Lyndon B. Johnson Freeway, Suite 800, Dallas, Texas 75234

(Address of principal executive offices)

(Zip (Zip Code)

((469)469) 522-4200

 (Registrant’s(Registrant’s telephone number, including area code)

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

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 registrantRegistrant 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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ☐ No

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the numberAs of November 10, 2022, there were 4,168,414shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.outstanding.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and par value amounts)

(Unaudited)

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

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share amounts)

(Unaudited)

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

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY 

(dollars in thousands)

(Unaudited)

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

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Nine Months Ended September 30, 2021, and 2020

(dollars in thousands)

(Unaudited)

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

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(Unaudited)

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

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION(dollars in thousands, except per share and square foot amounts)

(Unaudited)

Organization

Income Opportunity Investors, Inc. (the “Company”) is an externally managed company that invests in mortgage notes receivables. As used herein, the terms “IOR”, “the Company”, “we”“We”, “our”“Our”, “us”or “Us” refer to Income Opportunity Realty Investors, Inc., a Nevada corporation, individually or together with its subsidiaries. Income Opportunity Realty Investors, Inc. is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985. The Company is headquartered in Dallas, Texas, and its common stock trades on the NYSE American under the symbol (“IOR”).Company.

Transcontinental Realty Investors, Inc. (“TCI”), whose common stock is traded on the NYSE under the symbol “TCI”, owns approximately 81.1% of the Company’sour stock and with its affiliates owns approximately 87.6% of our common stock. Effective July 17, 2009, IOR’sAccordingly our financial results wereare included in the consolidated with thosefinancial statements of TCI’s in their Form 10-K and in their tax filings. American Realty Investors, Inc. (“ARL”) and TCI and their subsidiaries. IOR, whose common stock is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with ARL and its ultimate parent, May Realty Holdings, Inc. (“MRHI”). We have no employees.traded on the NYSE under the symbol “ARL”, in turn, owns approximately 78.4% of TCI.

Our business is managed by Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager under a contractual arrangementin accordance with an Advisory Agreement that is reviewed annually by our Board of Directors. The day-to-day operations of IOR are performed by Pillar as the contractual Advisor, under the supervision of the Board. is considered to be related parties (See Note 4 – Related Party Transactions).

Pillar’s duties include, but are not limited to, locating, evaluating and recommending businessreal estate and real estate-related investment opportunities. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with IOR’s business plan and investment policy. Pillar also serves as an Advisorarranges our debt and Cash Manager to TCIequity financing with third party lenders and ARL.investors.

Our primary business is currently investing in mortgage receivables. At September 30, 2021, the principal source of revenue for the Company is interest income on approximately $96.8 million of notes receivable due from related parties, out of which, $11.1 million are due from United Housing Foundation, Inc. (“UHF”) (Refer to Note 2).

Basis of Presentation

The accompanying unaudited Consolidated Financial Statementsconsolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included. The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year. As of September 30, 2021, and December 31, 2020, IOR was not the primary beneficiary of a variable interest entity (“VIE”).

The year-end Consolidated Balance Sheetconsolidated balance sheet at December 31, 2020,2021 was derived from the audited Consolidated Financial Statementsconsolidated financial statements at that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements. For further information, refer to the Consolidated Financial Statementsconsolidated financial statements and notes thereto included in the Company’sour Annual Report on Form 10-K for the year ended December 31, 2020.2021. Certain 2021 consolidated financial statement amounts have been reclassified to conform to the current presentation.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

Fair Value MeasurementNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share and square foot amounts)

(Unaudited)

We consolidate entities in which we are considered to be the primary beneficiary of a variable interest entity (“VIE”) or have a majority of the voting interest of the entity. We have determined that we are a primary beneficiary of the VIE when we have (i) the power to direct the activities of a VIE that most significantly impacts its economic performance, and (ii) the obligations to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, we consider qualitative and quantitative factors, including ownership interest, management representation, ability to control decision and other contractual rights.

We applyaccount for entities in which we have less than a controlling financial interest or entities where we are not deemed to be the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures”, toprimary beneficiary under the valuationequity method of notes receivable. 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 asaccounting. Accordingly, we include our share of the measurement date and includes three levels defined as follows:

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest levelnet earnings or losses 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 orthese entities who have one or morein our results of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

Newly Issued Accounting Pronouncements

On April 10, 2020, the FASB issued a Staff Q&A (“Q&A”) related to the application of the lease guidance in ASC 842 for the accounting impact of lease concessions related to the COVID-19 pandemic. The Q&A, allows an entity to make an election to account for lease concessions related to the effects of the COVID-19 as though enforceable rights and obligations for those concessions existed. As a result of this election, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance in ASC 842, as long as the concessions do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Our election of the guidance of the Q&A has not had a significant impact on our consolidated financial statements during the nine months ended September 30, 2021.operations.

NOTE 2. NOTES AND INTEREST RECEIVABLE FROM RELATED PARTIES

NotesThe following table summarizes our notes receivables at September 30, 2022 and interest receivable from related parties is comprised of junior mortgage loans, which are loans secured by mortgages that are subordinate to one or more prior liens on the underlying real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.December 31, 2021:

The Company has various notes receivable from Unified Housing foundation, Inc. “UHF”. UHFborrower is determined to be a related party due to our significant investment in the performance of the collateral secured underby the notes receivable. PaymentsPrincipal and interest payments on the notes from Unified Housing Foundation, Inc. (“UHF”) are duefunded from surplus cash flow from operations, sale or refinancing of the underlying properties. These notesproperties and 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.

All of the Company’s notes receivable are with UHF. The notes mature in December 2032 and have interest rates of 12.0%.

In February 2021, the Company collected $1.017 million which is the remaining balance of a fully reserved note receivable and is included in other income. In addition, in February, the Company collected $1.9 million of principal and $.6 million of accrued interest on the UHF notes receivable listed below.

On September 30, 2021, we had mortgage loans and accrued interest receivable from related parties totaling $11.5 million. As of September 30, 2021, we recognized interest income of $1 million related to these notes receivable. Below is a summary of notes and interest receivable from related parties (dollars in thousands):

All are related party notes.

NOTE 3. RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES

From time to time, IOR and its related parties have made unsecured advances to each other which include transactions involving the purchase, sale, and financing of property. In addition, we have a cash management agreement with our Advisor. The agreement provides for excess cash to be invested in and managed by our Advisor, Pillar, a related party.

The Advisory agreement provides for Pillar or a related party of Pillar to receive fees and cost reimbursements as defined in Part III, Item 10. Directors, Executive Officers and Corporate Governance – The Advisor. Cost reimbursements are allocated based on the relative market values of the Company’s assets. The Company and Pillar entered into an Advisory Agreement and Cash Management Agreement 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. The advisory fees and cost reimbursements paid to Pillar, TCI and related parties are detailed below (dollars in thousands):

As of September 30, 2021, IOR has notes and interest receivable of $11.5 million due from Unified Housing Foundation, Inc., and recognized interest income of $1.03 million related to these notes receivable. (See details in Note 2. Notes and Interest Receivable from Related Parties.)

The table below reflects the various transactions between IOR, Pillar, and TCI (dollars in thousands):

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.investment in notes receivables. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

Pillar is a wholly owned by an affiliate of the best interestMay Realty Holdings, Inc., which owns approximately 90.8% of ARL, which owns approximately 78.4% of TCI, which owns 81.1% of the Company.

Advisory fees paid to Pillar were $283

and $257

for the three months ended September 30, 2022 and 2021, respectively, and $NOTE 4. 824 and $COMMITMENTS AND CONTINGENCIES849 for the nine months ended September 30, 2022 and 2021, respectively.

LitigationNotes receivable are amounts held by UHF (See Note 3 – Notes Receivable). The Company and its subsidiaries, from timeUHF is determined to time, have been involved in various items of litigation incidentalbe a related party due to andour significant investment in the ordinary courseperformance of its businessthe collateral secured by the notes receivable. Interest income on these notes was $338 and in$338 for the opinion of management,three months ended September 30, 2022 and 2021, respectively, and $1,003 and $1,033 for the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operations or liquidity.nine months ended September 30, 2022 and 2021, respectively.

Berger LitigationInterest income on related party receivables from

TCI was $1,483 and $910 for the three months ended September 30, 2022 and 2021, respectively, and $3,503 and $2,664 for the nine months ended September 30, 2022 and 2021, respectively.

On Related party receivables represents amounts outstanding from TCI for loans and advances, net of unreimbursed fees, expenses and costs as provided above.

INCOME OPPORTUNITY REALTY INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share and square foot amounts)

(Unaudited)

In February 4, 2019,, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. Paul Berger (“IOR”Berger”) filed suit against us and others that alleged that we completed improper sales and/or transfers of property. Berger sought to proceed derivatively and directly, requests a Complaintpayoff of various related party loans to us and that we then distribute the funds to its stockholders. After discovery and motions to dismiss substantial portions of the complaint, on June 28, 2022, Plaintiff Berger sought to voluntarily dismiss the action for reasons stated in the motion. The parties have not entered into any settlement, and neither Berger nor their counsel has received any consideration for the voluntary dismissal. The parties, through counsel, have stipulated to the dismissal with prejudice. On June 29, 2022, the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directorsordered that notice of the Companies (“Additional Parties”)dismissal be provided to our shareholders. A copy of the required notice was filed as an exhibit to a Form 8-K for event occurring June 29, 2022 (the date of the Court’s order), and two other individuals. The Complaint filed alleges thaton July 7, 2022, a copy of the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary dutyrequired notice was posted on our website. If no action is taken by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case allegesour other related claims. The Plaintiff seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a returnstockholders prior to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020,August 19, 2022, the Court denied IOR’s demand futility motion. The remaining Defendants’ motions were granted in part and denied in part inmay enter an order dismissing the first quarter of 2020. Discovery is ongoing.Berger case with prejudice. The Plaintiff did not seek class certification in the case.

Contingencies. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and across our portfolio. While we did not experience significant disruptions during 2020 from the COVID-19 pandemic, we are unable to predict the impact the COVID-19 pandemic will have on its financial condition, results of operations and cash flows due to numerous uncertainties.

NOTE 5. SUBSEQUENT EVENTS

The Company has evaluated subsequentdate to which events through November 9, 2021,occurring after September 30, 2022, the date of the Consolidated Financial Statementsmost recent balance sheet, have been evaluated for possible adjustment to the consolidated financial statements or disclosure is November 10, 2022, which is the date on which the consolidated financial statements were available to be issued and has determined that there are none to be reported.issued.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis by management should be read in conjunction with the financial statementsunaudited Condensed Consolidated Financial Statements and notes thereto appearing elsewhereNotes included in this report.Quarterly Report on Form 10-Q (the “Quarterly Report”) and in our Form 10-K for the year ended December 31, 2021 (the “Annual Report”).

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption “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:

The risks included here are not exhaustive. 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 factors listed and described in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2020. 2021.

As further set forth under the caption “Risk Factors” in ParPart I, Item 1A of the Form 10-K, the recent coronavirus (“COVID-19”) pandemic as well as the response to mitigate its spread and effect, may adversely impact our Company. We will continue to actively monitor the situation and make further actions as may be required by governmental authorities or that we determine are in the best interest of the Company.

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters 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 to other materials we may furnish to the public from time to time through Forms 8-K or otherwise as we file them with the SEC.

Management’s Overview

We are an externally advised and managed investment company. We have no employees.

company that invests in notes receivable that are collateralized by income-producing properties in the Southern United States and in the past, real property. Our primarycurrent principal source of revenueincome is from the interest income on approximately $96.8 million of notes receivable duenote receivables from related parties.

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

Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. The day-to-dayOur operations of IOR are performedmanaged by Pillar as the contractual Advisor, under the supervision of the Board.in accordance with an Advisory Agreement. Pillar’s duties include, but are not limited to, locating, evaluating and recommending business and investment opportunities. Additionally,We have no employees. Employees of Pillar serves asrender services to us in accordance with the terms of the Advisory Agreement. Pillar is considered to be a consultantrelated party due to the Boardits common ownership with regard to their decisions in connection with IOR’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI, and ARL.who is our controlling shareholder.

Critical Accounting Policies

We presentThe preparation of our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation ofconsolidated financial statements in conformity with U.S. GAAP.United States generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying unaudited Consolidated Financial StatementsSome of these estimates and assumptions include judgments on the provisions for uncollectible accounts and fair value measurements. Our significant accounting policies are described in more detail in Note 2—Summary of Significant Accounting Policies in our accounts, our subsidiaries, generally all of whichnotes to the consolidated financial statements. However, the following policies are wholly-owned, and all entities in which we have a controlling interest. As of September 30, 2021, IOR is not the primary beneficiary of a VIE.deemed to be critical.

Recognition of Revenue

Our revenues are composed largely of interest income on notes receivable recorded in accordance with the terms of the notes.

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.

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 from Related Parties” for details on our notes receivable.

Fair Value of Financial Instruments

We apply the guidance in ASC Topic 820, “Fair Value Measurements and DisclosuresDisclosures”, 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,”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 itsour own separate interests, or affiliates of the entity.

Newly Issued Accounting Pronouncements

On April 10, 2020, the FASB issued a Staff Q&A (“Q&A”) related to the application of the lease guidance in ASC 842 for the accounting impact of lease concessions related to the COVID-19 pandemic. The Q&A, allows an entity to make an election to account for lease concessions related to the effects of the COVID-19 as though enforceable rights and obligations for those concessions existed. As a result of this election, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance in ASC 842, as long as the concessions do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Our election of the guidance of the Q&A has not had a significant impact on our consolidated financial statements during the nine months ended September 30, 2021.

Results of Operations

The following discussion is based on our “StatementConsolidated Financial Statements Consolidated Statement of Operations”Operations, for the three and nine months ended September 30, 2022 and 2021 and 2020, as included in Part I, Item 1. “Financial Statements” of this report. It is not meant to be an all-inclusive discussion of the changes in our net income applicable to common shares. Instead, we have focused on significant fluctuations within our operations that we feel are relevant to obtain an overall understanding of the change in income applicable to common shareholders.

Our primary business is currently investing in mortgage receivables. Our principal sourceoperating expenses consist primarily of revenue is interestgeneral and administrative costs such as audit and legal fees and administrative fees paid to a related party.

We also have other income generated from notes receivables due from related parties.and expense items. We also receive interest income from the funds deposited with our AdvisorTCI at a rate of prime plus 1%1.0%. Our operating expenses consist mainly of general and administration costsWe have receivables from related to the Company.parties which also provide interest income.

Comparison of the three months ended September 30, 2021,2022 to the same period ended 2020:

We had net income of $712 thousand or $0.17 per diluted share for the three months ended September 30, 2021 compared to net income of $761 thousand or $0.18 per diluted share for the same period ended 2020.:

Expenses

General and administrative expensesThere were $88 thousandno significant changes in operating results for the three months ended September 30, 2022 to the three months ended September 30, 2021. This represents a decrease of $6 thousand, compared to general and administrative expenses of $94 thousand for the three months ended September 30, 2020. This decrease was primarily driven by a decrease in cost reimbursements to our Advisor of approximately $5 thousand.

Advisory fees were $201 thousand for the three months ended September 30, 2021, compared to $194 thousand for the same period in 2020 for an increase of $7 thousand. 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.

Net income fee to related party was $56 thousand for the three months ended September 30, 2021. This represents an increase of $5 thousand, compared to the net income fee of $51 thousand for the three months ended September 30, 2020. The net income fee paid to our Advisor is calculated at 7.5% of net income.

Other income (expense)

Interest income decreased to $1.2 million for the three months ended September 30, 2021, compared to $1.3 million for the same period in 2020.  The decrease of $100 thousand was primarily due to a decrease in interest recognized due to some notes being paid off in 1Q 2021.

Comparison of the nine months ended September 30, 2021,2022 to the same period ended 2020:

We had net income of $2.9 million or $0.69 earnings per diluted share for the nine months ended September 30, 2021 as well as net income of $2.9 million or $0.69 earnings per diluted share for the same period in 2020.:

Expenses

General and administrative expensesThere were $376 thousandno significant changes in operating results for the nine months ended September 30, 2022 to the nine months ended September 30, 2021, compared to $361 thousand for the nine months ended September 30, 2020, for an increase of $15 thousand. The increase was primarily due to an increase in cost reimbursements to our Advisor of approximately $29 thousand plus an increase in stock transfer fees of approximately $7 thousand partially offset by a decrease in legal fees of $18 thousand.

Advisory fees were $599 thousand for the nine months ended September 30, 2021, compared to $574 thousand for the same period of 2020 for an increase of $25 thousand. 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.

Net income fee to related party increased by $1 thousand to $250 thousand for the nine months ended September 30, 2021, compared to $249 thousand for the same period in 2020. The net income fee paid to our Advisor is calculated at 7.5% of net income. 

Other income (expense)

Interest income was $3.7 million for the nine months ended September 30, 2021. This represents a decrease of $400 thousand as compared to interest income of $4.1 million for the nine months ended September 30, 2020, as a result of a decrease in interest recognized due to some notes being paid off in 1Q 2021.

Other income was $1.2 million for the nine months ended September 30, 2021, due to the collection of a note previously written off. Other income of $742 thousand for the nine months ended September 30, 2020, was due to a tax increment reimbursement from the City of Farmers Branch, Texas for previous infrastructure development performed by the Company.

Liquidity and Capital Resources

General

Our principal liquidity needs are to fund normal recurring expenses. And ourOur principal sources of cash are and will continue to be the collection of mortgage notes receivables, and the collections of receivables and interestinterests from related companies.

Cash Flow Summary We anticipate that our cash and cash equivalents as of September 30, 2022, along with cash that will be generated in the next twelve months from notes and interest receivables, will be sufficient to meet all of our current cash requirements.

The following summary discussion of our cash flows is based on the Consolidated Statementsconsolidated statements of Cash Flows from Part I, Item 1. “Financial Statements”cash flows in our consolidated financial statements, 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):

The increase in cash from operating activities is primarily due to the the recovery of bad debts.

The primary usedecrease in cash provided by investing activities was due to the collection of cash for operations is daily operating costs, general and administrative expenses, and advisory fees. Our primary source of cash for operations is from interest income on notes receivable.a note receivable in 2021.

Our primary cash outlays for investing activities are for investment of excess cash with our Advisor. The investing activity in the current period was mainly due to the proceeds received on the notes receivable. We invested more cash with our Advisor in the current period.

We did not pay quarterly dividends during the nine months ended September 30, 2021, and 2020.

Environmental Matters

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

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

Inflation

The effects of inflation on our operations are not quantifiable. Fluctuations in the rate of inflation affect the sales value of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings, as well as the cost of variable interest rate debt, will be affected.

Tax Matters 

IOR is a member of the May Realty Holdings, Inc., (“MRHI”) consolidated group for federal income tax reporting.  There is a tax sharing and compensating agreement between American Realty Investors, Inc. (“ARL”), Transcontinental Realty Investors, Inc. (“TCI”), and IOR.

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. IOR has taxable income for the first nine months of 2021 on a standalone basis.  The income tax expense for the nine months ending September 30, 2021, was $768 thousand.

On September 30, 2021, the Company had no outstanding debt

Optional and has no exposure to quantitative or qualitative issues.not included.

Based on an evaluation by our management (with the participation of our Principal Executive Officer and Principal Financial Officer), as of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.

There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

In February 2019, Paul Berger (“Berger”) filed suit against us and others that alleged that we completed improper sales and/or transfers of property. Berger sought to proceed derivatively and directly, requests a payoff of various related party loans to us and that we then distribute the funds to its stockholders. After discovery and motions to dismiss substantial portions of the complaint, on June 28, 2022, Plaintiff Berger sought to voluntarily dismiss the action for reasons stated in the motion. The parties have not entered into any settlement, and neither Berger nor their counsel has received any consideration for the voluntary dismissal. The parties, through counsel, have stipulated to the dismissal with prejudice. On June 29, 2022, the United States District Court ordered that notice of the dismissal be provided to our shareholders. A copy of the required notice was filed as an exhibit to a Form 8-K for event occurring June 29, 2022 (the date of the Court’s order), and on July 7, 2022, a copy of the required notice was posted on our website. If no action is taken by one or more of our other stockholders prior to August 19, 2022, the Court may enter an order dismissing the Berger case with prejudice.

Except as set forth below, there have been no material changes from the risk factors previously disclosed in the 2021 10-K. For a discussion on these risk factors, please see “Item 1A. Risk Factors” contained in the 2021 10-K.

Risks Related to COVID-19 Pandemic

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and our property portfolio. While we did not incur significant disruptions during the nine months ended September 30, 2022, from the COVID-19 pandemic, our commercial properties have experienced a decline in occupancy. We are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact and the direct and indirect economic effects of the pandemic and containment measures, among others. Nearly every industry has been impacted directly or indirectly, and the commercial real estate market has come under pressure due to numerous factors, including preventative measures taken by local, state and federal authorities to alleviate the public health crisis such as mandatory business closures, quarantines, and restrictions on travel and “shelter-in-place” or “stay-at-home” orders. The future impact of COVID-19 on our business and financial activities will depend on future developments, which at this stage are unpredictable considering the fluctuations of COVID-19 outbreaks and the resulting changes in the markets.

On December 5, 1989, the governing body of the predecessor of the Company approved

We have a share repurchase program authorizingthat allows for the repurchase of up to a total of 200,000 shares of the predecessor. In June 2000, the Board of Directors of the Company increased the authorization to 500,000 shares. With the 3-for-1 forward split of the Company’s Common Stock in June 2005, such authorization would be appropriately increased to 1,500,000 shares and the number of shares previously purchased would be appropriately increased by the same ratio. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 150,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,650,0001,637,000 shares of our common stock. This repurchase program has no termination date. There were no shares purchased under this program during the third quarter of 2021.nine months ended September 30, 2022. As of September 30, 2021, 1,034,7612022, 1,230,535 shares have been purchased and 615,239406,465 shares may be purchased under the program.

None

Not applicable

None

The following documentsexhibits are filed herewith as exhibitswith this report or incorporated by reference as indicated:indicated;

* Filed herewith.

SIGNATURESSIGNATURE PAGE

Pursuant to the requirements 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.