The accompanying
notes are an integral part of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
As
used herein, the terms “TCI”, “the Company”, “we”, “our” or “us” refer
to Transcontinental Realty Investors, Inc., a Nevada corporation which was formed in 1984. The Company is headquartered in Dallas,
Texas and its common stock trades on the New York Stock Exchange (“NYSE”) under the symbol (“TCI”). Subsidiaries
of American Realty Investors, Inc. (“ARL”) own approximately 77.68% of the Company’s common stock. 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 trades on the New York Stock Exchange under the symbol (“ARL”).
TCI
is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with
American Realty Investors, Inc. (“ARL”), whose common stock is traded on the NYSE under the symbol “ARL”.
Subsidiaries and affiliates of ARL own in excess of 80% of the Company’s common stock. ARL and one of its subsidiaries own
77.68% and the parent of ARL owns 6.98% 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”.
On
July 17, 2009, the Company acquired an additional 2,518,934 shares of common stock of Income Opportunity Realty Investors, Inc.
(“IOR”), and in doing so, increased its ownership from approximately 25% to over 80% of the shares of common stock
of IOR outstanding. Upon acquisition of the additional shares in 2009, IOR’s results of operations began to be consolidated
with those of the Company for tax and financial reporting purposes. As of December 31, 2018, TCI owned 81.25% of the outstanding
IOR common shares. Shares of IOR common stock are listed and traded on the NYSE American under the symbol “IOR”.
At
the time of the acquisition, the historical accounting value of IOR’s assets was $112 million and liabilities were $43 million.
In that the shares of IOR acquired by TCI were from a related party, the values recorded by TCI are IOR’s historical accounting
values at the date of transfer. The Company’s fair valuation of IOR’s assets and liabilities at the acquisition date
approximated IOR’s book value. The net difference between the purchase price and historical accounting basis of the assets
and liabilities acquired is $25.6 million and has been reflected by TCI as deferred income. The deferred income will be recognized
upon the sale of the land that IOR held on its books as of the date of sale, to an independent third party.
TCI’s
Board of Directors are responsible for directing the overall affairs of TCI and for setting the strategic policies that guide
the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income
Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually
by TCI’s Board of Directors. The directors of TCI are also directors of ARL and IOR. The Chairman of the Board of Directors
of TCI also serves as the Chairman of the Board of Directors of ARL and IOR. The officers of TCI also serve as officers of ARL,
IOR and Pillar.
Since
April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member
of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is May Realty Holdings,
Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc.), effective August 7, 2014), a Nevada corporation,
the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager.
Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related
investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders
and investors. Pillar also serves as an Advisor and Cash Manager to 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.
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. Refer to 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” or “SPC”) 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 (“TASE”). Southern operates in the United States and is primarily involved in investing in, developing,
constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in
the consolidated financial statements of TCI.
On
January 1, 2012, the Company entered into a development agreement with Unified Housing Foundation, Inc. “UHF” a non-profit
corporation that provides management services for the development of residential apartment projects in the future. This development
agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold
several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment
in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
On
November 19, 2018, we executed an agreement between the Macquarie Group (“Macquarie”) and Southern and TCI to create
a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily
residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary
markets. In connection with the formation of the joint venture, Southern and TCI contributed a portfolio of 49 income producing
apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million.
At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage
debt to the Department of Housing and Urban Development (“HUD”).
VAA
is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of Southern and Summerset Intermediate Holdings 2
LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and
Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”). The remaining
2% of the profits interest is held by Daniel J. Moos, who serves as the President and Chief Executive officer of the Company (“Class
B Member”) and Manager of the joint venture.
Properties
At
March 31, 2019, our portfolio of 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;
|
|
●
|
Nine
residential apartment communities owned directly by us comprising 1,489 units, excluding
apartments being developed;
|
|
●
|
Approximately
2,287 acres of developed and undeveloped land; and
|
|
●
|
Fifty-one
residential apartment communities totaling 9,786 units owned by our 50% owned investee
VAA.
|
We
join with various third-party development companies to construct residential apartment communities. We are in the predevelopment
process on several residential apartment communities that have not yet begun construction. The third-party developer typically
holds a general partner as well as a majority limited partner interest in a limited partnership formed for the purpose of building
a single property, while we generally take a minority limited partner interest in the limited partnership. We may contribute land
to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the
land. We are required to fund all necessary equity contributions while the third-party developer is responsible for obtaining
construction financing, hiring a general contractor and for the overall management, successful completion and delivery of the
project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships
in our Consolidated Financial Statements. The third-party developer is paid a developer fee typically equal to a percentage of
the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership
interests in exchange for any remaining unpaid developer fees.
Basis
of Presentation
The
accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“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 three months
ended March 31, 2019, are not necessarily indicative of the results that may be expected for other interim periods or for the
full fiscal year.
The
year-end Consolidated Balance Sheet at December 31, 2018 was derived from the audited Consolidated 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 Statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018. Certain 2018 Consolidated Financial Statement amounts have been reclassified
to conform to the 2019 presentation.
Principles
of Consolidation
The
accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are
wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or
similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance
of ASC Topic 810, “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet
certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”)
Issue 04-5, 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 is generally 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 is included in consolidated net income. Our investment in ARL and VAA is accounted for under the equity method.
Real
Estate, Depreciation and Impairment
Real
estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments
are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the
useful lives of the properties (buildings and improvements: 10-40 years; furniture, fixtures and equipment: 5-10 years). The Company
continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC
Topic 360 (“ASC 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 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.
Real
Estate Held For Sale
We
periodically classify real estate assets as “held for sale.” An asset is classified as held for sale after the approval
of our Board of Directors, after an active program to sell the asset has commenced and if the sale is probable. One of the deciding
factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is
probable within the year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is
reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification
of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately
on the accompanying Consolidated Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified
as an operating asset and depreciation expense is reinstated.
Cost
Capitalization
Costs
related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated
Balance Sheets. We capitalize interest to qualifying assets under development based on average accumulated expenditures outstanding
during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt,
if any, and next use the weighted average interest rate of non-project specific debt. We capitalize interest, real estate taxes
and certain operating expenses until building construction is substantially complete and the building is ready for its intended
use, but no later than one year from the cessation of major construction activity.
We
capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease
agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them
over the related lease term.
Fair
Value Measurement
We
apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures”, to the valuation of real estate assets.
These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction
between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing
fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy
gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data
(Level 3 measurements), such as the reporting 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.
Deferred
Costs
Costs
relating to the financing of properties are deferred and amortized over the life of the related financing agreement. Amortization
is reflected as interest expense in the Consolidated Statements of Operations, with remaining terms ranging from 6 months to 40
years. Unamortized financing costs are written off when the financing agreement is extinguished before the maturity date.
Related
Parties
We
apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities
who have one or more of the following characteristics, which include entities for which investments in their equity securities
would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate
families, management personnel of the entity and members of their immediate families and other parties with which the entity may
deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
Newly
Issued Accounting Standards
In
February 2016, FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. This 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 adoption of ASU 2016-02 did not have a material impact on the Company’s financial position and results of operations.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure
Requirements for Fair Value Measurement
that eliminates, adds and modifies certain disclosure requirements for fair value
measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after
December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable
inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied
prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating
the impact that the adoption of ASU 2018-13 may have on its consolidated financial statements.
NOTE
2.
INVESTMENT IN VAA
On
November 19, 2018, we executed an agreement between the Macquarie Group (“Macquarie”) and Southern and TCI to create
a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily
residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary
markets.
The
Company accounts for its investment in VAA under the equity method of accounting. Under the equity method of accounting, our net
equity in the investment is reflected within the Consolidated Balance Sheets in the caption ‘Investment in VAA’, and
our share of the net income or loss from the joint venture is included within the Consolidated Statements of Operations in the
caption ‘Equity earnings from VAA’. 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 and other agreed upon adjustments.
The
following is a summary of the financial position and results of operations of VAA (dollars in thousands):
|
|
March
31, 2019
|
|
Balance
Sheet
|
|
|
|
|
Net real
estate assets
|
|
$
|
1,257,557
|
|
Other assets
|
|
|
67,020
|
|
Debt, net
|
|
|
(796,065
|
)
|
Other liabilities
|
|
|
(275,448
|
)
|
Total
equity
|
|
|
(253,064
|
)
|
|
|
|
For
the Three Months
Ended
March 31, 2019
|
|
Results
of Operations
|
|
|
|
|
Total revenue
|
|
$
|
27,401
|
|
Total property, operating,
and maintenance expenses
|
|
|
(14,169
|
)
|
Interest expense
|
|
|
(15,070
|
)
|
Depreciation and Amortization
|
|
|
(15,233
|
)
|
Total
other expense
|
|
|
(675
|
)
|
Net
loss
|
|
$
|
(17,746
|
)
|
Below
is a reconciliation of our allocation of income or loss from VAA.
|
|
For
the Three Months
Ended
March 31, 2019
|
|
VAA net
loss
|
|
$
|
(17,746
|
)
|
Adjustments
to reconcile to income (loss) from VAA
|
|
|
|
|
Interest
expense on mezzanine loan
|
|
|
6,089
|
|
In-place
lease intangibles - amortization expense
|
|
|
8,336
|
|
Depreciation
basis differences
|
|
|
1,211
|
|
Net
loss
|
|
$
|
(2,110
|
)
|
Percentage ownership
in VAA
|
|
|
50
|
%
|
Loss from VAA
|
|
$
|
(1,055
|
)
|
NOTE
3. REAL ESTATE ACTIVITY
Below
is a summary of the real estate owned as of March 31, 2019 (dollars in thousands):
Apartments
|
|
$
|
111,537
|
|
Apartments under construction
|
|
|
35,608
|
|
Commercial properties
|
|
|
227,867
|
|
Land held for development
|
|
|
77,749
|
|
Real estate subject
to sales contract
|
|
|
4,325
|
|
Real
estate held for sale
|
|
|
14,737
|
|
Total real estate,
at cost, less impairment
|
|
$
|
471,823
|
|
Less
accumulated deprecation
|
|
|
(81,885
|
)
|
Total
real estate, net of depreciation
|
|
$
|
389,938
|
|
The
following is a description of our significant real estate and financing transactions for the three months ended March 31, 2019:
We
sold 76 land parcels (or 11.96 acres of land) from our Mercer Crossing land holdings in Farmers Branch, Texas and 10.33
acres of land, located in Dallas, Texas to third parties for an aggregate sales price of $8.7 million and recognized a
gain on the sale of approximately $2.2 million.
We
purchased from a third party 8.94 acres of land located in Collin County, Texas for a total purchase price of $2.5 million. In
addition, purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark
County, Nevada) for $2.0 million from a third party land developer.
We
entered into a purchase and sale agreement with a third party for the sale of Vista Ridge Apartments, located in Lee County, Mississippi.
This asset is classified as ‘held for sale’ for the period ended March 31, 2019.
We
continue to invest in the development of apartment projects. During the three months ended March 31, 2019, we have invested $7.6
million related to the construction or predevelopment of various apartment complexes and capitalized $0.2 million of interest
costs.
NOTE
4. SUPPLEMENTAL CASH FLOW INFORMATION
For
the three months ended March 31, 2019 and 2018, the Company paid interest expense of $8.9 million and $13.3 million, respectively.
Cash
and cash equivalents, and restricted cash for the three months ended March 31, 2019 and 2018 was $80.1 million and $96.3 million,
respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total
presented in the consolidated statement of cash flows:
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and
cash equivalents
|
|
$
|
28,156
|
|
|
$
|
40,894
|
|
Restricted cash (cash
held in escrow)
|
|
|
33,709
|
|
|
|
38,800
|
|
Restricted cash (certificate
of deposits)
|
|
|
11,876
|
|
|
|
10,652
|
|
Restricted
cash (held with Trustee)
|
|
|
6,398
|
|
|
|
5,948
|
|
|
|
$
|
80,139
|
|
|
$
|
96,294
|
|
Amounts
included in restricted cash represent funds required to be set aside to meet contractual obligations with certain financial institutions
for the payment of reserve replacement, tax and insurance escrow. In addition, restricted cash includes funds held with the Trustee
for payment of bonds interest and other bond related expenses.
NOTE
5. 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 guarantees, 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.
Below
is a summary of our notes receivable as of March 31, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
Interest
|
|
|
|
|
|
|
|
Borrower
|
|
|
Date
|
|
|
Rate
|
|
|
Amount
|
|
|
Security
|
|
Performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H198,
LLC (Las Vegas Land)
|
|
|
01/20
|
|
|
12.00
|
%
|
|
|
5,907
|
|
|
|
Secured
|
|
H198,
LLC (Legacy at Pleasant Grove Land)
|
|
|
10/19
|
|
|
12.00
|
%
|
|
|
496
|
|
|
|
Secured
|
|
Oulan-Chikh
Family Trust
|
|
|
03/21
|
|
|
8.00
|
%
|
|
|
174
|
|
|
|
Secured
|
|
H198,
LLC (McKinney Ranch Land)
|
|
|
09/20
|
|
|
6.00
|
%
|
|
|
4,554
|
|
|
|
Secured
|
|
Forest
Pines
|
|
|
09/19
|
|
|
5.00
|
%
|
|
|
2,230
|
|
|
|
Secured
|
|
Spyglass
Apartments of Ennis, LP
|
|
|
11/19
|
|
|
5.00
|
%
|
|
|
5,141
|
|
|
|
Secured
|
|
Bellwether
Ridge
|
|
|
05/20
|
|
|
5.00
|
%
|
|
|
3,540
|
|
|
|
Secured
|
|
Parc
at Windmill Farms
|
|
|
05/20
|
|
|
5.00
|
%
|
|
|
6,202
|
|
|
|
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
|
%
|
|
|
6,369
|
|
|
|
Secured
|
|
Unified
Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,953
|
|
|
|
Secured
|
|
Unified
Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,000
|
|
|
|
Secured
|
|
Unified
Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
4,000
|
|
|
|
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
|
%
|
|
|
6,140
|
|
|
|
Secured
|
|
Unified
Housing Foundation, Inc.
(1)
|
|
|
12/19
|
|
|
12.00
|
%
|
|
|
10,401
|
|
|
|
Unsecured
|
|
Unified
Housing Foundation, Inc.
(1)
|
|
|
06/20
|
|
|
12.00
|
%
|
|
|
11,075
|
|
|
|
Unsecured
|
|
Other
related party notes
|
|
|
Various
|
|
|
Various
|
|
|
|
2,363
|
|
|
|
Various
secured interests
|
|
Other
non-related party notes
|
|
|
Various
|
|
|
Various
|
|
|
|
1,376
|
|
|
|
Various
secured interests
|
|
Accrued
interest
|
|
|
|
|
|
|
|
|
|
5,569
|
|
|
|
|
|
Total
Performing
|
|
|
|
|
|
|
|
|
$
|
84,294
|
|
|
|
|
|
Allowance
for estimated losses
|
|
|
|
|
|
|
|
|
|
(1,825
|
)
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
82,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Related
party notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
invest in mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold
interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral
and guarantees.
At
March 31, 2019, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $50.5
million. We recognized interest income of $1.4 million related to these notes receivables for the three months ended March 31,
2019.
The
Company has various notes receivable from Unified Housing Foundation, Inc. (“UHF”) and Foundation for Better Housing,
Inc. (“FBH”). UHF and FBH are determined to be related parties due to our reliance upon the performance of the collateral
secured under the notes receivable. Payments are due from surplus cash flow of operations of the properties. A sale or refinance
of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes
for the specific borrower. These notes are cross-collateralized for the specific borrower, but to the extent cash is received
from a specific UHF or FBH property, it is applied first against any outstanding interest for the related-property note. The allowance
on the UHF notes was a purchase allowance that was netted against the notes when acquired.
NOTE
6. 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% ownership 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 an unconsolidated joint venture.
Investments
accounted for via the equity method consists of the following, except for VAA which is discussed in Note 2.
Our
interest in the common stock of ARL in the amount of 0.90% is accounted for under the equity method because we exercise significant
influence over the operations and financial activities. Accordingly, the investments are carried at cost, adjusted for the Company’s
proportionate share of earnings or losses.
The
following is a summary of the financial position and results of operations from our unconsolidated parent (dollars in thousands):
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
ARL
|
|
|
|
|
|
|
Real estate,
net of accumulated depreciation
|
|
$
|
549
|
|
|
$
|
5,193
|
|
Notes receivable
|
|
|
41,992
|
|
|
|
45,414
|
|
Other assets
|
|
|
65,823
|
|
|
|
58,253
|
|
Notes payable
|
|
|
(9,444
|
)
|
|
|
(6,266
|
)
|
Other liabilities
|
|
|
(30,902
|
)
|
|
|
(32,539
|
)
|
Shareholders’
equity/partners capital
|
|
|
(68,018
|
)
|
|
|
(70,055
|
)
|
|
|
|
For
the Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Rents, interest and
other income
|
|
$
|
1,654
|
|
|
$
|
1,629
|
|
Operating expenses
|
|
|
(482
|
)
|
|
|
(417
|
)
|
Interest
expense
|
|
|
(2,009
|
)
|
|
|
(1,631
|
)
|
Loss
from continuing operations
|
|
$
|
(837
|
)
|
|
$
|
(419
|
)
|
Net
loss
|
|
$
|
(837
|
)
|
|
$
|
(419
|
)
|
|
|
|
|
|
|
|
|
|
Company’s proportionate share of loss
|
|
$
|
(8
|
)
|
|
$
|
(4
|
)
|
NOTE
7. NOTES AND INTEREST PAYABLE
Below
is a summary of our notes and interest payable as of March 31, 2019 (dollars in thousands):
|
|
March
31, 2019
|
|
|
|
|
Notes
Payable
|
|
|
|
Accrued
Interest
|
|
|
|
Total
Debt
|
|
Apartments
|
|
$
|
94,368
|
|
|
$
|
269
|
|
|
$
|
94,637
|
|
Apartments under Construction
|
|
|
21,919
|
|
|
|
—
|
|
|
|
21,919
|
|
Commercial
|
|
|
136,126
|
|
|
|
670
|
|
|
|
136,796
|
|
Land
|
|
|
21,860
|
|
|
|
180
|
|
|
|
22,040
|
|
Corporate
and other notes
|
|
|
17,631
|
|
|
|
—
|
|
|
|
17,631
|
|
Total
|
|
$
|
291,904
|
|
|
$
|
1,119
|
|
|
$
|
293,023
|
|
Unamortized
deferred borrowing costs
|
|
($
|
9,089
|
)
|
|
|
|
|
|
($
|
9,089
|
)
|
|
|
$
|
282,815
|
|
|
$
|
1,119
|
|
|
$
|
283,934
|
|
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 $7.5 million in construction
loans during the three months ended March 31, 2019.
NOTE
8. BONDS PAYABLE
Following
is the outstanding balance of SPC’s bonds and interest payable as of March 31, 2019 and December 31, 2018 (dollars in
thousands):
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
Bonds (Series
A)
|
|
$
|
99,376
|
|
|
$
|
106,686
|
|
Bonds (Series B)
|
|
|
37,913
|
|
|
|
36,740
|
|
Bonds
(Series B expansion)
|
|
|
19,906
|
|
|
|
19,290
|
|
Total
outstanding bonds
|
|
|
157,195
|
|
|
|
162,716
|
|
Less:
deferred bond issuance costs
|
|
|
(7,587
|
)
|
|
|
(8,179
|
)
|
Total
outstanding bonds, net
|
|
|
149,608
|
|
|
|
154,537
|
|
Accrued
Interest
|
|
|
1,857
|
|
|
|
4,037
|
|
Total
oustanding bonds, net and accrued interest
|
|
$
|
151,465
|
|
|
$
|
158,574
|
|
The
aggregate maturity of the bonds are as follows:
Year
|
|
|
March
31,
2019
|
|
|
December
31,
2018
|
|
2019
|
|
|
$
|
11,024
|
|
|
$
|
22,049
|
|
2020
|
|
|
|
22,049
|
|
|
|
22,049
|
|
2021
|
|
|
|
33,629
|
|
|
|
33,629
|
|
2022
|
|
|
|
33,629
|
|
|
|
33,629
|
|
2023
|
|
|
|
30,070
|
|
|
|
30,070
|
|
Thereafter
|
|
|
|
26,794
|
|
|
|
21,290
|
|
|
|
|
$
|
157,195
|
|
|
$
|
162,716
|
|
On
January 31, 2019, the Company paid $10.4 million and $5.8 million on bond principal and interests, respectively, and recognized
a loss on foreign currency exchange rate of $5.8 million.
NOTE
9. DEFERRED INCOME
In
previous years, the Company has sold properties to related parties where we have had continuing involvement in the form of management
or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the
sale, the sales criteria for the full accrual method is not met, and as such the Company has deferred some or all of the gain
recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate,
until the sales criteria is met. The gain on these transactions have been deferred until the properties are sold to a non-related
third party. As of March 31, 2019, we had deferred gain of $13.9 million.
For
the quarter ended March 31, 2019, the Company recognized, from the proportionate share of the remaining deferred gain, $3.6 million
as gain on sale, as a result of the sale of land to third parties.
NOTE
10. RELATED PARTY TRANSACTIONS
During
the ordinary course of business, we have related party transactions that include, but are not limited to, rental income, interest
income, interest expense, general and administrative costs, commissions, management fees, and property expenses. In addition,
we have assets and liabilities that include related party amounts. The related party amounts included in assets and liabilities,
and the related party revenues and expenses received and paid are shown on the face of the Consolidated Financial Statements.
The
following table provides the reconciliation of the beginning and ending balances of accounts receivable from and (accounts payable)
to related parties as of March 31, 2019 (dollars in thousands):
|
|
March 31, 2019
|
|
|
|
Pillar
|
|
|
ARL
|
|
|
Total
|
|
Related party receivable, beginning balance
|
|
$
|
—
|
|
|
$
|
133,642
|
|
|
$
|
133,642
|
|
Cash transfers
|
|
|
11,248
|
|
|
|
—
|
|
|
|
11,248
|
|
Advisory fees
|
|
|
(1,648
|
)
|
|
|
—
|
|
|
|
(1,648
|
)
|
Net income fee
|
|
|
(100
|
)
|
|
|
—
|
|
|
|
(100
|
)
|
Cost reimbursements
|
|
|
(1,455
|
)
|
|
|
—
|
|
|
|
(1,455
|
)
|
Interest income
|
|
|
—
|
|
|
|
2,355
|
|
|
|
2,355
|
|
Expenses (paid)/received by advisor
|
|
|
(347
|
)
|
|
|
—
|
|
|
|
(347
|
)
|
Income tax expense
|
|
|
(258
|
)
|
|
|
—
|
|
|
|
(258
|
)
|
Related party receivable, ending balance
|
|
$
|
7,440
|
|
|
$
|
135,997
|
|
|
$
|
143,437
|
|
NOTE
11. OPERATING SEGMENTS
Our
segments are based on our method of internal reporting, which classifies our operations by property type. Our property types are
grouped into commercial, apartments, land and other operating segments. 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 and other expenses. Management evaluates the performance of each of the operating segments and allocates resources
to them based on their net operating income and cash flow.
Items
of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation
award, equity in partnerships, and gains on sale of real estate. Expenses that are not reflected in the segments are provision
for losses, advisory fees, 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 notes receivable and corporate debt.
Presented below is our reportable segments’ operating income for the three months ended March 31, 2019
and 2018, including segment assets and expenditures (dollars in thousands):
For the Three Months Ended March 31, 2019
|
|
Commercial
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
8,227
|
|
|
$
|
3,700
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
11,929
|
|
Property operating expenses
|
|
|
(3,936
|
)
|
|
|
(2,058
|
)
|
|
|
43
|
|
|
|
(46
|
)
|
|
|
(5,997
|
)
|
Depreciation
|
|
|
(2,375
|
)
|
|
|
(734
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,109
|
)
|
Mortgage and loan interest
|
|
|
(1,967
|
)
|
|
|
(934
|
)
|
|
|
(253
|
)
|
|
|
(4,805
|
)
|
|
|
(7,959
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,558
|
|
|
|
4,558
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
2,216
|
|
|
|
—
|
|
|
|
2,216
|
|
Segment operating (loss) income
|
|
$
|
(51
|
)
|
|
$
|
(26
|
)
|
|
$
|
2,006
|
|
|
$
|
(291
|
)
|
|
$
|
1,638
|
|
Capital expenditures
|
|
|
55,612
|
|
|
|
589
|
|
|
|
4,081
|
|
|
|
—
|
|
|
|
60,282
|
|
Assets
|
|
$
|
154,780
|
|
|
$
|
153,084
|
|
|
$
|
82,074
|
|
|
$
|
—
|
|
|
$
|
389,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,499
|
)
|
|
|
—
|
|
|
|
(6,499
|
)
|
Gain on land sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
For the Three Months Ended March 31, 2018
|
|
Commercial
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
7,555
|
|
|
$
|
23,525
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
31,082
|
|
Property operating expenses
|
|
|
(3,749
|
)
|
|
|
(10,582
|
)
|
|
|
(30
|
)
|
|
|
(94
|
)
|
|
|
(14,455
|
)
|
Depreciation
|
|
|
(2,293
|
)
|
|
|
(4,149
|
)
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(6,446
|
)
|
Mortgage and loan interest
|
|
|
(1,849
|
)
|
|
|
(5,456
|
)
|
|
|
(110
|
)
|
|
|
(6,678
|
)
|
|
|
(14,093
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,876
|
|
|
|
3,876
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
1,335
|
|
|
|
—
|
|
|
|
1,335
|
|
Segment operating (loss) income
|
|
$
|
(336
|
)
|
|
$
|
3,338
|
|
|
$
|
1,195
|
|
|
$
|
(2,898
|
)
|
|
$
|
1,299
|
|
Capital expenditures
|
|
$
|
633
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
633
|
|
Assets
|
|
$
|
135,805
|
|
|
$
|
728,525
|
|
|
$
|
113,004
|
|
|
$
|
651
|
|
|
$
|
977,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
2,512
|
|
|
$
|
2,984
|
|
|
$
|
—
|
|
|
$
|
5,496
|
|
Cost of sale
|
|
|
—
|
|
|
|
(2,512
|
)
|
|
|
(1,649
|
)
|
|
|
—
|
|
|
|
(4,161
|
)
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
The table below provides the reconciliation
of segment information to the corresponding amounts in the Consolidated Statements of Operations for the three months ended March
31, 2019 and 2018 (dollars in thousands):
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Segment operating income
|
|
$
|
1,638
|
|
|
$
|
1,299
|
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(2,328
|
)
|
|
|
(2,192
|
)
|
Net income fee to related party
|
|
|
(100
|
)
|
|
|
(53
|
)
|
Advisory fee to related party
|
|
|
(1,648
|
)
|
|
|
(2,748
|
)
|
Other income
|
|
|
3,892
|
|
|
|
1,826
|
|
Foreign currency translation (loss) gain
|
|
|
(5,818
|
)
|
|
|
1,756
|
|
Loss from joint venture
|
|
|
(1,055
|
)
|
|
|
—
|
|
Losses (earnings) from other unconsolidated investees
|
|
|
(7
|
)
|
|
|
11
|
|
Net loss from continuing operations
|
|
$
|
(5,426
|
)
|
|
$
|
(101
|
)
|
The tables below reconcile the segment information to the corresponding
amounts in the Consolidated Balance Sheets:
|
|
For the Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Segment assets
|
|
$
|
389,938
|
|
|
$
|
977,985
|
|
Investments in unconsolidated subsidiaries and investees
|
|
|
90,138
|
|
|
|
2,483
|
|
Notes and interest receivable
|
|
|
82,469
|
|
|
|
83,342
|
|
Other assets and receivables
|
|
|
290,069
|
|
|
|
266,779
|
|
Total assets
|
|
$
|
852,614
|
|
|
$
|
1,330,589
|
|
NOTE 12. COMMITMENTS AND CONTINGENCIES
AND LIQUIDITY
Liquidity.
Management believes that
TCI will generate excess cash from property operations in 2019; such excess, however, will not be sufficient to discharge all of
TCI’s obligations as they become due. Management intends to sell land and income-producing real estate, refinance real estate
and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.
Partnership Buyouts
. TCI is
the limited partner in various partnerships related to the construction of residential properties. As permitted in the respective
partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships
subsequent to the completion of these projects. The amounts paid to buy out the non-affiliated partners are limited to development
fees earned by the non-affiliated partners and are outlined in the respective partnership agreements.
Litigation.
The ownership of
property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its
subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion
of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition,
results of operation or liquidity.
Guarantees.
The Company is
the primary guarantor on a $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 March 31, 2019 UHF was in compliance with the covenants to the loan agreement.
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 Judgement against Dynex Commercial, Inc., as well as pursue additional claims, if any,
against Dynex Capital, Inc.
Berger Litigation
On February 4, 2019, an individual claiming
to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed
a Complaint in 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 directors of the Companies (“Additional Parties”)
and two other individuals. The Complaint filed alleges that 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 duty by the one
or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff
seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return 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.
NOTE 13. 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 March 31, 2019, there are no preferred
stock or stock options that are required to be included in the calculation of EPS.
NOTE 14. SUBSEQUENT EVENTS
The date to which events occurring after
March 31, 2019, the date of the most recent balance sheet, have been evaluated for possible adjustment to the Consolidated Financial
Statements or disclosure is May 15, 2019, which is the date on which the Consolidated Financial Statements were available to be
issued.