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”). We have no employees.
TCI is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated tax return with ARL and its ultimate parent, May Realty Holdings, Inc. (“MRHI”).
TCI owns approximately 81.25% of the common stock of Income Opportunity Realty Investors, Inc. (“IOR”). Accordingly IOR’s financial results are consolidated with those of TCI and its subsidiaries. Shares of IOR are traded on the New York Stock Exchange Euronext (“NYSE American”) under the symbol (“IOR”).
TCI invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing the affairs of TCI, and for setting the policies which guide it, the day-to-day operations of TCI are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to: locating, evaluating and recommending real estate and real estate-related investment opportunities, and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCI’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to ARL and IOR.
Regis Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services for our real estate portfolio. TCI engages third-party companies to lease and manage its apartment properties.
Properties
We own or had interests in a total property portfolio of fifty three income-producing properties as of June 30, 2018. The properties consisted of:
|
●
|
Seven commercial properties consisting of five office buildings and two retail centers comprising in aggregate approximately 1.7 million rentable square feet;
|
|
●
|
Forty six apartment communities totaling 8,195 units; excluding apartments being developed; and
|
|
●
|
3,398 acres of developed and undeveloped land.
|
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. At June 30, 2018, we had ten apartment projects in development. The third-party developer typically holds a general partner interest in a limited partnership formed for the purpose of building a single property, we generally are a majority of the limited partner interests 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 and six months ended June 30, 2018, 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, 2017, 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, 2017. Certain 2017 Consolidated Financial Statement amounts have been reclassified to conform to the 2018 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 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 Pronouncements
In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company does not believe the adoption of this guidance had a material impact on its financial statements.
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 Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial position and results of operations, if any.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years; however, early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. The Company adopted this standard effective on January 1, 2018. ASU 2016-15 will impact our presentation of operating, investing and financing activities related to certain cash receipts and payments on our consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of changes in restricted cash. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. Upon adoption, restricted cash balances will be included along with cash and cash equivalents as of the end of the period and beginning period, respectively, in the Company’s consolidated statement of cash flows for all periods presented. Upon adoption, separate line items showing changes in restricted cash balances will be eliminated from the Company’s consolidated statement of cash flows. The Company adopted this guidance effective on January 1, 2018. ASU 2016-18 will impact our presentation of operating, investing and financing activities related to restricted cash on our consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business and thus will be treated as asset acquisitions. Acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The Company adopted this guidance effective January 1, 2018. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in-substance real estate. The ASU requires the Company to measure at fair value any retained interest in a partial sale of real estate. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2017-05 effective January 1, 2018. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
NOTE 2. REAL ESTATE ACTIVITY
Below is a summary of the real estate owned as of June 30, 2018 (dollars in thousands):
Apartments
|
|
$
|
730,045
|
|
Apartments under construction
|
|
|
152,943
|
|
Commercial properties
|
|
|
202,367
|
|
Land held for development
|
|
|
64,700
|
|
Real estate subject to sales contract
|
|
|
43,767
|
|
Total real estate
|
|
$
|
1,193,822
|
|
Less accumulated depreciation
|
|
|
(184,741
|
)
|
Total real estate, net of depreciation
|
|
$
|
1,009,081
|
|
The highlights of our significant real estate transactions for the six months ended June 30, 2018, are listed below:
Purchases
During the six months ended June 30, 2018, the Company purchased through one of its subsidiaries, an 80 unit residential apartment community located in Baton Rouge, LA for a total purchase price of $12 million, paid through a seller's financing note of $1.9 million, issuance of note payable of $8.6 million, and by exercising an option to purchase of $1.5 million paid in the previous year.
Sales
For the six months ended June 30, 2018, TCI sold 62 acres of land to an independent third party for a total sales price of $3.0 million and recorded a gain of $1.3 million from the land sale. Also, for the quarter just ended, the Company sold a golf course comprising approximately 96.09 acres for an aggregate sales price of $2.3 million, out of which, $0.6 million was received in cash and $1.7 million in note receivables. In addition, during the first quarter, the Company sold six income-producing properties to a related party for an aggregate purchase price of $8.5 million, out of which, $2.1 million was received in cash and $6.4 million in note receivables. No gain or loss was recorded from the sale of income-producing properties.
As of June 30, 2018, the Company has approximately 67 acres of land, at various locations that were sold to related parties in multiple transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets. Due to the related party nature of the transactions TCI has deferred the recording of the sales in accordance with ASC 360-20.
We continue to invest in the development of apartment projects. During the six months ended June 30, 2018, we have invested $47.5 million related to the construction or predevelopment of various apartment complexes and capitalized $3.5 million of interest costs.
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended June 30, 2018 and 2017, the Company paid interest expense of $26.7 million and $26.5 million, respectively.
Cash and cash equivalents, and restricted cash for the six months ended June 30, 2018 and 2017 was $92.8 million and $96.5 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:
|
|
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
28,105
|
|
|
$
|
59,034
|
|
Restricted cash (cash held in escrow)
|
|
|
49,777
|
|
|
|
30,537
|
|
Restricted cash (certificate of deposits)
|
|
|
9,162
|
|
|
|
—
|
|
Restricted cash (held with Trustee)
|
|
|
5,730
|
|
|
|
6,899
|
|
|
|
$
|
92,774
|
|
|
$
|
96,470
|
|
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 4. 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 June 30, 2018 (dollars in thousands):
Borrower
|
|
Maturity
Date
|
|
Interest
Rate
|
|
Amount
|
|
Collateral
|
Performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
H198, LLC (Las Vegas Land)
|
|
|
01/20
|
|
|
12.00
|
%
|
|
$
|
5,907
|
|
Secured
|
H198, LLC (McKinney Ranch Land)
|
|
|
09/18
|
|
|
6.00
|
%
|
|
|
4,554
|
|
Secured
|
Oulan-Chikh Family Trust
|
|
|
03/21
|
|
|
8.00
|
%
|
|
|
174
|
|
Secured
|
Spyglass Apartments of Ennis, LP
|
|
|
11/19
|
|
|
5.00
|
%
|
|
|
4,743
|
|
Secured
|
D4DS, LLC (Bellwether Ridge)
|
|
|
05/20
|
|
|
5.00
|
%
|
|
|
3,184
|
|
Secured
|
Parc at Windmill Farms
|
|
|
05/20
|
|
|
5.00
|
%
|
|
|
5,731
|
|
Secured
|
2818 Ventures LLC (Forest Pines)
|
|
|
11/18
|
|
|
5.00
|
%
|
|
|
2,223
|
|
Secured
|
ABC Land & Development (Mandahl Bay)
|
|
|
05/38
|
|
|
6.00
|
%
|
|
|
1,735
|
|
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
|
%
|
|
|
6,000
|
|
Secured
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,953
|
|
Secured
|
Unified Housing Foundation, Inc. (Timbers of Terrell)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,323
|
|
Secured
|
Unified Housing Foundation, Inc. (Tivoli)
(1)
|
|
|
12/32
|
|
|
12.00
|
%
|
|
|
6,140
|
|
Secured
|
Unified Housing Foundation, Inc.
(1)
|
|
|
12/18
|
|
|
12.00
|
%
|
|
|
3,994
|
|
Unsecured
|
Unified Housing Foundation, Inc.
(1)
|
|
|
12/18
|
|
|
12.00
|
%
|
|
|
6,407
|
|
Unsecured
|
Unified Housing Foundation, Inc.
(1)
|
|
|
06/20
|
|
|
12.00
|
%
|
|
|
5,760
|
|
Unsecured
|
Unified Housing Foundation, Inc.
(1)
|
|
|
03/21
|
|
|
12.00
|
%
|
|
|
5,314
|
|
Unsecured
|
Other related party notes
(1)
|
|
|
Various
|
|
|
Various
|
|
|
|
510
|
|
Various unsecured interests
|
Other non-related party notes
|
|
|
Various
|
|
|
Various
|
|
|
|
796
|
|
Various secured interests
|
Other non-related party notes
|
|
|
Various
|
|
|
Various
|
|
|
|
981
|
|
Various unsecured interests
|
Accrued interest
|
|
|
|
|
|
|
|
|
|
6,184
|
|
|
Total Performing
|
|
|
|
|
|
|
|
|
$
|
83,463
|
|
|
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 June 30, 2018, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $50.0 million. We recognized interest income of $2.8 million related to these notes receivables for the six months ended June 30, 2018.
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 5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES
Investments in unconsolidated joint ventures and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence, are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses under the equity method of accounting. ARL is our parent company and is considered as an unconsolidated joint venture.
Investments in unconsolidated joint ventures and investees consist of the following:
|
|
Percentage ownership as of
|
|
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
American Realty Investors, Inc.
(1)
|
|
|
0.90
|
%
|
|
|
0.90
|
%
|
|
(1)
|
Unconsolidated investment in parent company owning 140,000 shares of ARL Common Stock.
|
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):
As of June 30
|
|
2018
|
|
|
2017
|
|
Real estate, net of accumulated depreciation
|
|
$
|
5,193
|
|
|
$
|
14,452
|
|
Notes receivable
|
|
|
43,045
|
|
|
|
28,005
|
|
Other assets
|
|
|
59,510
|
|
|
|
67,847
|
|
Notes payable
|
|
|
(6,184
|
)
|
|
|
(6,821
|
)
|
Other liabilities
|
|
|
(30,927
|
)
|
|
|
(38,623
|
)
|
Shareholders’ equity
|
|
|
(70,637
|
)
|
|
|
(64,860
|
)
|
For the Six Months Ended June 30
|
|
|
2018
|
|
|
|
2017
|
|
Rents and interest and other income
|
|
$
|
3,388
|
|
|
$
|
3,282
|
|
Depreciation
|
|
|
—
|
|
|
|
(95
|
)
|
Operating expenses
|
|
|
(1,459
|
)
|
|
|
(2,460
|
)
|
Interest expense
|
|
|
(3,362
|
)
|
|
|
(3,170
|
)
|
Income (loss) from continuing operations
|
|
|
(1,433
|
)
|
|
|
(2,443
|
)
|
Income (loss) from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(1,433
|
)
|
|
$
|
(2,443
|
)
|
|
|
|
|
|
|
|
|
|
Company’s proportionate share of net loss
|
|
$
|
(13
|
)
|
|
$
|
(22
|
)
|
NOTE 6. NOTES AND INTEREST PAYABLE
Below is a summary of our notes and interest payable as of June 30, 2018 (dollars in thousands):
|
|
Notes Payable
|
|
|
Accrued Interest
|
|
|
Total Debt
|
|
Apartments
|
|
$
|
568,449
|
|
|
$
|
1,585
|
|
|
$
|
570,034
|
|
Apartments under Construction
|
|
|
118,665
|
|
|
|
31
|
|
|
|
118,696
|
|
Commercial
|
|
|
125,807
|
|
|
|
616
|
|
|
|
126,423
|
|
Land
|
|
|
15,855
|
|
|
|
191
|
|
|
|
16,046
|
|
Real estate subject to sales contract
|
|
|
376
|
|
|
|
—
|
|
|
|
376
|
|
Mezzanine financing
|
|
|
93,422
|
|
|
|
509
|
|
|
|
93,931
|
|
Other
|
|
|
8,487
|
|
|
|
(593
|
)
|
|
|
7,894
|
|
Total
|
|
$
|
931,061
|
|
|
$
|
2,339
|
|
|
$
|
933,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized deferred borrowing costs
|
|
|
(17,841
|
)
|
|
|
—
|
|
|
|
(17,841
|
)
|
|
|
$
|
913,220
|
|
|
$
|
2,339
|
|
|
$
|
915,559
|
|
The segment labeled as “Other” consists of unsecured or stock-secured notes payable.
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 $44.7 million in construction loans during the six months ended June 30, 2018.
The properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.
NOTE 7. BONDS PAYABLE
In August 2016, Southern Properties Capital LTD (“Southern”), a British Virgin Islands corporation was incorporated for the purpose of raising funds by issuing Bonds to be traded on the Tel Aviv Stock Exchange (“TASE”). The Company transferred certain residential and commercial properties located in the United States to Southern, its wholly owned subsidiary.
On February 13, 2017, Southern filed a final prospectus with the TASE for an offering and sale of nonconvertible Series A Bonds to be issued by Southern. The bonds are obligations of Southern. During the year ended December 31, 2017 on three separate occasions Southern issued nonconvertible Series A Bonds with a total value of approximately NIS400 million New Israeli Shekels (“NIS”) or approximately $115 million dollars. The Series A Bonds have a stated interest rate of 7.3%. At March 31, 2018 the effective interest rate is 9.17%. The bonds require semi-annual equal installments on January 31 and July 31 of each year from 2019 to 2023 (inclusive). The interest will be repaid on January 31 and July 31 of each of the years 2018 to 2023 (inclusive), with the first payment commencing on July 31, 2017.
On January 25, 2018, interest payment of approximately NIS 14.6 million (or approximately $4.3 million) was paid to the Series A bondholders.
On February 15, 2018, Southern issued Series B bonds in the amount of NIS 137.7 million par value (approximately $39.2 million as of February 15, 2018). The Series B bonds are registered on the TASE. The bonds are reported in NIS and bear annual interest rate of 6.8%. Interest shall be repaid January 31 and July 31 of each of the years 2019 to 2023 (inclusive), first payment commencing on July 31, 2018. The principal shall be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). The total bond issuance cost of $1.4 million was incurred. The effective interest rate is 7.99%.
On July 26, 2018, interest payment of approximately NIS 18.9 million (or approximately $5.2 million) was paid to the Series A and B bondholders.
The outstanding balance of these Bonds at June 30, 2018 is as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Bonds (Series A)
|
|
$
|
109,552
|
|
|
$
|
115,336
|
|
Bonds (Series B)
|
|
|
37,726
|
|
|
|
—
|
|
Less: deferred issuance expense, net
|
|
|
(7,210
|
)
|
|
|
(5,916
|
)
|
Accrued Interest
|
|
|
3,829
|
|
|
|
3,627
|
|
|
|
$
|
143,897
|
|
|
$
|
113,047
|
|
The aggregate maturity of the bonds are as follows:
Year
|
|
|
|
|
2018
|
|
|
$
|
—
|
|
2019
|
|
|
|
23,067
|
|
2020
|
|
|
|
23,067
|
|
2021
|
|
|
|
23,067
|
|
2022
|
|
|
|
30,903
|
|
Thereafter
|
|
|
|
47,174
|
|
|
|
|
$
|
147,278
|
|
The funds were used primarily for the acquisition and development of additional real estate operations in the United States. The funds were raised and will be repaid in NIS, however the funds raised have been converted to US dollars. The Company records unrealized gains or losses each quarter based upon the relative exchange values of the US dollar and the NIS; however, no gain or loss will be realized until a conversion from US dollars to NIS actually occurs in the future. The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment of principal and interest on the bonds is made. For the six months ended June 30, 2018, the Company recorded a gain on foreign currency transaction of approximately $7.6 million.
NOTE 8. RELATED PARTY TRANSACTIONS
The following table provides the reconciliation of the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of June 30, 2018 (dollars in thousands):
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/paid are shown on the face of the Consolidated Financial Statements.
|
|
Pillar
|
|
|
ARL
|
|
|
Total
|
|
Related party receivable, December 31, 2017
|
|
$
|
—
|
|
|
$
|
111,665
|
|
|
$
|
111,665
|
|
Cash transfers
|
|
|
26,046
|
|
|
|
—
|
|
|
|
26,046
|
|
Advisory fees
|
|
|
(5,474
|
)
|
|
|
—
|
|
|
|
(5,474
|
)
|
Net income fee
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
(106
|
)
|
Fees and commissions
|
|
|
(162
|
)
|
|
|
—
|
|
|
|
(162
|
)
|
Cost reimbursements
|
|
|
(2,190
|
)
|
|
|
—
|
|
|
|
(2,190
|
)
|
Interest income
|
|
|
—
|
|
|
|
3,262
|
|
|
|
3,262
|
|
Notes receivable purchased
|
|
|
(5,315
|
)
|
|
|
—
|
|
|
|
(5,315
|
)
|
Expenses (paid)/received by advisor
|
|
|
6,227
|
|
|
|
—
|
|
|
|
6,227
|
|
Sales/Purchases transactions
|
|
|
(7,772
|
)
|
|
|
—
|
|
|
|
(7,772
|
)
|
Related party receivable, June 30, 2018
|
|
$
|
11,254
|
|
|
$
|
114,927
|
|
|
$
|
126,181
|
|
NOTE 9. 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 June 30, 2018 and 2017, including segment assets and expenditures (dollars in thousands):
For the Three Months Ended June 30, 2018
|
|
Commercial
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
7,404
|
|
|
$
|
24,201
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
31,607
|
|
Property operating expenses
|
|
|
(4,238
|
)
|
|
|
(11,199
|
)
|
|
|
(55
|
)
|
|
|
—
|
|
|
|
(15,492
|
)
|
Depreciation and amortization
|
|
|
(2,323
|
)
|
|
|
(4,195
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
(6,522
|
)
|
Mortgage and loan interest
|
|
|
(1,893
|
)
|
|
|
(5,342
|
)
|
|
|
148
|
|
|
|
(7,088
|
)
|
|
|
(14,175
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,544
|
|
|
|
3,544
|
|
Segment operating (loss) income
|
|
$
|
(1,050
|
)
|
|
$
|
3,465
|
|
|
$
|
93
|
|
|
$
|
(3,546
|
)
|
|
$
|
(1,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data as of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
—
|
|
|
|
2,092
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
2,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,313
|
|
Cost of sale
|
|
|
(2,313
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,313
|
)
|
Gain (loss) on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
For the Three Months Ended June 30, 2017
|
|
|
Commercial
Properties
|
|
|
|
Apartments
|
|
|
|
Land
|
|
|
|
Other
|
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
8,267
|
|
|
$
|
23,030
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
31,302
|
|
Property operating expenses
|
|
|
(4,694
|
)
|
|
|
(10,211
|
)
|
|
|
(155
|
)
|
|
|
(150
|
)
|
|
|
(15,210
|
)
|
Depreciation and amortization
|
|
|
(2,348
|
)
|
|
|
(4,030
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,378
|
)
|
Mortgage and loan interest
|
|
|
(2,121
|
)
|
|
|
(5,028
|
)
|
|
|
(310
|
)
|
|
|
(8,324
|
)
|
|
|
(15,783
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,709
|
|
|
|
3,709
|
|
Loss on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(476
|
)
|
|
|
—
|
|
|
|
(476
|
)
|
Segment operating (loss) income
|
|
$
|
(896
|
)
|
|
$
|
3,761
|
|
|
$
|
(941
|
)
|
|
$
|
(4,760
|
)
|
|
$
|
(2,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data as of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
555
|
|
|
$
|
—
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
507
|
|
|
$
|
—
|
|
|
$
|
507
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(983
|
)
|
|
|
—
|
|
|
|
(983
|
)
|
Loss on land sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
|
$
|
—
|
|
|
$
|
(476
|
)
|
The following table below provides the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations for the three months ended June 30, 2018 and 2017 (dollars in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Segment operating income (loss)
|
|
$
|
(1,038
|
)
|
|
$
|
(2,836
|
)
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(2,173
|
)
|
|
|
(1,295
|
)
|
Provision on impairment of notes receivable and real estate assets
|
|
|
|
|
|
|
|
|
Net income fee to related party
|
|
|
(53
|
)
|
|
|
(76
|
)
|
Advisory fee to related party
|
|
|
(2,726
|
)
|
|
|
(2,501
|
)
|
Other income
|
|
|
13,371
|
|
|
|
(3,529
|
)
|
Loss from unconsolidated joint ventures and investees
|
|
|
(9
|
)
|
|
|
(10
|
)
|
Net income (loss) from continuing operations
|
|
$
|
7,372
|
|
|
$
|
(10,247
|
)
|
Presented below is our reportable segments’ operating income for the six months ended June 30, 2018 and 2017, including segment assets and expenditures (dollars in thousands):
For the Six Months Ended June 30, 2018
|
|
Commercial
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
14,959
|
|
|
$
|
47,726
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
62,689
|
|
Property operating expenses
|
|
|
(7,986
|
)
|
|
|
(21,782
|
)
|
|
|
(84
|
)
|
|
|
(95
|
)
|
|
|
(29,947
|
)
|
Depreciation and amortization
|
|
|
(4,616
|
)
|
|
|
(8,344
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(12,968
|
)
|
Mortgage and loan interest
|
|
|
(3,742
|
)
|
|
|
(10,798
|
)
|
|
|
36
|
|
|
|
(13,764
|
)
|
|
|
(28,268
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,420
|
|
|
|
7,420
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
1,335
|
|
|
|
—
|
|
|
|
1,335
|
|
Segment operating (loss) income
|
|
$
|
(1,385
|
)
|
|
$
|
6,802
|
|
|
$
|
1,287
|
|
|
$
|
(6,443
|
)
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,725
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,725
|
|
Real estate assets
|
|
|
135,294
|
|
|
|
764,672
|
|
|
|
108,467
|
|
|
|
648
|
|
|
|
1,009,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
2,313
|
|
|
$
|
8,512
|
|
|
$
|
2,984
|
|
|
$
|
—
|
|
|
$
|
13,809
|
|
Cost of sale
|
|
|
(2,313
|
)
|
|
|
(8,512
|
)
|
|
|
(1,649
|
)
|
|
|
—
|
|
|
|
(12,474
|
)
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
For the Six Months Ended June 30, 2017
|
|
|
Commercial
Properties
|
|
|
|
Apartments
|
|
|
|
Land
|
|
|
|
Other
|
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
17,138
|
|
|
$
|
45,691
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
62,837
|
|
Property operating expenses
|
|
|
(9,377
|
)
|
|
|
(20,956
|
)
|
|
|
(314
|
)
|
|
|
(452
|
)
|
|
|
(31,099
|
)
|
Depreciation and amortization
|
|
|
(4,604
|
)
|
|
|
(8,077
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,681
|
)
|
Mortgage and loan interest
|
|
|
(3,727
|
)
|
|
|
(11,787
|
)
|
|
|
(860
|
)
|
|
|
(14,599
|
)
|
|
|
(30,973
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,130
|
|
|
|
7,130
|
|
Loss on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(31
|
)
|
Segment operating (loss) income
|
|
$
|
(570
|
)
|
|
$
|
4,871
|
|
|
$
|
(1,205
|
)
|
|
$
|
(7,913
|
)
|
|
$
|
(4,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,898
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
2,483
|
|
Real estate assets
|
|
$
|
146,621
|
|
|
$
|
656,455
|
|
|
$
|
117,753
|
|
|
$
|
—
|
|
|
$
|
920,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,596
|
|
|
$
|
—
|
|
|
$
|
1,596
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,627
|
)
|
|
|
—
|
|
|
|
(1,627
|
)
|
Loss on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
|
$
|
—
|
|
|
$
|
(31
|
)
|
The following table reconciles segment information to the corresponding amounts in the Consolidated Statements of Operations for the six months ended June 30, 2018 and 2017 (dollars in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Segment operating income (loss)
|
|
$
|
261
|
|
|
$
|
(4,817
|
)
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(4,365
|
)
|
|
|
(3,075
|
)
|
Net income fee to related party
|
|
|
(106
|
)
|
|
|
(136
|
)
|
Advisory fee to related party
|
|
|
(5,474
|
)
|
|
|
(4,806
|
)
|
Other income
|
|
|
16,953
|
|
|
|
(2,410
|
)
|
Loss from unconsolidated joint ventures and investees
|
|
|
2
|
|
|
|
(18
|
)
|
Net income (loss) from continuing operations
|
|
$
|
7,271
|
|
|
$
|
(15,262
|
)
|
The following table reconciles segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):
|
|
As of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Segment assets
|
|
$
|
1,009,081
|
|
|
$
|
920,829
|
|
Investments in real estate partnerships
|
|
|
2,474
|
|
|
|
2,428
|
|
Notes and interest receivable
|
|
|
83,463
|
|
|
|
78,868
|
|
Other assets
|
|
|
273,727
|
|
|
|
247,966
|
|
Total assets
|
|
$
|
1,368,745
|
|
|
$
|
1,250,091
|
|
NOTE 10. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
Liquidity.
Management believes that TCI will generate excess cash from property operations in 2018; 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.
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 explore possible additional claims, if any, against Dynex Capital, Inc.
Litigation.
The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.
Guarantees.
The Company is the primary guarantor on a $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 June 30, 2018, UHF was in compliance with the covenants to the loan agreement.
NOTE 11. 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 June 30, 2018, there are no preferred stock or stock options that are required to be included in the calculation of EPS.
NOTE 12. SUBSEQUENT EVENTS
On July 19, 2018, Southern closed a private placement offering of its Series B bonds in the amount of NIS 72.3 million (or approximately $19.8 million). The bonds are reported in NIS, are registered on the TASE, bear an annual interest rate of 6.8% and have an effective interest rate of 9.60%. Interest will be paid on January 31 and July 31 of each of the years 2019 to 2023 (inclusive). The principal will be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). The Company incurred bond issuance costs of approximately $1.9 million.