0000949961 false 2021 Q2 --12-31 INCOME OPPORTUNITY REALTY INVESTORS INC /TX/ 0000949961 2021-01-01 2021-06-30 0000949961 2021-08-12 0000949961 2021-06-30 0000949961 2020-12-31 0000949961 2021-04-01 2021-06-30 0000949961 2020-04-01 2020-06-30 0000949961 2020-01-01 2020-06-30 0000949961 us-gaap:CommonStockMember 2021-03-31 0000949961 us-gaap:TreasuryStockMember 2021-03-31 0000949961 us-gaap:AdditionalPaidInCapitalMember 2021-03-31 0000949961 us-gaap:RetainedEarningsMember 2021-03-31 0000949961 2021-03-31 0000949961 us-gaap:CommonStockMember 2021-04-01 2021-06-30 0000949961 us-gaap:TreasuryStockMember 2021-04-01 2021-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2021-04-01 2021-06-30 0000949961 us-gaap:RetainedEarningsMember 2021-04-01 2021-06-30 0000949961 us-gaap:CommonStockMember 2021-06-30 0000949961 us-gaap:TreasuryStockMember 2021-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2021-06-30 0000949961 us-gaap:RetainedEarningsMember 2021-06-30 0000949961 us-gaap:CommonStockMember 2020-03-31 0000949961 us-gaap:TreasuryStockMember 2020-03-31 0000949961 us-gaap:AdditionalPaidInCapitalMember 2020-03-31 0000949961 us-gaap:RetainedEarningsMember 2020-03-31 0000949961 2020-03-31 0000949961 us-gaap:CommonStockMember 2020-04-01 2020-06-30 0000949961 us-gaap:TreasuryStockMember 2020-04-01 2020-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2020-04-01 2020-06-30 0000949961 us-gaap:RetainedEarningsMember 2020-04-01 2020-06-30 0000949961 us-gaap:CommonStockMember 2020-06-30 0000949961 us-gaap:TreasuryStockMember 2020-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2020-06-30 0000949961 us-gaap:RetainedEarningsMember 2020-06-30 0000949961 2020-06-30 0000949961 us-gaap:CommonStockMember 2020-12-31 0000949961 us-gaap:TreasuryStockMember 2020-12-31 0000949961 us-gaap:AdditionalPaidInCapitalMember 2020-12-31 0000949961 us-gaap:RetainedEarningsMember 2020-12-31 0000949961 us-gaap:CommonStockMember 2021-01-01 2021-06-30 0000949961 us-gaap:TreasuryStockMember 2021-01-01 2021-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2021-01-01 2021-06-30 0000949961 us-gaap:RetainedEarningsMember 2021-01-01 2021-06-30 0000949961 us-gaap:CommonStockMember 2019-12-31 0000949961 us-gaap:TreasuryStockMember 2019-12-31 0000949961 us-gaap:AdditionalPaidInCapitalMember 2019-12-31 0000949961 us-gaap:RetainedEarningsMember 2019-12-31 0000949961 2019-12-31 0000949961 us-gaap:CommonStockMember 2020-01-01 2020-06-30 0000949961 us-gaap:TreasuryStockMember 2020-01-01 2020-06-30 0000949961 us-gaap:AdditionalPaidInCapitalMember 2020-01-01 2020-06-30 0000949961 us-gaap:RetainedEarningsMember 2020-01-01 2020-06-30 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncMember 2021-06-30 0000949961 us-gaap:NotesReceivableMember iot:UnifiedHousingFoundationIncMember 2021-01-01 2021-06-30 0000949961 us-gaap:NotesReceivableMember iot:UnifiedHousingFoundationIncMember 2021-06-30 0000949961 2021-02-01 2021-02-28 0000949961 us-gaap:NotesReceivableMember iot:UnifiedHousingFoundationIncMember 2021-02-01 2021-02-28 0000949961 iot:UnifiedHousingFoundationIncEchoStationMember us-gaap:PerformingFinancingReceivableMember 2021-01-01 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncEchoStationMember us-gaap:PerformingFinancingReceivableMember 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncLakeshoreVillasMember us-gaap:PerformingFinancingReceivableMember 2021-01-01 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncLakeshoreVillasMember us-gaap:PerformingFinancingReceivableMember 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncLakeshoreVillas1Member us-gaap:PerformingFinancingReceivableMember 2021-01-01 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncLakeshoreVillas1Member us-gaap:PerformingFinancingReceivableMember 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncTimbersofTerrellMember us-gaap:PerformingFinancingReceivableMember 2021-01-01 2021-06-30 0000949961 iot:UnifiedHousingFoundationIncTimbersofTerrellMember us-gaap:PerformingFinancingReceivableMember 2021-06-30 0000949961 us-gaap:PerformingFinancingReceivableMember 2021-06-30 0000949961 us-gaap:NotesReceivableMember iot:UnifiedHousingFoundationIncMember 2021-06-30 0000949961 us-gaap:NotesReceivableMember iot:UnifiedHousingFoundationIncMember 2021-01-01 2021-06-30 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2020-12-31 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2019-12-31 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2021-01-01 2021-06-30 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2020-01-01 2020-06-30 0000949961 iot:TranscontinentalRealtyInvestorIncMember 2020-06-30 0000949961 2019-02-03 2019-02-04 0000949961 2019-02-04 iso4217:USD xbrli:shares iso4217:USD xbrli:shares xbrli:pure

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021 

or  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to              

Commission File Number 001-14784

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 Nevada 75-2615944

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

   

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

(Address of principal executive offices)

(Zip Code)

 (469) 522-4200 

 (Registrant’s telephone number, including area code)

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which
registered
Common Stock IOR NYSE American Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

 

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

 

Large accelerated filer    Accelerated filer
Non-accelerated filer   Smaller reporting company
  Emerging growth company

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock, $.01 par value 4,168,414
   
(Class) (Outstanding at August 12, 2021)

 

 

 

 

 

  

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
  PAGE
Item 1. Financial Statements  
  Consolidated Balance Sheets at June 30, 2021 (unaudited) and December 31, 2020 3
  Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (unaudited) 4
  Consolidated Statement of Shareholders’ Equity for the three and six months ended June 30, 2021 and 2020 (unaudited) 5
  Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (unaudited)   6
  Notes to Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6. Exhibits 19
SIGNATURES 20

2

 

 

PART I. FINANCIAL INFORMATION  

 

ITEM 1. FINANCIAL STATEMENTS

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

 

      June 30,       December 31,  
    2021     2020  
    (Unaudited)     (Audited)  
    (dollars in thousands, except par value amount)  
Assets                
Current assets                
Cash and cash equivalents   $ 2     $ 12  
Receivable and accrued interest from related parties     94,797       90,526  
Total current assets     94,799       90,538  
                 
Non current assets                
Notes and interest receivable from related parties     11,837       13,930  
Total non current assets     11,837       13,930  
                 
Total Assets   $ 106,636     $ 104,468  
                 
Liabilities and Shareholders' Equity                
                 
Liabilities:                
Accounts payable and other liabilities   $ 9     $ 12  
Total liabilities     9       12  
                 
Shareholders’ equity:                
Common stock, $0.01 par value, authorized 10,000,000 shares; issued 4,173,675 and outstanding 4,168,414 shares in 2021 and 2020     42       42  
Treasury stock at cost, 5,261 shares in 2021 and 2020     (39 )     (39 )
Paid-in capital     61,955       61,955  
Retained earnings     44,669       42,498  
Total shareholders' equity     106,627       104,456  
Total liabilities and shareholders' equity   $ 106,636     $ 104,468  

 

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

 

3

 

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited) 

                                 
    For the Three Months Ended
June 30,
    For the Six Months Ended
June 30,
 
    2021     2020     2021     2020  
    (dollars in thousands, except per share amounts)     (dollars in thousands, except per share amounts)  
Revenues:            
Revenue from operations   $     $     $     $  
                                 
Expenses:                                
General and administrative (including $155 and $120 for the six months ended 2021 and 2020, respectively, to related parties)     100       128       288       267  
Net income fee to related party     55       112       194       198  
Advisory fee to related party     201       191       398       380  
Total operating expenses     356       431       880       845  
Net operating loss     (356 )     (431 )     (880 )     (845 )
                                 
Other income (expenses):                                
Interest income from related parties     1,231       1,290       2,449       2,769  
Other income     162       742       1,179       742  
Total other income     1,393       2,032       3,628       3,511  
Income before taxes     1,037       1,601       2,748       2,666  
Income tax expense     218       336       577       560  
Net income   $ 819     $ 1,265     $ 2,171     $ 2,106  
                                 
Earnings per share - basic and diluted                                
Net income   $ 0.20     $ 0.30     $ 0.52     $ 0.51  
                                 
Weighted average common shares used in computing earnings per share     4,168,414       4,168,414       4,168,414       4,168,414  

 

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

 

4

 

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2021 and 2020

(dollars in thousands)

(Unaudited)

 

                                                 
      Common Stock                                  
For the three months ended
June 30, 2021
    Issued Shares       Amount       Treasury Stock       Paid-in Capital       Retained Earnings     Total Equity  
Balance, March 31, 2021     4,173,675     $ 42     $ (39 )   $ 61,955     $ 43,850     $ 105,808  
Net income                             819       819  
Balance, June 30, 2021     4,173,675     $ 42     $ (39 )   $ 61,955     $ 44,669     $ 106,627  

   

                                                 
      Common Stock                                  
For the three months ended
June 30, 2020
    Issued Shares       Amount       Treasury Stock       Paid-in Capital       Retained Earnings     Total Equity  
Balance, March 31, 2020     4,173,675     $ 42     $ (39 )   $ 61,955     $ 39,125     $ 101,083  
Net income                             1,265       1,265  
Balance, June 30, 2020     4,173,675     $ 42     $ (39 )   $ 61,955     $ 40,390     $ 102,348  

 

                                                 
      Common Stock                                  
For the six months ended
June 30, 2021
    Issued Shares       Amount       Treasury Stock       Paid-in Capital       Retained Earnings     Total Equity  
Balance, December 31, 2020     4,173,675     $ 42     $ (39 )   $ 61,955     $ 42,498     $ 104,456  
Net income                             2,171       2,171  
Balance, June 30, 2021     4,173,675     $ 42     $ (39 )   $ 61,955     $ 44,669     $ 106,627  

   

                                                 
      Common Stock                                  
For the six months ended
June 30, 2020
    Issued Shares       Amount       Treasury Stock       Paid-in Capital       Retained Earnings     Total Equity  
Balance, December 31, 2019     4,173,675     $ 42     $ (39 )   $ 61,955     $ 38,284     $ 100,242  
Net income                             2,106       2,106  
Balance, June 30, 2020     4,173,675     $ 42     $ (39 )   $ 61,955     $ 40,390     $ 102,348  

 

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

 

5

 

 

INCOME OPPORTUNITY REALTY INVESTORS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

                 
    For the Six Months Ended June 30,  
    2021     2020  
Cash Flow From Operating Activities:   (dollars in thousands)  
Net income   $ 2,171     $ 2,106  
Adjustments to reconcile net income applicable to common shares to net cash provided by operating activities:                
(Increase) decrease in assets:                
Accrued interest receivable from related parties     2,093       10  
Increase (decrease) in other liabilities     (3 )     (6 )
Net cash provided by operating activities     4,261       2,110  
                 
Cash Flow From Investing Activities:                
Related Party Receivables     (4,271 )     (2,071 )
Net cash used in investing activities     (4,271 )     (2,071 )
Net (decrease) increase in cash and cash equivalents     (10 )     39  
Cash and cash equivalents, beginning of period     12       5  
Cash and cash equivalents, end of period   $ 2     $ 44  

 

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

 

6

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

 

Organization

 

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

 

Transcontinental Realty Investors, Inc. (“TCI”) owns approximately 81.1% of the Company’s common stock. Effective July 17, 2009, IOR’s financial results were consolidated with those of American Realty Investors, Inc. (“ARL”) and TCI and their subsidiaries. IOR is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated income tax return with ARL and its ultimate parent, May Realty Holdings, Inc. (“MRHI”). We have no employees.

 

Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. The day-to-day operations of IOR 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 business and investment opportunities. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with IOR’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and ARL.

  
Our primary business is currently investing in mortgage receivables. At June 30, 2021, the principal source of revenue for the Company is interest income on approximately $95.9 million of notes receivable due from related parties, out of which, $11.1 million are due from United Housing Foundation, Inc. (“UHF”) (Refer to Note 2).

 

Basis of Presentation

 

The accompanying unaudited Consolidated Financial 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 six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year. As of June 30, 2021 and December 31, 2020, IOR was not the primary beneficiary of a variable interest entity (“VIE”).

 

The year-end Consolidated Balance Sheet at December 31, 2020, 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, 2020.

 

7

 

 

Fair Value Measurement

 

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures”, to the valuation of notes receivable. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

 

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

 

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

 

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

 

Related Parties

 

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

 

Newly Issued Accounting Pronouncements

 

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

 

 

8

 

 

NOTE 2. NOTES AND INTEREST RECEIVABLE FROM RELATED PARTIES

 

Notes and interest receivable from related parties is comprised of junior mortgage loans, which are loans secured by mortgages that are subordinate to one or more prior liens on the underlying real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.

 

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

 

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

 

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

 

At June 30, 2021, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $11.8 million. As of June 30, 2021, we recognized interest income of $664 thousand related to these notes receivable. Below is a summary of notes and interest receivable from related parties (dollars in thousands):

 

    Maturity       Interest                  
Borrower   Date     Rate       Amount       Collateral  
Performing loans:                              
Unified Housing Foundation, Inc. (Echo Station)   12/32     12.00 %   $ 1,481       Secured  
Unified Housing Foundation, Inc. (Lakeshore Villas)   12/32     12.00 %   $ 2,000       Secured  
Unified Housing Foundation, Inc. (Lakeshore Villas)   12/32     12.00 %   $ 6,369       Secured  
Unified Housing Foundation, Inc. (Timbers of Terrell)   12/32     12.00 %   $ 1,323       Secured  
Total Notes Receivable                   11,173          
Accrued interest                   664          
Total Performing                 $ 11,837          

 

All are related party notes.

 

9

 

 

NOTE 3. RECEIVABLE FROM AND PAYABLE TO RELATED PARTIES

 

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

 

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

                 
    Period Ended June 30,  
    2021     2020  
Fees:            
Advisory   $ 398     $ 380  
Net income     194       198  
    $ 592     $ 578  
Other Expense:                
Cost reimbursements   $ 155     $ 120  
                 
Revenue:                
Interest received   $ 2,449     $ 2,769  

 

As of June 30, 2021, IOR has notes and interest receivable of $11.8 million due from Unified Housing Foundation, Inc. and recognized interest income of $695 thousand related to these notes receivable. (See details in Note 2. Notes and Interest Receivable from Related Parties.)

 

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

                 
    TCI  
    2021     2020  
Balance, December 31,   $ 90,526     $ 86,221  
Cash transfers     3,680       1,457  
Advisory fees     (398 )     (380 )
Net income fee     (194 )     (198 )
Cost reimbursements     (155 )     (120 )
Expenses Paid by Advisor     (1 )     (2 )
Interest income     1,754       1,874  
Income Tax     (577 )     (560 )
AMT Credit     162        
Balance, June 30,   $ 94,797     $ 88,292  

 

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

 

10

 

 

NOTE 4. COMMITMENTS AND CONTINGENCIES

 

Litigation. The Company and its subsidiaries, from time to time, have been involved in various items of litigation incidental to and in the ordinary course of its business and, 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 operations or liquidity.

 

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. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remaining Defendants’ motions were granted in part and denied in part in the first quarter of 2020. Discovery is ongoing.

 

NOTE 5. SUBSEQUENT EVENTS

 

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

 

The Company has evaluated subsequent events through August 12, 2021, the date the Consolidated Financial Statements were available to be issued, and has determined that there are none to be reported.

 

11

 

 

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

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

 

This Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will”, “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

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

 

  failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

 

  risks associated with downturns in the national and local economies, increases in interest rates and volatility in the securities markets;

    

  potential liability for uninsured losses and environmental contamination; and

 

  risks associated with our dependence on key personnel whose continued service is not guaranteed.

 

The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements, include among others, the factors listed and described in Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K, which investors should review. There have been no changes from the risk factors previously described in the Company’s Form 10-K for the fiscal year ended December 31, 2020. 

 

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

 

12

 

Other sections of this report may also include suggested factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for management to predict all such matters; nor can we assess the impact of all such matters on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise as we file them with the SEC.

 

Overview

 

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

 

Our primary source of revenue is from the interest income on approximately $95.9 million of notes receivable due from related parties.

 

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

 

Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. The day-to-day operations of IOR 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 business and investment opportunities. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with IOR’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and ARL.

 

Critical Accounting Policies

 

We present our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. The accompanying unaudited Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. As of June 30, 2021, IOR is not the primary beneficiary of a VIE.

 

Recognition of Revenue

 

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

 

Non-Performing Notes Receivable

 

We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

 

13

 

Allowance for Estimated Losses

 

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 “Notes and Interest Receivable from Related Parties” for details on our notes receivable.

 

Fair Value of Financial Instruments

 

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures and includes three levels defined as follows:”

 

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

 

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

 

Related Parties 

 

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

 

Newly Issued Accounting Pronouncements

 

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

 

14

 

Results of Operations

 

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

 

Our primary business is currently investing in mortgage receivables. Our principal source of revenue is interest income generated from notes receivables due from related parties. We also receive interest income from the funds deposited with our Advisor at a rate of prime plus 1%. Our operating expenses consist mainly of general and administration costs related to the Company.

 

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

 

We had net income of $819 thousand or $0.20 per diluted share for the three months ended June 30, 2021, compared to net income of $1.3 million or $0.30 per diluted share for the same period ended 2020.

 

Expenses

 

General and administrative expenses were $100 thousand for the three months ended June 30, 2021. This represents a decrease of $28 thousand, compared to general and administrative expenses of $128 thousand for the three months ended June 30, 2020. This decrease was primarily driven by a decrease in legal fees of $12 thousand and audit fees of approximately $15 thousand.

 

Advisory fees were $201 thousand for the three months ended June 30, 2021 compared to $191 thousand for the same period in 2020 for an increase of $10 thousand. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

Net income fee to related party was $55 thousand for the three months ended June 30, 2021. This represents a decrease of $57 thousand, compared to the net income fee of $112 thousand for the three months ended June 30, 2020. The net income fee paid to our Advisor is calculated at 7.5% of net income.

 

Other income (expense)

 

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

 

Other income was $162 thousand for the three months ended June 30, 2021 compared to $742 thousand for the three months ended June 30, 2020. The decrease was due to a tax increment reimbursement from City of Farmers Branch received in 2020.

 

Comparison of the six months ended June 30, 2021 to the same period ended 2020:

 

We had net income of $2.2 million or $0.52 earnings per diluted share for the six months ended June 30, 2021 compared to net income of $2.1 million or $0.51 earnings per diluted share for the same period in 2020.

 

Expenses

 

General and administrative expenses were $288 thousand for the six months ended June 30, 2021 compared to $267 thousand for the six months ended June 30, 2020 for an increase of $21 thousand. The increase was primarily due to an increase in cost reimbursements to our Advisor of approximately $34 thousand partially offset by a decrease in legal fees of $19 thousand.

 

15

 

Advisory fees were $398 thousand for the six months ended June 30, 2021 compared to $380 thousand for the same period of 2020 for an increase of $18 thousand. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

Net income fee to related party decreased by $4 thousand to $194 thousand for the six months ended June 30, 2021 compared to $198 thousand for the same period in 2020. The net income fee paid to our Advisor is calculated at 7.5% of net income. 

 

Other income (expense)

 

Interest income was $2.4 million for the six months ended June 30, 2021. This represents a decrease of $300 thousand as compared to interest income of $2.7 million for the six months ended June 30, 2020, as a result of a decrease in interest recognized due to some notes being paid off in 1Q 2021.

 

Other income was $1.1 million for the six months ended June 30, 2021 due to the collection of a note previously written off. Other income of $742 thousand for the six months ended June 30, 2020 was due to a tax increment reimbursement from the City of Farmers Branch, Texas for previous infrastructure development performed by the Company.

 

Liquidity and Capital Resources

 

General

 

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

 

Cash Flow Summary  

 

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows from Part I, Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flows (dollars in thousands):

 

    For the Six Months Ended June 30,        
    2021     2020     Variance  
    (dollars in thousands)        
Net cash provided by operating activities   $ 4,261     $ 2,110     $ 2,151  
Net cash used in investing activities   $ (4,271 )   $ (2,071 )   $ (2,200 )

 

The primary use of cash for operations is daily operating costs, general and administrative expenses, and advisory fees. Our primary source of cash for operations is from interest income on notes receivable.

 

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

 

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

 

16

 

Environmental Matters

 

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

 

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

 

Inflation

 

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

 

Tax Matters 

 

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

 

Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. IOR has taxable income for the first six months of 2021 on a standalone basis.  The income tax expense for the six months ending June 30, 2021 was $577 thousand.

 

17

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

At June 30, 2021, the Company had no outstanding debt and has no exposure to quantitative or qualitative issues.

 

ITEM 4. CONTROLS AND PROCEDURES

 

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

 

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

 

PART II. OTHER INFORMATION

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On December 5, 1989, the governing body of the predecessor of the Company approved a share repurchase program authorizing the repurchase of up to a total of 200,000 shares of the predecessor. In June 2000, the Board of Directors of the Company increased the authorization to 500,000 shares. With the 3-for-1 forward split of the Company’s Common Stock in June 2005, such authorization would be appropriately increased to 1,500,000 shares and the number of shares previously purchased would be appropriately increased by the same ratio. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 150,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,650,000 shares of our common stock. This repurchase program has no termination date. There were no shares purchased under this program during the second quarter of 2021. As of June 30, 2021, 1,034,761 shares have been purchased and 615,239 shares may be purchased under the program.

 

18

 

ITEM 6. EXHIBITS

 

The following documents are filed herewith as exhibits or incorporated by reference as indicated:

 

Exhibit
Number
  Description
     
3.0   Articles of Incorporation of Income Opportunity Realty Investors, Inc., (incorporated by reference to Appendix C to the Registrant’s Registration Statement on Form S-4, dated February 12, 1996).
3.1   Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix D to the Registrant’s Registration Statement on Forms S-4 dated February 12, 1996).
10.3   Advisory Agreement dated as of April 30, 2011 between Income Opportunity Realty Investors, Inc. and Pillar Income Asset Management, Inc. (incorporated by reference to Exhibit 10.3 to the registrant’s current on Form 10-Q for event of May 2, 2011).
10.4   Loan Purchase Agreement (without exhibits), dated as of June 7, 2013 between IORI Operating Inc. and BDF TCI Mercer III, LLC.
10.5  

Settlement and Release Agreement dated June 7, 2013 among TCI Mercer Crossing, Inc., Income Opportunity Realty Investors, Inc., Transcontinental Lamar, Inc., Transcontinental Realty Investors, Inc., Prime Income Asset Management, LLC, American Realty Investors, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., BDF TCI Mercer III, LLC, and Transcontinental BDF III, LLC.

 

31.1 *   Certification by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.
32.1 *   Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

  * Filed herewith.

 

19

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  INCOME OPPORTUNITY REALTY INVESTORS,
INC.
     
Date: August 12, 2021 By:  
/s/ Gene S. Bertcher
    Gene S. Bertcher
    Principal Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

 

20

Income Opportunity Realt... (AMEX:IOR)
Historical Stock Chart
From Oct 2021 to Nov 2021 Click Here for more Income Opportunity Realt... Charts.
Income Opportunity Realt... (AMEX:IOR)
Historical Stock Chart
From Nov 2020 to Nov 2021 Click Here for more Income Opportunity Realt... Charts.