UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2004
Commission File Number 1-9240
TRANSCONTINENTAL REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer
Identification No.)
(469) 522-4200
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨. No x.
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 x. No ¨.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
PART I. FINANCIAL INFORMATION
The accompanying Consolidated Financial Statements as of and for the three months ended March 31, 2004, have not been audited by independent certified public accountants, but in the opinion of the management of Transcontinental Realty Investors, Inc. (“TCI”), all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of TCI’s consolidated financial position, consolidated results of operations and consolidated cash flows at the dates and for the periods indicated, have been included.
CONSOLIDATED BALANCE SHEETS
March 31,
2004
December 31,
2003
(dollars in thousands,
except per share)
Real estate held for investment
Less—accumulated depreciation
Real estate held for sale
Notes and interest receivable
Performing (including $20,925 in 2004 and $18,793 in 2003 from affiliates and related parties)
Nonperforming, nonaccruing
Less—allowance for estimated losses
Investment in real estate entities
Marketable equity securities, at market value
Cash and cash equivalents
Other assets (including $1,706 in 2004 and $4,819 in 2003 from affiliates and related parties)
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
CONSOLIDATED BALANCE SHEETS—Continued
Liabilities
Notes and interest payable
Liabilities related to assets held for sale
Other liabilities (including $10,509 in 2004 and $607 in 2003 to related parties)
Commitments and contingencies
Minority interest
Stockholders’ equity
Preferred Stock
Series C; $.01 par value; authorized, issued and outstanding 30,000 shares (liquidation preference $3,000)
Common stock, $.01 par value; authorized, 10,000,000 shares; issued and outstanding 8,113,669 shares in 2004 and 8,072,594 in 2003
Paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
3
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
Property revenue
Rents
Property expense
Property operations (including $803 for three months of 2004 and $807 for three months of 2003 to affiliates and related parties)
Operating income
Other income (loss)
Interest and other (including $201 for three months of 2004 and $152 for three months of 2003 from affiliates and related parties)
Equity in loss of equity investees
Other expense
Interest
Depreciation
Advisory fee to affiliates
Net income fee to affiliate
General and administrative (including $478 for three months of 2004 and $559 for three months of 2003 to affiliates and related parties)
Loss on foreign currency transaction
Discount on sale of note receivable
Net loss from continuing operations
Discontinued operations:
Income (loss) from operations
Gain on sale of operations
Equity in investees gain on sale of real estate
Net income (loss)
Preferred dividend requirement
Net income (loss) applicable to common shares
4
Basic earnings per share
Discontinued operations
Diluted earnings per share
Weighted average common shares used in computing earnings per share
Basic
Diluted
Convertible Series C Preferred stock (226,881 shares) and options to purchase 30,000 shares of TCI’s common stock were excluded from the computation of diluted earnings per share for the three months ended March 31, 2004, because the effect of their inclusion would be antidilutive.
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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Accumulated
Deficit
Other
Comprehensive
Income/(Loss)
Stockholders’
Equity
Balance, January 1, 2004
Comprehensive income
Unrealized gain on foreign currency translation
Unrealized gain on marketable securities
Net income
Series C Preferred Stock cash dividend ($7.00 per share)
Balance, March 31, 2004
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Reconciliation of net income (loss) to net cash provided by (used in) operating activities
Net income(loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation and amortization
Amortization of deferred borrowing costs
Gain on sale of real estate
Loss (income) allocated to minority interest
Increase in interest receivable
Decrease (increase) in other assets
Decrease in interest payable
Increase in other liabilities
Net cash provided by (used in) operating activities
Cash Flows from Investing Activities
Collections on notes receivable
Funding of notes receivable
Acquisition of real estate (including $690 in 2003 to affiliates and related parties)
Real estate improvements
Payments made under interest rate swap agreement
Real estate construction
Proceeds from sale of real estate
Distributions from equity investees, net
Payments from (to) advisor
Deposits on pending purchases and financings
Purchase of marketable equity securities
Net cash used in investing activities
Cash Flows from Financing Activities
Payments on notes payable
Proceeds from notes payable
Deferred financing costs (including $54 in 2003 to affiliates and related parties)
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
7
CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
Schedule of noncash investing and financing activities:
Notes payable assumed on purchase of real estate
Notes payable assumed by buyer on sale of real estate
Funds collected by affiliate on sale of note receivable
Notes receivable provided on sale of real estate
Note payable proceeds used by affiliate for purchase of real estate
Real estate received from related party as payment of debt
Real estate purchased from affiliate increasing affiliate payable
Note payable paid by affiliate
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Transcontinental Realty Investor, Inc. (“TCI”) is a Nevada corporation and successor to a California business trust which was organized on September 6, 1983. TCI invests in real estate through direct ownership, leases and partnerships. TCI also invests in mortgage loans on real estate.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Dollar amounts in tables are in thousands, except per share amounts. Certain balances for 2003 have been reclassified to conform to the 2004 presentation.
Operating results for the three month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the Consolidated Financial Statements and notes included in TCI’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”).
Effective March 31, 2003, TCI financial results have been consolidated in the American Realty Investors, Inc. (“ARI”) Form 10-Q and related consolidated financial statements. As of March 31, 2004, ARI owned 80.0% of the outstanding TCI common shares.
TCI provides stock options to certain directors. TCI accounts for these stock options using the intrinsic method pursuant to the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” (“SFAS 148”), which amended SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The new standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in the annual and interim financial statements for fiscal years ending after December 15, 2002. In compliance with SFAS No. 148, TCI has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25. If TCI had elected to recognize compensation cost for the issuance of options to directors of TCI based on the fair value at the grant dates for awards consistent with the fair value method prescribed by SFAS No. 123, net income (loss) and income (loss) per share would have been impacted as follows:
As reported
Proforma compensation expense, net of tax
Proforma
Basic earnings (loss) per share:
Diluted earnings (loss) per share:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—Continued
NOTE 2. REAL ESTATE
In 2004, TCI purchased the following properties:
Property
Location
Purchase
Price
Rate
Maturity
Date
First Quarter
Apartments
288 City Park(1)
Blue Lake Villas II(1)
Bridges on Kinsey(1)
Dakota Arms(1)
Lake Forest(1)
Vistas of Vance Jackson(1)
Land
Lubbock land
Railroad land
Vista Ridge land(2)
Second Quarter
Wildflower Villas(1)
Rogers land(1)
In 2003, TCI purchased the following properties:
Heather Creek(1)
Capitol Hill(1)
Kingsland Ranch(1)
Shopping Center
Bridgeview Plaza(2)
Cullman(2) (5)
Maumelle
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In 2004, TCI sold the following properties:
Sales
Net Cash
Received
Debt
Extinguished
Gain
on Sale
Office Building
Countryside Harmon
Countryside Retail
Industrial Warehouse
Kelly (Pinewood)
Ogden Industrial
Texstar Warehouse(2)
K-Mart(3)
Allen
Red Cross
Atrium
TCI did not sell any properties in the first quarter of 2003.
At March 31, 2004, TCI had the following properties under construction:
Amount
Expended
AdditionalAmount
to Expend
ConstructionLoan
Funding
288 City Park
Blue Lake Villas II
Bluffs at Vista Ridge
Breakwater Bay
Bridges on Kinsey
Capitol Hill
Dakota Arms
Kingsland Ranch
Lake Forest
Vistas at Pinnacle Park
Vistas of Vance Jackson
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For the three months ended March 31, 2004, TCI completed the 248 unit DeSoto Ranch Apartments in DeSoto, Texas, the 314 unit Verandas at Cityview Apartments in Fort Worth, Texas and the 216 unit Mariposa Villas (Echo Valley) in Dallas, Texas.
NOTE 3. NOTES AND INTEREST RECEIVABLE
In March 2004, TCI sold 492.531 acres in Collin County, Texas to a third party for $19.9 million. TCI provided $7.2 million of the purchase price as seller financing for a portion of the land on a contingent basis. The note bears interest at 7% and matures in September 2004. The buyer has the option to convey the contingent land back to TCI for cancellation of the note. The purchaser also has the option to extend the note to December 2004 with a $1.1 million extension payment prior to the maturity date.
In June 2003, TCI sold the 104 unit Willow Wick Apartments in North Augusta, South Carolina, for $2.7 million and provided $42,000 of the purchaser’s closing costs as seller financing. The note bears interest at a fixed rate of 5% and requires all interest and principal payments be paid at maturity on December 2003. This loan was extended until February 2004 and $10,000 was received in March 2004. Current negotiations are ongoing to extend the loan or collect payment.
In July 2003, an unsecured loan of $22,000 was made to an individual. The note bears interest at a fixed rate of 12% and requires all interest and principal payments be paid at maturity in January 2004. This note, including accrued and unpaid interest, was paid in full in March 2004.
In August 2001, TCI agreed to fund up to $5.6 million secured by a second lien on an office building in Dallas, Texas. The note receivable bears interest at a variable rate, currently 9.0% per annum, requires monthly interest only payments and matured in January 2003. As of September 2003, TCI has funded a total of $4.3 million and the note is classified as nonperforming. The collateral used to secure TCI’s second lien was seized by the first lien holder. On March 11, 2004, TCI agreed to accept an assignment of claims in litigation as security for the note. TCI is also working on securing additional collateral for this note and restructuring the terms of the note but a new agreement has not been reached. The current agreement requires interest to accrue at the default rate of 18%.
In March 2002, TCI sold the 174,513 sq.ft. Hartford Office Building in Dallas, Texas, for $4.0 million and provided the $4.0 million purchase price as seller financing and an additional $1.4 million line of credit for leasehold improvements in the form of a first lien mortgage note. The note bears interest at a variable interest rate, currently 6.0% per annum, requires monthly interest only payments of $14,667 and matures in March 2007. As of March 2004, TCI funded $354,000 of the additional line of credit.
In July 2002, TCI entered into an agreement to fund up to $300,000 under a revolving line of credit secured by 100% interest in a partnership of the borrower. The line of credit bears interest at 12.0% per annum and requires monthly interest only payments, and matures in June 2005. As of March 2004, TCI has funded $300,000 of the line of credit.
In September 2002, TCI sold a 36 acre tract of the Palm Desert land parcel for $3.6 million and provided $2.7 million as seller financing in the form of a first lien mortgage note. The note bears interest at 8.0% per annum, requires quarterly interest only payments of $54,000 and matures in September 2004. In March 2003, the note was sold to a financial institution for $2.6 million.
Related Party. In March 2004, TCI sold a K-Mart in Cary, North Carolina to BCM for $3.2 million, including the assumption of debt. TCI also provided $1.5 million of the purchase price as seller financing. The note bears interest at the prime rate plus 2%, which is currently 6.0%, and matures in April 2005.
In March 2004, TCI sold the Texstar Warehouse in Arlington, Texas to BCM for $2.4 million, including the assumption of debt. TCI also provided $1.3 million of the purchase price as seller financing. The note bears interest at the prime rate plus 2%, which is currently 6.0%, and matures in April 2005.
NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES
Real estate entities. TCI’s investment in real estate entities at March 31, 2004 included equity securities of two publicly traded real estate entities, Income Opportunity Realty Investors, Inc. (“IORI”) and ARI, related parties, and interests in real estate joint venture partnerships. Basic Capital Management, Inc. (“BCM”), TCI’s advisor until July 1, 2003, also served as advisor to IORI and ARI until July 1, 2003. Effective July 1, 2003, BCM was replaced as contractual advisor to TCI by Prime Asset Management, Inc., (“PAMI”). Effective August 18, 2003, PAMI changed its name to Prime Income Asset Management, Inc., (“PIAMI”). On October 1, 2003, Prime Income Asset Management, LLC, (“Prime”) replaced PIAMI as the advisor to TCI. ARI is a related party that owns 80% of TCI’s common stock and consolidates TCI’s financial accounts and operations.
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TCI accounts for its investment in IORI and ARI and the joint venture partnerships using the equity method.
TCI’s investment in real estate entities, accounted for using the equity method, at March 31, 2004, was as follows:
Investee
Percentage
of TCI’sOwnership atMarch 31, 2004
Carrying
Value ofInvestment atMarch 31, 2004
Market Value
of Investment at
March 31, 2004
IORI
ARI
Management continues to believe that the market value of each of IORI and ARI undervalues their assets and, therefore, TCI may continue to increase its ownership in these entities.
Set forth below is summarized results of operations of equity investees for the first three months of 2004 and 2003.
Revenues
Equity in loss of partnerships
Property operating expenses
Interest expense
Loss before gains on sale of real estate
NOTE 5. MARKETABLE EQUITY SECURITIES
In March 2003, TCI obtained a loan in the amount of $5.0 million to acquire equity securities of Realty Korea CR-REIT Co., Ltd. No. 1 representing approximately a 9.2% ownership interest. As of May 2003, the loan was paid in full. This investment is considered an available-for-sale security. TCI recognized an unrealized gain of $396,000 for the period ending March 31, 2004 due to an increase in market price.
NOTE 6. RELATED PARTIES
On September 19, 2002, TCI’s Board of Directors authorized the Chief Financial Officer of TCI to advance funds either to or from TCI, through BCM, in an amount up to $15.0 million on the condition that such advances shall be repaid in cash or transfers of assets within 90 days. These advances are unsecured and bear no interest and generally have not had specific repayment terms and have been reflected in TCI’s financial statements as other assets and other liabilities.
In March 2004, a related party purchased the loans on TCI’s three Chicago hotels for $10.8 million. This amount increased the affiliate payable balance by $10.8 million.
In February 2004, TCI received a loan for $1.0 million used for the purchase of land by ARI, decreasing the affiliate payable balance by $1.0 million.
In January 2004, TCI purchased 14.216 acres of land from an affiliate with a net purchase price of $2.6 million, increasing the affiliate payable balance by $2.6 million.
In March 2003, TCI purchased two properties from an affiliate with a net purchase price of $10.7 million, reducing the affiliate receivable balance by $8.1 million after the assumption of debt of $2.65 million.
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The following table reconciles the beginning and ending Affiliates receivable (payable) balances as of March 31, 2004.
Balance, December 31, 2003
Cash transfers
Cash repayments
Repayments through property transfers
Repayment through affiliate refinance
Advance through receipt of loan obligation
Other additions
Other repayments
NOTE 7. NOTES AND INTEREST PAYABLE
In March 2004, a related party to TCI purchased the loans on TCI’s three Chicago hotels, the City Suites hotel, the Willows hotel and The Majestic hotel. The loans, including accrued but unpaid interest, were purchased for $10.8 million dollars. The purchased loans were applied as an affiliate payable to the Prime affiliate balance.
In February 2004, the Brandeis office building was returned to the lender via a Deed in Lieu of Foreclosure process. The outstanding debt and accrued interest was $8.8 million. TCI recorded a net impairment of $4.4 million in the fourth quarter of 2003 for this transaction.
In February 2004, TCI received a loan for $1.0 million that is cross defaulted and cross collateralized with ARI’s purchase of land in Portage County, Ohio. The loan bears interest at the prime rate plus .5%, which is currently 4.5%, requires monthly principal and interest payments, and matures in February 2005.
In 2004, TCI refinanced or financed the following properties:
Incurred
Discharged
Received/(Paid)
Centura Tower
Centura Land
Hollywood, Dominion & Mira Lago(2)
Marine Creek(3)
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In 2003, TCI refinanced or financed the following properties:
Mountain Plaza
Stone Oak
Bonita Plaza
Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, equity in loss of equity investees and equity in investees gains on sales of real estate which totaled $856,000 and $1.1 million for the three months ended March 31, 2004 and 2003, respectively. Expenses that are not reflected in the segments are general and administrative expenses, discount on sale of note receivable, loss on foreign currency transaction, minority interest, advisory and net income fees which totaled $5.0 million and $3.4 million for the three months ended March 31, 2004 and 2003, respectively. Also excluded from segment assets are assets of $105.5 million at March 31, 2004, and $96.7 million at March 31, 2003, which are not identifiable with an operating segment. There are no intersegment revenues and expenses.
Presented below is the operating income of each operating segment for the three months ended March 31, 2004 and 2003, and each segment’s assets at March 31.
Three Months Ended
Commercial
Properties
Operating income (loss)
Assets
Property Sales:
Sales price
Cost of sales
Deferred current gain
Gain on sale
15
March 31, 2003
NOTE 9. DISCONTINUED OPERATIONS
For the three months ended March 31, 2004 and 2003, income from discontinued operations relates to 9 properties that TCI sold during 2004 and 17 properties that TCI sold during 2003. The following table summarizes revenue and expense information for these properties sold and held-for-sale.
Revenue
Rental
Property operations
Expenses
Net loss from discontinued operations before gains on sale of real estate
Net income from discontinued operations
Discontinued operations have not been segregated in the consolidated statements of cash flows. Therefore, amounts for certain captions will not agree with respective consolidated statements of operations.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Liquidity. Management anticipates that TCI will generate excess cash from operations in 2004 due to increased rental rates and occupancy at its properties, however, such excess will not be sufficient to discharge all of TCI’s debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements.
Litigation. TCI is involved in various lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on TCI’s financial condition, results of operations or liquidity.
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Introduction
TCI invests in real estate through acquisitions, leases and partnerships. TCI also invests in mortgage loans. TCI is the successor to a business trust organized on September 6, 1983, and commenced operations on January 31, 1984.
Liquidity and Capital Resources
TCI reported net income of $1.5 million for the three months ended March 31, 2004, which included the following non-cash charges: depreciation and amortization of $6.0 million, equity loss of equity investees of $570,000, equity investees gain on sale of real estate of $1.0 million and gain on sale of operations of $10.9 million. For the three months ended March 31, 2003, TCI reported a net loss of $7.4 million, which included the following non-cash charges: depreciation and amortization of $5.1 million, equity loss of equity investees of $1.3 million and equity investees gain on sale of real estate of $1.5 million.
For the three months ended March 31, 2004, net cash provided by operating activities amounted to $11.6 million, interest receivable increased by $345,000 due to additional notes receivable fundings, other assets decreased by $47,000, interest payable decreased by $1.3 million due to notes paid or assumed on property sales and other liabilities increased by $16.0 million primarily due to an increase in affiliated payables and deferred gains on property sales.
Also for the three months ended March 31, 2004, net cash used in investing activities was $19.5 million primarily due to real estate construction and improvements of $55.1 million, payments for real estate acquisitions of $14.7 million, deposits on pending purchases of $2.6 million and additional fundings on notes receivable of $55,000. These outflows for investing activities were offset by the collection of $38,700 on notes receivable, payments received from the advisor of $1.1 million and proceeds from sale of real estate of $51.8 million.
Net cash provided by financing activities of $8.8 million was due to proceeds received from the funding or refinancing of notes payable of $117.1 million; offset by cash payments of $106.9 million to paydown existing notes payable and $1.5 million for financing costs.
In the first three months of 2004, TCI sold one shopping center, three industrial warehouses, two land parcels and two office buildings for a total of $68.1 million, receiving $15.2 million in cash and extinguishing debt of $39.5 million after the payment of various closing costs.
Also in the first three months of 2004, TCI financed or refinanced one office building and three parcels of land for a total of $46.8 million and paying $4.6 million in cash.
Further in the first three months of 2004, TCI purchased two parcels of unimproved land and seven parcels of unimproved land for apartment construction for $17.9 million. TCI paid $3.0 million in cash, including various closing costs and incurred $11.7 million in debt for the new construction properties. TCI also incurred $53.3 million on property construction, of which $51.1 million was funded by debt. For the remainder of 2004 and the first half of 2005, TCI expects to spend an additional $92.8 million on property construction projects, of which $80.3 million will be funded by debt.
Management reviews the carrying values of TCI’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The mortgage note receivable review includes an evaluation of the collateral property securing each note. The property review generally includes: (1) selective property inspections; (2) a review of the property’s current rents compared to market rents; (3) a review of the property’s expenses; (4) a review of maintenance requirements; (5) a review of the property’s cash flow; (6) discussions with the manager of the property; and (7) a review of properties in the surrounding area.
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Results of Operations
TCI had net income of $1.5 million in the period ended March 31, 2004, including gains on the sale of real estate totaling $10.9 million, a loss from discontinued operations of $329,000 and $1.0 million gain on the sale of real estate by equity investees, compared to a net loss of $7.4 million in the corresponding period in 2003, including a loss from discontinued operations of $40,000 and $1.5 million gain on sale of real estate by equity investees. Fluctuations in this and other components of revenues and expense between the 2004 and 2003 periods are discussed below.
Rents in the period ended March 31, 2004, increased to $29.5 million compared to $24.5 million in 2003. This increase is mainly due to new rental income from the completion of ten apartments in 2004 and 2003.
Property operations expense increased to $18.1 million in the period ended March 31, 2004, compared to $16.6 million in 2003. This increase is mainly due to the completion of ten apartments in 2004 and 2003. Property operations expenses for the remaining quarters of 2004 are expected to increase as TCI continues to upgrade the quality of apartments and commercial properties.
Interest income decreased to $398,000 in the period ended March 31, 2004, compared to $848,000 in 2003. The decrease was primarily due to the collection of four loans in 2003. Although TCI added $9.9 million in new notes receivable in the first quarter of 2004, only one month of interest was recognized due to all being added in March 2004. Interest income for the remaining quarters of 2004 is expected to decrease due to loans maturing in 2004.
Equity in losses of investees was $570,000 in the period ended March 31, 2004 compared to $1.3 million in 2003. ARI and IORI both had smaller losses in the first quarter of 2004 as compared to the first quarter of 2003.
Interest expense increased to $10.5 million in the period ended March 31, 2004, from $8.5 million in 2003. This increase is due to the completion of ten apartments in 2003 and 2004, which was offset by lower commercial interest due to sales in 2003 and 2004.
Depreciation expense increased to $5.7 million in the period ended March 31, 2004 from $4.4 million in 2003. This increase is due to depreciation from the ten completed apartments in 2003 and 2004, which was offset by lower commercial depreciation due to sales in 2003 and 2004. Depreciation expense for the remaining quarters of 2004 may continue to increase as TCI completes its apartment construction projects.
Net income fee due to affiliate in the period ended March 31, 2004 was $79,000. The net income fee is payable to TCI’s advisor based on 7.5% of TCI’s net income. TCI had a net loss for the three months ended March 31, 2003 and no such fee was recorded.
General and administrative expenses increased to $3.0 million in the period ended March 31, 2004, from $1.7 million in 2003. These increases were mainly due to higher legal fees, state income taxes and cost reimbursements to Prime.
In the three months of 2004, gains on sale of real estate totaling $10.9 million were recognized, including $5.5 million on the sale of Countryside Retail center, $1.9 million on the sale of Countryside Harmon, $1.4 million on the sale of Ogden Industrial Warehouse, $153,000 on the sale of the Pinewood Kelly Warehouse and $2.1 million on the sale of the 492.531 acres of Allen land.
Tax Matters
Financial statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference in the allowance for estimated losses. TCI had a loss for federal income tax purposes after the use of net operating loss carryforwards in the first three months of 2004 and a loss for federal income tax purposes in the first three months of 2003; therefore, it recorded no provision for income taxes.
At March 31, 2004, TCI had a net deferred tax asset of $7.0 million due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that TCI will realize the benefit of the deferred tax assets, a 100% valuation allowance has been established.
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Inflation
The effects of inflation on TCI’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, TCI’s earnings from short-term investments and the cost of new financings as well as the cost of variable interest rate debt, will be affected.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, TCI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.
Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on TCI’s business, assets or results of operations.
At March 31, 2004, TCI’s exposure to a change in interest rates on its debt is as follows:
Weighted Average
Interest Rate
Effect of 1%Increase In
Base Rates
Notes payable:
Variable rate
Total decrease in TCI’s annual net income
Per share
As of the end of the period covered by this report, TCI carried out an evaluation, under the supervision and with the participation of TCI’s Acting Principal Executive Officer and principal accounting officer, of TCI’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, TCI’s Acting Principal Executive Officer and principal accounting officer concluded that TCI’s disclosure controls and procedures are effective.
There have been no significant changes in TCI’s internal controls over financial reporting during the quarter ending March 31, 2004, that have materially affected, or are reasonably likely to materially affect, TCI’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Period
Average Price
Paid per Share
Maximum Number ofShares that May
Yet be Purchased
Under the Program(a)
January 1-31, 2004
February 1-29, 2004
March 1-31, 2004
Total
Description
Current Report on Form 8-K for event occurring on February 19, 2004 (dated March 11, 2004) reporting under Item 5 “Other Events and Regulation FD Disclosure.”
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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.
Date: May 14, 2004
By:
/s/ Ronald E. Kimbrough
Ronald E. Kimbrough
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer and Acting Principal Executive Officer)
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EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 2004
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