TRANSCONTINENTAL REALTY INVESTORS, INC. FORM 10-Q

Management’s Overview

We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development throughout the Southern United States. Our portfolio includes residential apartment communities (“multifamily properties”), office buildings, and retail properties (“commercial properties”). Our investment strategy involves acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project.

Our operations are managed by Pillar Income Asset Management, Inc. (“Pillar”) in accordance with an Advisory Agreement. Pillar’s duties include locating, evaluating, and recommending real estate and real estate-related investment opportunities, as well as arranging our debt and equity financing. We have no employees, and Pillar’s employees render services to us under the terms of the Advisory Agreement. Pillar is considered a related party due to its common ownership with our controlling shareholder, American Realty Investors, Inc. (“ARL”).

Acquisitions and Dispositions

• On December 13, 2024, we sold 30 single-family lots from our holdings in Windmill Farms for $1.4 million, resulting in a gain on sale of $1.1 million.
• On March 25, 2025, we received $3.5 million in proceeds from the condemnation settlement that provided for the conveyance of 11.2 acres from our holdings in Windmill Farms, resulting in a gain on sale of $3.1 million.

Financing Activities

• On January 1, 2024, we amended our cash management agreement with Pillar, changing the interest rate on the related party receivable from prime plus one to SOFR.
• On February 8, 2024, we extended the maturity of our loan on Windmill Farms to February 28, 2026 at an interest rate of 7.50%.
• On July 10, 2024, we replaced the existing loan on Forest Grove with a $6.6 million loan that bears interest at SOFR plus 2.15% and matures on August 1, 2031.
• On October 21, 2024, we entered into a $27.5 million construction loan to finance the development of Mountain Creek, which bears interest at SOFR plus 3.45% and matures on October 20, 2026.

Development Activities

Our development activities include the ongoing development of Windmill Farms and the construction of four multifamily properties:

Windmill Farms is a collection of freshwater districts in Kaufman County, Texas, being developed into single-family lots, multifamily properties, and retail properties. We develop the infrastructure in Windmill Farms to allow the land to appreciate and sell land units (“lots”) to home builders. We receive reimbursement of the infrastructure costs (“District Receivables”) through the issuance of municipal bonds by the Districts. As of March 31, 2025, we have $55.2 million in District Receivables.

We have entered into development agreements with Pillar to develop the following multifamily properties, each funded in part by a construction loan:

During the three months ended March 31, 2025, we incurred $26.3 million in development costs, funded in part by $17.1 million in borrowing from our construction loans.

Other Developments

On December 16, 2024, we announced a tender offer to purchase up to 100,000 shares of the outstanding common shares of IOR at a price of $18 per share, which was completed on January 29, 2025, resulting in our acquisition of 21,678 shares for a total cost of $0.5 million. During the three months ended March 31, 2025, we purchased an additional 12,680 common shares of IOR in the market for a total cost of $0.2 million.

Critical Accounting Policies

The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Our significant accounting policies are described in more detail in the notes to the consolidated financial statements, with the following policies deemed critical:

Fair Value of Financial Instruments We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets, which defines fair value and establishes a hierarchy for the inputs used to measure fair value.

Related Parties We apply ASC Topic 805, “Business Combinations,” to evaluate business relationships and identify related parties, which include entities with common ownership or management personnel, as well as other parties that may not be fully pursuing their own separate interests.

Results of Operations

For the three months ended March 31, 2025 compared to the three months ended March 31, 2024:

The $2.0 million increase in net income is primarily attributed to:

• Increased profit from the multifamily and commercial segments due to higher rents and lower operating expenses, respectively.
• A $1.4 million decrease in interest income, net, due to lower average balances and interest rates on short-term investments.
• A $3.9 million increase in gain on sale of assets, primarily due to the $3.1 million condemnation settlement in 2025.

Liquidity and Capital Resources

Our principal sources of cash include property operations, proceeds from land and property sales, collection of notes receivable, refinancing of existing debt, and additional borrowings. Our principal liquidity needs are to fund normal recurring expenses, meet debt service and principal repayment obligations, fund capital expenditures, and finance development costs and potential property acquisitions.

As of March 31, 2025, we believe our cash and cash equivalents, along with cash generated from notes, related party receivables, and investments, will be sufficient to meet our cash requirements. We may selectively sell land and income-producing assets, refinance or extend real estate debt, and seek additional borrowings secured by real estate to meet our liquidity needs.

The following table summarizes our cash flows for the three months ended March 31, 2025 and 2024 (in thousands):

The key variances in cash flows are:

• $11.3 million increase in cash used in operating activities, primarily due to decreases in accounts payable and other assets.
• $28.2 million increase in cash used in investing activities, primarily due to increased development and renovation of real estate and net redemption of short-term investments.
• $17.1 million increase in cash provided by financing activities, due to borrowings on construction loans for development projects.

Funds From Operations (FFO)

We use FFO, in addition to net income, to report our operating and financial results. FFO is a non-GAAP measure defined by Nareit as net income (loss) excluding gains or losses from sales of properties, plus real estate-related depreciation and amortization, impairment write-downs, and adjustments for unconsolidated joint ventures.

The following table reconciles net income attributable to the Company to FFO and FFO adjusted for the three months ended March 31, 2025 and 2024 (in thousands):

We believe FFO provides a meaningful measure of our operating results and is a useful supplement to GAAP measures, allowing investors to compare our performance between periods and to the performance of other real estate companies.