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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

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

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

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

As used herein, the terms “TCI”, “the Company”, “we”, “our” or “us” refer to Transcontinental Realty Investors, Inc., a Nevada corporation which was formed in 1984. The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE”) under the symbol (“TCI”). Subsidiaries of American Realty Investors, Inc. (“ARL”) own approximately ~~80.9%~~77.68% of the Company’s common stock. Accordingly, TCI’s financial results are consolidated with those of ARL’s on Form 10-K and related Consolidated Financial Statements. ARL’s common stock trades on the New York Stock Exchange under the symbol (“ARL”). We have no employees.

TCI is a “C” corporation for U.S. federal income tax purposes and files an annual consolidated tax return with ARL and its ultimate parent, May Realty Holdings, Inc. (“MRHI”).

TCI owns approximately ~~81.1%~~81.25% of the common stock of Income Opportunity Realty Investors, Inc. (“~~IOT”~~IOR”). Accordingly ~~IOT’s~~IOR’s financial results are consolidated with those of TCI and its subsidiaries. Shares of ~~IOT~~IOR are traded on the New York Stock Exchange Euronext (“NYSE ~~MKT”~~American”) under the symbol (“~~IOT”~~IOR”).

TCI invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing the affairs of TCI, and for setting the policies which guide it, the day-to-day operations of TCI are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to: locating, evaluating and recommending real estate and real estate-related investment opportunities, and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCI’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to ARL and ~~IOT.~~IOR.

Regis Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services for our real estate portfolio. TCI engages third-party companies to lease and manage its apartment properties.

We own or had interests in a total property portfolio of 58fifty-three income-producing properties as of March 31, ~~2017.~~2018. The properties consisted of:

We join with various third-party development companies to construct residential apartment communities. We are in the predevelopment process on several residential apartment communities that have not yet begun construction. At March 31, ~~2017,~~2018, we had ~~five~~fourteen apartment projects in development. The third-party developer typically holds a general partner, as well as a majority limited partner interest in a limited partnership formed for the purpose of building a single property, while we generally take a minority limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all necessary equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our Consolidated Financial Statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, ~~2017,~~2018, are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.

The year-end Consolidated Balance Sheet at December 31, ~~2016,~~2017, was derived from the audited Consolidated Financial Statements at that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. Certain ~~2016~~2017 Consolidated Financial Statement amounts have been reclassified to conform to the ~~2017~~2018 presentation.

The accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary is generally the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income. Our investment in ARL is accounted for under the equity method.

Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements: 10-40 years; furniture, fixtures and equipment: 5-10 years). The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360 (“ASC 360”), “Property, Plant and Equipment”. Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.

We periodically classify real estate assets as “held for sale.” An asset is classified as held for sale after the approval of our Board of Directors, after an active program to sell the asset has commenced and if the sale is probable. One of the deciding factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is probable within the year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified as an operating asset and depreciation expense is reinstated.

Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. We capitalize interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average interest rate of non-project specific debt. We capitalize interest, real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready for its intended use, but no later than one year from the cessation of major construction activity.

We capitalize leasing costs, which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.

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

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

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.

Costs relating to the financing of properties are deferred and amortized over the life of the related financing agreement. Amortization is reflected as interest expense in the Consolidated Statements of Operations, with remaining terms ranging from 6 months to 40 years. Unamortized financing costs are written off when the financing agreement is extinguished before the maturity date.

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.

In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company ~~is currently evaluating the impact of~~does not believe the adoption of ~~ASU 2014-09~~this guidance had a material impact on its financial ~~position and results of operations, if any.~~

In February 2016, ~~Accounting Standards Update No.~~FASB issued ASU 2016-02 (“ASU 2016-02”), ~~Leases was issued.~~Leases. This guidance establishes a new model for accounting for leases and provides for enhanced disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial position and results of operations, if any.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years; however, early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively if retrospective application would be impracticable. The Company adopted this standard effective on January 1, 2018. ASU 2016-15 will impact our presentation of operating, investing and financing activities related to certain cash receipts and payments on our consolidated statements of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of changes in restricted cash. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. Upon adoption, restricted cash balances will be included along with cash and cash equivalents as of the end of the period and beginning period, respectively, in the Company’s consolidated statement of cash flows for all periods presented. Upon adoption, separate line items showing changes in restricted cash balances will be eliminated from the Company’s consolidated statement of cash flows. The Company adopted this guidance effective on January 1, 2018. ASU 2016-18 will impact our presentation of operating, investing and financing activities related to restricted cash on our consolidated statements of cash flows.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business and thus will be treated as asset acquisitions. Acquisition costs for those acquisitions that are not businesses will be capitalized rather than expensed. The Company adopted this guidance effective January 1, 2018. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in-substance real estate. The ASU requires the Company to measure at fair value any retained interest in a partial sale of real estate. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. The Company adopted ASU 2017-05 effective January 1, 2018. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.

Below is a summary of the real estate owned as of March 31, ~~2017~~2018 (dollars in thousands):

The highlights of our significant real estate transactions for the three months ended March 31, ~~2017,~~2018, are listed below:

For the three months ended March 31, ~~2017, we acquired two land parcels for development for a total purchase price of $6.4 million, adding 11.12 acres to the development portfolio.~~

~~For the three months ended March 31, 2017,~~2018, TCI sold ~~2.49~~62 acres of land ~~located in Farmers Branch, Texas~~ to an independent third party for a total sales price of ~~$1.1~~$3.0 million. We recorded an aggregate gain of ~~$0.4~~$1.3 million from the land sale. In addition, the Company sold six income-producing properties to a related party for an aggregate purchase price of $8.5 million, out of which, $2.1 million was received in cash and $6.4 million in note receivables. No gain or loss was recorded from the sale of income-producing properties.

As of March 31, ~~2017,~~2018, the Company has approximately 9167 acres of land, at various locations that were sold to related parties in multiple transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets. Due to the related party nature of the transactions TCI has deferred the recording of the sales in accordance with ASC 360-20.

We continue to invest in the development of apartment projects. During the three months ended March 31, ~~2017,~~2018, we have expended ~~$8.4~~$20.1 million related to the construction or predevelopment of various apartment complexes and capitalized ~~$0.2~~$0.9 million of interest costs.

NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION

For the three months ended March 31, 2018 and 2017, the company paid interest expense of $13.3 million and $12.2 million, respectively.

Cash and cash equivalents, and restricted cash for the three months ended March 31, 2018 and 2017 was $96.3 million and $86.3 million, respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total presented in the consolidated statement of cash flows:

	March 31,
	2018		2017

Cash and cash equivalents	$	40,894	$	52,815
Restricted cash (cash held in escrow)		38,800		30,537
Restricted cash (certificate of deposits)		10,652		—
Restricted cash (held with Trustee)		5,948		2,975
	$	96,294	$	86,327

Amounts included in restricted cash represent funds required to be set aside to meet contractual obligations with certain financial institutions for the payment of reserve replacement and tax and insurance escrow. In addition, restricted cash includes funds held with the Trustee for payment of bonds interest and other bond related expenses.

NOTE 3.4. NOTES AND INTEREST RECEIVABLE

A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and guarantees, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity. Below is a summary of our notes receivable as of March 31, ~~2017~~2018 (dollars in thousands):

~~TCI NOTE 3 - NOTES AND INTEREST RECEIVABLE - March 31, 2017~~


Borrower	Maturity Date		Interest Rate			Amount			Collateral	Maturity Date	Interest Rate			Amount		Collateral
Performing loans:
H198, LLC (Las Vegas Land)		01/20		12.00	%		5,907		Secured	01/20		12.00	%	$	5,907	Secured
H198, LLC (McKinney Ranch Land)										09/18		6.00	%		4,558	Secured
Oulan-Chikh Family Trust		03/21		8.00	%		174		Secured	03/21		8.00	%		174	Secured
Spyglass Apartments of Ennis LP										11/19		5.00	%		4,638	Secured
D4DS, LLC										05/20		5.00	%		3,027	Secured
Parc at Windmill Farms										05/20		5.00	%		4,777	Secured
Unified Housing Foundation, Inc. (Echo Station) ⁽¹⁾		12/32		12.00	%		1,481		Secured	12/32		12.00	%		1,481	Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) ⁽¹⁾		12/32		12.00	%		2,000		Secured	12/32		12.00	%		2,000	Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) ⁽¹⁾		12/32		12.00	%		6,368		Secured	12/32		12.00	%		6,369	Secured
Unified Housing Foundation, Inc. (Limestone Canyon) ⁽¹⁾		12/32		12.00	%		4,640		Secured
Unified Housing Foundation, Inc. (Limestone Canyon) ⁽¹⁾		12/32		12.00	%		2,653		Secured
Unified Housing Foundation, Inc. (Limestone Ranch) ⁽¹⁾		12/32		12.00	%		6,000		Secured	12/32		12.00	%		6,000	Secured
Unified Housing Foundation, Inc. (Limestone Ranch) ⁽¹⁾		12/32		12.00	%		1,953		Secured	12/32		12.00	%		1,953	Secured
Unified Housing Foundation, Inc. (Parkside Crossing) ⁽¹⁾		12/32		12.00	%		1,936		Secured
Unified Housing Foundation, Inc. (Sendero Ridge) ⁽¹⁾		12/32		12.00	%		4,812		Secured
Unified Housing Foundation, Inc. (Sendero Ridge) ⁽¹⁾		12/32		12.00	%		4,491		Secured
Unified Housing Foundation, Inc. (Timbers of Terrell) ⁽¹⁾		12/32		12.00	%		1,323		Secured	12/32		12.00	%		1,323	Secured
Unified Housing Foundation, Inc. (Tivoli) ⁽¹⁾		12/32		12.00	%		7,966		Secured	12/32		12.00	%		6,140	Secured
Unified Housing Foundation, Inc. ⁽¹⁾		12/17		12.00	%		1,207		Unsecured	12/18		12.00	%		3,994	Unsecured
Unified Housing Foundation, Inc. ⁽¹⁾		12/18		12.00	%		3,994		Unsecured	12/18		12.00	%		6,407	Unsecured
Unified Housing Foundation, Inc. ⁽¹⁾		12/18		12.00	%		6,407		Unsecured	06/20		12.00	%		5,760	Unsecured
Unified Housing Foundation, Inc. ⁽¹⁾		06/19		12.00	%		5,400		Unsecured	03/21		12.00	%		5,314	Unsecured
Other related party notes ⁽¹⁾		Various		Various			782		Various unsecured interests	Various		Various			6,894	Various unsecured interests
Other non-related party notes		Various		Various			796		Various secured interests	Various		Various			796	Various secured interests
Other non-related party notes		Various		Various			4,658		Various unsecured interests	Various		Various			981	Various unsecured interests
Accrued interest							3,733								4,849
Total Performing						$	78,681							$	83,342

Allowance for estimated losses							(1,825	)
Total						$	76,856

⁽¹⁾

~~Related party notes~~

⁽¹⁾Related party notes

We invest in mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and guarantees.

At March 31, ~~2017,~~2018, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling ~~$76.9~~$83.3 million. We recognized interest income of $2.1 million related to these notes receivables for the three months ending March 31, ~~2017.~~2018.

The Company has various notes receivable from Unified Housing Foundation, Inc. (“UHF”) and Foundation for Better Housing, Inc. (“FBH”). UHF and FBH are determined to be related parties due to our reliance upon the performance of the collateral secured under the notes receivable. Payments are due from surplus cash flow of operations of the properties. A sale or refinance of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes for the specific borrower. These notes are cross-collateralized for the specific borrower, but to the extent cash is received from a specific UHF or FBH property, it is applied first against any outstanding interest for the related-property note. The allowance on the UHF notes was a purchase allowance that was netted against the notes when acquired.

NOTE 4.5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES

Investments in unconsolidated joint ventures and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence, are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses under the equity method of accounting. ARL is our parent company and is considered as an unconsolidated joint venture.

Investments in unconsolidated joint ventures and investees consist of the following:

Percentage ownership as of
March 31, 2017 March 31, 2016
American Realty Investors, Inc.⁽¹⁾ 0.90 % 0.90 %

	Percentage ownership as of
	March 31, 2018			March 31, 2017
American Realty Investors, Inc.⁽¹⁾		0.90	%		0.90	%


⁽¹⁾	~~Unconsolidated investment in parent company owning 140,000 shares of ARL Common Stock~~

(1) Unconsolidated investment in parent company owning 140,000 shares of ARL Common Stock

Our interest in the common stock of ARL in the amount of 0.90% is accounted for under the equity method because we exercise significant influence over the operations and financial activities. Accordingly, the investments are carried at cost, adjusted for the Company’s proportionate share of earnings or losses.

The following is a summary of the financial position and results of operations from our unconsolidated parent (dollars in thousands):

As of March 31, 2017 2016
Real estate, net of accumulated depreciation $ 14,495 $ 14,619
Notes receivable 44,840 48,681
Other assets 127,106 127,357
Notes payable (7,742 ) (24,015 )
Other liabilities (112,388 ) (98,687 )
Shareholders’ equity (66,311 ) (67,955 )

For the Three Months Ended March 31, 2017 2016
Rents and interest and other income $ 1,713 $ 1,778
Depreciation (45 ) (40 )
Operating expenses (980 ) (881 )
Interest expense (1,606 ) (1,048 )
Net loss $ (918 ) $ (191 )

Company’s proportionate share of loss $ (8 ) $ (2 )

As of March 31	2018			2017
Real estate, net of accumulated depreciation	$	5,193		$	14,495
Notes receivable		45,414			44,840
Other assets		58,253			127,106
Notes payable		(6,266	)		(7,742	)
Other liabilities		(32,539	)		(112,388	)
Shareholders’ equity		(70,055	)		(66,311	)

For the Three Months Ended March 31	2018			2017
Rents and interest and other income	$	1,629		$	1,713
Depreciation		—			(45	)
Operating expenses		(417	)		(980	)
Interest expense		(1,631	)		(1,606	)
Net income (loss)	$	(419	)	$	(918	)

Company's proportionate share of income (loss)⁽¹⁾		(4)			(8)

^{(1) Income (loss) represents continued and discontinued operations}

NOTE 5.6. NOTES AND INTEREST PAYABLE

Below is a summary of our notes and interest payable as of March 31, ~~2017~~2018 (dollars in thousands):

	Notes Payable			Accrued Interest		Total Debt			Notes Payable			Accrued Interest			Total Debt
Apartments	$	541,710		$	1,417	$	543,127		$	560,147		$	1,585		$	561,732
Apartments under Construction		20,721			—		20,721			96,026			113			96,139
Commercial		108,051			532		108,583			126,557			628			127,185
Land		25,134			229		25,363			16,000			598			16,598
Real estate subject to sales contract		3,707			470		4,177
Mezzanine financing		119,422					119,422			93,423			401			93,824
Other		24,128			—		24,128			9,572			(248	)		9,324
Total	$	842,873		$	2,648	$	845,521		$	901,725		$	3,077		$	904,802

Unamortized deferred borrowing costs		(18,046	)		—		(18,046	)		(18,248	)		—			(18,248	)
Total	$	824,827		$	2,648	$	827,475
									$	883,477		$	3,077		$	886,554

The segment labeled as “Other” consists of unsecured or stock-secured notes payable.

There are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note due to expiration of the loan. We are in constant contact with these lenders, working together in order to modify the terms of these loans and we anticipate a timely resolution that is similar to the existing agreement or subsequent modification. During the three months ended March 31, 2017, we refinanced two loans with a total principal balance of $35.6 million. The transactions provided for lower monthly payments over the term of the loans due to lower interest rates and the extension of maturity dates of the loans.

In conjunction with the development of various apartment projects and other developments, we drew down ~~$7.3~~$20.1 million in construction loans during the three months ended March 31, ~~2017.~~2018.

The properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.

NOTE ~~6. SERIES A~~7. BONDS PAYABLE

~~On February 13, 2017,~~In August 2016 Southern Properties Capital LTD (“Southern”), a British Virgin Islands corporation was incorporated for the purpose of raising funds by issuing Bonds to be traded on the Tel Aviv Stock Exchange (“~~Southern”~~TASE”),. The Company transferred certain residential and commercial properties located in the United States to Southern, its wholly owned subsidiary. On February 13, 2017, Southern filed a final prospectus with the ~~Tel Aviv Stock Exchange LTD (the “TASE”)~~TASE for an offering and sale of nonconvertible Series A Bonds ~~(the “Debentures”),~~ to be issued by ~~Southern, which is an indirect subsidiary of TCI. Southern, in turn, wholly owns interest in other entities, which, in turn,~~Southern. The bonds are ~~the principal owners of various residential and commercial properties located in the south and southwestern portions of the United States. The Debentures are unsecured~~ obligations of Southern. ~~On February 14,~~During the year ended December 31, 2017 on three separate occasions Southern ~~commenced the institutional tender~~issued nonconvertible Series A Bonds with a total value of ~~the Debentures and has accepted application for 276~~approximately NIS400 million New Israeli ~~new~~ Shekels (approximately $73,651,065 USD, based on the exchange rate of 3.7474 Shekels to the U.S. Dollar effective February 14, 2017) in both institutional and public tenders, at an annual interest rate averaging(“NIS”) or approximately ~~7.3%.~~

$115 million dollars. The Series A Bonds ~~payable~~ have a stated interest rate of 7.3%. At March 31, 2018 the effective interest rate is 9.17%. The bonds require semi-annual equal installments on January 31 and ~~an effective yield~~July 31 of ~~9.09%~~each year from 2019 to 2023 (inclusive). The interest will be repaid on January 31 and July 31 of each of the years 2018 to 2023 (inclusive), with the first payment commencing on July 31, 2017.

On February 15, 2018, the Company issued Series B bonds in the amount of NIS 137.7 million par value (approximately $39.2 million as of February 15, 2018). The Series B bonds are registered on the TASE. The bonds are reported in NIS and bear annual interest rate of 6.8%. Interest ~~payments~~shall be repaid January 31 and July 31 of each of the years 2019 to 2023 (inclusive), first payment commencing on July 31, 2018. The principal shall be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). The total bond issuance cost of $1.4 million was incurred. The effective interest rate is 7.99%

The outstanding balance of these Bonds at March 31, 2018 is as follows:

	March 31, 2018			December 31, 2017

Bonds (Series A)	$	113,793		$	115,336
Bonds (Series B)		39,179			—
Less: deferred issuance expense, net		(7,639	)		(5,916	)
Accrued Interest		1,555			3,627
	$	146,888		$	113,047

The aggregate maturity of the bonds are ~~due semiannually beginning~~as follows:

Year
2018	$	—
2019		23,067
2020		23,067
2021		23,067
2022		30,903
Thereafter		52,868
	$	152,972

The funds were used primarily for the acquisition and development of additional real estate operations in ~~July 2017 through July 2023 with ten semiannual~~the United States. The funds were raised and will be repaid in NIS, however the funds raised have been converted to US dollars. The Company records unrealized gains or losses each quarter based upon the relative exchange values of the US dollar and the NIS; however, no gain or loss will be realized until a conversion from US dollars to NIS actually occurs in the future. The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment of principal ~~payments due beginning July 2019 through July 2023. During~~and interest on the bonds is made. For the three months ended March 31, ~~2017,~~2018, the Company recorded a ~~net loss~~gain on foreign currency transaction of ~~$0.3~~approximately $1.8 million.

NOTE 7.8. RELATED PARTY TRANSACTIONS

The following table reflects the reconciliation of the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of March 31, ~~2017~~2018 (dollars in thousands):

	Pillar			ARL			Total			Pillar			ARL		Total

Related party receivable, December 31, 2016	$	(7,103	)	$	108,752		$	101,649
Related party receivable, December 31, 2017										$	—		$	111,665	$	111,665
Cash transfers		19,562			—			19,562			17,579			—		17,579
Advisory fees		(2,306	)		—			(2,306	)		(2,748	)		—		(2,748	)
Net income fee		(60	)		—			(60	)		(53	)		—		(53	)
Fees and commissions		(542	)		—			(542	)		(83	)		—		(83	)
Cost reimbursements		(588	)		—			(588	)		(1,063	)		—		(1,063	)
Interest income		—			1,141			1,141			—			1,570		1,570
Notes receivable purchased		(447	)					(447	)		(5,315	)				(5,315	)
Expenses paid by advisor		(2,431	)		—			(2,431	)		(2,262	)		—		(2,262	)
Financing (mortgage payments)		(10,532	)		—			(10,532	)
Sales/Purchases transactions		(5,732	)		—			(5,732	)		(3,556	)		—		(3,556	)
Series K preferred stock acquisition		—			—			—
Income tax expense		—			—			—
Purchase of obligations		3,076			(3,076	)		—
Related party receivable, March 31, 2017	$	(7,103	)	$	106,817		$	99,714
Related party receivable, March 31, 2018										$	2,499		$	113,235	$	115,734

During the ordinary course of business, we have related party transactions that include, but are not limited to, rental income, interest income, interest expense, general and administrative costs, commissions, management fees, and property expenses. In addition, we have assets and liabilities that include related party amounts. The related party amounts included in assets and liabilities, and the related party revenues and expenses received/paid are shown on the face of the Consolidated Financial Statements.

NOTE 8.9. OPERATING SEGMENTS

Our segments are based on our method of internal reporting, which classifies our operations by property type. Our property types are grouped into commercial, apartments, land and other operating segments. Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative and other expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow.

Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships, and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory fees, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.

The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.

Presented below is our reportable segments’ operating income for the three months ended March 31, ~~2017~~2018 and ~~2016,~~2017, including segment assets and expenditures (dollars in thousands):

Commercial
For the Three Months Ended March 31, 2017 Properties Apartments Land Other Total
Rental and other property revenues $ 8,872 $ 22,660 $ — $ 3 $ 31,535
Property operating expenses (4,683 ) (10,745 ) (159 ) (302 ) (15,889 )
Depreciation (2,257 ) (4,046 ) — — (6,303 )
Mortgage and loan interest (1,606 ) (6,758 ) (551 ) (6,275 ) (15,190 )
Interest income — — — 3,421 3,421
Gain on land sales — — 445 — 445
Segment operating income (loss) $ 326 $ 1,111 $ (265 ) $ (3,153 ) $ (1,981 )
Capital expenditures 1,343 399 1,742
Real estate assets 148,115 635,845 117,922 — 901,882

Property Sales
Sales price $ — $ — $ 1,089 $ — $ 1,089
Cost of sale — — (644 ) — (644 )
Gain on sale $ — $ — $ 445 $ — $ 445

Commercial
For the Three Months Ended March 31, 2016 Properties Apartments Land Other Total
Rental and other property revenues $ 7,588 $ 21,315 $ — $ — $ 28,903
Property operating expenses (4,858 ) (9,394 ) (731 ) 20 (14,963 )
Depreciation (2,273 ) (3,535 ) — — (5,808 )
Mortgage and loan interest (1,950 ) (6,157 ) (530 ) (4,529 ) (13,166 )
Interest income — — — 3,847 3,847
Loss on sale of income producing properties (244 ) — — — (244 )
Gain on land sales — — 1,652 — 1,652
Segment operating income (loss) $ (1,737 ) $ 2,229 $ 391 $ (662 ) $ 221
Capital expenditures 976 770 1,746
Real estate assets 150,680 558,721 136,076 — 845,477

Property Sales
Sales price $ 1,500 $ — $ 4,180 $ — $ 5,680
Cost of sale (1,744 ) — (2,528 ) — (4,272 )
Gain (loss) on sale $ (244 ) $ — $ 1,652 $ — $ 1,408

	Commercial
For the Three Months Ended March 31, 2018	Properties			Apartments			Land			Other			Total
Rental and other property revenues	$	7,555		$	23,525		$	—		$	2		$	31,082
Property operating expenses		(3,749	)		(10,582	)		(30	)		(94	)		(14,455	)
Depreciation		(2,293	)		(4,149	)		—			(4	)		(6,446	)
Mortgage and loan interest		(1,849	)		(5,456	)		(110	)		(6,678	)		(14,093	)
Interest income		—			—			—			3,876			3,876
Gain on land sales		—			—			1,335			—			1,335
Segment operating income (loss)	$	(336	)	$	3,338		$	1,195		$	(2,898	)	$	1,299
Capital expenditures		633			—			—			—			633
Real estate assets		135,805			728,525			113,004			651			977,985

Property Sales
Sales price	$	—		$	2,512		$	2,984		$	—		$	5,496
Cost of sale		—			(2,512	)		(1,649	)		—			(4,161	)
Gain on sale	$	—		$	—		$	1,335		$	—		$	1,335

	Commercial
For the Three Months Ended March 31, 2017	Properties			Apartments			Land			Other			Total
Rental and other property revenues	$	8,872		$	22,660		$	—		$	3		$	31,535
Property operating expenses		(4,683	)		(10,745	)		(159	)		(302	)		(15,889	)
Depreciation		(2,257	)		(4,046	)		—			—			(6,303	)
Mortgage and loan interest		(1,606	)		(6,758	)		(551	)		(6,275	)		(15,190	)
Gain on land sales		—			—			445			—			445
Segment operating income (loss)	$	326		$	1,111		$	(265	)	$	(3,153	)	$	(1,981	)
Capital expenditures		1,343			—			399			—			1,742
Real estate assets		148,115			635,845			117,922			—			901,882

Property Sales
Sales price	$	—		$	—		$	1,089		$	—		$	1,089
Cost of sale		—			—			(644	)		—			(644	)
Gain (loss) on sale	$	—		$	—		$	445		$	—		$	445

The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations for the three months ended March 31, ~~2017~~2018 and ~~2016~~2017 (dollars in thousands):

For the Three Months Ended
March 31,
2017 2016
Segment operating income (loss) $ (1,981 ) $ 221
Other non-segment items of income (expense)
General and administrative (1,780 ) (1,609 )
Net income fee to related party (60 ) (72 )
Advisory fee to related party (2,305 ) (2,371 )
Other income 1,119 267
Loss from unconsolidated joint ventures and investees (8) (2 )
Income tax benefit — 1
Net loss from continuing operations $ (5,015 ) $ (3,565 )

	For the Three Months Ended
	March 31,
	2018			2017
Segment operating income (loss)	$	1,299		$	(1,981	)
Other non-segment items of income (expense)
General and administrative		(2,192	)		(1,780	)
Net income fee to related party		(53	)		(60	)
Advisory fee to related party		(2,748	)		(2,305	)
Other income		3,582			1,119
Loss from unconsolidated joint ventures and investees		11			(8	)
Net loss from continuing operations	$	(101)		$	(5,015	)

The table below reflects a reconciliation of the segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):

As of March 31,
2017 2016
Segment assets $ 901,882 $ 845,477
Investments in real estate partnerships 2,438 2,460
Notes and interest receivable 76,856 67,557
Other assets 246,539 187,226
Total assets $ 1,227,715 $ 1,102,720

~~NOTE 9. DISCONTINUED OPERATIONS~~

Prior to January 1, 2015, we applied the provisions of ASC 360, “Property, Plant and Equipment”, which required that long-lived assets that are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.

Effective January 1, 2015, the Company adopted the provisions of ASU 2014-08, which changed the criteria of ASC 360 related to determining which disposals qualify to be accounted for as discontinued operations and modified related reporting and disclosure requirements. Disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results will be presented as discontinued operations.

There were no sales of income-producing properties in the first three months of 2017. Amounts included in discontinued operations for the three months ended March 31, 2016, represent the residual amounts from sales classified as discontinued operations prior to January 1, 2015. The following table summarizes revenue and expense information for the properties sold and held for sale (dollars in thousands):

For the Three Months
Ended March 31,
2016
Revenues:
Rental and other property revenues $ —
—
Expenses:
Property operating expenses (3 )
Total operating expenses (3 )

Other income (expense):
Other income —
Total other income (expenses) —

Gain from discontinued operations before income tax expense 3
Income tax expense (1 )
Income from discontinued operations $ 2

	As of March 31,
	2018		2017
Segment assets	$	977,985	$	901,882
Investments in real estate partnerships		2,483		2,438
Notes and interest receivable		83,342		76,856
Other assets		266,779		246,539
Total assets	$	1,330,589	$	1,227,715

NOTE 10. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY

Liquidity. Management believes that TCI will generate excess cash from property operations in ~~2017;~~2018; such excess, however, will not be sufficient to discharge all of TCI’s obligations as they become due. Management intends to sell land and income-producing real estate, refinance real estate and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.

Partnership Buyouts. TCI is the limited partner in various partnerships related to the construction of residential properties. As permitted in the respective partnership agreements, TCI intends to purchase the interests of the general and any other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buy out the non-affiliated partners are limited to development fees earned by the non-affiliated partners and are outlined in the respective partnership agreements.

Dynex Capital, Inc.

On July 20, 2015, the ~~68th~~68^th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).

An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015.

The Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic $0.256 million in damages, plus pre-judgment interest of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages are paid. Lastly, the Judgement awarded Basic, ART, and TCI $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.

~~In April 2017,~~

The Company is working with counsel to identify assets and collect on the ~~plaintiffs filed a lawsuit~~Final Judgement against Dynex Commercial, Inc., as well as explore possible additional claims, if any, against Dynex Capital, Inc. ~~and Dynex Commercial, Inc. for $50 million alleging, among other things, fraudulent transfer and alter ego.~~

Litigation. The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.

Guarantees. The Company is the primary guarantor on a ~~$60.4~~$39.1 million mezzanine loan between UHF and a lender. In addition, ARI and an officer of the Company are limited recourse guarantors of the loan. As of March 31, ~~2017,~~2018, UHF was in compliance with the covenants to the loan agreement.

NOTE 11. EARNINGS PER SHARE

Earnings per share (“EPS”) have been computed pursuant to the provisions of ASC 260 “Earnings per Share.” Basic EPS is calculated by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the period that they were outstanding.

Prior to July 9, 2014, TCI had 30,000 shares of Series C cumulative convertible preferred stock issued and outstanding. These 30,000 shares were owned by RAI, a related party, and had accrued dividends unpaid of $0.9 million. The stock had a liquidation preference of $100.00 per share and could be converted into common stock at 90% of the daily average closing price of the common stock for the prior five trading days. On July 9, 2014, RAI converted all 30,000 shares into the requisite number of shares of common stock. The conversion resulted in the issuance of 304,298 new shares of common stock. The effects of the Series C Cumulative Convertible Preferred Stock are no longer included in the dilutive earnings per share calculation for the current period, but are considered in the calculation for the prior periods if applying the if-converted method is dilutive.

As of March 31, ~~2017,~~2018, there are no preferred stock or stock options that are required to be included in the calculation of EPS.

NOTE 12. SUBSEQUENT EVENTS

The date to which events occurring after March 31, ~~2017,~~2018, the date of the most recent balance sheet, have been evaluated for possible adjustment to the Consolidated Financial Statements or disclosure is May 15, ~~2017,~~2018, which is the date on which the Consolidated Financial Statements were available to be issued.

On May 8, 2017, Southern Properties Capital LTD, a British Virgin Islands corporation (“Southern”), sold nonconvertible Series A Bonds (the “Debentures”), to be issued by Southern, which is an indirect subsidiary of Transcontinental Realty Investors, Inc. (“TCI”). Southern, in turn, wholly owns interest in other entities, which, in turn, are the principal owners of various residential and commercial properties located in the south and southwestern portions of the United States. The Debentures are unsecured obligations of Southern. On May 8, 2017, Southern commenced the institutional tender of the Debentures and has accepted application for 102 million Israeli, new Shekels (approximately $28,325,007 USD, based on the exchange rate of 3.607 Shekels to the U.S. Dollar) in both institutional and public tenders, at an annual interest rate averaging approximately 7.3%.

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this report.

This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business”, “Risk Factors” and “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:

●

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

●

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

●

demand for apartments and commercial properties in the Company’s markets and the effect on occupancy and rental rates;

●

the Company’s ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties;

●

risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;

●

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

●

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

●

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

●

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

●

potential liability for uninsured losses and environmental contamination;

●

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

●

the other risk factors identified in this Form 10-Q, including those described under the caption “Risk Factors.”

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 at 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, ~~2016.~~2017.

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 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 real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. Our portfolio of income-producing properties includes residential apartment communities, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties, as well as developing new properties on land already owned or acquired for a specific development project. We acquire land primarily in urban in-fill locations or high-growth suburban markets. We are an active buyer and seller of real estate. During the three months ended March 31, ~~2017,~~2018, we sold ~~2.49~~62 acres of land for a total sales price of ~~$1.1~~$3.0 million and ~~acquired 2 land parcels~~sold six income-producing properties for ~~development with a combined total of 11.12 acres and~~ an aggregate purchase price of $8.5 million, out of which, $2.1 million was received in cash and $6.4 ~~million.~~ million in note receivables.

As of March 31, ~~2017,~~2018, we owned ~~8,226~~8,115 units in 50forty-five residential apartment communities, 7seven commercial properties comprising approximately 1.7 million rentable square feet, and a golf course. In addition, we own ~~3,517~~3,401 acres of land held for development. The Company currently owns income-producing properties and land in ten states as well as in the U.S. Virgin Islands.

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. We will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of our wholly-owned properties. When we sell assets, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. We generate operating revenues primarily by leasing apartment units to residents and leasing office, retail and industrial space to commercial tenants. We have no employees.

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. Although the Board of Directors is directly responsible for managing the affairs of TCI, and for setting the policies which guide it, the day-to-day operations of TCI are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with TCI’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to ARL and ~~IOT.~~IOR.

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 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 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. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities are included in consolidated net income. Our investment in ARL is accounted for under the equity method.

Real Estate

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, ~~“above-market��~~“above-market” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with ASC Topic 805 “Business Combinations”, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors, including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We cease capitalization when a building is considered substantially complete and ready for its intended use, but no later than one year from the cessation of major construction activity.

Depreciation and Impairment

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other project costs incurred during the period of development.

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods.

Investments in Unconsolidated Real Estate Ventures

Except for ownership interests in variable interest entities, we account for our investments in unconsolidated real estate ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, we consolidate those in which we are the primary beneficiary.

Recognition of Rental Income

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to the terms of the individual commercial lease agreements.

Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.

Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

Revenue Recognition on the Sale of Real Estate

Sales and the associated gains or losses of real estate are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

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.

Interest Recognition on Notes Receivable

We record interest income as earned in accordance with the terms of the related loan agreements.

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 34 “Notes and Interest Receivable” for details on our notes receivable.

Fair Value of Financial Instruments

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

Results of Operations

The discussion of our results of operations is based on management’s review of operations, which is based on our operating segments. Our operating segments consist of apartments, commercial properties, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties and developed properties in the lease-up phase. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not been held for the entire period for both periods being compared. Developed properties in the lease-up phase consist of completed projects that are being leased-up. As we complete each phase of the project, we lease-up that phase and include those revenues in our continued operations. Once a developed property becomes leased-up and is held the entire period for both periods under comparison, it is considered to be included in the same property portfolio.

Prior to January 1, 2015, the operating results of real estate assets held for sale and sold were reported as discontinued operations in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets. The Company adopted ASU 2014-08, effective January 1, 2015, which substantially changed the criteria for determining whether a disposition qualifies for discontinued operations presentation. As a result, we had no dispositions that met the criteria for discontinued operations during the three months ending March 31, ~~2017.~~2018.

The following discussion is based on our Consolidated Statements of Operations for the three months ended March 31, ~~2017~~2018 and ~~2016,~~2017, as included in Part I, Item 1. “Financial Statements” of this report. As of March 31, ~~2017~~2018 and ~~2016,~~2017, we owned or had interests in a portfolio of 58fifty-three and 56fifty-nine income-producing properties, respectively.

Comparison of the three months ended March 31, ~~2017~~2018 to the same period ended ~~2016:~~2017:

For the three months ended March 31, ~~2017,~~2018, we reported a net loss applicable to common shares of $0.5 million or $0.05 per diluted earnings per share, compared to a net loss applicable to common shares of $5.4 million or $0.61 per diluted earnings per share ~~compared to a net loss applicable to common shares of $3.8 million or $0.43 per diluted earnings per share~~ for the same period ended ~~2016.~~2017.

Revenues

Rental and other property revenues were ~~$31.5~~$31.1 million for the three months ended March 31, ~~2017.~~2018. This represents ~~an increase~~a decrease of ~~$2.6~~approximately $0.4 million, compared to the prior period revenues of ~~$28.9~~$31.5 million. This change, by segment, is an increase in the apartment portfolio of ~~$1.3~~$0.9 million, and ~~an increase~~a decrease in the commercial portfolio of $1.3 million. The increase in the apartment portfolio is primarily due to the purchase of two apartment communities on December 31, 2016. During the three months ended March 31, 2017, we recorded $1.2 million of revenue from these two properties. The increase in revenue for the commercial portfolio is primarily due to the increased occupancy in three of these properties.

Expense

Property operating expenses were ~~$15.9~~$14.5 million for the three months ended March 31, ~~2017.~~2018. This represents ~~an increase~~a decrease of ~~$0.9~~$1.4 million, compared to the prior period operating expenses of ~~$15.0~~$15.9 million. This change, by segment, is ~~an increase~~a decrease in the apartment portfolio of ~~$1.4~~$0.2 million, ~~due primarily to our purchase of two new properties on December 31, 2016 and an increase~~a decrease in the commercial portfolio of ~~$0.2~~$0.9 million ~~partially offset by~~and a decrease in the land portfolio of ~~$0.6~~$0.2 million.

Depreciation and amortization expenses were ~~$6.3~~$6.4 million for the three months ended March 31, ~~2017.~~2018. This represents an increase of ~~$0.5~~$0.1 million as compared to prior period depreciation of ~~$5.8~~$6.3 million. ~~This change is consistent with the increase in acquired properties in the apartment and commercial portfolios.~~

24 Other income (expense)

Mortgage and loan interest expense was ~~$15.2~~$14.1 million for the three months ended March 31, ~~2017.~~2018. This represents ~~an increase~~a decrease of $2$1.1 million, as compared to the prior period expense of ~~$13.2~~$15.2 million. The change by segment is an increase in the other portfolio of ~~$1.7~~$0.4 million and a decrease in the apartment portfolio of $1.4 million, and an increase in the ~~apartment portfolio of $0.6 million, partially offset by a decrease in the~~ commercial portfolio of ~~$0.3~~$0.2 million. Within the other portfolio, the increase is primarily due to ~~$1.4~~$2.3 million of interest expense related to the Israeli Series A Bond payable which is comprised of $0.8 million interest based on the stated rate of the bond, $0.3 million interest expense related to the bond issuance costs and $0.3 million for the Medley loan that was placed in the SPC corporate financial statements. The increase within the apartment portfolio is primarily due to loan charges and prepayment penalties for the refinancing of two mortgage loans at lower rates.bonds.

Other income was ~~$1.1~~$3.6 million for the three months ended March 31, ~~2017.~~2018. This represents an increase of ~~$0.8~~$2.5 million compared to prior period other income of ~~$0.3~~$1.1 million. This increase is due to forgiveness of debt of $1$1.5 million during the first ~~Q, insurance proceeds for flood damage to Parc at Denham of $0.4 million,~~quarter and ~~partially offset by $0.3~~$1.8 million of foreign currency translation ~~loss~~gain due to ~~Series A bond offering.~~change in currency exchange rate.

Gain on land sales ~~decreased~~increased for the three months ended March 31, ~~2017,~~2018, compared to the prior period. In the current period we sold 62 acres of land for a sales price of $3.0 million and recorded a gain of $1.3 million. For the same period in 2017, we sold 2.49 acres of land for a sales price of $1.1 million and recorded a gain of $0.4 million. ~~For the same period in 2016, we sold 40.9 acres of land for a sales price of $4.2 million and recorded a gain of $1.7 million.~~

We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans. Management anticipates that our available cash from property operations may not be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowing secured by real estate to meet its liquidity requirements. Although the past cannot predict the future, historically, management has been successful at extending a portion of our current maturity obligations and selling assets as necessary to meet current obligations.

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

Our primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties. In addition, we have a related party account in which excess cash is transferred to or from.

Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the three months ended March 31, ~~2017,~~2018, we advanced $8.1 million toward various notes receivable and $20.1 million for development of new properties. For the same period a year ago, we purchased two land properties for $6.4 million. ~~We did not purchase any properties during the three months ended March 31, 2016.~~

Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the three months ended March 31, ~~2017,~~2018, we received aggregate sales proceeds of ~~$1.1~~$2.6 million from the sale of ~~2.49~~62 acres of land with recorded total gain of ~~$0.4~~$1.3 million from the sale. In addition, we received aggregate sale proceeds of $2.1 million from the sale of six income producing properties. During the three months ended March 31, ~~2016,~~2017, we sold approximately ~~40.9~~2.49 acres of land for a total sales price of ~~$4.2 million and recorded total gains of $1.7 million and one commercial property for $1.5~~$1.1 million and recorded a ~~net loss~~gain of ~~$0.2~~$0.4 million.

Our primary sources of cash from financing activities are from proceeds on notes payables either through refinancing our existing loans or by obtaining new financing. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable. The increase in cash flow from financing activities is due primarily to ~~$76~~$39.4 million of proceeds received from the sale of nonconvertible Series AB Bonds by Southern Properties Capital LTD, a British Virgin Islands corporation (“Southern”), which is an indirect subsidiary of TCI.

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.

The effects of inflation on our operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases, market conditions and decreases in real estate 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, earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.

TCI 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”), Income Opportunities Realty Investors, Inc. (“IOR”), and TCI.

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 ~~net operating~~ loss for federal income tax purposes in the first three months of 2018, and net operating losses for 2017 and ~~taxable losses in 2016 and 2015;~~2016; therefore, it recorded no provision for income taxes.

At March 31, ~~2017,~~2018, TCI had a net deferred tax asset of ~~$57.1~~approximately $30 million due to tax deductions available to ~~the Company~~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.

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates. Of our ~~$827.5~~$886.6 million in notes payable at March 31, ~~2017, $34.9~~2018, $65.2 million represented debt subject to variable interest rates. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by ~~$0.35~~$0.65 million, and would result in a decrease of ~~$0.03~~$0.07 in our earnings per share.

Our variable rate exposure is mitigated through the ability to secure long-term fixed rate HUD financing on the residential apartment complexes with a weighted average borrowing rate of ~~5.12%~~6.25% at March 31, ~~2017.~~2018.

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.

In December 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 687,000 shares of TCI’s common stock. In June 2000, the Board increased this authorization to 1,387,000 shares. On August 10, 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,637,000 shares of our common stock. This repurchase program has no termination date. There were no shares purchased under this program during the first quarter of ~~2017.~~2018. As of March 31, ~~2017,~~2018, 1,230,535 shares have been purchased and 406,465 shares may be purchased under the program.

The following exhibits are filed with this report or incorporated by reference as indicated;


Large accelerated filer ☐	Accelerated filer	☐
	Emerging growth company	☐
Non-accelerated filer ☐ (do not check if a smaller reporting company)	Smaller reporting company	☒


Common Stock, $.01 par value	8,717,767
(Class)	(Outstanding at May 15, ~~2017)~~2018)


		PAGE
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets at March 31, ~~2017~~2018 (unaudited) and December 31, ~~2016~~2017		3

	Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 ~~and 2016~~ (unaudited)		4

	Consolidated Statement of Shareholders’ Equity for the three months ended March 31, ~~2017~~2018 (unaudited)		5

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017 ~~and 2016~~ (unaudited)		6

	Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 ~~and 2016~~ (unaudited)		7

	Notes to Consolidated Financial Statements		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	27	26

Item 4.	Controls and Procedures		27

PART II. OTHER INFORMATION

Item 5.2.	Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 6.	Exhibits		28

SIGNATURES			29

							March 31, 2018			December 31, 2017
	March 31, 2017			December 31, 2016			(unaudited)			(audited)
	(dollars in thousands, except share and par value amounts)						(dollars in thousands, except share and par value amounts)
Assets
Real estate, at cost	$	1,015,791		$	998,498		$	1,111,346		$	1,112,721
Real estate subject to sales contracts at cost		46,360			46,956			45,739			45,739
Less accumulated depreciation		(160,269	)		(154,281	)		(179,100	)		(178,590	)
Total real estate		901,882			891,173			977,985			979,870
Notes and interest receivable:
Performing (including $65,289 in 2017 and $67,912 in 2016 from related parties)		78,681			81,133
Less allowance for doubtful accounts (including $1,825 in 2017 and 2016 from related parties)		(1,825	)		(1,825	)
Performing (including $48,553 in 2018 and $45,155 in 2017 from related parties)								83,342			70,166
Total notes and interest receivable		76,856			79,308			83,342			70,166
Cash and cash equivalents		55,282			17,506			40,894			42,705
Restricted cash		31,045			38,227			55,400			45,637
Investments in unconsolidated joint ventures and investees		2,438			2,446			2,483			2,472
Receivable from related party		99,714			101,649			115,734			111,665
Other assets		60,498			55,605			54,751			60,907
Total assets	$	1,227,715		$	1,185,914		$	1,330,589		$	1,313,422

Liabilities and Shareholders’ Equity
Liabilities:
Notes and interest payable	$	822,922		$	835,528		$	885,831		$	892,149
Notes related to real estate held for sale		376			376			376			376
Notes related to real estate subject to sales contracts		4,177			5,612			347			1,957
Bond and bond interest payable		71,975			—			146,888			113,047
Deferred revenue (including $50,699 in 2017 and $50,689 in 2016 to related parties)		71,075			71,065
Accounts payable and other liabilities (including $6,647 in 2017 and $6,487 in 2016 to related parties)		37,950			48,856
Deferred revenue (including $40,584 in 2018 and $40,574 in 2017 to related parties)								60,960			60,949
Accounts payable and other liabilities (including $6,701 in 2018 and $7,236 in 2017 to related parties)								28,249			36,683
Total liabilities		1,008,475			961,437			1,122,651			1,105,161

Shareholders’ equity:
Preferred stock, Series C: $0.01 par value, authorized 10,000,000 shares; issued and outstanding zero shares in 2017 and 2016. Series D: $0.01 par value, authorized, issued and outstanding 100,000 shares in 2017 and 2016 (liquidation preference $100 per share)		1			1
Common stock, $0.01 par value, authorized 10,000,000 shares; issued 8,717,967 shares in 2017 and 2016; outstanding 8,717,767 shares in 2017 and 2016		87			87
Treasury stock at cost, 200 shares in 2017 and 2016		(2	)		(2	)
Preferred stock, Series C: $0.01 par value, authorized 10,000,000 shares; issued and outstanding zero shares in 2018 and 2017. Series D: $0.01 par value, authorized, issued and outstanding 100,000 shares in 2018 and 2017 (liquidation preference $100 per share)								1			1
Common stock, $0.01 par value, authorized 10,000,000 shares; issued 8,717,967 shares in 2018 and 2017; outstanding 8,717,767 shares in 2018 and 2017								87			87
Treasury stock at cost, 200 shares in 2018 and 2017								(2	)		(2	)
Paid-in capital		269,627			269,849			268,727			268,949
Retained earnings		(69,184	)		(64,050	)
Retained deficit								(80,098	)		(79,865	)
Total Transcontinental Realty Investors, Inc. shareholders’ equity		200,529			205,885			188,715			189,170
Non-controlling interest		18,711			18,592			19,223			19,091
Total shareholders’ equity		219,240			224,477			207,938			208,261
Total liabilities and shareholders’ equity	$	1,227,715		$	1,185,914		$	1,330,589		$	1,313,422

	For the Three Months Ended March 31,
	2018			2017
		(dollars in thousands, except share and par value amounts)
Revenues:
Rental and other property revenues (including $208 and $190 for the three months ended 2018 and 2017, respectively, from related parties)	$	31,082		$	31,535

Expenses:
Property operating expenses (including $227 and $228 for the three months ended 2018 and 2017, respectively, from related parties)		14,455			15,889
Depreciation and amortization		6,446			6,303
General and administrative (including $1,093 and $732 for the three months ended 2018 and 2017, respectively, from related parties)		2,192			1,780
Net income fee to related party		53			60
Advisory fee to related party		2,748			2,305
Total operating expenses		25,894			26,337

Net operating income		5,188			5,198

Other income (expenses):
Interest income (including $3,236 and $3,169 for the three months ended 2018 and 2017, respectively, from related parties)		3,876			3,421
Other income (expense)		1,826			1,442
Mortgage and loan interest (including $318 and $151 for the three months ended 2018 and 2017, respectively, from related parties)		(14,093	)		(15,190	)
Foreign currency translation gain (loss)		1,756			(323	)
Earnings (losses) from unconsolidated joint ventures and investees		11			(8	)

Total other expenses		(6,624	)		(10,658	)

Loss before gain on land sales, non-controlling interest, and taxes		(1,436	)		(5,460	)

Gain on land sales		1,335			445
Net loss from continuing operations before taxes		(101	)		(5,015	)

Net loss from continuing operations		(101	)		(5,015	)

Net loss		(101	)		(5,015	)

Net (income) attributable to non-controlling interest		(132	)		(119	)

Net loss attributable to Transcontinental Realty Investors, Inc.		(233	)		(5,134	)

Preferred dividend requirement		(222	)		(222	)
Net loss applicable to common shares	$	(455	)	$	(5,356	)

Earnings per share - basic
Net loss from continuing operations	$	(0.05	)	$	(0.61	)

Earnings per share - diluted
Net loss from continuing operations	$	(0.05	)	$	(0.61	)

Weighted average common shares used in computing earnings per share		8,717,767			8,717,767
Weighted average common shares used in computing diluted earnings per share		8,717,767			8,717,767


Amounts attributable to Transcontinental Realty Investors, Inc.
Net loss from continuing operations	$	(233	)	$	(5,134	)
Net loss applicable to Transcontinental Realty Investors, Inc.	$	(233	)	$	(5,134	)

	Total			Comprehensive			Preferred		Common Stock				Treasury			Paid-in			Retained			Non-controlling
	Equity			Income (Loss)			Stock		Shares		Amount		Stock			Capital			Deficit			Interest

Balance, December 31, 2017	$	208,261		$	(80,168	)	$	1		8,717,967	$	87	$	(2	)	$	268,949		$	(79,865	)	$	19,091

Series D preferred stock dividends (9.0% per year)		(222	)		—			—		—		—		—			(222	)		—			—

Net income (loss)		(101	)		(233	)		—		—		—		—			—			(233	)		132

Balance, March 31, 2018	$	207,938		$	(80,401	)	$	1		8,717,967	$	87	$	(2	)	$	268,727		$	(80,098	)	$	19,223

	For the Three Months Ended March 31,
	2017			2016
	(dollars in thousands)
Cash Flow From Operating Activities:
Net loss	$	(5,015	)	$	(3,563	)
Adjustments to reconcile net loss applicable to common shares to net cash flows from operating activities:
Gain on sale of income-producing properties		—			(1,652	)
(Gain) loss on sale of land		(445	)		244
Depreciation and amortization		6,303			5,274
Amortization of deferred borrowing costs		1,053			1,398
Amortization of bond issuance costs		141			—
Losses (earnings) from unconsolidated joint ventures and investees		8			2
(Increase) decrease in assets:
Accrued interest receivable		1,746			1,575
Other assets		(1,634	)		1,709
Prepaid expense		(1,734	)		(11,622	)
Escrow		7,280			15,698
Earnest money		(53	)		(1,454	)
Rent receivables		(1,524	)		—
Related party receivables		1,935			(5,123	)
Increase (decrease) in liabilities:
Accrued interest payable		846			(140	)
Other liabilities		(10,896	)		(8,659	)
Net cash used in operating activities		(1,989	)		(6,313	)

Cash Flow From Investing Activities:
Proceeds from notes receivable		706			1,569
Originations or advances on notes receivable		—			(1,150	)
Proceeds from insurance claim		413			—
Acquisition of land held for development		(6,400	)		—
Proceeds from sale of income-producing properties		—			1,608
Proceeds from sale of land		1,089			3,412
Investment in unconsolidated real estate entities		8			2,781
Improvement of land held for development		(1,154	)		(947	)
Improvement of income-producing properties		(1,031	)		(1,002	)
Construction and development of new properties		(8,406	)		(8,395	)
Net cash used in investing activities		(14,775	)		(2,124	)

Cash Flow From Financing Activities:
Proceeds from notes payable		47,577			43,487
Recurring amortization of principal on notes payable		(3,423	)		(2,911	)
Payments on maturing notes payable		(59,392	)		(36,204	)
Proceeds from Series A bonds		75,991			—
Bond issuance costs		(4,829	)		—
Deferred financing costs		(1,162	)		(671	)
Preferred stock dividends - Series D		(222	)		(222	)
Net cash provided by financing activities		54,540			3,479

Net increase (decrease) in cash and cash equivalents		37,776			(4,958	)
Cash and cash equivalents, beginning of period		17,506			15,171
Cash and cash equivalents, end of period	$	55,282		$	10,213

Supplemental disclosures of cash flow information:
Cash paid for interest	$	12,205		$	10,628

Apartments	$	698,344		$	718,373
Apartments under construction		40,134			124,272
Commercial properties		205,751			201,436
Land held for development		71,562			67,265
Real estate subject to sales contract		46,360			45,739
Total real estate	$	1,062,151		$	1,157,085
Less accumulated depreciation		(160,269	)		(179,100	)
Total real estate, net of depreciation	$	901,882		$	977,985

	Percentage ownership as of
	March 31, 2017			March 31, 2016
American Realty Investors, Inc.⁽¹⁾		0.90	%		0.90	%

	For the Three Months Ended March 31,
	2016
Revenues:
Rental and other property revenues	$	—
		—
Expenses:
Property operating expenses		(3	)
Total operating expenses		(3	)

Other income (expense):
Other income		—
Total other income (expenses)		—

Gain from discontinued operations before income tax expense		3
Income tax expense		(1	)
Income from discontinued operations	$	2


Exhibit Number		Description

3.0		Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to Exhibit No. 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).

3.1		Certificate of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., (incorporated by reference to the Registrant’s Current Report on Form 8-K, dated June 3, 1996).

3.2		Certificate of Amendment of Articles of Incorporation of Transcontinental Realty Investors, Inc., dated October 10, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).

3.3		Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., setting forth the Certificate of Designations, Preferences and Rights of Series A Cumulative Convertible Preferred Stock, dated October 20, 1998 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).

3.4		Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, References, Limitations, Restriction and Relative Rights of Series B Cumulative Convertible Preferred Stock, dated October 23, 2000 (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000).

3.5		Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designating, Preferences, Limitations, Restrictions and Relative Rights of Series C Cumulative Convertible Preferred Stock, dated September 28, 2001 (incorporated by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).

3.6		Articles of Amendment to the Articles of Incorporation of Transcontinental Realty Investors, Inc., Decreasing the Number of Authorized Shares of and Eliminating Series B Preferred Stock dated December 14, 2001 (incorporated by reference to Exhibit 3.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001).

3.7		By-Laws of Transcontinental Realty Investors, Inc. (incorporated by reference to Exhibit No. 3.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1991).

3.8		Certificate of Designation of Transcontinental Realty Investors, Inc., setting forth the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of Series D Cumulative Preferred Stock filed August 14, 2006 with the Secretary of State of Nevada (incorporated by reference to Registrant’s Current Report on Form 8-K for event dated November 21, 2006 at Exhibit 3.8 thereof).

10.1		Advisory Agreement dated as of April 30, 2011, between Transcontinental Realty Investors, Inc., and Pillar Income Asset Management, Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K for event occurring May 2, 2011).

31.1*		Certification of the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended.

31.2*		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. 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


	TRANSCONTINENTAL REALTY INVESTORS, INC.

Date: May 15, ~~2017~~2018	By:	/s/ Daniel J. Moos
		Daniel J. Moos
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 15, ~~2017~~2018	By:	/s/ Gene S. Bertcher
		Gene S. Bertcher
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)