TRANSCONTINENTAL REALTY INVESTORS INC (TCI) stock intrinsic value fair value estimate & owner earnings analysis

Transcontinental Realty Investors owns 13 apartment communities (2,128 units, mostly in Texas and Louisiana, plus Mississippi and Colorado), four older Dallas and Houston office buildings (about 1.0 million square feet, 55% to 65% leased), roughly 1,800 acres of Texas land centered on Windmill Farms in Kaufman County, and four new apartment projects (906 units, about $207 million budget) that are finishing construction and leasing up: Alera in Lake Wales, Florida, Bandera Ridge in Temple, Merano in McKinney and Mountain Creek in Dallas. It is controlled by American Realty Investors and the family-owned group behind it, and all management is outsourced to an affiliate, Pillar, which charges 0.75% a year of gross asset value plus a net-income fee (about $9.1 million in 2025, against $49 million of revenue). That overhead, about $15 million a year in total, is a drag in every case below. A large part of the earnings comes from lending to affiliates. About $227 million (roughly a fifth of assets) is owed by Pillar and by United Housing Foundation, and interest on it was about $10.0 million in 2025. That interest is added to the balance rather than collected in cash, which is why reported operating cash flow was negative in 2023 and 2025 and again in the first half of 2026 despite positive net income. The balance has grown every year and the filings give no way to verify the ability to repay; the auditor flags collectability of the company's notes as a critical matter. We count the interest as earnings, but the bear case reduces it. Cash earnings per share (net income plus depreciation and similar non-cash items, excluding sale gains, less a reserve of 8% of rental revenue for upkeep, since the company does not disclose maintenance spending) were $2.07 in 2023, $1.88 in 2024 and $1.13 in 2025. The decline reflects interest income falling as cash was spent on construction, the January 2024 cut in the rate on the Pillar advance, and a higher advisory fee. We do not use the 2023-2024 levels as the starting point, because they reflect interest-earning cash that has since become unfinished buildings. Instead we start from the 2025 results adjusted for a one-time tax charge and a one-time land condemnation gain, and for the first half of 2026: revenue rose to $25.2 million from $24.2 million, but property operating costs rose to $15.5 million from $12.5 million as new buildings opened with few tenants, interest income fell to $7.6 million from $8.6 million, interest expense rose to $5.7 million from $3.5 million as construction interest stopped being capitalized, and the company lost about $1.0 million. On that basis the business produces roughly $10.6 million a year before interest on its debt, about $1.23 per share, after the upkeep reserve and the advisory fee. Interest on cash and short-term investments is left out of that figure because the cash is counted separately below. The company now has $214.5 million of mortgage and construction debt (June 30, 2026), mostly floating at 2.15 to 3.45 points over SOFR, which is more than the business earns on it today: interest is roughly $15 million a year against about $10.6 million of pre-interest earnings. Cash of $10.7 million and short-term investments of $73.4 million, together with a $29.4 million income-tax refund receivable and $55.7 million of Windmill Farms infrastructure receivables that municipal districts reimburse through bond issues, fund the gap. Scheduled principal is small (about $32 million due in 2027, then about $3 million a year until about $167 million falls due after 2030), but the new construction loans and a roughly $33 million remaining cost to finish Mountain Creek and the other projects are real claims on those resources. We subtract the debt, the cost to finish, and a modest extra amount because the loans cost more than the long-run rate, and add the cash above operating needs, the tax refund and the discounted district receivables. Growth. In the 2025 fiscal year, cash earnings per share fell 40%, and our before-interest figure fell about a third. The base case still has the next twelve months rising from the $10.6 million run-rate to about $12.6 million, then $15.0 million, then $17.3 million a year from the third year, for a specific, dated reason: certificates of occupancy were issued on Alera, Bandera Ridge and Merano during 2025 (Alera was only 12.9% occupied at December 31, 2025), Mountain Creek completes in 2026, and the construction cost is already spent and borrowed. We credit those 906 units with $7,000 of annual operating profit each, which is what the company's existing 2,128 units earn, and nothing for rent increases, a recovery in the office buildings, land sales beyond about $2.5 million a year of gains (the recent range is $0.2 million to $4.8 million), or any value for the acreage beyond that sales pace. We tested the $7,000 figure against the project cost of about $228,000 per unit: it is a yield of only about 3%, so if the new buildings do not rent as well as the older ones, the result falls materially, and the lease-up in the first half of 2026 has been slow. Bear case: the new units stabilize at $5,500 each over four to five years; apartments go through a downturn like 2008-2010, taking about 12% off property operating profit for two years and half that in a third; the Dallas office buildings lose another quarter of their operating profit as leases roll off (scheduled future rent from existing leases drops from about $14 million in the next twelve months to under $8 million in four years); 30% of the affiliate interest stops from year three; land sales fall to about $1.1 million a year; and construction debt reprices at wider spreads. Pre-interest earnings sink to about $6 million in year three and recover to about $10 million. The business is worth about $165 million ($19.08 per share) and the company owes a net $140 million after cash and receivables ($16.17 per share), leaving about $25 million, or $2.90 per share. In this case earnings do not cover interest for about four years, and the cash and tax refund carry the shortfall. Base case: pre-interest earnings reach $17.3 million a year by the third year and stay level. The business is worth about $282 million ($32.63 per share), net obligations are about $115 million ($13.36 per share), leaving about $166 million, or $19.30 per share. Bull case: the new units stabilize at $8,500 each, lot sales at Windmill Farms run near $4.0 million a year under the existing agreements for about 470 lots, and the affiliate interest holds at its 2025 level, producing about $21.4 million a year. The business is worth about $347 million ($40.18 per share), net obligations are about $108 million ($12.46 per share), leaving about $240 million, or $27.70 per share. What changed since our September 2026 analysis: that estimate used a different basis, so its numbers are not comparable. In the business itself, the first half of 2026 showed weaker property profit and higher interest costs while the new buildings lease up, the affiliate interest rate and income continue to fall, and debt grew to $214.5 million. Against that, we now give credit for the $29.4 million tax refund receivable, the $55.7 million of district receivables and the short-term investments, which add real value that the earlier work did not count. The roughly $98 per share of book value is mostly the historical cost of land, buildings and affiliate loans, and we credit only income and claims we can document. Margin-of-safety price. We are not highly sure of the earnings level: about 60% of the stabilized profit before overhead depends on affiliate interest and on new buildings that are still mostly empty. The worst plausible outcome is a write-down of most of the $227 million owed by affiliates, which no case fully models; the structure would not survive it intact, because debt of $214.5 million sits on floating-rate loans and the controlling owner, not minority holders, decides on distributions. If we are wrong that affiliate interest holds half its value and the new units earn only $5,000, the shares are worth roughly $7. The price assumes a holding period of about five years, and the company pays nothing over that period (no common dividend in years; proceeds have been lent to affiliates). From $5.50 a share, the base case implies a very high return, the two-error case about 12% a year, and the bear case a small loss, which leaves room for the overall result to reach 20% a year; above that price the bear case and the lack of any payout leave too little cushion. The margin-of-safety price is $5.50.