American Realty Investors Inc 10-Q for FY2020 Q1
American Realty Investors Inc (ARL)
About this 10-Q
American Realty Investors Inc filed this 10-Q on May 15, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).
Headline figures
Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $11.92M
- down 0.1% from $11.93M a year earlier
- Net income
- $2.95M
- compared with a net loss of $6.15M a year earlier
- Diluted EPS
- $0.18
- compared with -$0.38 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number 001-15663
AMERICAN REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada |
75-2847135 |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
1603 Lyndon B. Johnson Freeway, Suite 800, Dallas, Texas 75234
(Address of principal executive offices) (Zip Code)
(469) 522-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common Stock |
ARL |
NYSE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) ☒ Yes ☐ No.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer ☐ |
Accelerated filer |
☐ |
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|
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Non-accelerated filer ☐ |
Smaller reporting company |
☒ |
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Emerging growth company ☐ |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
Common Stock, $.01 par value |
15,997,076 |
|
(Class) |
(Outstanding at May 15, 2020) |
AMERICAN REALTY INVESTORS, INC.
FORM 10-Q
TABLE OF CONTENTS
2
AMERICAN REALTY INVESTORS, INC.
| March 31, 2020 | December 31, 2019 | |||||||
| (Unaudited) | (Audited) | |||||||
| (dollars in thousands, except share
and par value amounts) |
||||||||
| Assets | ||||||||
| Real estate, at cost | $ | 482,834 | $ | 469,997 | ||||
| Real estate subject to sales contracts at cost | 6,887 | 7,966 | ||||||
| Less accumulated depreciation | (93,144 | ) | (90,173 | ) | ||||
| Total real estate | 396,577 | 387,790 | ||||||
| Notes and interest receivable (including $106,148 in 2020 and $105,524 in 2019 from related parties) | 170,918 | 169,299 | ||||||
| Less allowance for estimated losses (including $12,557 and $13,099 in 2020 and 2019 from related parties) | (12,557 | ) | (13,099 | ) | ||||
| Total notes and interest receivable | 158,361 | 156,200 | ||||||
| Cash and cash equivalents | 39,946 | 51,228 | ||||||
| Restricted cash | 28,158 | 32,083 | ||||||
| Investment in VAA | 53,508 | 59,148 | ||||||
| Investment in other unconsolidated investees | 8,623 | 8,507 | ||||||
| Receivable from related party | 78,779 | 85,996 | ||||||
| Other assets | 51,119 | 49,689 | ||||||
| Total assets | $ | 815,071 | $ | 830,641 | ||||
| Liabilities and Shareholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Notes and interest payable | $ | 260,969 | $ | 254,873 | ||||
| Bond and interest payable | 207,832 | 229,722 | ||||||
| Deferred revenue (including $24,762 in 2020 and 2019 to related parties) | 24,762 | 24,762 | ||||||
| Accounts payable and other liabilities (including $12,069 in 2020 and $11,817 in 2019 to related parties) | 20,604 | 24,768 | ||||||
| Total liabilities | 514,167 | 534,125 | ||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued 614 and outstanding 1,800,614 in 2020 and 2019 (liquidation preference $10 per share), including 1,800,000 shares held by ARL and its subsidiaries in 2020 and 2019. | 5 | 5 | ||||||
| Common stock, $0.01 par value, 100,000,000 shares authorized; 16,412,861 shares issued and 15,997,076 outstanding as of 2020 and 2019, including 140,000 shares held by TCI (consolidated) in 2020 and 2019. | 164 | 164 | ||||||
| Treasury stock at cost; 415,785 shares in 2020 and 2019, and 140,000 shares held by TCI (consolidated) as of 2020 and 2019. | (6,395 | ) | (6,395 | ) | ||||
| Paid-in capital | 82,017 | 82,017 | ||||||
| Retained earnings | 166,654 | 163,708 | ||||||
| Total American Realty Investors, Inc. shareholders’ equity | 242,445 | 239,499 | ||||||
| Non-controlling interest | 58,459 | 57,017 | ||||||
| Total shareholders’ equity | 300,904 | 296,516 | ||||||
| Total liabilities and shareholders’ equity | $ | 815,071 | $ | 830,641 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended March 31, |
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2020 |
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2019 |
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(dollars in thousands, except per share amounts) |
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Revenues: |
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|
|
|
|
|
|
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Rental and other property revenues (including $221 and $113 for the three months ended 2020 and 2019, respectively, from related parties) |
|
$ |
11,918 |
|
|
$ |
11,929 |
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|
|
|
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Expenses: |
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|
|
|
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|
|
|
|
Property operating expenses (including $242 and $257 for the three months ended 2020 and 2019, respectively, from related parties) |
|
|
6,310 |
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|
|
5,997 |
|
|
Depreciation and amortization |
|
|
3,394 |
|
|
|
3,109 |
|
|
General and administrative (including $1,133 and $1,597 for the three months ended 2020 and 2019, respectively, from related parties) |
|
|
2,795 |
|
|
|
2,480 |
|
|
Franchise taxes and other expenses |
|
|
1,496 |
|
|
|
125 |
|
|
Net income fee to related party |
|
|
86 |
|
|
|
100 |
|
|
Advisory fee to related party |
|
|
2,287 |
|
|
|
1,853 |
|
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Total operating expenses |
|
|
16,368 |
|
|
|
13,664 |
|
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Net operating loss |
|
|
(4,450 |
) |
|
|
(1,735 |
) |
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Other income (expenses): |
|
|
|
|
|
|
|
|
|
Interest income (including $5,031 and $5,881 for the three months ended 2020 and 2019, respectively, from related parties) |
|
|
5,754 |
|
|
|
6,153 |
|
|
Other income |
|
|
1,212 |
|
|
|
3,667 |
|
|
Mortgage and loan interest (including $1,915 and $2,307 for the three months ended 2020 and 2019, respectively, from related parties) |
|
|
(9,602 |
) |
|
|
(9,968 |
) |
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Foreign currency transaction (loss) gain |
|
|
7,843 |
|
|
|
(5,818 |
) |
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Loss on extinguishment of debt |
|
|
— |
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|
|
— |
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Equity loss from VAA |
|
|
(376 |
) |
|
|
(1,055 |
) |
|
Earnings from unconsolidated subsidiaries and investees |
|
|
116 |
|
|
|
58 |
|
|
Total other income (expenses) |
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|
4,947 |
|
|
|
(6,963 |
) |
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Income (loss) before gain on land sales, non-controlling interest, and taxes |
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|
497 |
|
|
|
(8,698 |
) |
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Gain on land sales |
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|
4,138 |
|
|
|
2,216 |
|
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Net income (loss) from continuing operations before taxes |
|
|
4,635 |
|
|
|
(6,482 |
) |
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State inncome tax expense |
|
|
(247 |
) |
|
|
— |
|
|
Net income (loss) from continuing operations |
|
|
4,388 |
|
|
|
(6,482 |
) |
|
Net income (loss) |
|
|
4,388 |
|
|
|
(6,482 |
) |
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Net (income) loss attributable to non-controlling interest |
|
|
(1,442 |
) |
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|
335 |
|
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Net income (loss) attributable to American Realty Investors, Inc. |
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|
2,946 |
|
|
|
(6,147 |
) |
|
Net income (loss) applicable to common shares |
|
$ |
2,946 |
|
|
$ |
(6,147 |
) |
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(Loss) earnings per share - basic |
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|
|
|
|
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|
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Net income (loss) from continuing operations |
|
$ |
0.27 |
|
|
$ |
(0.41 |
) |
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Net income (loss) applicable to common shares |
|
$ |
0.18 |
|
|
$ |
(0.38 |
) |
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(Loss) earnings per share - diluted |
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Net income (loss) from continuing operations |
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$ |
0.27 |
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|
$ |
(0.41 |
) |
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Net income (loss) applicable to common shares |
|
$ |
0.18 |
|
|
$ |
(0.38 |
) |
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|
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Weighted average common shares used in computing earnings per share |
|
|
15,997,076 |
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|
15,997,076 |
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Weighted average common shares used in computing diluted earnings per share |
|
|
15,997,076 |
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|
|
15,997,076 |
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Amounts attributable to American Realty Investors, Inc. |
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|
|
|
|
|
||
|
Net income (loss) from continuing operations |
|
$ |
4,388 |
|
|
$ |
(6,482 |
) |
|
Net income (loss) applicable to American Realty Investors, Inc. |
|
$ |
2,946 |
|
|
$ |
(6,147 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
4
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2020 and 2019
(Unaudited, dollars in thousands, except share amounts)
|
|
|
Total |
|
|
Comprehensive |
|
|
Preferred |
|
|
Common Stock |
|
|
Treasury |
|
|
Paid-in |
|
|
Retained |
|
|
Non-controlling |
|
||||||||||||
|
|
|
Equity |
|
|
Income (Loss) |
|
|
Stock |
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Interest |
|
|||||||||
|
Balance, December 31, 2019 |
|
$ |
296,516 |
|
|
$ |
90,128 |
|
|
$ |
5 |
|
|
$ |
16,412,861 |
|
|
$ |
164 |
|
|
$ |
(6,395) |
|
|
$ |
82,017 |
|
|
$ |
163,708 |
|
|
$ |
57,017 |
|
|
Net income |
|
|
4,388 |
|
|
|
2,946 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,946 |
|
|
|
1,442 |
|
|
Balance, March 31, 2020 |
|
$ |
300,904 |
|
|
$ |
93,074 |
|
|
$ |
5 |
|
|
$ |
16,412,861 |
|
|
$ |
164 |
|
|
$ |
(6,395 |
) |
|
$ |
82,017 |
|
|
$ |
166,654 |
|
|
$ |
58,459 |
|
|
|
|
Total |
|
|
Comprehensive |
|
|
Preferred |
|
|
Common Stock |
|
|
Treasury |
|
|
Paid-in |
|
|
Retained |
|
|
Non-controlling |
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||||||||||||
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|
|
Equity |
|
|
Income (Loss) |
|
|
Stock |
|
|
Shares |
|
|
Amount |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Interest |
|
|||||||||
|
Balance, December 31, 2018 |
|
$ |
321,127 |
|
|
$ |
106,086 |
|
|
$ |
5 |
|
|
$ |
16,412,861 |
|
|
$ |
164 |
|
|
$ |
(6,395 |
) |
|
$ |
84,885 |
|
|
$ |
179,666 |
|
|
$ |
62,802 |
|
|
Net loss |
|
|
(6,482 |
) |
|
|
(6,147 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,147 |
) |
|
|
(335 |
) |
|
Distribution to equity partner |
|
|
(67 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(67 |
) |
|
|
— |
|
|
|
— |
|
|
Balance, March 31, 2019 |
|
$ |
314,578 |
|
|
$ |
99,939 |
|
|
$ |
5 |
|
|
$ |
16,412,861 |
|
|
$ |
164 |
|
|
$ |
(6,395 |
) |
|
$ |
84,818 |
|
|
$ |
173,519 |
|
|
$ |
62,467 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
For the Three Months Ended March 31, |
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|||||
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2020 |
|
|
2019 |
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||
|
|
|
(dollars in thousands) |
|
|||||
|
Net income (loss) |
|
$ |
4,388 |
|
|
$ |
(6,482 |
) |
|
Total comprehensive income (loss) |
|
|
4,388 |
|
|
|
(6,482 |
) |
|
Comprehensive (income) loss attributable to non-controlling interest |
|
|
(1,442 |
) |
|
|
335 |
|
|
Comprehensive income (loss) attributable to American Realty Investors, Inc. |
|
$ |
2,946 |
|
|
$ |
(6,147 |
) |
The accompanying notes are an integral part of these consolidated financial statements.
6
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2020 | 2019 | |||||||
| (dollars in thousands) | ||||||||
| Cash Flow From Operating Activities: | ||||||||
| Net income (loss) | $ | 4,388 | $ | (6,482 | ) | |||
| Adjustments to reconcile net income (loss) applicable to common shares to net cash used in operating activities: | ||||||||
| Foreign currency transaction (gain) loss | (7,843 | ) | 5,818 | |||||
| Allowance for bad debt | (542 | ) | — | |||||
| Gain on sale of land | (4,138 | ) | (2,216 | ) | ||||
| Depreciation and amortization | 3,394 | 3,109 | ||||||
| Amortization of deferred borrowing costs | 153 | 339 | ||||||
| Amortization of bond issuance costs | 778 | 592 | ||||||
| Loss from joint venture | 376 | 1,055 | ||||||
| (Earnings) from unconsolidated subsidiaries and investees | (116 | ) | (58 | ) | ||||
| (Increase) decrease in assets: | ||||||||
| Accrued interest receivable | 1,475 | 1,726 | ||||||
| Other assets | (1,408 | ) | 4,822 | |||||
| Prepaid expense | (791 | ) | (5,340 | ) | ||||
| Rent receivables | 180 | (3,275 | ) | |||||
| Related party receivables | (151 | ) | (7,971 | ) | ||||
| Increase (decrease) in liabilities: | ||||||||
| Accrued interest payable | (3,193 | ) | (5,466 | ) | ||||
| Other liabilities | (4,164 | ) | (3,102 | ) | ||||
| Net cash (used in) operating activities | (11,602 | ) | (16,449 | ) | ||||
| Cash Flow From Investing Activities: | ||||||||
| Proceeds from notes receivables | 5,042 | 255 | ||||||
| Origination of notes receivables | (768 | ) | (385 | ) | ||||
| Acquisition of land held for development | (2,000 | ) | (2,479 | ) | ||||
| Proceeds from sale of land | 5,638 | 8,715 | ||||||
| Distribution from equity investee | 5,264 | — | ||||||
| Improvement of income producing properties | (2,289 | ) | (3,699 | ) | ||||
| Construction and development of new properties | (5,453 | ) | (7,838 | ) | ||||
| Net cash provided by (used in) investing activities | 5,434 | (5,431 | ) | |||||
| Cash Flow From Financing Activities: | ||||||||
| Bond payments | (11,561 | ) | (10,378 | ) | ||||
| Proceeds from notes payable | 5,114 | 8,019 | ||||||
| Recurring payment of principal on notes payable | (2,592 | ) | (1,182 | ) | ||||
| Distributions to equity partner | — | (67 | ) | |||||
| Net cash (used in) financing activities | (9,039 | ) | (3,608 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (15,207 | ) | (25,488 | ) | ||||
| Cash and cash equivalents, beginning of period | 83,311 | 106,615 | ||||||
| Cash and cash equivalents, end of period | $ | 68,104 | $ | 81,127 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 13,090 | $ | 10,887 | ||||
| Schedule of noncash investing and financing activities: | ||||||||
| Notes payable issued on acquisition of land held for development | $ | 3,350 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
As used herein, the terms “ARL”, “the Company”, “we”, “our” or “us” refer to American Realty Investors, Inc., a Nevada corporation, which was formed in 1999. The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE”) under the symbol (“ARL”). Over 90% of ARL’s stock is owned by related party entities.
ARL and a subsidiary own approximately 78.38% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, whose common stock is traded on the NYSE under the symbol (“TCI”). TCI, a subsidiary of ARL, owns approximately 81.15% of the common stock of Income Opportunity Realty Investors, Inc. (“IOR”). Effective July 17, 2009, IOR’s financial results were consolidated with those of ARL and TCI and their subsidiaries. IOR’s common stock is traded on the NYSE American under the symbol (“IOR”).
ARL’s Board of Directors is responsible for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors of ARL are also directors of TCI and IOR. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board of Directors of TCI and IOR. The officers of ARL also serve as officers of TCI, IOR and Pillar.
ARL 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 ARL, and for setting the policies which guide it, the day-to-day operations of ARL 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 ARL’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and IOR.
Regis Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services. ARL engages third-party companies to lease and manage its apartment properties.
Southern Properties Capital Ltd. a British Virgin Island corporation (“Southern” or “SPC”), is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures that cannot be converted into shares on the Tel-Aviv Stock Exchange (“TASE”). Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI.
On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
On November 19, 2018, TCI executed an agreement between the Macquarie Group (“Macquarie”) and SPC and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, SPC and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).
8
VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”). The remaining 2% of the profit participation interest is held by Daniel J. Moos ARL’s President and Chief Executive Officer (“Class B Member”) who also serves as the Manager of the joint venture.
Properties
At March 31, 2020, our portfolio of income-producing properties consisted of:
|
● |
Seven commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7 million square feet; |
|
● |
Ten residential apartment communities owned directly by us comprising in 1,657 units, excluding apartments being developed; |
|
● |
Approximately 1,982 acres of developed and undeveloped land; and |
|
● |
Fifty-one residential apartment communities totaling 10,137 units owned by our 50% owned investee VAA. |
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. 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.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2019, 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, 2019 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, 2019. Certain 2019 Consolidated Financial Statement amounts have been reclassified to conform to the 2020 presentation.
9
Principles of Consolidation
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 investments in Gruppa Florentina, LLC and VAA are accounted for under the equity method.
Real Estate, Depreciation and Impairment
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.
Real Estate Held For Sale
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.
10
Cost Capitalization
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.
Fair Value Measurement
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:
|
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.
Deferred Costs
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.
Related Parties
We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required; trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
11
Newly Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Also, the amendments in this Update simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted retrospectively with early adoption permitted. The adoption of ASU 2018-17 did not have a material impact on the Company’s financial position and results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The adoption of ASU 2018-13 did not have a material impact on the Company’s financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but it eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The Company early adopted the standard on January 1, 2019.
The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year. The Company adopted the standard on January 1, 2019, but since no material lease arrangements were identified where the Company was the lessee, there were no right-of-use assets or lease liabilities recorded.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient. The ASU also provided a transition option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers. The scope of this standard specifically excludes lease contracts. The Company adopted the standard on January 1, 2019, but it did not have an impact to the financial statements as the majority of the Company’s revenue is from rental revenue generated from lease contracts.
12
NOTE 2. INVESTMENT IN VAA
On November 19, 2018, TCI executed an agreement with Macquarie Group (“Macquarie”) to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets.
The Company accounts for its investment in VAA under the equity method of accounting. Under the equity method of accounting, our net equity in the investment is reflected within the Consolidated Balance Sheets in the caption ‘Investment in VAA’, and our share of the net income or loss from the joint venture is included within the Consolidated Statements of Operations in the caption ‘Equity earnings from VAA’. 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 and other agreed upon adjustments.
The following is a summary of the financial position and results of operations of VAA (dollars in thousands):
|
|
|
For the period ended March 31, |
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|||
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
Net real estate assets |
|
$ |
1,239,252 |
|
|
$ |
1,257,557 |
|
|
|
Other assets |
|
|
48,968 |
|
|
|
67,020 |
|
|
|
Debt, net |
|
|
(834,826 |
) |
|
|
(796,065 |
) |
|
|
Other liabilities |
|
|
(261,620 |
) |
|
|
(275,448 |
) |
|
|
Total equity |
|
|
(191,774 |
) |
|
|
(253,064 |
) |
|
|
|
|
For the Three Months Ended March 31, |
|
||||||
|
|
|
2020 |
|
|
2019 |
|
|||
|
Results of Operations |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
29,660 |
|
|
$ |
27,401 |
|
|
|
Total property, operating, and maintenance expenses |
|
|
(13,842 |
) |
|
|
(14,169 |
) |
|
|
Interest expense |
|
|
(15,074 |
) |
|
|
(15,070 |
) |
|
|
Depreciation and Amortization |
|
|
(7,657 |
) |
|
|
(15,233 |
) |
|
|
Total other expense |
|
|
(982 |
) |
|
|
(675 |
) |
|
|
Net loss |
|
$ |
(7,895 |
) |
|
$ |
(17,746 |
) |
|
Below is a reconciliation of our allocation of income or loss from VAA.
|
|
|
For the Three Months Ended March 31, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
VAA net loss |
|
$ |
(7,895 |
) |
|
$ |
(17,746 |
) |
|
Adjustments to reconcile to income (loss) from VAA |
|
|
|
|
|
|
|
|
|
Interest expense on mezzanine loan |
|
|
5,873 |
|
|
|
6,089 |
|
|
In-place lease intangibles - amortization expense |
|
|
— |
|
|
|
8,336 |
|
|
Depreciation basis differences |
|
|
1,270 |
|
|
|
1,211 |
|
|
Net loss |
|
$ |
(752 |
) |
|
$ |
(2,110 |
) |
|
Percentage ownership in VAA |
|
|
50 |
% |
|
|
50 |
% |
|
Loss from VAA |
|
$ |
(376 |
) |
|
$ |
(1,055 |
) |
13
NOTE 3. REAL ESTATE ACTIVITY
Below is a summary of the real estate owned as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Apartments |
|
$ |
157,753 |
|
|
$ |
156,173 |
|
|
Apartments under construction |
|
|
33,166 |
|
|
|
22,363 |
|
|
Commercial properties |
|
|
230,133 |
|
|
|
229,424 |
|
|
Land held for development |
|
|
61,782 |
|
|
|
62,037 |
|
|
Real estate subject to sales contract |
|
|
6,887 |
|
|
|
7,966 |
|
|
Total real estate, at cost, less impairment |
|
$ |
489,721 |
|
|
$ |
477,963 |
|
|
Less accumulated deprecation |
|
|
(93,144 |
) |
|
|
(90,173 |
) |
|
Total real estate, net of depreciation |
|
$ |
396,577 |
|
|
$ |
387,790 |
|
The following is a description of our significant real estate and financing transactions for the three months ended March 31, 2020:
|
● |
Sold a combined 18.7 acres of land in Farmers Branch, Texas and Forney, Texas to third parties for an aggregate sales price of $5.7 million and recognized a gain on the sale of approximately $4.1 million. |
|
● |
Acquired 100% of the membership interest in EQK Portage, LLC, which owns approximately 49.2 acres of land in Kent, OH. The Company purchased the land for development at a purchase price of $5.4 million, consisting of $2.0 million in cash and a 3.4 million note payable. The note has an interest rate of 10% and a maturity date of November 13, 2024. |
|
● |
Purchased notes receivables from related parties for an aggregate purchase price of $7.4 million. No gain or loss was recognized from the purchase of the notes receivables (refer to Note 5). |
|
● |
Paid $11.6 million in Series A bond principal and $7.3 million interests payments in Series A, B and C bonds. |
|
● |
Converted $16.0 million to approximately 59.8 million (NIS) for the upcoming July 31, 2020 payment to the bond holders for principal and interest on Series A, B, and C Bonds. |
The Company continues to invest in the development of apartment projects. During the three months ended March 31, 2020, we have invested $5.4 million related to the construction or predevelopment of various apartment complexes out of which $0.3 million represents capitalized interest costs.
14
NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION
For the three months ended March 31, 2020 and 2019, the Company paid interest expense of $13.1 million and $10.9 million, respectively.
Cash and cash equivalents, and restricted cash for the three months ended March 31, 2020 and 2019 was $68.1 million and $81.1 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, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash and cash equivalents |
|
$ |
39,946 |
|
|
$ |
28,163 |
|
|
Restricted cash (cash held in escrow) |
|
|
14,031 |
|
|
|
34,690 |
|
|
Restricted cash (certificate of deposits) |
|
|
2,854 |
|
|
|
11,876 |
|
|
Restricted cash (held with Trustee) |
|
|
11,273 |
|
|
|
6,398 |
|
|
Total cash, cash equivalents and restricted cash |
|
$ |
68,104 |
|
|
$ |
81,127 |
|
Amounts included in restricted cash represent funds set aside to meet contractual obligations with certain financial institutions for the payment of reserve replacement deposits and tax and insurance escrow. In addition, restricted cash includes funds to the Bond’s Trustee for payment of principal and interests.
15
NOTE 5. 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, 2020 (dollars in thousands):
| Maturity | Interest | |||||||||||||
| Borrower | Date | Rate | Amount | Security | ||||||||||
| Performing loans: | ||||||||||||||
| Prospectus Endeavors 4, LLC | 01/23 | 12.00% | 5,907 | Secured | ||||||||||
| Prospectus Endeavors 6, LLC | 10/22 | 12.00% | 496 | Secured | ||||||||||
| Oulan-Chikh Family Trust | 03/21 | 8.00% | 174 | Secured | ||||||||||
| H198, LLC (McKinney Ranch Land) | 09/20 | 6.00% | 4,554 | Secured | ||||||||||
| Forest Pines phase I | 11/20 | 5.00% | 2,869 | Secured | ||||||||||
| Spyglass Apartments of Ennis, LP | 11/20 | 5.00% | 5,335 | Secured | ||||||||||
| Bellwether Ridge | 05/20 | 5.00% | 3,853 | Secured | ||||||||||
| Parc at Windmill Farms | 05/20 | 5.00% | 7,697 | Secured | ||||||||||
| Autumn Breeze Apts | 10/21 | 5.00% | 1,414 | Secured | ||||||||||
| Plum Tree | 10/21 | 5.00% | 492 | Secured | ||||||||||
| Parc at Ingleside | 12/21 | 5.00% | 1,827 | Secured | ||||||||||
| RNC Revolving Line of Credit | 09/24 | 5.00% | 8,851 | Secured | ||||||||||
| Steeple Crest | 10/20 | 5.00% | 6,665 | Secured | ||||||||||
| RAI PFBL 2018 Purch Fee Note Weatherford | 12/21 | 12.00% | 525 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Echo Station) (1) | 12/32 | 12.00% | 1,481 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Inwood on the Park) (1) | 12/32 | 12.00% | 3,639 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Kensington Park) (1) | 12/32 | 12.00% | 3,933 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Lakeshore Villas) (1) | 12/32 | 12.00% | 2,000 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Lakeshore Villas) (1) | 12/32 | 12.00% | 6,369 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Lakeshore Villas) (1) | 12/32 | 12.00% | 2,732 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Limestone Ranch) (1) | 12/32 | 12.00% | 1,953 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Limestone Ranch) (1) | 12/32 | 12.00% | 2,000 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Limestone Ranch) (1) | 12/32 | 12.00% | 4,000 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Timbers of Terrell) (1) | 12/32 | 12.00% | 1,323 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 12/21 | 12.00% | 10,401 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 06/20 | 12.00% | 5,314 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/22 | 12.00% | 4,782 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (Lakeshore Villas) (1) | 07/21 | 12.00% | 838 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Limestone Ranch) (1) | 07/21 | 12.00% | 773 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Marquis at Vista Ridge) (1) | 07/21 | 12.00% | 839 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Timbers at the Park) (1) | 07/21 | 12.00% | 432 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (Bella Vista) (1) | 08/21 | 12.00% | 212 | Secured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 10/21 | 12.00% | 6,832 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 12/32 | 12.00% | 497 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/23 | 12.00% | 61 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/23 | 12.00% | 1,482 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/23 | 12.00% | 4,792 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/23 | 12.00% | 716 | Unsecured | ||||||||||
| Unified Housing Foundation, Inc. (1) | 03/23 | 12.00% | 317 | Unsecured | ||||||||||
| Realty Advisors Management, Inc. (1) | 12/22 | 2.28% | 20,387 | Unsecured | ||||||||||
| One Realco Corporation | 01/23 | 3.00% | 7,000 | Unsecured | ||||||||||
| Other related party notes (1) (2) | Various | Various | 1,825 | Various secured interests | ||||||||||
| Other non-related party notes | Various | Various | 11,692 | Various secured interests | ||||||||||
| Accrued interest | 11,637 | |||||||||||||
| Total Performing | $ | 170,918 | ||||||||||||
| Allowance for estimated losses | (12,557 | ) | ||||||||||||
| Total | $ | 158,361 | ||||||||||||
|
|
(1) |
Related party notes. |
|
|
(2) |
An allowance was taken for estimated losses at full value of note. |
16
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, 2020, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $96.9 million and recognized interest income of $8.1 million related to these notes receivables. During the quarter just ended, the Company collected $5.0 million and purchased from a related party $7.4 million of notes receivables with an interest rate of 12% and maturity date of March 2023.
The Company has various notes receivable from Unified Housing foundation, Inc. (“UHF”). UHF is determined to be a related party due to our significant investment in the performance of the collateral secured under the notes receivable. Payments are due from surplus cash flow from operations, sale or refinancing of the underlying properties. These notes are cross collateralized to the extent that any surplus cash available from any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes. Furthermore, any surplus cash available from any of the properties UHF owns, besides the properties underlying these notes, can be used to repay outstanding interest and principal for these notes. The allowance on the notes was a purchase allowance that was netted against the notes when acquired.
NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES
The summary data presented below includes our investments accounted for under the equity method, except for our investment in VAA which is discussed in detail in Note 2 ‘Investment in VAA’.
The Company owns a 20% interest in Gruppa Florentina, LLC which is the sole shareholder of Milano Restaurants International Corporation, (“Milano”) which operates 33 pizza parlors under the trade name “Me-N-Ed’s Pizza Parlors” and four pizza parlors operating under the trade name “Blast 825 Pizza”, located primarily in Central and Northern California. Milano has a 100% ownership interest in Siena Corp, which operates two grills under the trade names “Me-N-Ed’s Victory Grill” and “Me-N-Ed’s Coney Island Grill”. Milano has a 100% ownership interest in Piazza del Pane, Inc., which operates two restaurants located in Central California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s Pizzerias.
The following is a summary of the financial position and results of operations as of March 31, 2020 and 2019 from our investees (dollars in thousands):
| For the period ended March 31, | ||||||||
| SUMMARY OF FINANCIAL POSITION: | 2020 | 2019 | ||||||
| Real estate, net of accumulated depreciation | $ | 12,403 | $ | 13,530 | ||||
| Notes receivable | 11,053 | 11,508 | ||||||
| Other assets | 33,416 | 31,381 | ||||||
| Notes payable | (9,159 | ) | (9,853 | ) | ||||
| Other liabilities | (7,052 | ) | (6,584 | ) | ||||
| Shareholders’ equity/partners capital | (40,661 | ) | (39,982 | ) | ||||
| For the three months ended March 31, | ||||||||
| SUMMARY OF OPERATIONS: | 2020 | 2019 | ||||||
| Revenue | $ | 13,414 | $ | 13,626 | ||||
| Depreciation | (351 | ) | (364 | ) | ||||
| Operating expenses | (12,342 | ) | (12,815 | ) | ||||
| Interest expense | (141 | ) | (156 | ) | ||||
| Income (loss) from continuing operations | $ | 580 | $ | 291 | ||||
| Net income (loss) | $ | 580 | $ | 291 | ||||
| Company’s 20% proportionate share of earnings | $ | 116 | $ | 58 | ||||
17
NOTE 7. NOTES AND INTEREST PAYABLE
Below is a summary of our notes and interest payable as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
March 31, |
|
December 31, |
||||
|
|
2020 |
|
2019 |
||||
|
Apartments |
$ |
120,370 |
|
$ |
120,024 |
||
|
Apartments under Construction |
|
16,710 |
|
|
9,017 |
||
|
Commercial |
|
92,319 |
|
|
92,838 |
||
|
Land |
17,644 |
|
19,128 |
||||
|
Corporate and other notes |
|
20,266 |
|
|
20,429 |
||
|
Total notes payable |
$ |
267,309 |
|
$ |
261,436 |
||
|
Less: unamortized deferred borrowing costs |
|
(7,189 |
) |
|
(7,342 |
||
|
Total outstanding notes payable, net |
$ |
260,120 |
|
$ |
254,094 |
||
|
Accrued Interest |
|
849 |
|
|
779 |
||
|
Total notes payable, net and accrued interest |
$ |
260,969 |
|
$ |
254,873 |
||
During the three months ended March 31, 2020, the Company drew down $4.3 million in construction loans to fund the development of various apartment projects. In addition, TCI through one of its subsidiaries issued a note payable of $3.4 million to purchase land for development in Kent, Ohio. The note has an interest rate of 10% and a maturity date of November 13, 2024.
NOTE 8. BONDS AND BONDS INTEREST PAYABLE
Following is the outstanding balance of SPC’s Bonds and interest payable as of March 31, 2020 and December 31, 2019 (dollars in thousands):
|
|
|
March 31, |
|
|
December 31, |
|
||
|
|
|
2020 |
|
|
2019 |
|
||
|
Bonds (Series A) |
|
$ |
78,541 |
|
|
$ |
92,653 |
|
|
Bonds (Series B) |
|
|
38,626 |
|
|
|
39,844 |
|
|
Bonds (Series B expansion) |
|
|
20,281 |
|
|
|
20,920 |
|
|
Bonds (Series C) |
|
|
77,139 |
|
|
|
79,572 |
|
|
Total outstanding bonds |
|
$ |
214,587 |
|
|
$ |
232,989 |
|
|
Less: deferred bond issuance costs |
|
|
(8,946 |
) |
|
|
(9,724 |
) |
|
Total outstanding bonds, net |
|
|
205,641 |
|
|
|
223,265 |
|
|
Accrued Interest |
|
|
2,191 |
|
|
|
6,457 |
|
|
Total outstanding bonds, net and accrued interest |
|
$ |
207,832 |
|
|
$ |
229,722 |
|
The aggregate maturity of the bonds are as follows:
|
|
|
March 31, |
|
|
December 31, |
|
||
|
Year |
|
2020 |
|
|
2019 |
|
||
|
2020 |
|
$ |
11,220 |
|
|
$ |
23,148 |
|
|
2021 |
|
|
34,222 |
|
|
|
35,301 |
|
|
2022 |
|
|
34,222 |
|
|
|
35,301 |
|
|
2023 |
|
|
111,361 |
|
|
|
114,873 |
|
|
2024 |
|
|
11,781 |
|
|
|
12,153 |
|
|
Thereafter |
|
|
11,781 |
|
|
|
12,213 |
|
|
|
|
$ |
214,587 |
|
|
$ |
232,989 |
|
On January 31, 2020, the Company paid $11.6 million in Series A bond principal and $7.3 million in interests payments in Series A, B and C bonds, respectively.
18
NOTE 9. RELATED PARTY TRANSACTIONS
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 and paid are shown on the face of the Consolidated Financial Statements.
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, 2020 (dollars in thousands):
|
|
|
Pillar |
|
|
|
Related party receivable, December 31, 2019 |
|
|
85,996 |
|
|
Cash transfers |
|
|
2,911 |
|
|
Advisory fees |
|
|
(2,287 |
) |
|
Net income fee |
|
|
(86 |
) |
|
Cost reimbursements |
|
|
(1,118 |
) |
|
Interest income |
|
|
1,103 |
|
|
Notes receivable purchased |
|
|
(7,368 |
) |
|
Expenses (paid) received by Advisor |
|
|
21 |
|
|
Financing (mortgage payments) |
|
|
(240 |
) |
|
Intercompany property transfers |
|
|
(153 |
) |
|
Related party receivable, March 31, 2020 |
|
$ |
78,779 |
|
NOTE 10. DEFERRED INCOME
In previous years, the Company has sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such the Company has deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gain on these transactions have been deferred until the properties are sold to a non-related third party. As of March 31, 2020, we had deferred gain of $24.8 million.
NOTE 11. 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 properties, 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, 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.
19
Presented below is our reportable segments’ operating income for the three months ended March 31, 2020 and 2019, including segment assets and expenditures (dollars in thousands):
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
For the Three Months Ended March 31, 2020 |
|
Properties |
|
|
Apartments |
|
|
Land |
|
|
Other |
|
|
Total |
|
|||||
|
Rental and other property revenues |
|
$ |
7,884 |
|
|
$ |
4,032 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
11,918 |
|
|
Property operating expenses |
|
|
(4,109 |
) |
|
|
(1,930 |
) |
|
|
(99 |
) |
|
|
(172 |
) |
|
|
(6,310 |
) |
|
Depreciation |
|
|
(2,522 |
) |
|
|
(872 |
) |
|
|
|
|
|
|
|
|
|
|
(3,394 |
) |
|
Mortgage and loan interest |
|
|
(1,371 |
) |
|
|
(1,172 |
) |
|
|
(281 |
) |
|
|
(6,778 |
) |
|
|
(9,602 |
) |
|
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,754 |
|
|
|
5,754 |
|
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
4,138 |
|
|
|
— |
|
|
|
4,138 |
|
|
Segment operating (loss) income |
|
$ |
(118 |
) |
|
$ |
58 |
|
|
$ |
3,758 |
|
|
$ |
(1,194 |
) |
|
$ |
2,504 |
|
|
Capital expenditures |
|
$ |
709 |
|
|
$ |
7,033 |
|
|
$ |
2,000 |
|
|
$ |
— |
|
|
|
9,742 |
|
|
Real estate assets |
|
$ |
148,424 |
|
|
$ |
179,484 |
|
|
$ |
68,669 |
|
|
$ |
— |
|
|
|
396,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5,712 |
|
|
$ |
— |
|
|
$ |
5,712 |
|
|
Cost of sale |
|
|
— |
|
|
|
— |
|
|
|
(1,574 |
) |
|
|
— |
|
|
|
(1,574 |
) |
|
Gain on sale |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,138 |
|
|
$ |
— |
|
|
$ |
4,138 |
|
|
|
|
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
For the Three Months Ended March 31, 2019 |
|
Properties |
|
|
Apartments |
|
|
Land |
|
|
Other |
|
|
Total |
|
|||||
|
Rental and other property revenues |
|
$ |
8,227 |
|
|
$ |
3,700 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
11,929 |
|
|
Property operating expenses |
|
|
(3,936 |
) |
|
|
(2,058 |
) |
|
|
43 |
|
|
|
(46 |
) |
|
|
(5,997 |
) |
|
Depreciation |
|
|
(2,375 |
) |
|
|
(734 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,109 |
) |
|
Mortgage and loan interest |
|
|
(1,967 |
) |
|
|
(934 |
) |
|
|
(329 |
) |
|
|
(6,738 |
) |
|
|
(9,968 |
) |
|
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,153 |
|
|
|
6,153 |
|
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
2,216 |
|
|
|
— |
|
|
|
2,216 |
|
|
Segment operating (loss) income |
|
$ |
(51 |
) |
|
$ |
(26 |
) |
|
$ |
1,930 |
|
|
$ |
(629 |
) |
|
$ |
1,224 |
|
|
Capital expenditures |
|
|
3,690 |
|
|
|
— |
|
|
|
5,167 |
|
|
|
— |
|
|
|
8,857 |
|
|
Real estate assets |
|
|
154,791 |
|
|
|
150,841 |
|
|
|
80,845 |
|
|
|
— |
|
|
|
386,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
8,715 |
|
|
$ |
— |
|
|
$ |
8,715 |
|
|
Cost of sale |
|
|
— |
|
|
|
— |
|
|
|
(6,499 |
) |
|
|
— |
|
|
|
(6,499 |
) |
|
Gain on sale |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,216 |
|
|
$ |
— |
|
|
$ |
2,216 |
|
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, 2020 and 2019 (dollars in thousands):
|
|
For the Three Months Ended |
|
|||||
|
|
March 31, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Segment operating income |
$ |
2,504 |
|
|
$ |
1,224 |
|
|
Other non-segment items of income (expense) |
|
|
|
|
|
|
|
|
General and administrative |
|
(2,795 |
) |
|
|
(2,480 |
) |
|
Franchise taxes and other expenses |
|
(1,496 |
) |
|
|
(125 |
) |
|
Net income fee to related party |
|
(86 |
) |
|
|
(100 |
) |
|
Advisory fee to related party |
|
(2,287 |
) |
|
|
(1,853 |
) |
|
Other income |
|
1,212 |
|
|
|
3,667 |
|
|
Foreign Currency Transaction gain (loss) |
|
7,843 |
|
|
|
(5,818 |
) |
|
Loss from joint venture |
|
(376 |
) |
|
|
(1,055 |
) |
|
Earnings from unconsolidated investees |
|
116 |
|
|
|
58 |
|
|
Net income (loss) from continuing operations |
$ |
4,635 |
|
|
$ |
(6,482 |
) |
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, |
|
|||||
|
|
2020 |
|
|
2019 |
|
||
|
Segment assets |
$ |
396,577 |
|
|
$ |
386,477 |
|
|
Investments in unconsolidated investees |
|
62,131 |
|
|
|
75,634 |
|
|
Notes and interest receivable |
|
158,361 |
|
|
|
124,462 |
|
|
Other assets |
|
198,002 |
|
|
|
228,240 |
|
|
Total assets |
$ |
815,071 |
|
|
$ |
814,813 |
|
20
NOTE 12. COMMITMENTS, CONTINGENCIES, AND LIQUIDITY
Liquidity. Management believes that ARL will generate excess cash flow from property operations in 2020; such excess, however, will not be sufficient to discharge all of ARL’s obligations as they became 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. ARL is the limited partner in various partnerships related to the construction of residential properties. As permitted in the respective partnership agreements, ARL 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.
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, unless otherwise noted below.
Guarantees. The Company is the primary guarantor on a $24.3 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, 2020 UHF was in compliance with the covenants to the loan agreement.
ART and ART Midwest, Inc.
A formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been parties to a litigation with Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. “ART” and ART Midwest, Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74 million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties, but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.
The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. “EQK”, and ART. The Clapper Parties seek damages from ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI. In February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated the case. We continue to vigorously defend the case and management believes it has defenses to the claims. The case has not been set for trial.
In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was lifted. The trial court subsequently dismissed the case on procedural grounds, but ART filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The Application for Review was denied by the Texas Supreme Court and the denial was appealed by a Motion for Rehearing. The Court denied the Motion for Rehearing in May 2020.
In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued the note at zero.
21
Dynex Capital, Inc.
On July 20, 2015, the 68th 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 was $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 was $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 was $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 were paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.
TCI is working with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as pursue additional claims, if any, against Dynex Capital, Inc. Post judgment interest continues to accrue.
Berger Litigation
On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filed alleges that the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019 which are currently still pending. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. On February 26, 2020, the Court denied IOR’s demand futility motion. The remaining Defendants filed motions to dismiss the case in its entirety in June 2019. The motions were granted in part and denied in part in the first quarter of 2020. Discovery is expected to begin in May of 2020.
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NOTE 13. EARNINGS PER SHARE
Earnings Per Share (“EPS”) have been computed pursuant to the provisions of ASC Topic 260, “Earnings Per Share”. The computation of basic EPS is calculated by dividing net income available to common shareholders from continuing operations, adjusted for preferred dividends, 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.
As of March 31, 2020, the Company have 614 shares issued and 1,800,614 shares outstanding of Series A 10.0% cumulative convertible preferred stock. These shares may be converted into common stock at 90% of the average daily closing price of the common stock for the prior 20 trading days. These are considered in the computation of diluted earnings per share if the effect of applying the if-converted method is dilutive. Of the issued 1,800,614 shares of Series A 10.0% cumulative convertible preferred stock, 1,800,000 shares are held by ARL and its subsidiaries. Dividends are not paid on the shares owned by ARL.
NOTE 14. SUBSEQUENT EVENTS
During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – 19.
As a result of the impact of COVID-19 on global financial markets, we have experienced volatility in foreign currency exchange rates. Extreme market volatility and disruption caused by COVID-19 may impact Company’s ability to raise additional capital through debt financing activities, our ability to repay or refinance maturing liabilities, or impact the terms of any new obligations, which in turn may have an adverse impact on our credit ratings. As we have no near term debt maturities we believe there is currently no adverse impact on the Company financing activities and credit ratings. The extent to which COVID-19 will impact our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted at this time due to the rapid evolution of this uncertain situation.
The date to which events occurring after March 31, 2020, the date of the most recent balance sheet, have been evaluated for possible adjustment to the Consolidated Financial Statements or disclosure is May 15, 2020, which is the date on which the Consolidated Financial Statements were available to be issued.
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ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this Quarterly Report on Form 10-Q (the “Quarterly Report”) and in the Company’s Form 10-K for the year ended December 31, 2019 (the “Annual 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:
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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); |
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risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments; |
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demand for apartments and commercial properties in the Company’s markets and the effect on occupancy and rental rates; |
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the Company’s ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties; |
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risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales; |
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failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; |
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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); |
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risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets; |
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costs of compliance with the Americans with Disabilities Act and other similar laws and regulations; |
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potential liability for uninsured losses and environmental contamination; |
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risks associated with our dependence on key personnel whose continued service is not guaranteed; and |
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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.
As further set forth under the caption “Risk Factors” in Par I, Item 1A of the Form 10-K, the recent coronavirus (“COVID-19”) pandemic as well as the response to mitigate its spread and effect, may adversely impact our Company and our tenants. We have taken a variety of actions to ensure the continued operations of our properties, while ensuring the safety and security of our employee, tenants and vendors. These measures include providing support for our tenants remotely, restricted commercial building use to essential personnel only, requiring work-from-home arrangements and other modifications to our business practices. We will continue to actively monitor the situation and make further actions as may be required by governmental authorities or that we determine are in the best interest of our employees, tenants and business partners.
As a result of the impact of COVID-19 on global financial markets, we have experienced volatility in foreign currency exchange rates. Extreme market volatility and disruption caused by COVID-19 may impact Company’s ability to raise additional capital through debt financing activities, our ability to repay or refinance maturing liabilities, or impact the terms of any new obligations, which in turn may have an adverse impact on our credit ratings. As we have no near term debt maturities we believe there is currently no adverse impact on the Company financing activities and credit ratings.
Additionally, the impact of COVID-19 on our operational results in subsequent periods will largely depend on future developments, which are highly uncertain and cannot be accurately predicted at this time. These developments may include, but are not limited to, new information concerning the severity of COVID-19, the degree of success of actions taken to contain or treat COVID-19 and the reactions by consumers, companies, governmental entities and financial institutions to such actions.
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.
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During the three months ended March 31, 2020, we sold 18.7 acres of land in Farmers Branch, Texas and Forney, Texas to third parties for an aggregate sales price of $5.7 million and recognized a gain on the sale of $4.1 million. Also, acquired 100% of the membership interest in EQK Portage, LLC, which owns approximately 49.2 acres of land in Kent, OH. We purchased the land for development at a total purchase price of $5.4 million, consisting of $2.0 million in cash and a 3.4 million note payable. The note has an interest rate of 10% and a maturity date of November 13, 2024.
In addition, we purchased notes receivables from related parties for an aggregate purchase price of $7.4 million. No gain or loss was recognized from the purchase of the notes receivables (refer to Note 5).
As of March 31, 2020, we owned 1,657 units in ten residential apartment communities, and seven commercial properties comprising of approximately 1.7 million rentable square feet. In addition, we own approximately 1,982acres of land held for development. The Company currently owns income-producing properties and land in eight states.
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 ARL, and for setting the policies which guide it, the day-to-day operations of ARL 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 ARL’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and IOR.
Regis Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services. ARL engages third-party companies to lease and manage its apartment properties.
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.
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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 are included in consolidated net income. Our investment in VAA and Gruppa Florentina, LLC are 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” 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.
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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.
The Company owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartments to tenants. As of March 31, 2020, our apartment leases generally have initial terms of 12 months or less and the rental revenue is recognized on an accrual basis when due from tenants in accordance with ASC 842, Leases. These leases are generally renewable at the end of the lease term subject to potential increases in rental rates. Collection of the rental payments is determined to be probable at lease commencement, so the payments are generally due and collected on a monthly basis and recognized monthly as earned, which is not materially different than on a straight-line basis, as lease terms are normally for periods of one year or less. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of lease revenue on a monthly basis consistent with rental payment revenue recognition. Lease revenue also includes all pass-through revenue from leases and common area maintenance reimbursements. These services represent non-lease components in a contract as the Company transfers a service to the lessee other than the right to use the underlying asset. The Company has elected the practical expedient under the leasing standard to not separate lease and non-lease components as the timing and pattern of revenue recognition for the non-lease component and related lease component are the same and the combined single lease component would be classified as an operating lease.
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.
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Allowance for Estimated Losses
We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 3 “Notes and Interest Receivable” for details on our notes receivable.
Fair Value of Financial Instruments
We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures”, to the valuation of real estate assets. 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:
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Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets. |
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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. |
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Unobservable inputs that are significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related Parties
We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
Results of Operations
The following discussion and analysis is based on our Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, as included in Part I, Item 1. “Financial Statements” of this report. At March 31, 2020 and 2019, we owned or had interests in a portfolio of ten and nine income-producing properties, respectively.
Comparison of the three months ended March 31, 2020 to the same period ended 2019:
For the three months ended March 31, 2020, we reported net income applicable to common shares of 2.9 million or $0.18 per diluted earnings per share, as compared to a net loss applicable to common shares of $6.1 million or $0.38 per diluted earnings per share for the same period ended 2019.
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Revenues
Rental and other property revenues were $11.9 million for the three months ended March 31, 2020, and 2019. For the quarter ended March 31, 2020, the Company generated revenues of $7.9 million and $4.0 million from its commercial and residential segments, respectively.
Expenses
Property operating expenses increased by $0.3 million to $6.3 million for the three months ended March 31, 2020 as compared to $6.0 million for the same period in 2019. The increase in property operating expenses is due to an increase in real estate taxes of approximately $0.5 million offset by an overall decrease in general property operating and maintenance expenses of $0.2 million.
Depreciation and amortization increased by $0.3 million to $3.4 million during the three months ended March 31, 2020 as compared to $3.1 million for the three months ended March 31, 2019. The increase in depreciation is due to an increase in our ownership of residential apartments to ten from nine for the same period a year ago which resulted in an increase in depreciation of $0.9 million from $0.7 million a year ago.
General and administrative expense was $2.8 million for the three months ended March 31, 2020, compared to $2.5 million for the same period in 2019. The increase of $0.3 million in general and administrative expenses was primarily due to increases professional fees of $0.1 million and legal fees of $0.3 million.
Franchise taxes and other expenses was $1.5 million for the three months ended March 31, 2020, compared to $0.125 million for the same period in 2019. The increase of $1.4 million in franchise taxes and other expenses was primarily due to increases in franchise taxes of $1.0 million.
Other income (expense)
Interest income was $5.8 million for the three months ended March 31, 2020, compared to $6.2 million for the same period in 2019. The decrease of $0.4 million was due to decrease in interest of $0.4 on receivables from related parties.
Other income decreased by $2.5 million to $1.2 million for the three months ended March 31, 2020, compared to $3.7 million for the same period in 2019. For the quarter just ended March 31, 2020, the Company received property tax refunds of approximately $0.2 million, and recorded miscellaneous income of approximately $1.0 million. For the same period a year ago, the Company recognized $3.6 million gain associated with the sale of land held by IOR to third parties.
Mortgage and loan interest expense was $9.6 million for the three months ended March 31, 2020, compared to $9.9 million for the same period in 2019.
Foreign currency transaction was a gain of $7.8 million for the three months ended March 31, 2020 as compared to a loss of $5.8 million for the same period in 2019. The unrealized gain was the result of the strengthening of the U.S. Dollar against the Israel Shekels due to perceived liquidity issues in Israel most likely as a result of the global pandemic outbreak. During the first quarter just ended, we paid $11.6 million in Series A bond principal and $7.3 million in interests payments to our Series A, B, and C bonds denominated in Israel Shekels.
Loss from unconsolidated investments was a net $0.26 million for the three months ended March 31, 2020 as compared to a net loss of $1.0 million for the three months ended March 31, 2019. The loss from unconsolidated investments during the first quarter just ended was driven primarily from our share in the losses reported by the VAA Joint Venture of $0.376 million.
Gain on land sales was $4.1 for the three months ended March 31, 2020, compared to $2.2 million for the same period in 2019. In the current period we sold approximately 18.7 acres of land for a sales price of $5.7 million which resulted in a gain of $4.1 million. For the same period in 2019, we sold approximately 22.3 acres of land for a sales price of $8.7 million which resulted in a gain of $2.2 million.
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Liquidity and Capital Resources
Our principal liquidity needs are:
| ● | fund normal recurring expenses; | |
| ● | meet debt service and principal repayment obligations including balloon payments on maturing debt; | |
| ● | fund capital expenditures, including tenant improvements and leasing costs; | |
| ● | fund development costs not covered under construction loans; and | |
| ● | fund possible property acquisitions. |
Our principal sources of cash have been and will continue to be:
| ● | property operations; | |
| ● | proceeds from land and income-producing property sales; | |
| ● | collection of mortgage notes receivable; | |
| ● | collection of receivables from related party companies; | |
| ● | refinancing of existing debt; and | |
| ● | additional borrowing, including mortgage notes, mezzanine financing and lines of credit. |
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.
Cash Flow Summary
The following summary discussion of our cash flows is based on the 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):
| For the Three Months
Ended March 31, |
||||||||||||
| 2020 | 2019 | Incr /(Decr) | ||||||||||
| Net cash (used in) operating activities | $ | (11,602 | ) | $ | (16,449 | ) | $ | 4,847 | ||||
| Net cash provided by (used in) investing activities | $ | 5,434 | $ | (5,431 | ) | $ | 10,865 | |||||
| Net cash (used in) financing activities | $ | (9,039 | ) | $ | (3,608 | ) | $ | (5,431 | ) | |||
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.
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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, 2020, we advanced $0.768 million toward various notes receivable, purchased land for development for $2.0 million, and invested approximately $7.7 million for the development of new properties and improvement of income producing properties. For the three months ended March 31, 2019, we advanced $0.385 million toward various notes receivable, purchased land for development for $2.5 million, and invested approximately $11.5 million for the development of new properties and improvement of income producing properties.
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, 2020, we received aggregate sales proceeds of $5.6 million from the sale of 18.7 acres of land and recorded a gain of $4.1 million. In addition, collected $5.0 million on note receivables and received $5.6 million on distributions from one of our equity investees. For the three months ended March 31, 2019, we received aggregate sales proceeds of $8.7 million from the sale of 22.3 acres of land and recorded a gain of $2.2 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.
During the three months ended March 31, 2020, the decrease in cash flow from financing activities is primarily due to a payment on bond principal of $11.6 million, and payments on our outstanding notes of $2.6 million, offset by proceeds from borrowings of approximately $5.1 million. During the three months ended March 31, 2019, the decrease in cash flow from financing activities is primarily due to a payment on bond principal of $10.4 million, and payments on our outstanding notes of $1.2 million, offset by proceeds from borrowings of approximately $8.0 million.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, we may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.
Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on our business, assets or results of operations.
Inflation
The effects of inflation on our operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in real estate costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings as well as the cost of variable interest rate debt will be affected.
Tax Matters
ARL 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 ARL, Income Opportunities Realty Investors, Inc. (“IOR”), and Transcontinental Realty Investors, Inc. (“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.
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For the quarter ended March 31, 2020, ARL had income before income taxes of $4.6 million driven mostly by the unrealized gain in foreign currency of $7.8 million which for federal income tax purposes is not taxable and therefore produces a loss before income taxes, and as such, the Company did not recognize a tax expense.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
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.
As of March 31, 2020, our outstanding notes payable balance was $267.3 million, out of which $263.6 million were notes with fixed interest rates and $3.7 million represented a note with a variable interest rate of 9.75%. If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, would increase by $0.01 million, and would result in a decrease of $0.001 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 approximately 5.1% at March 31, 2020.
| ITEM 4. | CONTROLS AND PROCEDURES |
Based on an evaluation by our management (with the participation of our Principal Executive Officer and Principal Financial Officer), as of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.
There has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On September 1, 2000, the Board of Directors approved a share repurchase program authorizing the repurchase of up to a total of 1,000,000 shares of ARL common stock. This repurchase program has no termination date. In August 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 1,250,000 shares. There were no shares purchased under this program during the first quarter of 2020. As of March 31, 2020, 986,750 shares have been purchased and 263,250 shares may be purchased under the program.
The following exhibits are filed herewith or incorporated by reference as indicated below:
|
Exhibit
Number |
Description of Exhibit | |
| 3.0 | Certificate of Restatement of Articles of Incorporation of American Realty Investors, Inc. dated August 3, 2000 (incorporated by reference to Exhibit 3.0 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). | |
| 3.1 | Certificate of Correction of Restated Articles of Incorporation of American Realty Investors, Inc. dated August 29, 2000 (incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q dated September 30, 2000). | |
| 3.2 | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc. decreasing the number of authorized shares of and eliminating Series B Cumulative Convertible Preferred Stock dated August 23, 2003 (incorporated by reference to Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). | |
| 3.3 | Articles of Amendment to the Restated Articles of Incorporation of American Realty Investors, Inc., decreasing the number of authorized shares of and eliminating Series I Cumulative Preferred Stock dated October 1, 2003 (incorporated by reference to Exhibit 3.4 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). | |
| 3.4 | Bylaws of American Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form S-4 filed December 30, 1999). | |
| 4.1 | Certificate of Designations, Preferences and Relative Participating or Optional or Other Special Rights, and Qualifications, Limitations or Restrictions Thereof of Series F Redeemable Preferred Stock of American Realty Investors, Inc., dated June 11, 2001 (incorporated by reference to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001). | |
| 4.2 | Certificate of Withdrawal of Preferred Stock, Decreasing the Number of Authorized Shares of and Eliminating Series F Redeemable Preferred Stock, dated June 18, 2002 (incorporated by reference to Exhibit 3.0 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). | |
| 4.3 | Certificate of Designation, Preferences and Rights of the Series I Cumulative Preferred Stock of American Realty Investors, Inc., dated February 3, 2003 (incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002). | |
| 4.4 | Certificate of Designation for Nevada Profit Corporations designating the Series J 8% Cumulative Convertible Preferred Stock as filed with the Secretary of State of Nevada on March 16, 2006 (incorporated by reference to Registrant’s current report on Form 8-K for event of March 16, 2006). |
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| 4.5 | Certificate of Designation for Nevada Profit Corporation designating the Series K Convertible Preferred Stock as filed with the Secretary of State of Nevada on May 6, 2013 (incorporated by reference to Registrant’s current report on form 8-K for event of May 7, 2013). | |
| 10.1 | Advisory Agreement between American Realty Investors, Inc. and Pillar Income Asset Management, Inc., dated April 30, 2011 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated May 2, 2011). | |
| 10.2 | Second Amendment to Modification of Stipulation of Settlement dated October 17, 2001 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4, dated February 24, 2002). | |
| 31.1* | Certification by 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 |
| * | Filed herewith. |
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AMERICAN REALTY INVESTORS, INC. | ||
| Date: May 15, 2020 | By: | /s/ Daniel J. Moos |
| Daniel J. Moos | ||
|
President and Chief Executive Officer (Principal Executive Officer) |
||
| Date: May 15, 2020 | By: | /s/ Alla Dzyuba |
| Alla Dzyuba | ||
|
Vice President and Chief Accounting Officer (Principal Financial Officer) |
||
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American Realty Investors, Inc. - 10-Q
Exhibit 31.1
CERTIFICATION
I, Daniel J. Moos, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of American Realty Investors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; |
| 4. | The registrant’s other certifying officers(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| (d) | Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 15, 2020 | By: | /s/ Daniel J. Moos |
| Daniel J. Moos | ||
President and Chief Executive Officer (Principal Executive Officer) |
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American Realty Investors, Inc. - 10-Q
Exhibit 31.2
CERTIFICATION
I, Alla Dzyuba, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of American Realty Investors, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; |
| 4. | The registrant’s other certifying officers(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
| (d) | Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officers(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 15, 2020 | By: | /s/ Alla Dzyuba |
| Alla Dzyuba | ||
Vice President and Chief Accounting Officer (Principal Financial Officer) |
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American Realty Investors, Inc. - 10-Q
Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
Of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of American Realty Investors, Inc., a Nevada corporation (the “Company”) hereby certifies that:
| (i) | The Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
| (ii) | The information contained in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020 fairly presents in all material respects, the financial condition and results of operations of the Company, at and for the period indicated. |
| AMERICAN REALTY INVESTORS, INC. | ||
| Date: May 15, 2020 | By: | /s/ Daniel J. Moos |
| Daniel J. Moos | ||
President and Chief Executive Officer (Principal Executive Officer) | ||
| Date: May 15, 2020 | By: | /s/ Alla Dzyuba |
| Alla Dzyuba | ||
Vice President and Chief Accounting Officer (Principal Financial Officer) |
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