American Realty Investors, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unaudited consolidated financial statements; dollar amounts below are USD millions unless stated otherwise. ARL is an externally advised real estate company with apartments, commercial properties, development land, and mortgage-note investments.
Financial and operating highlights
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Rental and other property revenue | $11.9 | $33.4 | $35.7 | $96.1 |
| Net operating income (loss), as reported | $(1.9) | $5.2 | $(8.0) | $13.7 |
| Net income (loss) | $(9.5) | $22.6 | $(19.8) | $28.5 |
| Net income (loss) applicable to common shares | $(7.6) | $20.1 | $(16.5) | $24.9 |
| Basic and diluted EPS applicable to common shares | $(0.47) | $1.30 basic; $1.21 diluted | $(1.03) | $1.60 basic; $1.50 diluted |
| Operating cash flow | Not separately provided | Not separately provided | $(8.8) | $(11.2) |
- Balance sheet at September 30: Total assets were $832.4 million, compared with $826.1 million at December 31, 2018. Total equity was $298.5 million, down from $321.1 million.
- Cash and liquidity: Cash and cash equivalents were $63.1 million; restricted cash was $36.9 million. Combined cash and restricted cash was $99.9 million. Management says expected 2019 excess property cash flow will not be sufficient to meet all obligations as due.
- Debt: Notes payable were $257.2 million gross ($250.7 million including accrued interest and net of deferred borrowing costs); bonds were $231.4 million gross ($223.4 million including accrued interest and net of issuance costs). The balance sheet reports $474.2 million combined in notes and bonds payable, including interest and net costs. Nine-month cash interest paid was $33.5 million.
- Portfolio: ARL reported nine directly owned apartment communities with 1,512 units, seven commercial properties totaling about 1.7 million square feet, and approximately 2,310 acres of land. Its 50%-owned VAA joint venture held 51 communities with 9,643 units.
Material changes versus the prior comparable period
- Revenue fell $21.5 million in Q3 and $60.4 million year to date, primarily because 49 apartment properties were contributed to VAA in late 2018 and are no longer consolidated. Related property expenses, depreciation, and mortgage interest also declined; the revenue decrease should not be read as an equivalent decline in the continuing portfolio.
- Results shifted from profit to loss. Year-to-date foreign-currency transaction results moved from a $6.4 million gain in 2018 to a $13.3 million loss in 2019, principally from NIS-denominated bonds and exchange-rate movements.
- ARL recognized a $5.2 million debt-extinguishment loss after paying off $41.5 million of commercial-property mortgage debt, including a $3.9 million prepayment penalty and $1.4 million write-off of borrowing costs.
- Land-sale gains were $9.9 million year to date versus $13.6 million in 2018. Q3 gains were $5.1 million versus $12.2 million.
- Investing cash outflow improved to $16.8 million from $71.9 million, while financing cash inflow fell to $18.9 million from $91.0 million. The company issued approximately $78.1 million of Series C bonds and used proceeds in part to repay the $41.5 million mortgage.
- Related-party interest income increased: $18.3 million of the $19.5 million nine-month interest income was from related parties. Notes and interest receivable totaled $158.2 million net of a $14.3 million allowance; $120.3 million was due from related parties. A further $71.1 million was reported as receivable from related parties.
Outlook, risks, contingencies, and unusual items
- Liquidity plans: Management intends to sell land and income-producing real estate, refinance or extend debt, and obtain additional property-secured borrowing. No quantified earnings or revenue guidance is provided.
- Foreign exchange exposure: The Series C bonds bear 4.65% interest, are denominated in NIS, and mature in 2023. Southern entered a six-month NIS/USD hedge with a face value of NIS 664 million (approximately $221 million); its cost and September 30 fair value were described as immaterial.
- Related-party and governance risk: More than 80% of ARL stock is owned by related-party entities. Pillar manages day-to-day operations and also advises affiliated companies. The filing cautions that related-party transactions may not be on arm’s-length terms.
- Guarantee: ARL is the primary guarantor of a $39.1 million UHF mezzanine loan; UHF was reported in compliance with loan covenants at September 30.
- Litigation: The filing describes several matters, including a shareholder suit alleging fiduciary-duty and related claims involving ARL, TCI, IOR, Pillar, and others; motions to dismiss were pending. Management intends to defend the case. It also discusses historical ART/ART Midwest litigation and a Dynex judgment involving other entities; the filing says ARL and its subsidiaries are not parties or obligated for the outcome of the ART judgment.
- Other items: Deferred gains on certain prior related-party property sales totaled $28.8 million. A $2.7 million promissory-note default led the company to distribute the relevant limited-partner interest. Management reported no material environmental liability known to it, and no change in internal controls materially affecting financial reporting.
- Principal risks include financing availability and maturities, property leasing and demand, development delays or cost overruns, property-sale timing, interest and currency movements, environmental exposure, and reliance on key personnel. Management stated there had been no change in previously disclosed risk factors.
Investor verification priorities
- Assess near-term debt maturities, refinancing capacity, and whether asset sales or new borrowing can cover obligations, given management’s stated liquidity shortfall.
- Reconcile the reported debt balances, bond maturities, collateral, and the effect of NIS/USD movements and the hedge.
- Review the economics, governance, debt, and future funding obligations of VAA, and how its results flow through equity-method accounting rather than consolidated rental revenue.
- Evaluate collectability and concentration of related-party notes and receivables, including UHF/FBH exposures, the allowance, and the $39.1 million guarantee.
- Confirm the status and potential financial exposure of pending litigation and the consequences of the reported note default and deferred property-sale gains.