American Realty Investors, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020; balance-sheet comparisons are with December 31, 2020. The company owns and develops multifamily and commercial real estate, with most operations conducted through its approximately 78.4%-owned subsidiary TCI. Its portfolio also includes a 50%-owned multifamily joint venture, VAA. More than 90% of the company’s stock is owned by related-party entities.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 or prior balance-sheet date |
|---|---|---|
| Total revenue | $11.8 million | $13.1 million |
| Net operating loss | $3.0 million | $3.2 million |
| Net income attributable to the company | $18.1 million | $2.9 million |
| Basic and diluted EPS | $1.12 | $0.18 |
| Net cash used in operating activities | $1.4 million | $11.6 million |
| Cash and cash equivalents | $53.9 million | $36.8 million at Dec. 31, 2020 |
| Restricted cash | $21.2 million | $50.2 million at Dec. 31, 2020 |
| Mortgages and notes payable plus bonds, carrying value | $432.8 million | $480.6 million at Dec. 31, 2020 |
| Total assets / total liabilities | $823.1 million / $469.5 million | $865.8 million / $535.4 million at Dec. 31, 2020 |
Rental revenue declined 9.4% to $10.4 million. Operating expenses were $14.8 million, and the net operating loss was about 25% of revenue. Segment profit was $1.7 million for multifamily and $2.8 million for commercial. The filing reports adjusted FFO, excluding foreign-currency gains, of $0.5 million versus a $1.1 million loss in Q1 2020.
Material changes and notable items
- Net income rose to $23.2 million before noncontrolling interests, primarily reflecting $17.4 million in net gains on sales or write-downs of assets and $3.3 million of equity income from unconsolidated joint ventures. The asset gains included $10.0 million of previously deferred gains recognized after UHF sold properties to an unrelated buyer, plus land and multifamily property transactions.
- Foreign-currency transaction gains were $7.6 million, compared with $7.8 million in Q1 2020. These gains relate to bonds denominated in New Israeli Shekels and are not equivalent to operating cash generation.
- Commercial segment revenue fell to $6.5 million from $7.9 million. Management cited lower occupancy at Browning Place after a tenant occupying approximately 25% of the building left at year-end 2020; a replacement tenant was expected to take possession in Q2 2021.
- Cash from investing activities was $14.6 million, including $14.4 million of asset-sale proceeds and $7.4 million of distributions from joint ventures. Financing activities used $25.2 million, including $25.1 million of debt repayments. Cash, cash equivalents and restricted cash together declined $12.0 million during the quarter.
- Debt fell during the quarter, including bond repayments. Several loans were extended, including the Athens loan to August 2022 and the Windmill Farms loan to February 2023 at a reduced 5% rate. The company said it was in compliance with loan covenants at March 31, 2021.
Outlook, risks and contingencies
No quantified earnings or operating guidance was provided. Management expects cash on hand and cash generated during the remainder of 2021 from notes and interest receivable to be sufficient for cash requirements, and plans to use asset sales, refinancing, extensions and additional real-estate-secured borrowing as needed. The filing also cautions that excess cash from property operations may not be sufficient to discharge all obligations as due.
- COVID-19 had not caused significant disruptions in Q1, but management said its future effects on operations, financial condition and cash flows remained uncertain, particularly given pressure on commercial real estate markets.
- A 2016 court ruling in litigation with David Clapper and related entities awarded approximately $59 million to the plaintiffs. The appellate court remanded the case for trial, which began in May 2021; the filing does not state a clear expected outcome or quantified accrued exposure.
- The company is in arbitration with its VAA joint-venture partner over an earn-out valuation for contributed properties. It recorded a $10 million liability it believes will settle the obligation.
- The company has a fully reserved $24.8 million judgment against Dynex and is pursuing collection. It also intends to defend a separate lawsuit alleging improper property sales or transfers involving IOR.
- Related-party exposure is significant: notes receivable included $75.1 million from related parties, and receivables from related parties totaled $126.8 million. The filing warns related-party transactions may not be on arm’s-length terms.
Important facts for investors to verify
- Whether replacement leasing at Browning Place proceeds as expected and how occupancy affects commercial revenue.
- Near-term debt maturities, refinancing or extension progress, and the company’s ability to meet obligations given negative operating cash flow.
- Collection timing and credit quality of notes and receivables, especially related-party balances and amounts associated with UHF.
- Outcomes and potential financial effects of the Clapper litigation, VAA earn-out arbitration, and other legal proceedings.
- How recurring property operations perform excluding asset-sale gains, deferred-gain recognition and foreign-currency gains.