American Realty Investors, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unless noted otherwise, amounts are in millions of dollars. The company invests in multifamily and commercial real estate and land, and conducts substantially all operations through its approximately 78.4%-owned subsidiary, Transcontinental Realty Investors, Inc. It is externally managed by Pillar, a related party.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $12.2 | $8.1 | $23.9 | $15.9 |
| Net operating loss | $(3.9) | $(3.0) | $(6.9) | $(7.5) |
| Net income | $0.3 | $20.0 | $4.5 | $34.6 |
| Net income attributable to common shares | $0.1 | $16.3 | $3.1 | $27.6 |
| EPS, basic and diluted | $0.01 | $1.01 | $0.19 | $1.71 |
| Net cash used in operating activities | — | $(8.5) | $(9.0) |
Q2 rental revenue was $11.4 million, up from $7.3 million. Multifamily segment profit increased to $3.2 million from $1.2 million; commercial segment profit declined to $1.2 million from $2.2 million. Total segment profit was $4.4 million versus $3.4 million. The filing does not present a consolidated operating-margin measure.
For the six months, operating cash use was $8.5 million; investing cash use was $8.8 million, versus $33.8 million provided in 2022; and financing cash use was $135.3 million, versus $39.8 million. Cash, cash equivalents and restricted cash ended at $69.8 million, down from $222.3 million at year-end 2022. The company also held $137.0 million of short-term investments and $145.9 million of notes receivable, including $76.9 million from related parties.
Balance sheet, debt and liquidity
- At June 30, total assets were $1,060.7 million, total liabilities $244.1 million and total equity $816.7 million.
- Mortgages and other notes payable were $184.4 million, down from $188.0 million at year-end; bonds payable declined from $129.2 million to zero. The company repaid Series C bonds in January and Series A and B bonds in May, recording a $1.7 million early-extinguishment loss. Six-month debt payments totaled $134.8 million.
- The company entered a $33.0 million Lake Wales construction loan at SOFR plus 3%, maturing in 2026 with two one-year extension options. It reported noncompliance with the minimum debt-service coverage ratio on the 770 South Post Oak loan; surplus property cash must be held in a lender-controlled account until compliance is achieved for two consecutive quarters.
- Management said cash and expected collections of notes and interest receivables should cover cash requirements, while also noting that excess property cash over the next 12 months might not be sufficient for all obligations. It expects to use property or land sales, refinancing and additional real-estate-secured borrowing to meet liquidity needs.
Changes, outlook and key risks
- Revenue growth primarily reflects the seven-property VAA multifamily portfolio acquired in November 2022 and the restoration and lease-up of Landing Bayou. Commercial results weakened with lower Stanford Center occupancy and higher insurance costs.
- Lower 2023 net income largely reflects comparison with unusually large 2022 items: foreign-currency gains, property-sale gains and joint-venture income. Q2 2023 foreign-currency gain was $0.02 million versus $14.1 million; six-month gain was $1.0 million versus $17.9 million. Six-month asset-sale/write-down gains were $0.2 million versus $15.0 million.
- The Lake Wales 240-unit project is expected to be completed in 2025 at an estimated total cost of $55.3 million; $10.8 million had been incurred by June 30. The agreement includes a $1.6 million fee payable to related-party manager Pillar. Windmill Farms development spending in 2023 was $2.6 million.
- Management provided no specific financial guidance. It cited risks including real-estate demand and occupancy, financing availability and interest rates, property sales timing, construction delays and cost overruns, insurance costs, and reliance on related-party management. More than 90% of the company’s stock is owned by related-party entities; related-party interest income and receivables are significant.
- A long-running Clapper litigation matter is under review by the U.S. Fifth Circuit after a jury found the defendants owed nothing and the court entered a take-nothing judgment. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Progress on the South Post Oak debt-service covenant and the status of near-term maturities, including Athens (August 2023), New Concept Energy (September 2023) and Windmill Farms (February 2024).
- Whether management can meet obligations through operating cash, receivable collections, asset sales, refinancing or new borrowing, given operating cash outflows and the stated liquidity caveat.
- Stanford Center occupancy, insurance-cost trends and performance of recently acquired and redeveloped multifamily properties.
- Collection, maturity extensions or conversion options for notes receivable, especially related-party balances and notes with past-due stated maturities.
- Lake Wales construction costs, funding and schedule, and the terms and oversight of related-party fees and transactions.