American Realty Investors, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
ARL is an externally managed real estate company focused on multifamily and commercial properties, land development, and mortgage notes. It owns approximately 78.4% of Transcontinental Realty Investors, Inc. (TCI), through which substantially all operations are conducted, and consolidates TCI’s results. At year-end, the reported portfolio included 10 directly owned multifamily properties with 1,636 units, 51 properties in the Victory Abode Apartments (VAA) joint venture with 9,888 units, six commercial properties totaling approximately 1.58 million square feet, and about 1,961 acres of land. The company has no employees; Pillar Income Asset Management manages its business.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $59.0 million | $59.0 million |
| Net income (loss) | $11.3 million | ($21.7 million) |
| Net income (loss) attributable to ARL | $9.0 million | ($16.0 million) |
| Basic and diluted EPS | $0.56 | ($1.00) |
| Net cash from (used in) operating activities | $3.5 million | ($40.6 million) |
| Net cash from (used in) investing activities | $4.2 million | ($3.7 million) |
| Net cash used in (provided by) financing activities | ($4.0 million) | $21.0 million |
| Cash and cash equivalents | $36.8 million | $51.2 million |
| Restricted cash | $50.2 million | $32.1 million |
| Total assets | $865.8 million | $830.6 million |
| Total liabilities | $535.4 million | $534.1 million |
| Debt: mortgages and notes plus bonds | $480.6 million | $473.1 million |
Segment operating profit increased to $27.5 million from $20.5 million. Multifamily segment revenue was $14.7 million and profit was $6.2 million; commercial segment revenue was $37.2 million and profit was $21.3 million. The filing reports no company-wide operating margin measure. FFO was $15.4 million, compared with negative $2.3 million in 2019; adjusted FFO was $28.7 million versus $18.1 million. FFO is a supplemental, non-GAAP measure and is not cash flow from operations.
Management said year-end cash and expected 2021 collections on notes and interest receivable were expected to meet cash requirements, while also stating it might need asset sales, refinancing, and additional real-estate-secured borrowing. The auditor’s report includes an emphasis of liquidity, referencing management’s planned asset sales and financing actions.
Material changes versus 2019
- Net income improved by $33.0 million, from a loss to profit. The result included a $36.9 million gain on sale or write-down of assets, up from $15.2 million in 2019, and a $13.4 million foreign-currency transaction loss.
- 2020 asset-sale gains included $25.2 million from land, $3.7 million from multifamily properties, and $4.6 million from the sale of Bridge View Plaza. Land sales included parcels at Windmill Farms and Mercer Crossing.
- Commercial segment profit benefited from a $6.0 million Browning Place lease-termination payment; same-property rental revenue was affected by lower occupancy. Multifamily results benefited from lease-up activity, partly offset by disposed properties.
- Operating cash flow improved substantially, but management attributed much of the comparison to a large related-party receivable cash-flow movement in 2019. Investing cash flow also benefited from lower development spending and higher asset-sale proceeds.
- Debt increased as bonds payable rose to $237.9 million, partly reflecting a November 2020 issuance of $19.7 million in Series A bonds that generated $18.8 million net proceeds. Mortgage and other notes payable were $242.7 million.
Outlook, risks and unusual items
- COVID-19: The filing describes uncertainty around rent collection, tenant finances, occupancy and demand, property values, construction schedules, financing access, and the effects of eviction restrictions. Management provides no quantified earnings or revenue guidance.
- Debt and refinancing: Management anticipated refinancing or extending obligations and identified land loans requiring modification or extension. Bonds had scheduled principal maturities of $44.8 million in each of 2021 and 2022 and $130.3 million in 2023. Mortgage and note principal payments were scheduled at $14.1 million in 2021, $14.4 million in 2022, and $37.7 million in 2023. Subsequent extensions included the HSW Partners loan to June 2021, the Athens loan to August 2022, and a Windmill Farms loan to February 2023 at a reduced 5% rate.
- Notes receivable and related parties: Notes receivable totaled $130.6 million, including $69.5 million from related parties on the balance sheet. Interest income included $19.5 million from related parties. The auditor identified collectability of notes receivable as a critical audit matter. ARL also reported $129.3 million due from related parties.
- Litigation and contingencies: A Clapper-related case involving enforcement of a prior judgment against an affiliate was set for trial in May 2021; the filing describes the judgment at approximately $59–$60 million in different sections. ARL’s separate Dynex award is described as $49.0 million in one section and $24.8 million in another; the receivable is fully reserved due to collection uncertainty. A shareholder lawsuit alleges improper property transfers involving IOR. A $10.0 million VAA earn-out liability is subject to arbitration because the parties could not agree on remeasurement.
- Capital allocation: No common dividends were declared for 2018–2020. Series A preferred stock carries a 10% cumulative dividend and a $10-per-share liquidation preference. The board determines any future common distributions.
- Governance and controls: The May Trust and affiliates beneficially owned approximately 90.8% of common stock. Pillar and other service providers are affiliates, creating related-party and potential conflict-of-interest considerations. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
- Audit and valuation: The financial statements received an unqualified audit opinion. Critical audit matters included real estate impairment, notes-receivable collectability, and straight-line commercial rental revenue.
Important facts for investors to verify
- Reconcile the Clapper judgment and Dynex award amounts across the filing, and assess potential litigation exposure and collection prospects.
- Review near-term debt maturities, covenant requirements, and the status and terms of extensions or refinancing, especially the 2021–2023 obligations.
- Evaluate the credit quality, collateral, payment status, and concentration of notes and receivables from related parties, including UHF.
- Track the VAA earn-out arbitration and the recorded $10.0 million liability, as well as VAA’s operating performance and debt.
- Assess commercial lease expirations and occupancy, and the occupancy and lease-up of recently completed multifamily properties.
- Consider the company’s dependence on asset dispositions and new borrowing to meet liquidity needs, alongside the amount of cash that is restricted.