American Realty Investors, Inc. — 2023 Form 10-K
Reporting period: Year ended December 31, 2023. ARL is an externally managed real estate company operating primarily through its 78.4%-owned subsidiary Transcontinental Realty Investors (TCI). Its portfolio included 14 multifamily properties with 2,328 units, four office buildings totaling approximately 1.06 million square feet, and about 1,843 acres of land.
Financial highlights
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $50.5 million | $37.5 million |
| Net income | $5.3 million | $475.3 million |
| Net income attributable to ARL | $4.0 million; $0.25 per share | $373.3 million; $23.11 per share |
| Net cash used in operating activities | $31.1 million | $45.4 million |
| Net cash provided by investing activities | $26.8 million | $307.4 million |
| Net cash used in financing activities | $139.0 million | $112.4 million |
| Total assets | $1,023.5 million | $1,197.5 million |
| Total debt | $182.7 million; no bonds outstanding | $317.2 million, including bonds |
Multifamily segment profit was $14.9 million on $32.6 million revenue (about 45.6%); commercial segment profit was $4.3 million on $14.4 million revenue (about 29.6%). ARL reported FFO of $20.0 million and adjusted FFO of $20.7 million. The company cautions that FFO is a supplemental, non-GAAP measure and is not cash flow available for all needs.
At year-end, cash and cash equivalents were $36.7 million, restricted cash $42.3 million, and short-term investments $90.4 million. Notes receivable totaled $144.1 million, while receivables from related parties were $96.5 million. Shareholders’ equity was $617.0 million. No common dividends were declared in 2023, 2022, or 2021.
Changes versus 2022
- Revenue rose about 35%, chiefly reflecting the seven multifamily properties acquired from the VAA joint venture in November 2022 and the completed restoration and lease-up of Landing on Bayou Cane.
- Net income fell sharply from 2022’s exceptional result, which included ARL’s share of VAA’s property-sale gain and a gain on remeasurement of the VAA properties distributed to ARL. 2023 included no comparable large transaction gain.
- Multifamily segment profit increased $6.6 million, while commercial segment profit declined $3.2 million, reflecting lower office occupancy and higher insurance costs.
- Net interest expense improved as bond repayments reduced interest expense. ARL repaid its Series C bonds in January 2023 and Series A and B bonds in May 2023; the latter repayment contributed to a $1.7 million early-extinguishment loss.
- Operating cash use improved year over year but remained negative. Investing cash inflows were much lower than in 2022, when major VAA distributions and property-sale proceeds were received.
Outlook, risks and unusual items
- Management said year-end cash, cash equivalents and short-term investments, together with anticipated 2024 collections of notes and interest receivable, were expected to cover cash requirements. It also expects to rely on selective asset sales, refinancing, extensions and additional property-secured borrowing. The auditor’s report includes an emphasis of liquidity; the filing says operating cash may not be sufficient to meet all obligations as due.
- Total debt was $182.7 million, including $128.9 million of HUD-insured mortgage debt. Scheduled principal payments were $23.3 million in 2024; the company subsequently extended the Windmill Farms loan maturity to February 2026. Variable-rate construction financing exposes the company to interest-rate risk.
- ARL was not in compliance with the minimum debt-service-coverage covenant on 770 South Post Oak at year-end. The lender required surplus property cash to be held in a lender-controlled account until the property meets the covenant for two consecutive quarters.
- Three multifamily developments—Lake Wales, Merano and Bandera Ridge—were expected to be completed in 2025, with estimated total costs of approximately $55.3 million, $51.9 million and $49.6 million, respectively. Windmill Farms land-lot development is expected to proceed over roughly two years beginning in the third quarter of 2024. Construction costs, schedules, leasing and financing remain risks.
- On March 8, 2024, the Fifth Circuit reversed and remanded the Clapper litigation after a jury and trial-court judgment had found no amount owed. The case therefore returns for further proceedings; the filing does not provide a clear estimate of potential exposure.
- Concentrated related-party dealings are a significant governance consideration: the May Trust and affiliates owned approximately 90.8% of ARL’s common stock. Pillar, an affiliate, manages ARL and received $10.2 million in advisory fees in 2023, in addition to reimbursements and development fees. ARL also has substantial related-party notes and receivables.
- Office occupancy was weak at year-end: 770 South Post Oak 50.4%, Browning Place 53.2%, and Stanford Center 40.8%. Risks include leasing demand, rising operating costs, refinancing, property-market conditions and the collectability of notes receivable.
The company reported effective disclosure controls and management assessed internal control over financial reporting as effective. The external auditor issued an unqualified opinion on the financial statements but did not attest to internal controls. No formal earnings or dividend guidance was provided.
Important facts for investors to verify
- Cash availability and near-term obligations, including restricted cash, the 2024 debt maturities and the 770 South Post Oak covenant lockbox.
- Collectability, maturity extensions and collateral values for $144.1 million of notes receivable and $96.5 million of related-party receivables; auditors identified collectability as a critical audit matter.
- Progress and remaining funding needs for the three 2025 multifamily developments and Windmill Farms lot sales and infrastructure work.
- Office leasing, occupancy and the financial impact of the Clapper litigation remand.
- Terms, oversight and potential conflicts arising from related-party management, financing and property transactions; also confirm whether the board changes its no-common-dividend policy.