American Realty Investors, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. ARL is an externally managed real estate company with operations primarily conducted through its majority-owned subsidiary, Transcontinental Realty Investors (TCI). At year-end, its portfolio included 14 multifamily properties with 2,328 units, four office buildings totaling approximately 1.06 million square feet, and approximately 1,858 acres of land. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $37.5 million | $42.0 million |
| Net income | $475.3 million | $6.4 million |
| Net income attributable to ARL | $373.3 million | $3.3 million |
| Basic and diluted EPS | $23.11 | $0.21 |
| Net cash used in operating activities | $45.4 million | $11.5 million |
| Net cash provided by investing activities | $307.4 million | $100.8 million |
| Net cash used in financing activities | $112.4 million | $103.6 million |
- Property operations: Segment profit was $15.7 million, down from $16.9 million. Multifamily segment profit increased to $8.3 million from $6.3 million; commercial segment profit declined to $7.4 million from $10.6 million. Consolidated rental revenue fell 9.9% to $34.1 million.
- One-time drivers: ARL’s results included $469.3 million of equity income from unconsolidated joint ventures, primarily its share of the VAA portfolio sale gain. It also recorded an $87.1 million gain on sales, remeasurement or write-down of assets, including a $73.2 million gain from remeasuring the seven-property VAA Holdback Portfolio. Income tax expense was $98.1 million.
- Supplemental operating measure: FFO was $43.3 million, versus $18.8 million in 2021; adjusted FFO, excluding foreign-currency effects and debt-extinguishment losses, was $41.3 million versus $26.4 million. These non-GAAP measures are not substitutes for cash flow or net income.
- Liquidity and assets: At year-end, ARL reported $113.4 million of cash and cash equivalents, $108.9 million of restricted cash, and $119.8 million of short-term investments. Total assets were $1.20 billion, compared with $770.6 million in 2021. Notes receivable totaled $139.6 million, including substantial related-party exposure.
- Debt: Mortgages and other notes payable were $188.0 million and bonds payable were $129.2 million, totaling approximately $317.2 million. The company paid off its $66.5 million Series C bonds on January 31, 2023. Series A bonds of $29.0 million were due July 2023; the filing lists $107.5 million of bond maturities in 2023, including the Series C bonds already repaid after year-end.
Material changes versus 2021
- Revenue declined, mainly reflecting property dispositions and lower commercial revenue; commercial segment revenue fell from $23.3 million to $16.3 million. Multifamily segment revenue rose from $14.5 million to $17.8 million, partly due to properties acquired in the VAA distribution.
- VAA sold 45 properties for approximately $1.81 billion in September 2022. ARL received distributions totaling approximately $386.9 million, including cash and settlement of the remaining earn-out obligation; it then obtained operational control of seven remaining properties, valued at $219.5 million, and assumed approximately $70.3 million of mortgage debt.
- Operating cash flow worsened to a $45.4 million use, in part because of taxes related to the VAA sale. Investing cash flow increased substantially, chiefly due to VAA distributions and short-term investment activity.
- Total equity rose to $812.2 million from $336.9 million, principally reflecting 2022 earnings and noncontrolling interests.
Outlook, risks and unusual items
- Management said year-end cash, cash equivalents and short-term investments, together with expected 2023 collections of notes and interest receivable, should meet cash requirements. It also expects to use selective asset sales, refinancing and additional real-estate-secured borrowing. The auditor’s report includes an emphasis of liquidity, noting that operating cash generation may not be enough to discharge all obligations as they fall due.
- ARL reported compliance with loan covenants except for the minimum debt-service-coverage ratio on 770 South Post Oak. The lender requires surplus property cash flow to be held in a controlled account until compliance is restored for two consecutive quarters. The company was negotiating extensions on certain loans, including Windmill Farms and RCM HC Enterprises.
- Key risks include leverage and refinancing needs, interest-rate exposure, property-market and tenant conditions, development costs and delays, property concentration, and restrictions on cash distributions under SPC bond covenants. Commercial occupancy was 61.6% at Stanford Center, 71.7% at Browning Place and 55.2% at 770 South Post Oak. Multifamily occupancy at Landing Bayou was 46.2%.
- Related-party and governance considerations are significant: affiliates owned approximately 90.8% of ARL’s common stock; Pillar manages the company and received $8.8 million of advisory fees plus $3.6 million of cost reimbursements in 2022. The filing notes that related-party transactions may not be on arm’s-length terms.
- ARL paid no common dividends in 2020–2022. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. The auditor identified critical audit matters involving real-estate impairment, notes-receivable collectability and straight-line commercial rent revenue.
- Litigation outcomes reported favorably included a January 2023 dismissal with prejudice of the Berger action and a March 2023 jury verdict for ARL in the Nixdorf case; the Nixdorf plaintiff could appeal. The Clapper case remained under Fifth Circuit review.
Important facts for investors to verify
- Whether VAA proceeds and available liquidity are sufficient to meet 2023 debt maturities, operating needs and planned investment, including restrictions on SPC cash.
- The status and terms of Series A bond repayment or refinancing and extensions of loans identified as under negotiation.
- Whether the 770 South Post Oak debt-service-coverage covenant is brought back into compliance and the cash lockbox is released.
- Collectability, maturity extensions and collateral support for the $139.6 million notes-receivable portfolio, particularly related-party notes and loans with near-term maturities.
- Leasing and operating performance at low-occupancy properties, notably Landing Bayou and the office portfolio, and the extent of upcoming commercial lease expirations.
- The sustainability of earnings excluding VAA sale and remeasurement gains, foreign-currency effects and other nonrecurring items; GAAP net income and EPS were heavily affected by these items.
- Related-party fees, receivables, lending and allocation of investment opportunities, given concentrated ownership and shared management among ARL, TCI and IOR.