American Realty Investors, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. The company is an externally advised real estate investor with apartment, commercial, land-development and mortgage-note investments. It reported 53 income-producing properties, 8,115 apartment units, approximately 3,495 acres of land and 14 apartment projects in development.
Financial results and position
- Revenue: Rental and other property revenue was $31.1 million, down $0.7 million (2.3%) from $31.8 million. Apartment revenue increased $0.8 million while commercial revenue declined $1.6 million.
- Profitability: Net loss was $0.4 million, versus $5.9 million a year earlier. Net loss attributable to ARI was $0.7 million; after preferred dividends, net loss applicable to common shares was $0.9 million, or $0.06 per share, compared with $6.0 million, or $0.39 per share. Reported net operating income was $4.9 million, up from $4.5 million.
- Key expenses and other items: Property operating expenses fell to $14.4 million from $16.3 million; depreciation and amortization was $6.4 million. Mortgage and loan interest expense was $15.7 million, down from $16.8 million. Other income included $1.5 million of debt forgiveness and a $1.8 million foreign-currency gain. Land-sale gains were $1.3 million, versus $0.4 million.
- Cash flow: Operating activities provided $3.5 million, compared with $9.0 million used in Q1 2017. Investing used $26.1 million, including $20.1 million for development and $11.1 million advanced on notes receivable. Financing provided $30.3 million. Cash and cash equivalents plus restricted cash totaled $96.3 million at quarter-end; unrestricted cash was $40.9 million.
- Assets and liquidity: Total assets were $1.312 billion and shareholders’ equity was $167.1 million. Management said operating cash flow expected in 2018 would not be sufficient to meet all obligations as they come due; it plans to sell assets, refinance and obtain additional real-estate-secured borrowing.
- Debt: The balance sheet reports $892.2 million of notes and interest payable and $146.9 million of bonds and interest payable. Southern Properties Capital issued approximately $39.2 million of Series B bonds in February, bearing 6.8% stated interest. The filing separately identifies $65.2 million of variable-rate notes; a 100-basis-point rate increase was estimated to add $0.65 million to annual interest cost.
Material changes and notable transactions
- Improved year-over-year net loss reflected lower property operating expenses and interest expense, higher other income and land-sale gains. Revenue declined, principally due to commercial properties.
- TCI sold 112.2 acres of land for $7.2 million and recorded a $1.3 million gain. Six income-producing properties were sold to a related party for $8.5 million; $2.1 million was received in cash and $6.4 million in notes, with no gain or loss recorded.
- On January 12, 2018, a related party converted 200,000 Series A preferred shares and accrued dividends into 482,716 common shares. The quarter-end preferred balance was 1,800,614 shares.
- Cash-flow presentation changed following adoption of restricted-cash and other cash-flow accounting guidance effective January 1, 2018.
Outlook, risks and contingencies
- Management expects excess cash flow from property operations in 2018 but explicitly cautions it will not cover all obligations as due. Planned sources include asset sales, refinancing, extensions and additional borrowing; these plans are not assured.
- Risks identified include property demand, occupancy and rents; access to financing and interest-rate changes; development delays and cost overruns; asset-sale timing; and economic and market conditions. Management reported no changes to the risk factors in the 2017 Form 10-K.
- Various land mortgages were undergoing modification or extension. The filing also says mortgages on properties sold to a related party but still classified as subject to sales contract were in default, primarily for nonpayment, with discussions ongoing with lenders.
- The company is primary guarantor on a $39.1 million mezzanine loan to Unified Housing Foundation; the borrower was reported in covenant compliance at March 31, 2018.
- Litigation includes the Clapper matter involving former affiliates and an appeal by ART awaiting a ruling. The company says it is not party to or obligated for the outcome of the former-entity judgment. It is also pursuing collection of a judgment against Dynex Commercial; recovery is uncertain.
- Related-party ownership and transactions are significant: over 80% of ARI stock was held by related-party entities, and the company reported substantial related-party notes, receivables, fees and asset transactions. Management cautions such transactions may not be on arm’s-length terms.
Investor facts to verify
- Confirm the timing, availability and terms of planned asset sales, debt extensions, refinancing and new borrowing against upcoming obligations.
- Assess the collectability and collateral support for mortgage notes receivable, including related-party exposures, and the $6.4 million seller note from the property sales.
- Review the status of defaulted mortgages, loan modifications, bond maturities and the company’s variable-rate exposure.
- Monitor development funding needs, project completion and lease-up, and the results of the disclosed litigation and judgment-collection efforts.
- Reconcile debt figures: the balance sheet reports $892.2 million of notes and interest payable, while the notes’ debt table gives a different total; the filing text does not clearly reconcile the difference.