American Realty Investors, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; this is an annual filing, not a standalone fourth-quarter report. ARL is an externally advised real estate owner and consolidates its majority-owned subsidiaries TCI and IOT. Its portfolio included 48 apartment communities with 8,873 units, 14 commercial properties totaling about 3.7 million square feet, and approximately 4,657 acres of land.
Financial and operating performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Operating revenue | $119.5 million | $108.5 million |
| Operating income (loss) | $17.2 million | $(40.3) million |
| Net income (loss) applicable to common shares | $(8.0) million; $(0.70) per diluted share | $(2.2) million; $(0.19) per diluted share |
| Gain on land sales | $5.5 million | $34.2 million |
| Operating cash flow | $(23.1) million | $23.6 million |
| Investing cash flow | $73.8 million | $4.1 million |
| Financing cash flow | $(53.9) million | $(20.0) million |
| Cash at year-end | $17.1 million | $20.3 million |
| Total assets / shareholders’ equity | $1,135.3 million / $85.1 million | $1,235.5 million / $95.3 million |
Revenue rose about 10%, with apartment revenue up $9.0 million and commercial revenue up $2.5 million. Management reported apartment occupancy averaging above 95%. Commercial revenue benefited in part from a tenant lease-termination settlement. Operating expenses fell to $102.3 million from $148.8 million, chiefly because impairment charges and general and administrative expenses declined. Depreciation increased to $21.6 million from $18.7 million. Mortgage and loan interest expense was $59.0 million, versus $59.2 million.
Despite positive operating income, ARL reported a common-share loss and negative operating cash flow. Net loss included $4.7 million of impairment provisions and $4.6 million of income from discontinued operations; the prior year included $44.4 million of impairment provisions and $29.1 million of discontinued-operations income. Cash from investing activity relied substantially on property and land sales and note activity.
Debt, liquidity and capital
- Notes payable totaled $861.3 million at year-end, with stated interest rates of 2.0%–12.5%; $718.7 million was fixed-rate and $142.6 million variable-rate. The weighted average rate was 5.09%, down from 6.39% in 2011. Separately, stock-secured notes were $28.9 million. The filing also cites approximately $869.9 million of total indebtedness in its risk discussion; the different debt figures reflect differing disclosures and should be reconciled.
- Scheduled principal maturities were $204.0 million in 2013 and $71.9 million in 2014. Contractual obligations, including interest and operating leases, totaled $1.439 billion, of which $239.2 million was due in 2013.
- Management stated that year-end cash and anticipated 2013 property operating cash flow may not cover all cash requirements. Its stated plan is to sell selected land and income-producing properties, refinance or extend debt, and seek additional real-estate-secured borrowing.
- Common dividends were not declared in 2012, 2011 or 2010. Preferred dividend requirements were $2.5 million for 2012.
- At year-end, notes and interest receivable were $103.5 million net of a $21.7 million allowance. Approximately $108.7 million, or 91.2% of the mortgage-note portfolio, was due from related parties, including UHF; ARL recognized $14.2 million of related-party interest income.
Material changes, outlook and risks
- Land-sale gains fell to $5.5 million from $34.2 million; land sold totaled 705.84 acres for $40.3 million, compared with 7,821.97 acres for $249.5 million in 2011. Total 2012 sales of land and income-producing properties were reported at $99.2 million.
- Impairments dropped sharply year over year, but ARL still recorded a $2.4 million commercial-property impairment and $2.3 million of land impairments. Net real estate declined to $930.4 million from $1,026.6 million.
- ARL changed its accounting for interest on surplus-cash notes effective January 1, 2012: it began accruing interest as earned rather than recognizing it only when cash was received. The filing attributes part of the $3.7 million increase in interest income to this change and higher cash receipts.
- Related-party transactions and governance are significant considerations. Approximately 87.4% of ARL’s stock was reported as owned by related entities; common officers, directors and the external advisor serve ARL, TCI and IOT. ARL paid Pillar $10.2 million in advisory fees and $3.4 million in cost reimbursements in 2012, among other fees.
- Management identified refinancing, debt-service, covenant, foreclosure, tenant, property-market and interest-rate risks. A 100-basis-point increase in variable borrowing rates was estimated to increase 2013 interest expense and reduce net income by $1.4 million. Substantially all assets were pledged as collateral.
- ARL disclosed lender deficiency claims with estimated aggregate maximum exposure of about $20 million, if any. A separate approximately $74 million judgment against ART and ART Midwest in the Clapper litigation was not against ARL or its other subsidiaries; ARL had sold ART for a $10 million seller-financed note that was fully reserved and valued at zero. ART subsequently filed for Chapter 11 bankruptcy.
- The Port Olpenitz development in Germany was affected by partner mismanagement and insolvency proceedings. ARL said it was cooperating with the insolvency manager and believed project value could cover creditors and return its investment; recovery and continued participation remain uncertain.
- No specific earnings or operating guidance was provided. Management said it would continue to focus on apartment development, market properties for lease and pursue asset sales and refinancing as needed. It reported no apartment projects in development at December 31, 2012, while $5.8 million had been spent on construction and development during the year.
Important facts for investors to verify
- Reconcile the filing’s debt disclosures, the $204.0 million of 2013 principal maturities, covenant status, and refinancing or extension progress.
- Assess whether property operations and asset-sale proceeds can meet 2013 liquidity needs, given negative 2012 operating cash flow and only $17.1 million of year-end cash.
- Review the collectability, collateral and allowance for related-party notes, particularly UHF balances and the fully reserved $10 million ART note.
- Examine deferred sales, lender transfers, guarantees and defaults tied to related-party property transactions, including the associated balance-sheet and impairment treatment.
- Track the outcomes and potential exposure from deficiency claims, the ART litigation and the German insolvency process, as well as the effect of related-party control and fees.
The independent auditor gave an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.