Business context and reporting period
American Realty Investors, Inc. (ARL) filed this unaudited Form 10-Q for the three months ended March 31, 2022. It acquires, develops and owns multifamily and commercial real estate and land, primarily in the Southern United States. ARL owns approximately 78.4% of Transcontinental Realty Investors, Inc. (TCI), through which substantially all operations are conducted. Unless otherwise noted, financial amounts below are in U.S. dollars and millions.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $7.787 | $11.828 |
| Operating loss | $(4.495) | $(3.002) |
| Net income | $14.567 | $23.215 |
| Net income attributable to ARL | $11.314 | $18.068 |
| Basic and diluted EPS | $0.70 | $1.12 |
| Cash used in operating activities | $(4.186) | $(1.449) |
| Cash provided by investing activities | $5.646 | $14.645 |
| Cash used in financing activities | $(38.769) | $(25.155) |
- GAAP net income included $11.148 million of net gains on asset sales or write-downs, $3.772 million of foreign-currency gains and $5.194 million of equity income from unconsolidated joint ventures. These items helped offset the operating loss.
- Segment profit was $3.453 million, down from $4.529 million. Multifamily revenue was $3.229 million and commercial revenue was $4.252 million; both were lower than a year earlier.
- ARL-reported FFO was $1.925 million versus $8.084 million; FFO adjusted for debt-extinguishment and foreign-currency items was a loss of $0.208 million versus income of $0.467 million.
- At March 31, total assets were $729.438 million, including $13.794 million cash and cash equivalents, $21.631 million restricted cash, $32.585 million short-term investments and $136.512 million notes receivable. Cash, cash equivalents and restricted cash totaled $35.425 million, down from $72.734 million at year-end.
- Mortgages and other notes payable were $169.205 million and bonds payable were $163.571 million, or $332.776 million combined. Total liabilities were $378.020 million; total equity was $351.418 million.
Material changes and significant events
- Revenue declined $4.041 million year over year, while net income attributable to ARL fell $6.754 million. Management cited lower commercial-segment profit, reduced land-sale gains and foreign-currency gains, partly offset by improved net interest and joint-venture income.
- ARL sold the 240-unit Toulon multifamily property for $26.750 million, recognized a $9.364 million gain and paid off its $14.740 million mortgage. It also sold 8.6 acres of Windmill Farms land for $2.3 million, recording a $1.989 million gain.
- Debt payments totaled $38.179 million, including the Toulon payoff. The Stanford Center loan was extended to February 2023. The company said some land loans were undergoing modification or extension discussions.
- Related-party advisory fees increased to $3.185 million from $2.436 million. ARL disclosed substantial related-party relationships, including common ownership of its advisor and related-party notes and receivables.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said cash on hand and cash expected from notes and interest receivable should meet cash requirements for the remainder of 2022, while also cautioning that excess property cash flow might not cover all obligations as they come due. Planned liquidity sources include asset sales, refinancing, extensions and additional property-secured borrowing.
- ARL reported noncompliance with the minimum debt-service-coverage covenant on its 770 South Post Oak loan. The lender may require a cash trap until compliance is achieved for two consecutive quarters.
- The company reported a $27.147 million remaining VAA earn-out obligation, payable from its share of future joint-venture distributions. It also described a $29.6 million charge related to the earn-out remeasurement; that amount is not separately identifiable in the presented statement of operations, so its accounting presentation warrants review.
- ARL and Macquarie had initiated a planned sale of the Victory Abode Apartments (VAA) portfolio. Its appraised value was approximately $1.4 billion, but the company cautioned that this value may not be realized; the sale arrangement was to expire August 1, 2022 if the portfolio had not been sold. SPC bond covenants restrict cash distributions.
- Commercial-property occupancy had declined. Management said the impact of COVID-19 remained uncertain. Other disclosed risks include real-estate demand, financing availability and interest rates, development costs and delays, property sales, and foreign-currency movements.
- Legal matters included an appeal in the Clapper litigation after a jury found the defendants owed nothing, and a separate Berger lawsuit alleging improper property transactions involving TCI and IOR, with trial scheduled for November 2022. The filing states ARL intends to defend the latter matter.
Important facts for investors to verify
- How the reported $29.6 million VAA earn-out charge is reflected in the financial statements, and how the remaining $27.147 million obligation will affect future distributions and liquidity.
- Progress and realized proceeds from the VAA portfolio sale, including the status of the sale arrangement and the value of properties to be distributed to ARL.
- Current compliance and any cash-trap consequences for the 770 South Post Oak loan, as well as the status of land-loan extensions and upcoming maturities.
- Cash availability after restricted balances, debt service and bond covenants, given negative operating cash flow and management’s reliance on asset sales and refinancing.
- Performance of related-party notes receivable and receivables, and the terms and oversight of related-party advisory and other transactions.
- Developments in the Clapper appeal and Berger litigation, and any resulting financial exposure.