American Realty Investors, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Unless stated otherwise, dollar amounts are in millions. ARL is an externally advised real estate investor with apartments, commercial properties, land and mortgage-note investments. At quarter-end it reported 48 apartment communities with 8,873 units, 14 commercial properties and 4,678 acres of land. It consolidates TCI and IOT; related parties owned approximately 88.2% of ARL.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Rental and other property revenue | $28.9 | $29.1 | $89.5 | $85.6 |
| Operating income (loss) | $3.6 | $1.0 | $13.4 | $(2.9) |
| Net income (loss) | $0.6 | $(4.5) | $(1.1) | $(8.6) |
| Net income (loss) applicable to common shares | $(0.05) | $(0.26) | $(2.9) | $3.7 |
| Basic and diluted EPS applicable to common shares | $0.00 | $(0.03) | $(0.25) | $0.32 |
- Q3 continuing-operations income was $0.7 million, versus a $9.7 million loss a year earlier. Nine-month continuing-operations loss narrowed to $5.8 million from $18.2 million. Land-sale gains and discontinued-operations gains materially affected reported results.
- Nine-month rental revenue increased $3.9 million; management attributed the increase mainly to apartment developments in lease-up and higher same-property apartment revenue. Apartment occupancy averaged over 95%, according to management.
- Nine-month cash flow: operating activities used $32.7 million, investing activities provided $90.1 million, and financing activities used $71.0 million. Cash declined $13.6 million to $6.7 million. Cash paid for interest was $32.1 million.
- At September 30, total assets were $1,133.6 million, total liabilities $1,042.4 million and total equity $91.2 million. Notes and interest payable were $789.6 million; an additional $53.4 million of notes related to assets subject to sales contracts and $26.7 million of stock-secured notes and margin debt were reported separately. Cash was $6.7 million; notes and interest receivable, net of a $21.7 million allowance, totaled $100.3 million.
- Variable-rate debt was $139.3 million at a weighted average rate of 4.60%. The filing estimates a 1 percentage-point rate increase would reduce annual net income by $1.4 million, or $0.12 per share.
Material changes versus the prior comparable period
- Nine-month revenue rose 4.6%, but common-share results shifted from $3.7 million of income to a $2.9 million loss. Operating income improved, while land-sale gains fell to $6.6 million from $18.4 million and discontinued-operations income fell to $4.7 million from $9.6 million.
- General and administrative expense declined to $5.1 million from $10.6 million, and advisory fees declined to $7.6 million from $10.2 million. Management cited lower professional-service costs, advisor reimbursements and gross assets following property sales.
- Interest income increased to $10.3 million from $2.9 million, largely reflecting receipts on related-party Unified Housing Foundation cash-flow notes. Mortgage and loan interest expense was broadly similar year to date, at $44.0 million versus $43.7 million; Q3 expense declined to $9.8 million from $13.8 million, in part because a commercial loan was no longer accruing default interest.
- Total assets declined from $1,235.5 million at December 31, 2011, and cash fell from $20.3 million. The allowance for estimated note losses increased from $13.4 million to $21.7 million.
Outlook, risks and unusual items
- Management said expected excess cash flow from property operations would not be sufficient to discharge all obligations as due. Its stated plan was to sell land and income-producing properties, refinance or extend debt, and obtain additional real-estate-secured borrowing. No numerical earnings or revenue guidance was provided.
- Operating cash flow was negative, and the company relied on property-sale proceeds, refinancing, note collections and additional borrowing. During the first nine months, it received $139.6 million of note proceeds and paid $172.2 million on maturing notes. Management also reported that sales proceeds were largely used for loan obligations.
- Some properties transferred or contracted to related parties remain accounted for as subject to sales contracts, with gains deferred because of continuing involvement or other sale-recognition criteria. The filing says mortgages on these properties were in default, primarily for nonpayment, and discussions with lenders were ongoing; some loans also have corporate guarantees.
- ARL sold American Realty Trust, Inc. (ART) for a $10 million seller-financed note, which was fully reserved; ART subsequently filed for Chapter 11. A separate lawsuit against ART and ART Midwest resulted in an approximately $74 million award, which ART appealed. The filing states ARL and its other subsidiaries did not guarantee or indemnify ART or ART Midwest.
- The Olpenitz, Germany development faced disputes with a local partner and German bankruptcy proceedings to remove that partner. Management said it believed project value would satisfy creditors and return its investment; this is not assured.
- The company reported a $97.3 million net deferred tax asset with a 100% valuation allowance. It also reported no apartment projects in development at quarter-end, while describing the Olpenitz project as under development.
Important facts for investors to verify
- Debt maturities, refinancing availability, lender negotiations and the status of defaulted mortgages, guarantees and assets subject to sales contracts.
- Cash needs and sources after quarter-end, including whether property sales and refinancing can cover obligations given low cash and negative operating cash flow.
- Recoverability of the $21.7 million note-receivable allowance, including the substantial related-party note exposure and UHF collections underlying higher interest income.
- Terms, valuation and collectability of related-party transactions and seller-financed notes; related parties own approximately 88.2% of ARL, and the filing identifies significant advisor and affiliate dealings.
- Developments in the ART litigation and bankruptcy, and the German Olpenitz proceedings and project funding requirements.
- Reported results rely on gains from sales and include discontinued operations; assess recurring property performance separately. Management stated that interim results are not necessarily indicative of full-year results.