American Realty Investors, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Business context
ARL is an externally advised real estate investor with commercial and apartment properties, development land, and mortgage notes. At quarter-end it reported seven commercial properties, ten directly owned apartment communities with 1,657 units, about 1,982 acres of land, and a 50% interest in VAA, which held 51 apartment communities. More than 90% of ARL’s stock is owned by related-party entities.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Rental and other property revenue | $11.9m | $11.9m |
| Operating expenses | $16.4m | $13.7m |
| Net operating loss | $(4.5)m | $(1.7)m |
| Net income (loss) attributable to ARL/common shares | $2.9m; $0.18 per share | $(6.1)m; $(0.38) per share |
| Operating cash flow | $(11.6)m | $(16.4)m |
| Investing cash flow | $5.4m | $(5.4)m |
| Financing cash flow | $(9.0)m | $(3.6)m |
| Cash and cash equivalents, balance sheet | $39.9m | $51.2m |
| Total cash including restricted cash | $68.1m | $83.3m at year-end 2019 |
| Total assets / total liabilities | $815.1m / $514.2m | $830.6m / $534.1m |
Profitability improved from the prior-year loss, but the quarter included a $7.8m foreign-currency transaction gain and a $4.1m gain on land sales. Rental revenue was essentially flat, while expenses rose; the net operating loss equaled approximately 37% of property revenue, versus 15% in Q1 2019. Mortgage and loan interest expense was $9.6m, and cash interest paid was $13.1m.
At March 31, notes payable, net and accrued interest totaled $261.0m; bonds, net and accrued interest totaled $207.8m. Cash and restricted cash are not wholly available for general use: restricted balances include escrow, deposits, and funds held by the bond trustee.
Material changes and transactions
- Sold 18.7 acres of Texas land for $5.7m, recognizing a $4.1m gain; Q1 2019 land sales were $8.7m with a $2.2m gain.
- Acquired about 49.2 acres in Kent, Ohio for $5.4m, funded with $2.0m cash and a $3.4m note bearing 10% interest and maturing in November 2024.
- Purchased $7.4m of notes receivable from related parties. Related-party notes and interest receivable were a significant asset; ARL reported $96.9m of net related-party mortgage loans and accrued interest.
- Paid $11.6m of Series A bond principal and $7.3m of interest on Series A, B, and C bonds. Total bonds outstanding fell from $233.0m at year-end to $214.6m.
- Invested $5.4m in apartment construction or predevelopment. Notes payable increased, including construction borrowing and the Ohio land note.
Outlook, risks and contingencies
- Liquidity: Management expects property operations to generate excess cash flow in 2020 but states it will not be sufficient to meet all obligations as due. Planned sources include asset sales, refinancing, and additional real-estate-secured borrowing.
- COVID-19: Management said the pandemic could affect tenants, operations, currency markets, access to debt financing, refinancing, and credit ratings. It reported no current adverse impact on financing or ratings and no near-term debt maturities, but future effects were uncertain.
- Currency exposure: The $7.8m unrealized gain reflected U.S. dollar strengthening against the Israeli shekel; bond obligations are denominated in shekels. ARL converted $16.0m into shekels for a scheduled July 31, 2020 bond payment.
- Litigation and guarantees: Disclosed matters include the Clapper-related litigation, Dynex judgment collection efforts, and Berger litigation involving ARL, TCI, IOR, and affiliates. ARL is primary guarantor on a $24.3m UHF mezzanine loan; UHF was reported covenant-compliant at quarter-end. Management did not expect ordinary-course litigation to materially affect ARL, subject to the specific disclosed matters.
- Related-party and execution risks: The company relies on an external advisor shared with affiliated entities, has substantial related-party balances and transactions, and cautions that such transactions may not be on arm’s-length terms. Development, financing, property sales, tenant demand, interest rates, and refinancing are also identified risks.
- No specific earnings or revenue guidance was provided. Management’s liquidity plans and expectations are forward-looking, not firm forecasts.
Most important facts for investors to verify
- Whether ARL can meet obligations from asset sales, refinancing, and new borrowing, given management’s statement that operating cash flow will be insufficient.
- The availability and restrictions on cash: balance-sheet cash was $39.9m versus $68.1m including restricted cash.
- The quality and collectability of the large related-party notes receivable, including UHF exposure and the $12.6m allowance for estimated losses.
- How much reported earnings depend on nonrecurring land-sale gains and foreign-exchange movements rather than property operations.
- Bond repayment and foreign-exchange exposure, including the scheduled July 2020 payment and subsequent COVID-19 effects.
- Developments in the disclosed litigation and the potential exposure, if any, from the mezzanine-loan guarantee.