American Realty Investors, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Dollar amounts below are in millions unless stated otherwise.
Business context
ARL is an externally advised real estate investor with commercial properties, apartments, development land, and mortgage notes. At quarter-end it reported seven commercial properties, nine directly owned apartment communities with 1,489 units, and about 2,324 acres of land. It also held a 50% equity-method interest in Victory Abode Apartments (VAA), a joint venture that owns 51 apartment communities totaling 9,786 units. ARL is majority-owned by related-party entities and has no employees; Pillar Income Asset Management provides advisory and cash-management services.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or prior date |
|---|---|---|
| Rental and other property revenue | $11.9 | $31.1 |
| Operating expenses | $13.7 | $26.2 |
| Net operating income (loss) | $(1.7) | $4.9 |
| Net loss attributable to ARL | $(6.1) | $(0.7) |
| Net loss applicable to common shares / diluted EPS | $(6.1) / $(0.38) | $(0.9) / $(0.06) |
| Cash from (used in) operating activities | $(16.4) | $3.5 |
| Cash from (used in) investing activities | $(5.4) | $(26.1) |
| Cash from (used in) financing activities | $(3.6) | $30.3 |
| Cash and cash equivalents | $28.2 | $36.4 at Dec. 31, 2018 |
| Cash plus restricted cash | $81.1 | $106.6 at start of Q1 2019 |
| Total assets / total liabilities | $814.8 / $500.2 | $826.1 / $505.0 at Dec. 31, 2018 |
Gross notes payable were $301.4 million, with $9.1 million of unamortized borrowing costs; reported notes and interest payable were $293.5 million. Net bonds and accrued interest were $151.5 million. Total reported notes and bond liabilities were therefore about $444.9 million. Shareholders’ equity was $314.6 million.
ARL recorded $8.7 million of land-sale proceeds and a $2.2 million gain. Interest income was $6.2 million; mortgage and loan interest expense was $10.0 million. A $5.8 million foreign-currency transaction loss materially affected results. Cash interest paid was $10.9 million.
Material changes versus Q1 2018
- Property revenue fell $19.2 million, chiefly because 49 apartment properties were contributed to VAA in Q4 2018 and were no longer consolidated. Property operating expenses declined $8.4 million and depreciation declined $3.3 million for the same reason. These comparisons are therefore affected by a major change in consolidation.
- Mortgage and loan interest expense fell $5.8 million following the VAA transaction, while equity-method accounting included a $1.1 million share of VAA losses.
- Operating cash flow shifted from a $3.5 million inflow to a $16.4 million outflow. Total cash and restricted cash declined $25.5 million during the quarter.
- Financing cash flow was a $3.6 million outflow, compared with a $30.3 million inflow in 2018, when ARL received $39.4 million from Southern’s Series B bond issuance. In Q1 2019, ARL paid $10.4 million of bond principal and received about $8.0 million from notes payable.
- The company sold about 22.3 acres for $8.7 million and a $2.2 million gain, compared with about 112 acres sold for $7.2 million and a $1.3 million gain in Q1 2018.
Outlook, risks, and unusual items
- Management expects excess cash flow from property operations in 2019, but says it will not be sufficient to meet all obligations as they come due. The stated plan is to sell land and income-producing assets, refinance or extend debt, and obtain additional real-estate-secured borrowings. No quantitative earnings or revenue guidance is provided.
- Some land mortgages were being modified or extended after loan expirations. Bond maturities include $11.0 million in 2019, $22.0 million in 2020, and larger amounts in 2021–2023.
- ARL is primary guarantor on a $39.1 million UHF mezzanine loan; UHF was reported in compliance with its covenants at March 31, 2019. Significant related-party exposure includes $78.3 million receivable from a related party and $114.3 million of net mortgage loans and accrued interest receivable from related parties.
- Litigation includes the Berger complaint filed in February 2019 alleging fiduciary-duty and related claims concerning transactions involving IOR and affiliated companies; defendants intend to contest it. The filing also describes legacy Clapper and Dynex litigation involving other entities and discusses related judgments and collection efforts. Management says ordinary-course litigation is not expected to materially affect ARL, except as otherwise disclosed.
- Other material risks include real-estate leasing and market conditions, financing availability and interest rates, development delays or cost overruns, property-sale timing, environmental exposure, and dependence on related parties and external management. Management reported no changes to the risk factors in its 2018 Form 10-K.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. Adoption of the new lease standard did not materially affect financial position or results.
Important facts for investors to verify
- How the VAA contribution affects the comparability of reported property revenue, expenses, debt, and assets, and how ARL’s equity-method returns develop.
- Whether operating cash flow improves and whether planned asset sales, refinancing, extensions, and new borrowing are completed in time to meet obligations.
- The status and terms of expired or near-term maturing property loans and the scheduled bond repayments.
- Collectability and repayment timing for related-party receivables and notes, including UHF exposures, and the related-party governance and advisory arrangements.
- The outcome and potential exposure, if any, from the Berger matter and other disclosed litigation, guarantees, and contingencies.
- The filing reports no dividend requirement for Q1 2019; verify future distributions and any changes to the preferred-stock terms or share count.