Business context and reporting period
American Realty Investors, Inc. (ARL) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. ARL invests in multifamily and commercial real estate and land; substantially all operations are conducted through its approximately 78.4%-owned subsidiary, Transcontinental Realty Investors, Inc. (TCI). At quarter-end, its portfolio included four office buildings, eight directly owned multifamily properties, approximately 1,847 acres of land, and an interest in a joint venture owning 52 multifamily properties.
Key financial results
Amounts below are in millions of dollars, except per-share figures. The filing presents financial statements in thousands.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $8.1 | $11.1 | $15.9 | $22.9 |
| Net operating loss | $(3.0) | $(8.8) | $(7.5) | $(11.8) |
| Net income (loss) attributable to ARL | $16.3 | $(27.3) | $27.6 | $(9.3) |
| EPS, basic and diluted | $1.01 | $(1.69) | $1.71 | $(0.57) |
| Funds from operations (FFO) | $19.5 | $8.5 | $25.6 | $19.0 |
| Adjusted FFO | $5.4 | $13.3 | $9.3 | $16.2 |
Q2 net income included a $14.1 million foreign-currency gain and $3.9 million net gain on asset sales or write-downs. For the six months, those items were gains of $17.9 million and $15.0 million, respectively; the period also included a $1.6 million debt-extinguishment loss. These items materially affect comparisons and should not be read as recurring operating performance. Segment profit was $3.4 million in Q2 versus $5.1 million a year earlier, and $6.9 million for six months versus $9.7 million.
Six-month operating cash flow was a use of $9.0 million, compared with a use of $0.1 million in 2021. Investing activities provided $33.8 million and financing activities used $39.8 million. Cash and cash equivalents were $38.2 million at June 30; restricted cash was $19.5 million. Total assets were $736.1 million, total liabilities $364.6 million, and total equity $371.4 million. Mortgages and other notes payable were $168.2 million and bonds payable were $148.8 million, or $317.0 million combined.
Material changes versus the prior comparable period
- Revenue declined 27% in Q2 and 31% for the six-month period. Management attributes lower multifamily and commercial segment results primarily to properties sold or contributed, including Toulon and 600 Las Colinas.
- ARL swung from a Q2 and six-month loss in 2021 to net income in 2022, principally reflecting favorable foreign-exchange movements and differences in asset-sale/write-down results. Lower general, administrative, and advisory costs also contributed; management cites higher prior-year legal costs.
- Debt declined from $372.8 million at December 31, 2021 to $317.0 million at June 30, 2022, including repayment of Toulon’s mortgage after its sale. Cash and cash equivalents fell from $50.7 million to $38.2 million.
- Six-month FFO increased, but adjusted FFO fell, in part because adjusted FFO excludes foreign-currency gains.
Outlook, risks, contingencies, and unusual items
- Management expects cash on hand and cash generated during the remainder of 2022, including receipts from notes and interest, to meet cash requirements. It also cautions that excess property-operating cash may not cover all obligations as due; planned options include asset sales, refinancing, extensions, and additional property-secured borrowing.
- VAA agreed to sell 45 properties to two private equity funds for $1.825 billion, with closing expected in Q3 2022. The buyer could remove up to five properties during inspection. A $50 million deposit was placed in escrow. This is a joint-venture transaction, not a stated ARL-level sale price or proceeds figure; distributions are subject to SPC bond covenants. ARL planned to sell Sugar Mill Phase III in connection with the transaction and could acquire seven holdback properties.
- ARL reported approximately $27.1 million remaining on the VAA Earn Out Obligation at June 30. A July 16, 2022 VAA distribution of approximately $10.2 million was paid directly to Macquarie against the obligation.
- Mortgage maturities include bonds due in January and July 2023, a $38.7 million Stanford Center loan due February 2023, and other loans due in 2022–2024. The Athens loan was due August 2022. The filing says some land mortgages were being modified, extended, or refinanced. ARL was out of compliance with the minimum debt-service coverage ratio on 770 South Post Oak; surplus property cash must be trapped until compliance is achieved for two consecutive quarters.
- Commercial-property occupancy had declined. Management believed the decline was temporary but said the effects of COVID-19 remained uncertain. Other stated risks include financing availability and rates, leasing demand, development costs and delays, property-sale timing, and market and economic conditions.
- ARL’s controlling shareholder owns approximately 90.8%; related parties provide management and advisory services. Related-party notes and receivables are substantial, and the filing cautions that related-party transactions may not be on arm’s-length terms.
- The Clapper litigation remained on appeal. In the Berger matter, the plaintiff sought voluntary dismissal and the parties stipulated to dismissal with prejudice; the court’s final dismissal could depend on whether other shareholders acted by August 19, 2022.
- Disclosure to verify: The filing’s Earn Out discussion is inconsistent: one note states a $29.6 million charge was recorded in 2022, while the gain/loss table presents a $29.6 million “Other” loss in 2021 and only a $0.2 million loss for “Other” in the 2022 six-month period. The timing and income-statement treatment are not clear from the filing text.
Important facts for investors to verify
- Whether the VAA sale closed as expected, the final properties and proceeds, ARL’s distribution, and any effect of SPC bond restrictions.
- Near-term debt maturities, refinancing or extension outcomes, and continuing compliance with the 770 South Post Oak covenant.
- Cash availability and the collectability and timing of related-party notes, receivables, and interest receipts.
- The correct period and accounting treatment for the Earn Out Obligation charge, given the filing’s inconsistent disclosure.
- Whether lower occupancy at commercial properties and weaker segment revenue persist, and how these affect cash flow and liquidity.