American Realty Investors, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in millions except per-share data. The company owns multifamily and commercial real estate and land, and consolidates TCI; more than 90% of its stock is owned by related-party entities.
Financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $11.1 | $14.7 | $22.9 | $27.9 |
| Net income (loss) | $(33.7) | $(3.3) | $(10.4) | $1.1 |
| Net income (loss) attributable to the Company | $(27.3) | $(2.3) | $(9.3) | $0.6 |
| Basic and diluted EPS | $(1.69) | $(0.14) | $(0.57) | $0.04 |
| Segment profit | $5.1 | $5.8 | $9.7 | $10.9 |
| Adjusted FFO | $13.7 | $10.1 | $19.6 | $12.1 |
At June 30, 2021, total assets were $808.3 million, total liabilities $488.3 million, and total equity $320.0 million. Cash and cash equivalents were $46.0 million, with restricted cash of $22.0 million. Mortgages and notes payable were $211.3 million and bonds payable were $203.6 million. Notes receivable totaled $140.4 million, including $77.1 million from related parties.
For the first half, operating cash flow was a use of $0.1 million, investing cash flow provided $29.5 million, and financing cash flow used $48.5 million. Cash, cash equivalents and restricted cash ended at $68.0 million, down from $87.0 million at year-end 2020. The company reported compliance with all loan covenants.
Material changes and notable items
- Q2 revenue declined $3.6 million year over year; first-half revenue fell $4.9 million. Commercial segment revenue declined $1.2 million in Q2 and $2.6 million in the first half. Multifamily segment revenue was down $0.2 million in Q2 but up $0.1 million for the first half.
- Q2 net loss widened by $30.3 million, primarily because of a $29.6 million charge related to remeasurement of the VAA earn-out obligation and a $7.6 million increase in general, administrative and advisory expenses, partly offset by improved joint-venture income. First-half net income shifted from $1.1 million profit to $10.4 million loss.
- Related-party advisory fees were $5.7 million for Q2 and $8.2 million for the first half, versus $2.4 million and $4.7 million, respectively, a year earlier. Management attributed higher general, administrative and advisory expenses primarily to advisory and legal fees.
- Land sales generated first-half gains, including sales at Windmill Farms and Mercer Crossing. The company also recognized $10.0 million of previously deferred gain after related-party sales of three multifamily properties to an unrelated buyer.
- On July 13, 2021, after quarter-end, an arbitration decision favored Macquarie on the VAA earn-out dispute. The company said it must pay approximately $39.6 million; it had recorded a $29.6 million charge in the quarter and planned to use future VAA distributions to fund the obligation.
Liquidity, outlook and risks
Management said June-end cash and expected cash generation from notes and interest receivables should meet cash requirements for the remainder of 2021. It also expects to selectively sell assets, refinance or extend debt, and seek additional real-estate-secured borrowing. Separately, the notes caution that excess cash from property operations over the next 12 months might not be sufficient to discharge all obligations as due.
The company reported lower occupancy at commercial properties, which management believed was temporary, while stating it could not predict COVID-19’s effects on results, liquidity or cash flows. Other stated risks include leasing and tenant credit, financing availability and interest rates, property-sale timing, development delays and cost overruns, and real-estate market conditions. No specific financial guidance was provided.
Two developments in litigation are notable: the prior approximately $59.0 million Clapper award was vacated after a 2021 retrial, with the court determining that Clapper would take nothing; a separate Berger-related case remained pending, with trial scheduled for November 2022. Management stated it intended to defend that case.
Investor verification points
- Verify the timing, funding source and cash-flow effect of the approximately $39.6 million VAA earn-out payment, including expected VAA distributions.
- Reconcile management’s expectation that liquidity will cover 2021 requirements with the note disclosure that operating cash may not meet all obligations over the next 12 months.
- Assess the sustainability of higher advisory and legal costs and the related-party fees and receivables, given the company’s significant related-party ownership and dealings.
- Monitor commercial occupancy, rental revenue and the status and economics of development projects and debt maturities.
- Review the Berger litigation and the company’s debt, refinancing and asset-sale plans as they develop.