American Realty Investors, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts are in millions of dollars unless stated otherwise. The company owns and develops multifamily and commercial real estate, with most operations conducted through its approximately 78.4%-owned subsidiary TCI. Its portfolio included commercial properties, directly owned apartments and land, plus a 50% investment in the VAA multifamily joint venture.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $10.5 | $11.9 | $33.4 | $39.8 |
| Net income | $25.1 | $9.6 | $14.6 | $10.7 |
| Net income attributable to the company | $19.4 | $8.0 | $10.2 | $8.6 |
| Basic and diluted EPS | $1.20 | $0.50 | $0.63 | $0.54 |
| Operating cash flow | Not presented quarterly | $(7.7) | $(17.4) | |
| Investing cash flow | Not presented quarterly | $106.5 | $16.2 | |
| Financing cash flow | Not presented quarterly | $(101.9) | $(21.1) |
- Q3 revenue declined 12% year over year; nine-month revenue declined 16%. Rental revenue fell to $9.6 million for Q3 from $11.5 million, and to $30.2 million for nine months from $34.5 million.
- Q3 net income included a $31.3 million gain on asset sales/write-downs, substantially reflecting the $27.3 million gain on the sale of 600 Las Colinas. Nine-month net income included $24.3 million of net gains in this line, after a $29.6 million charge related to the VAA earn-out. These items materially affect comparisons with operating performance.
- Commercial segment profit decreased to $2.4 million in Q3 from $3.8 million and to $8.9 million for nine months from $11.5 million, mainly reflecting disposed properties. Multifamily segment profit rose to $1.6 million in Q3 from $1.3 million and to $4.8 million for nine months from $4.5 million.
- General, administrative and advisory expenses increased to $7.1 million in Q3 from $4.3 million and to $24.4 million for nine months from $15.0 million. Management attributed the increase primarily to advisory fees related to transactions and legal costs.
- Interest expense declined to $22.5 million for nine months from $26.3 million; interest income increased to $17.4 million from $16.5 million. The company reported an operating loss of $16.9 million for nine months versus $4.1 million a year earlier.
Balance sheet, debt and liquidity
- Total assets were $772.7 million, down from $865.8 million at year-end. Cash and cash equivalents were $63.9 million, up from $36.8 million; restricted cash was $20.1 million, down from $50.2 million.
- Mortgages and notes payable were $185.0 million and bonds payable were $184.2 million, totaling $369.2 million, versus $480.6 million at year-end. The company paid $117.2 million of mortgage, note and bond principal during the nine months and incurred $4.1 million of debt-extinguishment costs.
- Notes receivable totaled $140.8 million, including $75.9 million from related parties. Receivables from related parties were another $103.4 million. Related-party interest income was $15.1 million for the nine-month period.
- Operating cash flow remained negative. Investing cash flow was supported by $103.7 million in asset-sale proceeds, including the sale of 600 Las Colinas; financing cash outflow primarily reflected debt repayment. Cash, cash equivalents and restricted cash together were $84.0 million at period-end.
- Management said available cash and expected cash generation from notes and interest receivable should meet cash requirements for the remainder of 2021. It also said excess property cash flow might not cover all obligations as due, and expects to use property sales, refinancing and additional real-estate-backed borrowing to meet liquidity needs.
Material developments, outlook and risks
- The company sold 600 Las Colinas, a 512,173-square-foot office building, for $74.8 million in August and used proceeds to repay its property loan and for general corporate purposes. It also sold land during the nine months, generating $27.4 million in proceeds from Windmill Farms and Mercer Crossing, according to management.
- The VAA earn-out arbitration went against the company. It is required to pay approximately $39.6 million to Macquarie; the filing says payment is to come from the company’s share of future VAA distributions. A $5.4 million VAA distribution was applied to the obligation in Q3.
- At September 30, the company was not in compliance with the minimum debt-service coverage ratio for its 770 South Post Oak loan. The lender may require surplus property cash to be trapped in a controlled account until compliance is restored for two consecutive quarters.
- COVID-19 had not caused significant operational disruption through the first nine months, but commercial occupancy had declined. Management characterized the decline as potentially temporary while noting that the pandemic’s effects remain uncertain. No numerical earnings or revenue guidance was provided.
- Risks include commercial occupancy and leasing conditions, refinancing and debt maturities, property-sale timing, development costs and delays, interest-rate and economic changes, and dependence on related parties. The company is externally managed by Pillar, an affiliate of its controlling shareholder; related-party advisory fees were $11.6 million for nine months.
- The Clapper litigation’s prior approximately $59 million award was vacated after retrial, with the court finding that Clapper would take nothing. A separate Berger lawsuit concerning property transfers and related-party loans was pending, with trial set for November 2022. Management intends to defend the case.
Most important facts for investors to verify
- How much of the approximately $39.6 million VAA earn-out remains unpaid, and the expected timing and effect of future distributions used to satisfy it.
- Whether 770 South Post Oak’s debt-service coverage covenant is restored and whether a cash trap is imposed.
- Collectability, terms and concentration of the substantial related-party notes and receivables, and the basis for related-party fees and transactions.
- Whether commercial occupancy and rental revenues stabilize after the reported decline, and how property dispositions affect ongoing earnings and cash generation.
- Liquidity available for debt maturities, development spending and other obligations, given negative operating cash flow and management’s reliance on sales and refinancing.
- The status and potential financial exposure of the Berger litigation. The filing provides no numerical forward guidance.