American Realty Investors, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Figures below are in millions of dollars unless otherwise noted. ARL is an externally advised real-estate investor; results include its consolidated subsidiaries, including TCI. At quarter-end, the portfolio comprised 57 income-producing properties, including 48 apartment communities with 7,983 units, eight commercial properties, a golf course, and 3,771 acres of land.
Financial results and position
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Rental and other property revenue | $29.2 | $23.2 |
| Operating expenses | $25.9 | $21.2 |
| Reported net operating income | $3.3 | $2.0 |
| Mortgage and loan interest expense | $13.5 | $9.8 |
| Net income (loss) | $(3.7) | $2.8 |
| Net income (loss) applicable to common shares | $(3.7), or $(0.24) per share | $3.0, or $0.17 per share |
| Operating cash flow | $(5.9) | $30.9 |
| Investing cash flow | $(1.4) | $(4.9) |
| Financing cash flow | $2.3 | $(18.6) |
| Cash and cash equivalents | $10.2 | $15.2 at Dec. 31, 2015 |
| Total assets | $1,107.3 | $1,117.4 at Dec. 31, 2015 |
| Total shareholders’ equity | $172.7 | $176.9 at Dec. 31, 2015 |
Restricted cash was $30.7 million at March 31, down from $45.7 million at year-end. Notes and interest payable on the balance sheet were $801.9 million; additional notes related to sales-contract assets and held-for-sale assets were $6.2 million and $0.4 million. The debt note reports $827.8 million of gross debt including accrued interest, less $19.3 million of unamortized borrowing costs, for $808.5 million net. The filing does not provide a conventional current ratio or a clear consolidated margin measure.
Material changes and management commentary
- Revenue rose $6.0 million year over year, primarily from apartment revenue (+$5.2 million) and commercial revenue (+$0.8 million). Management attributed the increase mainly to acquired properties and reported apartment occupancy averaging above 95%.
- Property operating costs increased $3.5 million and depreciation and amortization increased $1.1 million, largely in line with portfolio growth. Advisory fees increased $0.4 million; they are calculated at 0.75% annually of weighted-average gross asset value.
- Interest expense increased $3.7 million, reflecting acquired properties and additional debt. Loan charges and prepayment penalties fell to $0.7 million from $1.9 million.
- Land-sale gains were $1.7 million versus $2.9 million in Q1 2015. ARL also sold an income-producing industrial warehouse, recording a $0.2 million loss. Overall, reported net income shifted to a $3.7 million loss from $2.8 million income.
- Operating cash flow declined by $36.8 million year over year. Management cited, among other factors, related-party receivables and prior-period property-sale effects. The quarter included $8.4 million of apartment construction and predevelopment spending and $0.5 million of capitalized interest.
Outlook, liquidity, risks and unusual items
- Liquidity: Management expects property operations to generate excess cash flow in 2016 but says it will not be sufficient to meet all obligations as they come due. The company plans to sell land and income-producing real estate, refinance or extend debt, and obtain additional property-secured borrowings. No quantitative earnings or cash-flow guidance is provided.
- Debt and rates: During the quarter ARL obtained $43.5 million of note proceeds and repaid $37.0 million of maturing notes; it also drew $5.1 million on construction loans. The filing describes certain land mortgages as undergoing modification or extension. Variable-rate debt was $40.8 million at a 5.66% weighted-average rate; a 1% rate increase was estimated to reduce annual net income by $0.4 million, or $0.03 per share. Management cited fixed-rate HUD apartment financing as a partial offset.
- Sales-contract accounting: A November 2015 Mercer Crossing land transaction had total consideration of $75 million, including a $50 million subordinated buyer note. Because of limited down payment and seller financing, the deposit method applies: no sale revenue is recognized and the land remains on the books until recognition criteria are met. Allocation of proceeds among the participating parties remains unresolved.
- Related parties: Approximately 86.7% of ARL shares were owned by related parties. Related-party notes and interest income, advisory fees, receivables, and transactions are significant. The filing cautions that related-party dealings may not be on arm’s-length terms. ARL reported a $32.4 million receivable from a related party at quarter-end.
- Credit and contingencies: Some properties previously sold to a related party remain reported as subject to sales contracts; related mortgages are described as in default, primarily for nonpayment, with discussions underway with lenders. ARL also guarantees a $60.35 million mezzanine loan to UHF; UHF was reported in covenant compliance. A separate $22.1 million LK-Four Hickory loan is subject to an ARL guarantee, with reserves maintained for potential exposure.
- Legal matters: Management said ordinary-course litigation was not expected to materially affect ARL, subject to disclosed matters. The Clapper judgment was against former entities ART and ART Midwest, not ARL; ARL had fully reserved a $10 million note received in its 2012 sale of ART. A 2015 Dynex judgment awarded damages to ART and TCI, among others; ARL said it was reviewing next steps with counsel.
- Other: The company reported no subsequent events through May 13, 2016, and no material change in internal control over financial reporting. Management identified no changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Debt maturities, covenant compliance, refinancing progress, and the status of land loans described as in default or under modification.
- Cash availability and restrictions, and the company’s ability to fund obligations given negative Q1 operating cash flow and management’s statement that property cash flow alone is insufficient.
- Collection and recoverability of the $32.4 million related-party receivable and the $116.2 million net notes-receivable portfolio, including borrower concentration and collateral support.
- Final proceeds allocation, buyer-note collection, development commitments, and recognition timing for the Mercer Crossing and other deferred related-party land sales.
- Potential exposure under guarantees and the status and collectability of disclosed litigation-related claims and notes.
- Reconciliation of the different debt figures presented in the balance sheet and debt note, including the treatment of debt tied to sales-contract and held-for-sale assets.