American Realty Investors, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unless otherwise noted, amounts below are in U.S. dollars; financial-statement amounts are converted from thousands to millions. The company owns and develops apartments, commercial properties, hotels and land. Its portfolio included 71 income-producing properties and 5,983 acres of land at quarter-end.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Rental and other property revenue | $34.6m | $32.4m | $102.0m | $98.4m |
| Operating income | $2.1m | $0.6m | $0.2m | $1.4m |
| Net loss from continuing operations | $(15.5)m | $(15.4)m | $(29.2)m | $(50.1)m |
| Net income (loss) applicable to common shares | $(0.3)m | $(9.6)m | $3.7m | $(36.5)m |
| Basic and diluted EPS | $(0.02) | $(0.84) | $0.33 | $(3.17) |
- Nine-month revenue increased 3.6%. Apartment revenue growth, including properties in lease-up, was partly offset by lower commercial revenue attributed to increased vacancy. Nine-month operating expenses fell 2.1%, but general and administrative expense rose to $11.1m from $7.5m, primarily due to professional services.
- Nine-month mortgage and loan interest expense decreased to $47.3m from $52.3m. The company recorded a $5.6m impairment provision on notes receivable and real estate assets. Land-sale gains were $18.4m versus a $4.2m loss in the prior-year period.
- Discontinued operations contributed $20.6m of nine-month income, including $20.1m of property-sale gains. Accordingly, the $3.7m common-shareholder profit for the period depended on disposals despite a $29.2m continuing-operations loss.
- At September 30, total assets were $1.324bn, down from $1.557bn at year-end 2010. Cash was $9.4m; total equity was $97.3m, including $65.7m attributable to ARL shareholders.
- Reported debt-related balances included $815.0m of notes and interest payable, $188.7m of notes related to properties subject to sales contracts, and $23.7m of stock-secured notes and margin debt. These balances totaled approximately $1.027bn; the filing also describes stock-secured borrowings of $25.7m, so the precise comparable amount is unclear from the text.
- For the first nine months, operating cash flow was $(15.6)m, compared with $17.1m provided in 2010. Investing activities provided $244.0m, primarily from property and land sales; financing activities used $231.8m. Cash declined $3.3m to $9.4m.
Material changes, outlook and risks
- Property dispositions were substantial: the company reported $328.9m of land and income-producing property sales during the first nine months. Sale proceeds were often applied to associated debt or reflected buyer-assumed loans rather than retained as cash.
- Management said property operating cash flow in 2011 would not be sufficient to discharge all obligations as they came due. It planned to sell land and income-producing assets, refinance or extend debt, and seek additional real-estate-secured borrowing. The filing provides no quantified earnings or revenue guidance.
- The company said it was in default on mortgages associated with properties sold to related parties under common control, primarily for nonpayment, and was negotiating with lenders to settle or cure defaults. Sale gains on some related-party transactions were deferred because of continuing involvement or other sale-recognition criteria.
- A lender lawsuit alleges $30.2m due under guarantees on three real-estate notes. ARL is vigorously defending the claim and says its reserve exceeds the potential deficiency. Separately, an October 27, 2011 settlement regarding a $12.0m note requires transfer of 257.52 acres to the lender and leaves ARL with a $3.0m liability.
- The company reported $5.6m of impairment expense for the nine months and an $11.0m release of reserves on properties no longer owned by consolidated entities. Several lender transfers and sales were recognized or expected after period-end, making the timing and measurement of gains and losses important.
- Management cited commercial vacancy, availability and terms of financing, debt maturities, development costs and delays, property-sale timing, economic conditions, and interest-rate changes as risks. A 1% increase in base rates was estimated to reduce annual net income by $2.35m, or $0.20 per share, on $234.7m of variable-rate debt.
- Related-party concentration is significant: affiliated entities owned approximately 86.7% of ARL, and numerous property transactions, financing arrangements and management services involved related parties. The external advisor changed from Prime to Pillar effective April 30, 2011.
Key facts for investors to verify
- Near-term debt maturities, mortgage defaults, lender negotiations, guarantees and the company’s ability to fund obligations given $9.4m of cash and negative operating cash flow.
- Cash actually retained from reported asset sales, buyer-assumed debt, seller financing, deferred gains, and whether related-party transactions ultimately transfer to third parties or lenders.
- Support for the $30.2m guarantee litigation reserve and the $3.0m liability under the October 2011 Pioneer Crossing settlement, including any further subsequent-event developments.
- Reconciliation of debt disclosures, including the $23.7m balance-sheet amount versus the note’s $25.7m stock-secured borrowing figure.
- Sustainability of common-shareholder earnings: nine-month profit included material land and discontinued-property sale gains, while continuing operations remained loss-making.