American Realty Investors, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company invests in multifamily and commercial real estate and land, primarily through its approximately 78.4%-owned subsidiary, TCI. It reported 14 multifamily properties, four office buildings and approximately 1,858 acres of land.
Financial performance
- Third-quarter revenue: $12.5 million, up from $8.3 million in Q3 2022. Rental revenue was $11.8 million versus $7.6 million; the filing attributes much of the increase to properties acquired from VAA and the lease-up of Landing Bayou.
- Third-quarter earnings: Net income was $4.0 million, including $3.0 million attributable to common shares, or $0.18 per share. This compares with net income of $384.3 million and common-share earnings of $302.3 million, or $18.72 per share, in Q3 2022.
- Nine-month results: Revenue was $36.5 million versus $24.2 million. Net income was $8.5 million, with $6.1 million attributable to common shares ($0.38 per share), compared with $418.9 million and $329.9 million ($20.43 per share) in 2022.
- Operating segments: Q3 multifamily segment profit rose to $3.1 million from $0.9 million; commercial segment profit fell to $1.3 million from $2.0 million. For nine months, multifamily segment profit was $9.9 million versus $3.6 million, while commercial segment profit declined to $3.7 million from $6.1 million. Management cited Stanford Center occupancy declines and higher insurance costs for commercial weakness.
- Cash flow: Nine-month operating cash flow was $7.8 million, versus cash used of $6.9 million in 2022. Investing used $9.6 million, compared with $154.9 million provided in 2022; financing used $137.3 million, largely reflecting debt repayments. Cash, cash equivalents and restricted cash totaled $83.3 million at period-end, down from $222.3 million at year-end 2022.
- Assets and liquidity: Total assets were $1.062 billion, down from $1.197 billion at year-end. Cash, restricted cash and short-term investments together were $217.5 million, versus $342.1 million. Notes receivable were $145.7 million, including $76.9 million from related parties; net related-party receivables were $92.4 million.
- Debt and equity: Mortgages and other notes payable were $182.4 million, down from $188.0 million; bonds payable declined from $129.2 million to zero after repayment. Total liabilities were $241.6 million and total equity was $820.7 million.
Material changes and notable items
- The sharp year-over-year decline in earnings primarily reflects unusually large 2022 gains from the VAA joint venture portfolio sale: equity income from unconsolidated ventures was $464.1 million in Q3 2022 and $471.4 million for the first nine months of 2022, versus $0.2 million and $2.9 million in 2023. The 2022 periods also included substantial tax expense associated with that sale. Thus, reported earnings comparisons do not by themselves indicate the change in recurring property operations.
- Management reported higher interest income and lower interest expense, partly reflecting investment of VAA distributions and repayment of bonds. The company paid off its remaining Series A and B bonds in May 2023 and withdrew from the Tel Aviv Stock Exchange.
- The company is developing a 240-unit Lake Wales, Florida multifamily property, expected to be completed in 2025 at an estimated total cost of $55.3 million. A $33.0 million construction loan was entered into, with no advances drawn as of September 30; $12.3 million of development costs had been incurred.
- After quarter-end, the company entered into an agreement to develop a 216-unit McKinney, Texas property, expected to be completed in 2025 at an estimated cost of $51.3 million, partly funded by a $25.4 million construction loan.
Outlook, risks and contingencies
- Management expects period-end cash, cash equivalents, collections on notes and related-party receivables, and short-term investments to be sufficient for cash requirements. It also says operating cash surpluses over the next 12 months may not cover all obligations as they come due; planned liquidity measures include property sales, refinancing and additional real-estate-secured borrowing.
- The company was not in compliance with the minimum debt-service-coverage covenant on its 770 South Post Oak loan. The lender requires surplus property cash flow to be held in a controlled deposit account until compliance is achieved for two consecutive quarters. The company stated it was otherwise in compliance with its loan covenants.
- Management identified real-estate leasing and occupancy, financing availability and interest rates, property sales, development delays or cost overruns, economic conditions, and uninsured or environmental losses among risks to future results. No material changes to previously disclosed risk factors were reported.
- The Clapper litigation appeal remained under review by the U.S. Fifth Circuit after a jury found the defendants owed nothing and the court entered a take-nothing judgment. The filing reports no other legal proceedings.
- Related-party concentration merits attention: more than 90% of the company’s stock is owned by related-party entities, Pillar manages the company, and the filing cautions that related-party transactions may not be on arm’s-length terms.
Most important facts for investors to verify
- Whether occupancy and rental performance at Stanford Center and other commercial properties stabilize, and whether multifamily gains persist after the VAA acquisition and Landing Bayou lease-up effects.
- Progress toward satisfying the 770 South Post Oak debt-service-coverage covenant, and upcoming maturities, including the Windmill Farms loan due February 2024 and other near-term debt obligations.
- Actual development costs, financing drawdowns, schedules and Pillar fees for the Lake Wales and McKinney projects.
- Collectability and timing of notes and receivables from related parties, including amounts associated with Unified Housing Foundation and Pillar.
- The company’s ability to meet obligations through operations, asset sales and refinancing, given the decline in cash and restricted cash and management’s liquidity caveat.