American Realty Investors, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company acquires, develops and owns multifamily and commercial real estate, primarily through its approximately 78.4%-owned subsidiary, Transcontinental Realty Investors (TCI). At quarter-end, its portfolio included 14 multifamily properties, four office buildings and approximately 1,858 acres of land. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $11.688 | $7.787 |
| Net operating loss | $(3.086) | $(4.495) |
| Net income | $4.219 | $14.567 |
| Net income attributable to the Company | $2.978 | $11.314 |
| Basic and diluted EPS | $0.18 | $0.70 |
| Net cash from (used in) operating activities | $1.539 | $(4.186) |
| FFO / adjusted FFO | $6.129 / $5.158 | $1.925 / $(0.208) |
Revenue increased about 50%, largely reflecting the seven multifamily properties acquired from a joint venture in November 2022. Multifamily segment profit rose to $3.665 million from $1.508 million; commercial segment profit declined to $1.238 million from $1.945 million, primarily due to lower occupancy at Stanford Center. Operating expenses rose to $14.774 million from $12.282 million, leaving an operating loss despite higher revenue.
Net income fell by $10.348 million year over year. Q1 2022 included $11.148 million of gains on asset sales/write-downs, including the Toulon multifamily sale, and $3.772 million of foreign-currency gains, versus $0.971 million of currency gains in Q1 2023. Partly offsetting these items, net interest income increased to $5.155 million from $0.615 million, reflecting higher interest income and lower interest expense. Interest income included $7.811 million from related parties in Q1 2023.
Balance sheet, debt and liquidity
- Total assets were $1,113.420 million at March 31, down from $1,197.479 million at December 31, 2022; total equity was $816.387 million.
- Cash and cash equivalents were $55.340 million and restricted cash was $55.188 million. Short-term investments were $158.086 million. Cash, cash equivalents and restricted cash together totaled $110.528 million, down from $222.328 million at year-end.
- Mortgages and other notes payable were $187.179 million; bonds payable were $41.672 million net of issuance costs. Total reported debt was approximately $228.9 million at quarter-end. The company repaid $88.279 million of Series C bonds in January; on May 4, 2023, it repaid the remaining Series A and B bonds and withdrew from the Tel Aviv Stock Exchange.
- Cash used in investing activities was $24.212 million, including net purchases of short-term investments and $5.653 million of real estate development and renovation spending. Financing activities used $89.127 million, mainly for debt repayments.
- Management said quarter-end cash, together with collections of notes and interest receivable, was expected to meet cash requirements. It also said property-operation cash may not be sufficient to discharge all obligations as due, and expects to use asset sales, refinancing and additional real-estate-secured borrowing as needed.
Outlook, developments and risks
- The company began development of a 240-unit multifamily property in Lake Wales, Florida. Completion is expected in 2025 at an estimated total cost of $55.330 million; a $33 million interest-only construction loan bears interest at SOFR plus 3% and matures in 2026, with two one-year extension options. A $1.637 million development fee is payable to related-party adviser Pillar over the construction period. Costs incurred by March 31 were $10.140 million.
- Restoration and lease-up work at Landing Bayou, damaged by Hurricane Ida, was expected to finish by year-end 2023. The company reported $10.4 million of restoration costs, substantially funded by insurance proceeds.
- The company was not in compliance with the minimum debt-service coverage ratio for the 770 South Post Oak loan. The lender requires surplus property cash flow to be held in a lender-controlled account until the company meets the covenant for two consecutive quarters. Management reported compliance with other loan covenants.
- Management cited real-estate demand and leasing, financing availability and cost, interest rates, development delays and cost overruns, property sales, economic conditions, and uninsured or environmental losses among risks. It reported no material changes to the risk factors in its 2022 Form 10-K. The Clapper litigation remained under appeal after a jury found the defendants owed nothing and the court entered a take-nothing judgment.
- Related-party dependence is significant: more than 90% of the company’s stock is owned by related-party entities, and Pillar provides management and advisory services. The filing cautions that related-party transactions may not be on arm’s-length terms.
Important facts for investors to verify
- Whether the company collects related-party notes and receivables as expected; notes receivable totaled $139.361 million, including $76.935 million from related parties, and receivables from related parties were $101.879 million.
- Liquidity after the May 4 bond repayment, including the effect on unrestricted cash, and the company’s ability to meet near-term maturities and other obligations through operating cash, refinancing or asset sales.
- Progress toward curing the 770 South Post Oak DSCR breach, and lender approval for assumed mortgages on the acquired multifamily properties.
- Lake Wales construction costs, financing terms and delivery timing; Landing Bayou restoration and lease-up; and occupancy at Stanford Center.
- The ongoing appeal in the Clapper matter and any developments that could affect the company’s reported contingencies.