American Realty Investors, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012. ARL is an externally advised real estate company consolidating TCI and IOT. Its portfolio included 61 income-producing properties: 47 apartment communities with 8,559 units and 14 commercial properties, plus 4,629 acres of land. Related parties owned approximately 87.4% of ARL’s stock. The company has no employees.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 or prior balance date |
|---|---|---|
| Rental and other property revenue | $28.1 million | $28.0 million |
| Operating income | $4.4 million | $3.7 million |
| Loss from continuing operations | $4.8 million | $8.8 million |
| Net income (loss) attributable to ARL | $0.4 million | $(6.3) million |
| Net loss applicable to common shares; diluted EPS | $(0.2) million; $(0.02) | $(6.9) million; $(0.59) |
| Operating cash flow | $(9.1) million | $(21.8) million |
| Investing cash flow | $23.7 million | $13.9 million |
| Financing cash flow | $(23.5) million | $(4.3) million |
| Cash and cash equivalents | $8.3 million | $17.1 million at Dec. 31, 2012 |
| Total assets / total liabilities | $1,090.4 million / $1,006.0 million | $1,135.3 million / $1,050.2 million at Dec. 31, 2012 |
| Total equity | $84.4 million | $85.1 million at Dec. 31, 2012 |
Debt remains substantial. At March 31, notes and interest payable were $751.2 million; additional balances included $18.2 million of notes related to assets held for sale, $53.8 million related to properties subject to sales contracts, and $25.4 million of stock-secured notes and margin debt. A separate debt schedule reports $823.3 million of notes payable and accrued interest across property categories. Variable-rate debt was $138.4 million, with a disclosed estimated $1.4 million annual net-income reduction from a 1 percentage-point rate increase. Cash paid for interest was $11.2 million.
Material changes versus Q1 2012
- Property revenue was nearly flat, while operating income rose by $0.7 million. Lower general and administrative costs and lower mortgage interest helped; property operating expenses increased slightly.
- Interest expense fell $2.2 million, partly because two commercial loans no longer accrued default interest and late fees after lender settlements. This was partly offset by $2.5 million of deferred borrowing-cost amortization and $4.0 million of loan charges and prepayment penalties, both higher year over year.
- Q1 2013 included a $7.2 million gain on the sale of Verandas at City View, a 314-unit apartment property, reported in discontinued operations. Discontinued-operations net income was $4.7 million after tax, versus $1.3 million in Q1 2012. The gain materially reduced the common-share loss; continuing operations remained loss-making.
- Cash declined $8.9 million during the quarter. Operating cash outflows improved from the prior year, while investing cash inflows included $24.3 million of income-producing property sale proceeds. Financing used $23.5 million, including $94.7 million of maturing debt payments, partly offset by $78.3 million of new borrowing.
Outlook, risks, contingencies and unusual items
- Management expects excess cash flow from property operations in 2013, but says it will not be sufficient to discharge all obligations as they come due. Planned sources include selling land and income-producing real estate, refinancing or extending debt, and obtaining additional property-secured borrowing. No numerical earnings or revenue guidance is provided.
- Management reported land mortgages under modification or extension discussions. Properties sold to related parties with deferred sale recognition include assets whose underlying mortgages are in default, primarily for nonpayment; the company is discussing settlements or cures with lenders.
- ARL disclosed deficiency claims relating to foreclosed assets, with estimated aggregate maximum exposure of approximately $20 million, if any, potentially arising in future years. The separate Clapper litigation award of approximately $74 million is against ART and ART Midwest, not ARL or its other subsidiaries; ARL said its $10 million note received for ART was fully reserved and valued at zero.
- A February 2013 appellate ruling favored TCI in the long-running Dynex litigation and directed entry of a judgment based on jury findings, with damages and interest still subject to further proceedings and expected challenges. The filing does not state a final recovery amount.
- The German Olpenitz resort project faced developer mismanagement and insolvency proceedings. ARL said it was working with the insolvency manager and believed project value could satisfy creditors and return its investment; recovery is uncertain.
- Subsequent events: in May 2013, TCI resolved the Petra proceeding with a $5 million promissory note secured by collateral; the filing describes potential forgiveness tied to early repayment. TCI also recognized an approximately $10 million gain on the Amoco building transfer after settling obligations. These events occurred after quarter-end.
- ARL reported a $103.7 million net deferred tax asset offset by a 100% valuation allowance because management could not conclude realization was more likely than not. Related-party transactions, including substantial related-party notes receivable and advisory arrangements, are a notable governance and credit consideration.
- Management stated disclosure controls were effective and that there was no material quarterly change in internal control over financial reporting. The company cautioned that forward-looking statements are subject to risks including financing availability, interest rates, occupancy, rents, property sales, development execution and economic conditions.
Important facts for investors to verify
- Near-term maturities, refinancing and extension progress, lender discussions, and whether asset sales and new borrowing can meet obligations given $8.3 million of quarter-end cash and negative operating cash flow.
- Debt totals and classifications across the balance sheet and debt schedules, including secured, held-for-sale, sales-contract and stock-secured obligations, plus the effect of variable interest rates.
- Cash proceeds and realized economics of property dispositions, and the extent to which reported earnings depend on gains from discontinued operations rather than continuing operations.
- Recoverability and terms of related-party notes receivable, deferred related-party property sales, and the company’s related-party advisory and management arrangements.
- Updates on deficiency claims, Dynex proceedings, the Olpenitz insolvency process, and the post-quarter Petra and Amoco settlements.