American Realty Investors, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 30, 2012. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars; financial statement figures are generally in millions unless noted.
Business context
ARL is an externally advised real estate owner and developer, with approximately 82.7% ownership of Transcontinental Realty Investors, Inc. (TCI); TCI consolidates Income Opportunity Realty Investors, Inc. (IOT). At year-end, the portfolio included 50 apartment communities (9,317 units), 17 commercial properties (about 3.9 million square feet), one 161-room hotel, and approximately 5,315 acres of land. ARL sold $414.7 million of land and income-producing properties during 2011. Pillar replaced Prime as advisor and cash manager on April 30, 2011.
Financial results and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $118.4 million | $116.1 million |
| Operating loss | $45.3 million | $52.4 million |
| Net loss from continuing operations | $40.2 million | $108.8 million |
| Net income from discontinued operations | $33.5 million | $2.6 million |
| Net loss applicable to common shares | $2.2 million; $(0.19) per share | $97.2 million; $(8.48) per share |
| Operating cash flow | $23.6 million provided | $7.1 million used |
| Investing cash flow | $301.4 million provided | $198.1 million provided |
| Financing cash flow | $317.3 million used | $183.2 million used |
| Cash and cash equivalents at year-end | $20.3 million | $12.6 million |
| Total assets | $1,235.5 million | $1,557.3 million |
| Shareholders’ equity | $95.3 million | $106.3 million |
Operating margin, calculated as operating loss divided by operating revenue, was approximately negative 38.3%. Impairment charges were $49.1 million, including $21.6 million on land held and a $10.0 million reserve for ART assets. Mortgage and loan interest expense was $60.7 million, down from $66.2 million. Common shareholders received no dividends in 2011, 2010, or 2009; the 2011 preferred dividend requirement was $2.5 million.
Year-end notes payable totaled $923.9 million, including $191.6 million of variable-rate debt and $732.3 million of fixed-rate debt. The weighted-average interest rate was 7.29%, compared with 6.78% in 2010. Scheduled principal payments were $224.5 million in 2012. Separately, the contractual-obligations table reports $263.5 million of 2012 long-term debt obligations, including amounts beyond principal. The filing states that substantially all assets are pledged to secure debt.
Changes versus the prior year
- Revenue increased $2.2 million: apartment revenue rose $8.0 million, while commercial revenue fell $5.9 million, attributed mainly to higher vacancy.
- Common-shareholder loss narrowed substantially, largely because land-sale results improved from a $10.1 million loss to a $34.2 million gain and discontinued-operations income increased. The company still reported a $40.2 million continuing-operations loss.
- ARL recorded $56.9 million of gains on sales in discontinued operations. Cash from operations turned positive, while investing proceeds included $183.8 million from income-property sales and $174.1 million from land sales.
- Real estate assets declined to $1,026.6 million from $1,332.6 million; total assets fell by $321.8 million. The portfolio count declined from 82 properties at year-end 2010 to 68 at year-end 2011.
Outlook, risks, contingencies, and unusual items
- Liquidity: Management said cash on hand plus expected 2012 property cash flow might not cover all cash requirements. It plans selective asset sales, refinancing or extensions, and additional real-estate-secured borrowing. The auditor’s unqualified opinion references management’s liquidity plans; the filing does not provide a quantified 2012 funding shortfall.
- Defaults and related-party sales: Properties sold to related parties under common control were often accounted for as subject to sales contracts, with gains deferred. The company disclosed mortgage defaults, primarily for nonpayment, and ongoing lender discussions to settle or cure them. Some properties may transfer back to the seller; many loans have corporate guarantees. Related-party transactions may not be on arm’s-length terms.
- Debt and interest-rate exposure: Significant maturities, balloon payments, refinancing access, covenant compliance, foreclosures, and cross-default provisions pose risks. Management estimated that a 100-basis-point increase in average variable rates would raise 2012 interest expense and reduce net income by $1.9 million.
- Litigation: ART and its subsidiary ART Midwest received an approximately $74 million judgment in the Clapper litigation, including $26 million in damages and $48 million in interest. ART appealed; ARL reserved $10 million for ART’s assets and sold ART and its subsidiaries in January 2012 for a $10 million note that ARL says is fully reserved. ART subsequently filed for Chapter 11. The filing says ARL and its other subsidiaries did not guarantee or indemnify ART’s obligations.
- Other contingencies and projects: ARL is defending a lawsuit concerning guarantees on hotel loans with amounts owed reported at $30.2 million; it reserved the gain it otherwise would have recognized and said the reserve exceeds the potential deficiency. The Port Olpenitz development in Germany faces partner disputes and bankruptcy proceedings; management believes project value will cover creditors and return its investment. ARL also guaranteed a $24.7 million outstanding loan for an investee whose investment is fully reserved, with additional reserves for possible funding exposure.
- Management plans: ARL intends to focus on apartment development and leasing, selectively sell assets, and defer some land projects until economic conditions improve. It provided no numeric earnings or revenue guidance. Forward-looking statements are not guarantees and the company disclaims an obligation to update them.
- Subsequent events: Several apartment mortgages were refinanced in early 2012. The 220-unit Wildflower Villas complex sold in February 2012 for $19.6 million, with the buyer assuming $13.7 million of debt. Certain land parcels subject to sales contracts transferred to lenders in early 2012.
Most important facts for investors to verify
- Near-term debt maturities, covenant status, current payment defaults, lender negotiations, and the feasibility and cost of planned refinancing.
- How much of the reported property-sale proceeds was cash available to ARL versus assumed debt, seller financing, deferred gains, or amounts applied to secured loans.
- Valuation and recoverability of land, real estate, notes receivable, and related-party balances; approximately $96.7 million, or 90.9% of the mortgage-notes portfolio, was owed by affiliates at year-end.
- Terms, approvals, valuation support, and economic substance of material related-party asset transactions and deferred sales.
- Potential liability from hotel loan guarantees, the Clapper judgment and ART bankruptcy, the LK-Four Hickory guarantee, and the Port Olpenitz proceedings.
- Leasing and occupancy trends, especially commercial vacancies and apartment properties in lease-up; confirm the impact of portfolio sales and discontinued-operations reclassifications when comparing periods.