American Realty Investors, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial amounts below are in millions of dollars unless stated otherwise. The company owns and develops multifamily, office, retail and land assets; it is externally managed, and related-party entities own more than 90% of its stock.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $11.9 | $13.2 | $39.8 | $44.0 |
| Rental revenue | $11.5 | $11.4 | $34.5 | $34.4 |
| Net operating income (loss) | $(2.3) | $(0.6) | $(4.1) | $0.3 |
| Net income (loss) attributable to common shares | $8.0 | $(7.6) | $8.6 | $(16.5) |
| Diluted EPS | $0.50 | $(0.47) | $0.54 | $(1.03) |
- Common-share income included gains on asset sales or write-downs of $15.3 million in Q3 and $24.8 million year to date. Excluding these gains, reported earnings were materially weaker; operating expenses exceeded revenue in both periods.
- At September 30, total assets were $807.6 million and total liabilities were $500.4 million. Mortgages and notes payable were $248.9 million; bonds payable, net of issuance costs, were $203.2 million. Combined reported mortgage/note and bond debt was about $452.1 million, down from about $477.4 million at year-end 2019.
- Cash and cash equivalents were $33.0 million, with another $28.0 million restricted. Cash plus restricted cash totaled $61.0 million, versus $83.3 million at year-end 2019.
- For the first nine months, operating cash flow was negative $17.4 million; investing activities provided $16.2 million, while financing activities used $21.1 million. Cash, cash equivalents and restricted cash declined $22.3 million.
- Rental income was broadly flat year over year. Segment profit for the first nine months was $4.5 million for multifamily, up from $3.2 million, and $11.5 million for commercial, down from $11.9 million.
Material changes and notable transactions
- Year-to-date property sales generated $31.8 million of reported cash proceeds and $24.8 million of gains: land sales, Bridgeview Plaza, and Farnham Park Apartments. Villager Apartments was also sold, with part of the consideration funded by a seller note and the buyer assuming its mortgage.
- Interest income declined to $16.5 million from $19.5 million year to date, mainly due to lower interest on related-party receivables. Interest expense fell to $26.3 million from $29.8 million.
- Foreign-currency results improved to a $0.8 million gain year to date from a $13.3 million loss in 2019, primarily reflecting U.S. dollar strength against the Israeli shekel.
- Related-party notes receivable were $96.2 million of total notes receivable of $151.3 million. The company also reported an $86.1 million receivable from a related party. Advisory fees to a related party were $7.1 million year to date.
Outlook, risks and contingencies
- Liquidity: Management said property cash generation might not cover all obligations as due. It expects to rely on asset sales, refinancing or extending debt, and additional real-estate-secured borrowing. No quantified earnings or revenue guidance was provided.
- COVID-19: The company reported collecting approximately 96% of Q3 rents (95% multifamily; 97% office), stable 91% occupancy, positive leasing spreads, and no significant rent abatements or deferrals. Development continued without reported work stoppages. Management cautioned that future pandemic effects remain uncertain.
- Debt and currency: Most mortgage/note debt was fixed rate; $7.1 million was variable rate. Bonds issued through a subsidiary are denominated in Israeli shekels, exposing results and cash flows to currency movements. Management also noted LIBOR-referenced mortgage debt.
- Legal matters: The company is appealing a 2016 ruling awarding the Clapper parties approximately $59 million; trial was scheduled for May 2021. The filing does not state a clear expected loss or reserve for this matter. The company also guarantees a $24.3 million mezzanine loan to UHF, which was reported covenant-compliant, and is defending a separate lawsuit alleging improper property transactions with a consolidated subsidiary.
- Management identified ordinary real-estate risks, including tenant and leasing conditions, financing availability, development costs and delays, property sales, and economic conditions. It reported no material change to other previously disclosed risk factors.
Important facts for investors to verify
- Whether asset-sale gains are recurring and what earnings and cash generation look like excluding those gains.
- Near-term debt maturities, refinancing progress, covenant requirements, and the company’s ability to fund obligations given negative operating cash flow and management’s liquidity warning.
- Recoverability and terms of substantial related-party receivables and notes, plus related-party ownership, management fees and governance safeguards.
- Potential financial exposure and status of the Clapper litigation and other legal matters.
- Subsequent rent collection, occupancy, tenant payment trends and development conditions as the pandemic evolves.