American Realty Investors, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. Dollar amounts below are in millions unless stated otherwise. The company is an externally advised real estate investor; its portfolio included 59 income-producing properties, 8,226 apartment units, eight commercial properties, a golf course and 3,664 acres of land.
Financial results and position
| Metric | Q1 2017 | Q1 2016 / prior balance date |
|---|---|---|
| Rental and other property revenue | $31.8 | $29.2 |
| Net operating income, as reported | $4.5 | $3.3 |
| Net loss attributable to ARI | $5.7 | $3.2 |
| Net loss applicable to common shares | $6.0; $0.39 per share | $3.7; $0.24 per share |
| Net cash used in operating activities | $1.9 | $5.9 |
| Net cash used in investing activities | $13.4 | $1.4 |
| Net cash provided by financing activities | $53.0 | $2.3 |
| Cash and cash equivalents | $55.3 | $17.5 at Dec. 31, 2016 |
| Total assets | $1,213.7 | $1,174.9 at Dec. 31, 2016 |
| Total shareholders’ equity | $169.9 | $176.1 at Dec. 31, 2016 |
Operating expenses were $27.3 million, including $16.3 million of property operating costs and $6.3 million of depreciation and amortization. Mortgage and loan interest expense was $16.8 million, versus $14.2 million a year earlier. Cash paid for interest was $13.8 million. The balance sheet reported $835.3 million of notes payable, including accrued interest and net of deferred borrowing costs, plus $72.0 million of bond and interest payable. Restricted cash was $31.3 million.
Material changes versus Q1 2016
- Revenue increased $2.6 million, primarily from two apartment communities acquired at year-end 2016 and higher occupancy at three commercial properties.
- Property operating expenses rose $1.1 million and depreciation and amortization rose $0.5 million. Higher revenue lifted reported net operating income to $4.5 million from $3.3 million.
- The common-share loss widened to $6.0 million from $3.7 million. Higher interest expense and lower land-sale gains contributed; Q1 2017 land gains were $0.4 million versus $1.7 million.
- Other income included $1.0 million of debt forgiveness and $0.3 million of insurance proceeds; a $0.3 million foreign-currency loss related to the bond offering was recorded separately.
- Operating cash use narrowed, but investing cash use increased, including $6.4 million for two development land parcels and $8.5 million for construction and development. Financing cash flow included $76.0 million of bond proceeds before issuance costs.
Outlook, risks and unusual items
- Liquidity: Management expects excess property operating cash flow in 2017 but says it will not be sufficient to meet all obligations as they come due. Its plans include property and land sales, refinancing or extending debt, and additional real-estate-secured borrowing.
- Debt and refinancing: The company refinanced two loans totaling $35.6 million, reporting lower monthly payments from lower rates and extended maturities; it also drew $7.3 million on construction loans. Some land mortgages were being modified or extended. Certain mortgages on properties classified as subject to sales contracts were in default, primarily for nonpayment, and discussions with lenders were ongoing.
- Bond financing: An indirect TCI subsidiary issued unsecured Series A bonds in Israel at a stated 7.3% rate and effective yield of 9.09%, with principal repayments scheduled from July 2019 through July 2023. A further approximately $28.3 million offering by that subsidiary was completed after quarter-end, on May 8, 2017.
- Interest-rate exposure: $36 million of notes payable was variable-rate. Management estimated that a 100-basis-point increase would add $0.36 million to annual interest cost and increase loss per share by $0.03. HUD apartment financing had a 5.19% weighted-average borrowing rate.
- Contingencies and related parties: The company disclosed guarantees, ordinary-course litigation and a lawsuit involving claims against ARI related to a judgment against former entities; management stated it believed ARI had no liability for that judgment. Related-party transactions and ownership are substantial, and management cautioned that such transactions may not be on arm’s-length terms. The company also reported $121.7 million of net notes and interest receivable from related parties.
- Other: Management cited real-estate market, tenant, financing, development, interest-rate and property-sale risks; it reported no changes to the risk factors in its 2016 Form 10-K. Disclosure controls were assessed as effective, with no material quarterly change in internal control reported.
Important facts for investors to verify
- Upcoming debt maturities, status of extensions or modifications, and the company’s ability to raise funds through sales and secured borrowing.
- Terms, subsidiary-level recourse and repayment capacity for the Israeli bonds, including the post-quarter-end issuance.
- Default status and expected resolution for mortgages on properties subject to sales contracts, and any related impairment exposure.
- Collectability and concentration of related-party notes receivable, related-party balances and guarantees.
- Sustainability of property revenue and occupancy growth, development spending, and the drivers of rising interest expense and continuing losses.
- Developments in the disclosed litigation and other contingencies, including any change in management’s assessment.