American Realty Investors, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; filed August 14, 2020. ARL is an externally advised real estate company with apartments, commercial properties, development land and mortgage notes. At quarter-end, it owned 10 apartment communities (1,657 units), seven commercial properties (about 1.7 million square feet) and approximately 1,891 acres of land. Its 50%-owned VAA venture held 51 apartment communities.
Key financial metrics
Amounts below are in millions except per-share data.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Rental and other property revenue | $11.9 | $11.8 | $23.9 | $23.8 |
| Net operating loss | $(1.3) | $(4.4) | $(5.8) | $(6.1) |
| Net income (loss) attributable to ARL | $(2.3) | $(2.8) | $0.6 | $(8.9) |
| EPS applicable to common shares | $(0.14) | $(0.17) | $0.04 | $(0.56) |
| Net cash used in operating activities | Not separately provided for the quarter | $(12.2) | $(15.5) |
- Q2 land-sale gains were $5.3 million, on sales proceeds of about $6.6 million. Six-month gains were $9.5 million on $12.2 million of land-sale proceeds.
- At June 30, assets were $828.3 million, liabilities $530.7 million and shareholders’ equity $297.6 million. Cash and cash equivalents were $42.5 million; restricted cash was $30.1 million.
- Notes and interest payable totaled $263.3 million and bonds and interest payable $218.2 million. The filing reports $269.1 million of notes payable before deferred borrowing costs and accrued interest, and $220.7 million of bonds before issuance costs and accrued interest.
- For the first half, investing activities provided $8.7 million and financing activities used $7.2 million; cash, cash equivalents and restricted cash declined $10.7 million to $72.6 million.
Material changes versus prior comparable periods
- Q2 revenue was nearly flat year over year. The operating loss narrowed, principally alongside lower property operating costs, G&A and franchise-tax/other expenses.
- Six-month attributable earnings improved from an $8.9 million loss to $0.6 million of income. The period included $9.5 million of land-sale gains and a $2.2 million foreign-currency transaction gain, compared with an $8.1 million loss in 2019.
- Q2 foreign-currency transaction loss widened to $5.6 million from $2.3 million, attributed to the strengthening of the Israeli shekel against the U.S. dollar. Interest income declined to $5.3 million from $6.5 million in Q2.
- Operating cash outflow improved by $3.3 million year over year for the first half, but remained negative. Investing cash flow shifted to a $8.7 million inflow from a $7.9 million outflow, reflecting, among other items, property-sale proceeds and investee distributions.
- Total assets declined slightly from December 31, 2019, while notes and interest payable rose to $263.3 million from $254.9 million and bonds and interest payable declined to $218.2 million from $229.7 million.
Outlook, commentary, risks and unusual items
- Management expected excess cash flow from property operations in 2020 but stated it would not cover all obligations as due. Planned sources include asset sales, refinancing and additional real-estate-secured borrowing.
- Management reported collecting approximately 97% of Q2 rents (about 95% multifamily and 98% office), no significant rent abatements or deferments, and 87% occupancy at non-lease-up properties versus 89% a year earlier. Development work continued without reported work stoppages.
- Management cautioned that COVID-19’s future effects on financial condition, results and cash flows were uncertain. It cited potential real estate, tenant, financing, development, interest-rate and property-sale risks. No quantitative earnings guidance was provided.
- ARL reported $75.9 million receivable from a related party and $110.8 million of gross notes and interest receivable from related parties. Related-party transactions include note purchases, advisory fees and other balances; the company notes these transactions may not be on arm’s-length terms.
- Management disclosed a $24.3 million mezzanine-loan guarantee involving UHF and noted ongoing litigation, including the Clapper and Berger matters. The filing does not quantify a probable loss for these matters; management described its defenses and stated ordinary-course litigation was not expected to materially affect the company, subject to specific disclosed cases.
- On July 16, 2020, the company entered into a related-party agreement to sell a multifamily property for $13.3 million, with $5.4 million net cash proceeds and assumption of $9.1 million of debt. On July 22, it paid $11.7 million of Series A bond principal and $6.9 million of bond interest.
Important facts for investors to verify
- Near-term maturities, refinancing capacity and asset-sale assumptions, given management’s statement that operating cash flow would not meet all obligations.
- Collections and occupancy trends after Q2, and the continuing effects of COVID-19 on tenants, leasing and property values.
- Recoverability and collectability of related-party notes and receivables, including the $12.6 million allowance for estimated note losses and related collateral.
- Terms, governance and economic exposure of related-party transactions and the VAA joint venture.
- Outcomes and potential financial exposure from disclosed litigation and the UHF mezzanine-loan guarantee.