UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-15663
American Realty Investors, Inc.
(Exact name of registrant as specified in its charter)
Nevada | |
75-2847135 | |
(State or other jurisdiction of Incorporation or organization) | (IRS Employer Identification Number) |
1603 LBJ Freeway, Suite Dallas, Texas | 75234 |
(Address of principal executive offices) | (Zip Code) |
(469) 522-4200
Registrant’s Telephone Number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | ARL | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☒ |
Emerging growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No ☒
The
Based on the last sale at the close of business on June 30, 2019, the aggregate market value of the shares of voting and non-votingregistrant’s common equitystock held by non-affiliates of the Registrant, computed by reference to the closing price at which the common equityregistrant was last sold which was the sales price of the Common stock on the New York Stock Exchange as of June 30, 2016 (the last business day of the Registrant’s most recently completed second fiscal quarter) was $9,793,299 based upon a total of 2,019,327 shares held as of June 30, 2016 by persons believed to be non-affiliates of the Registrant.approximately $17,795,030 The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.
As of March 31, 2017,25, 2020, there were 15,514,36015,997,076 shares of common stock outstanding.
Documents Incorporated By Reference:
Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.; Commission File No. 001-14784
Consolidated Financial Statements of Transcontinental Realty Investors, Inc.; Commission File No. 001-09240
INDEX TO
ANNUAL REPORT ON FORM 10-K
2
FORWARD-LOOKING STATEMENTS
Certain Statements in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described in Part I, Item 1A. “Risk Factors”.
BUSINESS |
General
As used herein, the terms “ARL,” “the Company,” “We,” “Our,” or “Us” refer to American Realty Investors, Inc., a Nevada corporation, which was formed in 1999.
The Company is headquartered in Dallas, Texas and its common stock is listed and trades on the New York Stock Exchange (“NYSE”) under the symbol (“ARL”)“ARL”. Over 80% of ARL’s stock is owned by related parties. ARL and a subsidiary own approximately 78%78.38% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, which has its common stock listed and traded on the NYSE under the symbol (“TCI”)“TCI”. TCI’s financial results are consolidated with those of ARL. In 2012, May Realty Holdings, Inc. (“MRHI”) subsidiaries acquired more than 80% of ARL stock and as a result, ARL is included in the MRHI consolidated group for federal income tax reporting. We have no employees.
TCI a subsidiary of ARL, owns approximately 81.1%81.23% of the common stock of Income Opportunity Realty Investors, Inc. (“IOT”IOR”). IOT’sIOR’s financial results are consolidated with those of TCI and its subsidiaries. Shares of IOTIOR are listed and traded on the NYSE MKTAmerican under the symbol (“IOT”)“IOR”.
ARL’s Board of Directors isare responsible for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors of ARL are also directors of TCI and IOT.four are also directors of IOR. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board of Directors of TCI and IOT.IOR. The executive officers of ARL also serve as officers of TCI, IOTIOR and Pillar.
Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc.),MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external contractual Advisor and Cash Manager. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as anthe contractual Advisor and Cash Manager to TCI and IOT.IOR. As the contractual advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.
Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), manages our commercial properties and provides brokerage services. Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. ARL engages third-party companies to lease and manage its apartment properties.
3
Southern Properties Capital Ltd. a British Virgin Island corporation (“Southern” or “SPC”), is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures (that cannot be converted into any other security) listed and traded on the Tel-Aviv Stock Exchange(“TASE”). Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI.
On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
On November 19, 2018, TCI executed an agreement between the Macquarie Group (“Macquarie”) and SPC and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, SPC and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).
VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”). The remaining 2% of the profit participation interest is held by Daniel J. Moos ARL’s President and Chief Executive Officer (“Class B Member”) who also serves as the Manager of the joint venture.
ARL through subsidiaries invests in real estate through direct ownership, leases, and partnerships and also invests in mortgage loans on real estate. Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents; and by leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies.
3
At December 31, 2016,2019, our portfolio of income-producing properties (most of which were owned by subsidiaries of TCI) consisted of:
● | Seven commercial properties consisting of |
● |
Ten residential apartment communities owned directly by us comprising |
● | Approximately 1,951 acres of developed and undeveloped land; and |
● | Fifty-one residential apartment communities totaling 9,888 units owned by our 50% owned investee VAA. |
4
The following table sets forth the location of our real estate held for investment (income-producing properties only) by asset type as of December 31, 2016:2019:
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Apartments | Commercial |
| Apartments |
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| Apartments |
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| Commercial |
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Location | No. | Units | No. | SF |
| No. |
|
| Units |
|
| No. |
|
| Units |
|
| No. |
|
| SF |
| ||||||||||||||||||
Alabama | 1 | 168 | — | — |
|
| 1 |
|
|
| 200 |
|
|
| 1 |
|
|
| 168 |
|
|
| — |
|
|
| — |
| ||||||||||||
Arkansas | 5 | 938 | — | — |
|
| — |
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|
| — |
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|
| 5 |
|
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| 1,122 |
|
|
| — |
|
|
| — |
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Colorado | 2 | 260 | — | — |
|
| — |
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|
| — |
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| 2 |
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| 260 |
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| — |
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| — |
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Florida | 3 | 198 | 1 | 6,722 |
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| 1 |
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| 33 |
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| 2 |
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| 388 |
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| 1 |
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| 6,722 |
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Georgia | 1 | 222 |
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| — |
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| — |
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| 1 |
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| 222 |
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| — |
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| — |
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Illinois | — | — | 1 | 306,609 | ||||||||||||||||||||||||||||||||||||
Louisiana-Other | 2 | 384 | — | — | ||||||||||||||||||||||||||||||||||||
Louisiana |
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| 2 |
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| 384 |
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| 3 |
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| 464 |
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| — |
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| — |
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Mississippi | 9 | 924 | — | — |
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| 2 |
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|
| 400 |
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| 1 |
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| 196 |
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| — |
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| — |
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North Carolina |
|
| — |
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| — |
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| 1 |
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| 201 |
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| — |
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| — |
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Nevada |
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| — |
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| — |
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| 1 |
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| 308 |
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| — |
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| — |
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Tennessee | 4 | 708 | — | — |
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| 1 |
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| 144 |
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| 4 |
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| 708 |
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| — |
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| — |
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Texas-Greater Dallas-Ft Worth | 11 | 1,962 | 4 | 1,473,457 |
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| — |
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| — |
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| 19 |
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| 3,709 |
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| 4 |
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| 1,473,634 |
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Texas-Greater Houston | 2 | 416 | 1 | 94,792 |
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| — |
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| — |
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| 2 |
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| 416 |
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| 1 |
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| 95,329 |
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Texas-San Antonio | 2 | 468 | — | — | ||||||||||||||||||||||||||||||||||||
Texas-Other | 8 | 1,578 | — | — |
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| 3 |
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| 496 |
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| 9 |
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| 1,726 |
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| — |
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| — |
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Wisconsin | — | — | 1 | 122,205 |
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| — |
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| — |
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| — |
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| — |
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| 1 |
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| 122,205 |
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Total | 50 | 8,226 | 8 | 2,003,785 |
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| 10 |
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| 1,657 |
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| 51 |
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| 9,888 |
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| 7 |
|
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| 1,697,890 |
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We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific, first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable-rate construction loans that are refinanced with the proceeds of long-term, fixed-rate amortizing mortgages when the development has been completed and occupancy has been stabilized. When we sell properties, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable, secured by the property being sold. We may also from time to time enter into partnerships or joint ventures with various investors to acquire land or income-producing properties or to sell interests in certainsome of our properties.
We join with various third-party development companies to construct residential apartment communities. At December 31, 2016, we have three2019, TCI and VAA had five and one apartment projects in development. The third-party developer typically holds a general partner, as well as a limited partner interest in a limited partnership formed for the purpose of building a single property, while we generally take a limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion, initial lease-up and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.
4
At December 31, 2016,2019, our apartment projects in development included (dollars in thousands):
Total | ||||||||||||||
Projected | ||||||||||||||
Property | Location | No. of Units | Costs to Date (1) | Costs (1) | ||||||||||
Lakeside Lofts | Farmers Branch, TX | 494 | $ | 1,744 | $ | 78,000 | ||||||||
Overlook at Allensville Square II | Sevierville, TN | 144 | 2,114 | 18,400 | ||||||||||
Terra Lago | Rowlett, TX | 447 | 21,430 | 66,360 | ||||||||||
Total | 1,085 | $ | 25,288 | $ | 162,760 |
Property |
| Location |
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| No. of Units |
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| Costs to Date (1) |
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| Total Projected Costs (1) |
| |||
Sugar Mill III |
| Addis, LA |
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| 72 |
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| $ | 7,417,244 |
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| $ | 10,014,582 |
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Parc at Denham Springs Phase II |
| Denham Springs, LA |
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| 144 |
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| 17,791,765 |
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| 18,767,871 |
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Forest Pines II (Forest Grove) |
| Bryan, TX |
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| 84 |
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| 4,843,342 |
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| 11,258,990 |
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LD Athens |
| Athens, Al |
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| 232 |
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| 81,372 |
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| 30,519,021 |
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McKinney Heritage |
| McKinney, TX |
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| 176 |
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| 88,931 |
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| 24,767,176 |
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Total |
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| 708 |
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| $ | 30,222,654 |
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| $ | 95,327,640 |
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(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.
5
We have made investments in a number of large tracts of undeveloped and partially developed land and intend to a) continue to improve these tracts of land for our own development purposes or b) make the improvements necessary to ready the land for sale to other developers.
At December 31, 2016,2019, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands):
Location | Acquired | Acres | Cost | Intended Use |
| Acquired |
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| Acres |
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| Cost |
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| Intended Use |
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McKinney, TX | 1997-2008 | 10 | $ | 613 | Mixed use | ||||||||||||||||||||||||
Dallas, TX | 1996-2013 | 165 | 13,674 | Mixed use |
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| 1996-2013 |
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| 11.57 |
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| 3,057 |
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| Mixed use |
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Farmers Branch, TX |
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| 2008 |
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| 60.62 |
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| 10,966 |
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| Mixed use |
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Kaufman County, TX | 2008 | 25 | 2,547 | Multi-family residential |
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| 2011 |
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| 1,781.83 |
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| 49,238 |
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| Mixed use |
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Farmers Branch, TX | 2008 | 240 | 32,183 | Mixed use | |||||||||||||||||||||||||
Kaufman County, TX (1) | 2006 | 2,884 | 43,817 | Mixed use | |||||||||||||||||||||||||
Various | 1990-2008 | 342 | 35,273 | Various |
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| 1990-2008 |
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| 96.97 |
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| 6,742 |
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| Various |
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Total Land Holdings | 3,666 | $ | 128,107 |
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| 1,950.99 |
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| $ | 70,003 |
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(1) Windmill Farms Land was acquired by a subsidiary of ARL in 2006 and 2,900 acres were subsequently sold to TCI in 2011.
Significant Real Estate Acquisitions/Dispositions and Financings
A summary of someThe following is a description of the Company’s significant real estate and financing transactions for(through TCI) during the year ended December 31 2016 are discussed below:2019:
● | Sold 35.9 acres of land located in Farmers Branch, Texas for an aggregate sales price of $18.9 million and recognized a gain on the sale of $9.0 million. |
Purchases
● | Sold 29.4 acres of land located in Forney, Texas for a total sales price of $5.0 million and recognized a gain on the sale of approximately $4.1 million. |
During the year ended December 31, 2016, subsidiaries acquired four income-producing apartment properties from third parties in the states of Arkansas, Florida, Georgia and Mississippi, increasing the total number of units by 723, for a combined purchase price of $79.7 million. In addition, we acquired four land parcels for future development for a total purchase price of $12.5 million, adding 36.3 acres to the development portfolio.
● | Sold 10.33 acres of land located in Dallas, Texas for a total sales price of $2.1 million and recognized a gain on the sale of approximately $0.4 million. |
● | Sold 6.25 acres of land located in Nashville, Tennessee for a total sales price of $2.3 million and recognized a gain on the sale of approximately $0.9 million. |
● | Sold 23.24 acres of land located in Fort Worth, Texas for a total sales price of $1.8 million and recognized a gain on the sale of approximately $0.5 million. |
● | Sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million out of which $1.8 million represents land received with a total acreage of 1.27 acres located in Riverside, California in exchange for a note receivable of the same value. The Company recognized a loss from this sale of approximately $0.08 million. |
● | Purchased 33.05 acres of land in Athens, Alabama for a total purchase price of $2.1 million, out of which $0.9 million was paid in cash and the remaining balance of $1.2 million was issued as a note payable. The note payable matures in eighteen months and bears an annual interest rate of 5.91%. |
● | Purchased from a third party 8.94 acres of land located in Collin County, Texas for a total purchase price of $2.5 million. |
● | Purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer. |
● | Sold fresh water district receivables related to infrastructure development work, located in Kaufman County, Texas for $12.0 million. No gain or loss was recognized from the sale of these receivables. |
6
● | Purchased notes receivables from related parties for an aggregate purchase price of $29.0 million. No gain or loss was recognized from the purchase of the notes receivables (refer to Note 5). |
● | Issued Series C bonds on the TASE in the amount of NIS 275 million (or approximately $78.1 million), bearing an annual interest of 4.65%. The interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, with the bond principal payment due in 2023. From the proceeds from the sale of the Series C bonds the Company paid off the mortgage debt of $41.5 million related to one of its commercial buildings used as collateral for this issuance. |
Sales
For the year ended December 31, 2016, ARI sold a combined 129.7 acres of land located in Forney, Texas, McKinney, Texas, Farmers Branch, Texas and Nashville, Tennessee to independent third parties for a total sales price of $29.1 million. We recorded an aggregate $3.1 million gain from the land sales. In addition, the Company sold one apartment community located in Irving, Texas to an independent third party for a total sales price of $8.1 million and one apartment community located in Topeka, Kansas to an independent third party for a total sales price of $12.3 million. We recorded an aggregate gain of $16.4 million from the sale of these two properties. The Company also sold an industrial warehouse consisting of approximately 177,805 square feet. The sale resulted in a loss of approximately $0.2 million.
As of December 31, 2016, subsidiaries hold approximately 91 acres of land, at various locations that were sold to related parties in multiple transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets. Due to the related party nature of the transactions ARI has deferred the recording of the sales in accordance with ASC 360-20.
We continuecontinues to invest in the development of apartment projects. ForDuring the year ended December 31, 2016, we2019, ARL through its subsidiaries have expended $20.3invested $28.5 million related to the construction or predevelopment of various apartment complexes and capitalized $0.9$0.8 million of interest costs.
5
Business Plan and Investment Policy
Our business objective is to maximize long-term value for our stockholders by investing in residential and commercial real estate through the acquisition, development and ownership of apartments, commercial properties, and land. We intend to achieve this objective through acquiring and developing properties in multiple markets and operating as an industry-leading landlord. We believe this objective will provide the benefits of enhanced investment opportunities, economies of scale and risk diversification, both in terms of geographic market and real estate product type. We believe our objective will also result in continuing access to favorably priced debt and equity capital. In pursuing our business objective, we seek to achieve a combination of internal and external growth while maintaining a strong balance sheet and employing a strategy of financial flexibility. We maximize the value of our apartments and commercial properties by maintaining high occupancy levels while charging competitive rental rates, controlling costs and focusing on tenant retention. We also pursue attractive development opportunities either directly or in partnership with other investors.
For our portfolio of commercial properties, we generate increased operating cash flow through annual contractual increases in rental rates under existing leases. We also seek to identify best practices within our industry and across our business units in order to enhance cost savings and gain operating efficiencies. We employ capital improvement and preventive maintenance programs specifically designed to reduce operating costs and increase the long-term value of our real estate investments.
We seek to acquire properties consistent with our business objectives and strategies. We execute our acquisition strategy by purchasing properties which management believes will create stockholder value over the long-term. We will also sell properties when management believes value has been maximized or when a property is no longer considered an investment to be held long-term.
We are continuously in various stages of discussions and negotiations with respect to development, acquisition, and disposition projects. The consummation of any current or future development, acquisition, or disposition, if any, and the pace at which any may be completed cannot be assured or predicted.
Substantially all of our properties are owned by subsidiary companies, many of which are single-asset entities. This ownership structure permits greater access to financing for individual properties and permits flexibility in negotiating a sale of either the asset or the equity interests in the entity owning the asset. From time-to-time, our subsidiaries have invested in joint ventures with other investors, creating the possibility of risks that do not exist with properties solely owned by an ARL subsidiary. In those instances where other investors are involved, those other investors may have business, economic, or other objectives that are inconsistent with our objectives, which may in turn require us to make investment decisions different from those if we were the sole owner.
Real estate generally cannot be sold quickly. We may not be able to promptly dispose of properties in response to economic or other conditions. To offset this challenge, selective dispositions have been a part of our strategy to maintain an efficient investment portfolio and to provide additional sources of capital. We finance acquisitions through mortgages, internally generated funds, and, to a lesser extent, property sales. Those sources provide the bulk of funds for future acquisitions. We may purchase properties by assuming existing loans secured by the acquired property. When properties are acquired in such a manner, we customarily seek to refinance the asset in order to properly leverage the asset in a manner consistent with our investment objectives.
7
Our businesses are not generally seasonal with regard to real estate investments. Our investment strategy seeks both current income and capital appreciation. Our plan of operation is to continue, to the extent our liquidity permits, to make equity investments in income-producing real estate such as apartments, and commercial properties. We may also invest in the debt or equity securities of real estate-related entities. We intend to pursue higher risk, higher reward investments, such as improved and unimproved land where we can obtain reasonably-priced financing for substantially all of a property’s purchase price. We intend to continue the development of apartment properties in selected markets in Texas and in other locations where we believe adequate levels of demand exist. We intend to pursue sales opportunities for properties in stabilized real estate markets where we believe our properties’ value has been maximized. We also intend to be an opportunistic seller of properties in markets where demand exceeds current supply. Although we no longer actively seek to fund or purchase mortgage loans, we may, in selected instances, originate mortgage loans or we may provide purchase money financing in conjunction with a property sale.
Our Board of Directors has broad authority under our governing documents to make all types of investments, and we may devote available resources to particular investments or types of investments without restriction on the amount or percentage of assets that may be allocated to a single investment or to any particular type of investment, and without limit on the percentage of securities of any one issuer that may be acquired. Investment objectives and policies may be changed at any time by the Board without stockholder approval.
The specific composition from time-to-time of our real estate portfolio owned by ARL directly and through our subsidiaries depends largely on the judgment of management to changing investment opportunities and the level of risk associated with specific investments or types of investments. We intend to maintain a real estate portfolio that is diversified by both location and type of property.
6
Competition
The real estate business is highly competitive and we compete with numerous companies engaged in real estate activities (including certain entities described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”), some of which have greater financial resources than ARL. We believe that success against such competition is dependent upon the geographic location of a property, the performance of property-level managers in areas such as leasing and marketing, collection of rents and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to a property, the adequacy of related facilities such as parking and other amenities, and sensitivity to market conditions in determining rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the residents. We believe that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties are developed in the competing submarket are also competitive factors. See also Part I, Item 1A. “Risk Factors”.
To the extent that ARL seeks to sell any of its properties, the sales prices for the properties may be affected by competition from other real estate owners and financial institutions also attempting to sell properties in areas where ARL’s properties are located, as well as aggressive buyers attempting to dominate or penetrate a particular market.
As described above and in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence,” the officers and directors of ARL serve as officers and directors of TCI and IOT.IOR. TCI and IOTIOR have business objectives similar to those of ARL. ARL’s officers and directors owe fiduciary duties to both IOTIOR and TCI as well as to ARL under applicable law. In determining whether a particular investment opportunity will be allocated to ARL, IOT,IOR, or TCI, management considers the respective investment objectives of each Company and the appropriateness of a particular investment in light of each Company’s existing real estate and mortgage notes receivable portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all three or two of the entities.
In addition, as described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence,” ARL competes with related parties of Pillar having similar investment objectives related to the acquisition, development, disposition, leasing and financing of real estate and real estate-related investments. In resolving any potential conflicts of interest which may arise, Pillar has informed ARL that it intends to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.
8
We have historically engaged in and will continue to engage in certain business transactions with related parties, including but not limited to asset acquisitions and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interests of the Company.
Available Information
ARL maintains an Internet site at http://www.amrealtytrust.com.www.americanrealtyinvest.com. Available through the website, free of charge, are Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16, and amendments to those reports, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission. In addition, we have posted the charters for the Audit Committee, Compensation Committee, and Governance and Nominating Committee, as well as the Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence, and other information on the website. These charters and principles are not incorporated in this report by reference. We will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common shareholders.
7
ITEM 1A. | RISK FACTORS |
An investment in our securities involves various risks. All investors should carefully consider the following risk factors applicable to ARL and its subsidiaries in conjunction with the other information in this report before trading our securities.
Risk Factors Related to our Business
Our business may be impacted as a result of the pandemic impact the coronavirus (“COVID 19”) may have in the U.S. and global economy.
During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – 19. At this point, the extent to which COVID – 19 may impact the global economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business and results of operations.
Adverse events concerning our existing tenants or negative market conditions affecting our existing tenants could have an adverse impact on our ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth.
Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. We could be adversely affected by various facts and events over which the Company has limited or no control, such as:
● | lack of demand for space in areas where the properties are located; |
● | inability to retain existing tenants and attract new tenants; |
● | oversupply of or reduced demand for space and changes in market rental rates; |
● | defaults by tenants or failure to pay rent on a timely basis; |
● | the need to periodically renovate and repair marketable space; |
● | physical damage to properties; |
● | economic or physical decline of the areas where properties are located; and |
● | potential risk of functional obsolescence of properties over time. |
9
At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to the Company.
If tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is re-let, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and our ability to make distributions to shareholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance, and debt service payments, are not necessarily reduced when circumstances cause a decrease in rental income from the properties.
We may not be able to compete successfully with other entities that operate in our industry.
We experience a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.
In our effort to lease properties, we compete for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than we are able to offer.
If the availability of land or high quality properties in our markets diminishes, operating results could be adversely affected.
We may experience increased operating costs which could adversely affect our financial results and the value of our properties.
Our properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs, and maintenance of the properties. While some current tenants are obligated by their leases to reimburse us for a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets to offset the increased expenses, without at the same time decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service indebtedness could be adversely affected.
8
Our ability to achieve growth in operating income depends in part on its ability to develop additional properties.
We intend to continue to develop properties where warranted by market conditions. We have a number of ongoing development and land projects being readied for commencement.
Additionally, general construction and development activities include the following risks:
● | construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property; |
● | construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs; |
● | some developments may fail to achieve expectations, possibly making them less profitable; |
10
● | we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project; |
● | we may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If we determine to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss; |
● | we may expend funds on and devote management’s time to projects which will not be completed; and |
● | occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations. |
We face risks associated with property acquisitions.
We acquire individual properties and various portfolios of properties and intend to continue to do so. Acquisition activities are subject to the following risks:
● | when we are able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price; |
● | acquired properties may fail to perform as expected; |
● | the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates; |
● | acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and |
● | we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected. |
We may acquire properties subject to liabilities and without any recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, we might be required to pay substantial sums to settle it, which could adversely affect cash flow.
Many of our properties are concentrated in our primary markets and the Company may suffer economic harm as a result of adverse conditions in those markets.
Our properties are located principally in specific geographic areas in the southwestern, southeastern, and mid-western United States. The Company’s overall performance is largely dependent on economic conditions in those regions.
Our investments in joint ventures may decrease our ability to manage risk.
We conduct some of our operations through a joint venture in which we share control over certain economic and business interests with our joint venture partner. Our joint venture partner may have economic, business or legal interests or goals that are inconsistent with our goals and interests or may be unable to meet their obligations. Failure by us, or an entity in which we have a joint-venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and adversely affect our business, financial condition, results of operations and cash flows.
11
We are leveraged and may not be able to meet our debt service obligations.
We had total indebtedness, including bonds and notes payable, at December 31, 20162019 of approximately $867.7 $501.7 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. Our leveraged position makes us vulnerable to declines in the general economy and may limit the Company’s ability to pursue other business opportunities in the future.
9
We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.
We rely on proceeds from property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are also among the sources upon which the Company relies. There is no guarantee that we will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:
● | general economic conditions affecting these markets; |
● | our own financial structure and performance; |
● | the market’s opinion of real estate companies in general; and |
● | the market’s opinion of real estate companies that own similar properties. |
We may suffer adverse effects as a result of terms and covenants relating to the Company’s indebtedness.
Required payments on our indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, we could sustain a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.
We anticipate only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to refinance a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.
Our credit facilities and unsecured debt contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt. Our continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on terms that are detrimental to the Company.
Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.
The degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make us more vulnerable to a downturn in business or the general economy.
12
An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.
We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on our debt and the ability to make distributions to shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.
Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow.
If capital expenditures for ongoing or planned development projects or renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, we might not have access to funds on a timely basis to pay for the unexpected expenditures.
Construction costs are funded in large part through construction financing, which the Company may guarantee. The Company’s obligation to pay interest on this financing continues until the rental project is completed, leased-up and permanent financing is obtained, or the project is sold, or the construction loan is otherwise paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.
We may need to sell properties from time to time for cash flow purposes.
Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be limited. Real estate investments generally cannot be sold quickly. In the event that we must sell assets to generate cash flow, we cannot predict whether there will be a market for those assets in the time period desired, or whether we will be able to sell the assets at a price that will allow the Company to fully recoup its investment. We may not be able to realize the full potential value of the assets and may incur costs related to the early extinguishment of the debt secured by such assets.
10
We intend to devote resources to the development of new projects.
We plan to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:
● | we may abandon a project after spending time and money determining its feasibility; |
● | construction costs may materially exceed original estimates; |
● | the revenue from a new project may not be enough to make it profitable or generate a positive cash flow; |
● | we may not be able to obtain financing on favorable terms for development of a property, if at all; |
● | we may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs; and |
● | we may not be able to obtain, or may be delayed in obtaining, necessary governmental permits. |
The overall business is subject to all of the risks associated with the real estate industry.
We are subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:
● | our real estate assets are concentrated primarily in the southwest and any deterioration in the general economic conditions of this region could have an adverse effect; |
● | changes in interest rates may make the ability to satisfy overall debt service requirements more burdensome; |
13
● | lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive; |
● | changes in real estate and zoning laws; |
● | increases in real estate taxes and insurance costs; |
● | federal or local regulations or rent controls; |
● | acts of terrorism, and |
● | hurricanes, tornadoes, floods, earthquakes and other similar natural disasters. |
Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.
Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:
● | downturns in the national, regional and local economic conditions (particularly increases in unemployment); |
● | competition from other office, apartment and commercial buildings; |
● | local real estate market conditions, such as oversupply or reduction in demand for office, apartments or other commercial space; |
● | changes in interest rates and availability of financing; |
● | vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space; |
● | increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs; |
● | civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses; |
● | significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property; |
● | declines in the financial condition of our tenants and our ability to collect rents from our tenants; and |
● | decreases in the underlying value of our real estate. |
1114
Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, and financial condition.
Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the current dislocations in the credit markets and general global economic recession. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, and financial condition as a result of the following, among other potential consequences:
● | the financial condition of our tenants may be adversely affected which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons; |
● | significant job losses within our tenants may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted; |
● | our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense; |
● | reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and |
● | one or more lenders could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all. |
Real estate investments are illiquid, and the Company may not be able to sell properties if and when it is appropriate to do so.
Real estate generally cannot be sold quickly. We may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code may limit our ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous to do so, thereby adversely affecting returns to stockholders and adversely impacting our ability to meet our obligations.
None.
1215
PROPERTIES |
On December 31, 2016,2019, our portfolio consisted of 59sixteen income-producing properties consisting of 50ten apartment communities totaling 8,2661,657 units, 8seven commercial properties consisting of 5five office buildings and 3two retail centers; and a golf course.centers. In addition, we own or control 3,6661,951 acres of improved and unimproved land held for future development or sale.
The average annual rental and other property revenue dollar per square foot is $11.19$13.36 for the Company’s residential apartment portfolio and $14.91$25.61 for the commercial portfolio. Through our joint venture VAA we have a 50 percent ownership interest to a portfolio of fifty-one income-producing properties with a total of 9,888 units, which generated an average annual rental revenue of $14.74 per square foot.
The table below shows information relating to those properties in which we own or have an ownership interest through subsidiaries, all of which are suitable and adequate for the purpose for which each is utilized:
Residential Apartments | Location | Units | Occupancy | |||||||
Anderson Estates | Oxford, MS | 48 | 87.5 | % | ||||||
Blue Lake Villas I | Waxahachie, TX | 186 | 89.2 | % | ||||||
Blue Lake Villas II | Waxahachie, TX | 70 | 90.0 | % | ||||||
Breakwater Bay | Beaumont, TX | 176 | 90.9 | % | ||||||
Bridgewood Ranch | Kaufman, TX | 106 | 98.1 | % | ||||||
Capitol Hill | Little Rock, AR | 156 | 93.3 | % | ||||||
Centennial Village | Oak Ridge TN | 252 | 95.6 | % | ||||||
Crossing at Opelika | Opelika AL | 168 | 98.8 | % | ||||||
Curtis Moore Estates | Greenwood, MS | 104 | 90.4 | % | ||||||
Dakota Arms | Lubbock, TX | 208 | 89.4 | % | ||||||
David Jordan Phase II | Greenwood, MS | 32 | 90.6 | % | ||||||
David Jordan Phase III | Greenwood, MS | 40 | 87.5 | % | ||||||
Desoto Ranch | DeSoto, TX | 248 | 89.1 | % | ||||||
Falcon Lakes | Arlington, TX | 248 | 96.0 | % | ||||||
Heather Creek | Mesquite, TX | 200 | 93.5 | % | ||||||
Lake Forest | Houston, TX | 240 | 89.2 | % | ||||||
Legacy at Pleasant Grove | Texarkana, TX | 208 | 88.9 | % | ||||||
Lodge at Pecan Creek | Denton, TX | 192 | 92.7 | % | ||||||
Mansions of Mansfield | Mansfield, TX | 208 | 95.2 | % | ||||||
Metropolitan | Little Rock, AR | 260 | 81.2 | % | ||||||
Mission Oaks | San Antonio, TX | 228 | 96.5 | % | ||||||
Monticello Estate | Monticello, AR | 32 | 87.5 | % | ||||||
Northside on Travis | Sherman, TX | 200 | 96.0 | % | ||||||
Oak Hollow | Seguin TX | 160 | 91.3 | % | ||||||
Oceanaire | Biloxi, MS | 196 | 91.3 | % | ||||||
Overlook @ Allensville | Sevierville TN | 144 | 97.9 | % | ||||||
Parc at Clarksville | Clarksville, TN | 168 | 92.3 | % | ||||||
Parc at Denham Springs | Denham Springs, LA | 224 | 71.8 | % | ||||||
Parc at Maumelle | Little Rock, AR | 240 | 92.5 | % | ||||||
Parc at Metro Center | Nashville, TN | 144 | 97.9 | % | ||||||
Parc at Rogers | Rogers, AR | 250 | 98.0 | % | ||||||
Residences at Holland Lake | Weatherford TX | 208 | 95.2 | % | ||||||
Preserve at Pecan Creek | Denton, TX | 192 | 93.8 | % | ||||||
Preserve at Prairie Point | Lubbock, TX | 184 | 95.1 | % | ||||||
Riverwalk Phase I | Greenville, MS | 32 | 87.5 | % | ||||||
Riverwalk Phase II | Greenville, MS | 72 | 86.1 | % | ||||||
Sawgrass Creek | New Port Richey, FL | 45 | 95.6 | % | ||||||
Sonoma Court | Rockwall, TX | 124 | 91.1 | % | ||||||
Sugar Mill | Baton Rouge, LA | 160 | 95.0 | % | ||||||
Tattersall Village | Hinesville, GA | 222 | 95.0 | % | ||||||
Toulon | Gautier, MS | 240 | 97.9 | % | ||||||
Tradewinds | Midland TX | 214 | 90.2 | % | ||||||
Villager Apts | Fort Walton FL | 33 | 97.0 | % | ||||||
Villas at Park West I | Pueblo, CO | 148 | 93.9 | % | ||||||
Villas at Park West II | Pueblo, CO | 112 | 92.0 | % | ||||||
Vista Ridge | Tupelo MS | 160 | 91.3 | % | ||||||
Vistas of Vance Jackson | San Antonio, TX | 240 | 90.4 | % | ||||||
Waterford at Summer Park | Rosenberg TX | 196 | 91.3 | % | ||||||
Westwood Apts | Mary Ester FL | 120 | 98.3 | % | ||||||
Windsong | Fort Worth, TX | 188 | 96.8 | % | ||||||
Total Apartments | 8,226 |
Residential Apartments |
| Location |
|
| Units |
|
| Occupancy |
| ||
Chelsea |
| Beaumont, TX |
|
|
| 144 |
|
|
| 90.97 | % |
Farnham Park |
| Port Arthur, TX |
|
|
| 144 |
|
|
| 95.83 | % |
Landing Bayou |
| Houma, LA |
|
|
| 240 |
|
|
| 89.58 | % |
Legacy at Pleasant Grove |
| Texarkana, TX |
|
|
| 208 |
|
|
| 88.94 | % |
Toulon |
| Gautier, MS |
|
|
| 240 |
|
|
| 98.33 | % |
Villager |
| Fort Walton, FL |
|
|
| 33 |
|
|
| 90.91 | % |
Villas at Bon Secour Apts |
| Gulf Shores, AL |
|
|
| 200 |
|
|
| 92.00 | % |
Vista Ridge |
| Tupelo, MS |
|
|
| 160 |
|
|
| 93.13 | % |
Overlook at Allensville Phase II |
| Sevierville, TN |
|
|
| 144 |
|
|
| 89.58 | % |
Parc at Denham Springs Phase II |
| Denham Springs, LA |
|
|
| 144 |
|
|
| 5.56 | % |
10 |
| Total Apartment Units |
|
|
| 1,657 |
|
|
|
|
|
Office Buildings |
| Location |
|
| SqFt |
|
| Occupancy |
| ||
600 Las Colinas |
| Irving, TX |
|
|
| 512,173 |
|
|
| 79.43 | % |
770 South Post Oak |
| Houston, TX |
|
|
| 95,438 |
|
|
| 83.85 | % |
Browning Place (Park West I) |
| Farmers Branch, TX |
|
|
| 625,297 |
|
|
| 87.03 | % |
Senlac (VHP) |
| Farmers Branch, TX |
|
|
| 2,821 |
|
|
| 100.00 | % |
Stanford Center |
| Dallas, TX |
|
|
| 333,234 |
|
|
| 90.91 | % |
5 |
| Total Office Buildings |
|
|
| 1,568,963 |
|
|
|
|
|
Retail Centers |
| Location |
|
| SqFt |
|
| Occupancy |
| ||
Bridgeview Plaza |
| LaCrosse, WI |
|
|
| 122,205 |
|
|
| 37.25 | % |
Fruitland Park |
| Fruitland Park, FL |
|
|
| 6,722 |
|
|
| 100.00 | % |
2 |
| Total Retail Centers |
|
|
| 128,927 |
|
|
|
|
|
| Total Commercial |
|
|
| 1,697,890 |
|
|
|
|
|
1316
Office Buildings | Location | SqFt | Occupancy | |||||||
600 Las Colinas | Las Colinas, TX | 512,033 | 87.1 | % | ||||||
770 South Post Oak | Houston, TX | 94,792 | 97.2 | % | ||||||
Browning Place (Park West I) | Farmers Branch, TX | 625,378 | 66.6 | % | ||||||
Senlac (VHP) | Farmers Branch, TX | 2,812 | 100.0 | % | ||||||
Stanford Center | Dallas, TX | 333,234 | 97.8 | % | ||||||
Total Office Buildings | 1,568,249 | |||||||||
Retail Centers | Location | SqFt | Occupancy | |||||||
Bridgeview Plaza | LaCrosse, WI | 122,205 | 90.9 | % | ||||||
Cross County Mall | Matoon, IL | 306,609 | 56.3 | % | ||||||
Fruitland Park | Fruitland Park, FL | 6,722 | 100.0 | % | ||||||
Total Retail Centers | 435,536 | |||||||||
Total Commercial | 2,003,785 |
Our joint venture investee VAA, owns the following residential properties:
Residential Apartments | Location | Units | Occupancy | |||
Abode Red Rock Apartments | Las Vegas, NV | 308 | 83.04% | |||
Apalachee Point Villas Apartments | Tallahassee, FL | 200 | 91.88% | |||
Blue Lake Villas Apartments | Waxahachie, TX | 186 | 90.78% | |||
Blue Lake Villas Apartments Phase II | Waxahachie, TX | 70 | 89.02% | |||
Breakwater Bay Apartments. | Beaumont, TX | 176 | 97.53% | |||
Bridgewood Ranch Apartments | Kaufman, TX | 106 | 94.39% | |||
Capitol Hill Apartments | Little Rock, AR | 156 | 91.17% | |||
Centennial Village Apartments | Oak Ridge,TN | 252 | 94.83% | |||
Crossings at Opelika Apartments | Opelika, AL | 168 | 97.29% | |||
Dakota Arms Apartments | Lubbock, TX | 208 | 96.17% | |||
Desoto Ranch Apartments | DeSoto, TX | 248 | 92.61% | |||
Eagle Crossing Apartments | Dallas, TX | 150 | 97.63% | |||
Falcon Lake Apartments | Arlington, TX | 248 | 95.30% | |||
Heather Creek Apartments | Mesquite, TX | 200 | 96.64% | |||
Lake Forest Apartments | Humble, TX | 240 | 90.67% | |||
Lakeside Lofts | Farmers Branch, TX | 245 | 0.00% | |||
Lodge at Pecan Creek Apartments | Denton, TX | 192 | 95.04% | |||
Lofts at Reynolds Apartments | Asheville, NC | 201 | 93.87% | |||
Mansions Of Mansfield Apartments | Mansfield, TX | 208 | 96.38% | |||
McKinney Point Apartments | McKinney, TX | 198 | 91.96% | |||
Metropolitan Apartments | Little Rock, AR | 260 | 92.40% | |||
Mission Oaks Apartments | San Antonio, TX | 228 | 92.17% | |||
Northside on Travis Apartments | Sherman, TX | 200 | 90.03% | |||
Oak Hollow Phase I Apartments | Seguin, TX | 160 | 88.08% | |||
Oak Hollow Phase II Apartments | Seguin, TX | 96 | 86.61% | |||
Oceanaire Apartments | Biloxi, MS | 196 | 94.76% | |||
Overlook At Allensville Square Apartments Phase I | Sevierville, TN | 144 | 92.66% | |||
Parc at Wylie Apartments | Wylie, TX | 198 | 92.09% | |||
Parc at Bentonville Apartments | Bentonville, AR | 216 | 92.60% | |||
Parc at Clarksville Apartments | Clarksville, TN | 168 | 91.45% | |||
Parc at Denham Springs Apartments Phase I | Denham Spring, LA | 224 | 95.86% | |||
Parc at Garland Apartments | Garland, TX | 198 | 94.68% | |||
Parc at Mansfield Apartments | Mansfield, TX | 99 | 94.87% | |||
Parc at Maumelle Apartments | Little Rock, AR | 240 | 94.51% | |||
Parc at Metro Center Apartments | Nashville, TN | 144 | 97.48% | |||
Parc at Rogers Apartments | Rogers, AR | 250 | 92.99% | |||
Preserve at Pecan Creek Apartments | Denton, TX | 192 | 89.65% | |||
Preserve at Prairie Pointe Apartments | Lubbock, TX | 184 | 95.94% | |||
Residences at Holland Lake Apartments | Weatherford, TX | 208 | 94.45% | |||
Sawgrass Creek Apartments | New Port Richey, FL | 188 | 92.73% | |||
Sonoma Court Apartments | Rockwall, TX | 124 | 89.98% | |||
Sugar Mill Apartments, Phase I | Baton Rouge, LA | 160 | 76.24% | |||
Sugar Mill Apartments, Phase II | Addis, LA | 80 | 76.59% | |||
Tattersall Village Apartments | Hinesville, GA | 222 | 93.76% | |||
Terra Lago Apartments | Rowlett, TX | 451 | 69.45% | |||
Tradewinds Apartments | Midland, TX | 214 | 94.36% | |||
Villas of Park West Apartments Phase I | Pueblo, CO | 148 | 95.27% | |||
Villas of Park West Apartments Phase II | Pueblo, CO | 112 | 93.77% | |||
Vistas Of Vance Jackson Apartments | San Antonio, TX | 240 | 94.50% | |||
Waterford at Summer Park Apartments | Rosenberg, TX | 196 | 93.49% | |||
Windsong Apartments | Fort Worth, TX | 188 | 93.15% | |||
51 | Total Apartment Units | 9,888 | ||||
Development Project | ||||||
Lakeside Lofts Apartments | Farmers Branch, TX | 249 | ||||
Grand total | 10,137 |
17
Commercial Lease Expirations
The table below shows the lease expirations of the commercial properties over a nine-yearnine-year period and thereafter:
Year of Lease Expiration | Rentable Square Feet Subject to Expiring Leases | Current Annualized (1) Contractual Rent Under Expiring Leases | Current Annualized(1) Contractual Rent Under Expiring Leases (P.S.F.) | Percentage of Total Square Feet | Percentage of Gross Rentals |
| Rentable Square Feet |
|
| Current Annualized(1) |
|
| Current Annualized(1) |
|
| Percentage of Total |
|
| Percentage of Gross Rentals |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
2017 | 98,884 | $ | 1,794,900 | $ | 18.15 | 4.9 | % | 6.4 | % | ||||||||||||||||||||||||||||||||
2018 | 233,433 | 3,792,229 | 16.25 | 11.6 | % | 13.6 | % | ||||||||||||||||||||||||||||||||||
2019 | 309,343 | 5,459,692 | 17.65 | 15.4 | % | 19.6 | % | ||||||||||||||||||||||||||||||||||
2020 | 119,547 | 2,346,184 | 19.63 | 6.0 | % | 8.4 | % |
|
| 139,905 |
|
| $ | 3,082,003 |
|
| $ | 22.03 |
|
|
| 8.2 | % |
|
| 10.9 | % | ||||||||||||||
2021 | 120,934 | 2,447,251 | 20.24 | 6.0 | % | 8.8 | % |
|
| 123,629 |
|
|
| 2,344,184 |
|
|
| 18.96 |
|
|
| 7.3 | % |
|
| 8.3 | % | ||||||||||||||
2022 | 206,039 | 4,670,002 | 22.67 | 10.3 | % | 16.7 | % |
|
| 267,882 |
|
|
| 5,981,809 |
|
|
| 22.33 |
|
|
| 15.8 | % |
|
| 21.1 | % | ||||||||||||||
2023 | 231,362 | 2,344,412 | 10.13 | 11.5 | % | 8.4 | % |
|
| 362,224 |
|
|
| 6,035,138 |
|
|
| 16.66 |
|
|
| 21.3 | % |
|
| 21.3 | % | ||||||||||||||
2024 | 68,738 | 1,211,100 | 17.62 | 3.4 | % | 4.3 | % |
|
| 271,071 |
|
|
| 6,010,250 |
|
|
| 22.17 |
|
|
| 16.0 | % |
|
| 21.2 | % | ||||||||||||||
2025 | 127,499 | 2,727,050 | 21.39 | 6.4 | % | 9.8 | % |
|
| 125,667 |
|
|
| 2,909,360 |
|
|
| 23.15 |
|
|
| 7.4 | % |
|
| 10.3 | % | ||||||||||||||
2026 |
|
| 30,505 |
|
|
| 793,130 |
|
|
| 26.00 |
|
|
| 1.8 | % |
|
| 2.8 | % | |||||||||||||||||||||
Thereafter | 67,291 | 1,110,013 | 16.50 | 3.4 | % | 4.0 | % |
|
| 56,926 |
|
|
| 1,152,892 |
|
|
| 20.25 |
|
|
| 3.4 | % |
|
| 4.1 | % | ||||||||||||||
Total | 1,583,070 | $ | 27,902,834 | 79.2 | % | 100 | % |
|
| 1,377,809 |
|
| $ | 28,308,766 |
|
|
|
|
|
|
| 81.2 | % |
|
| 100 | % |
(1) | Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, |
14
The table below shows information related to the land parcels we own as of December 31, 2016:2019:
Land | Location | Acres | ||||
Dedeaux | Gulfport, MS | 9.90 | ||||
Dominion Mercer Phase II | Farmers Branch, TX | 5.29 | ||||
Gautier | Gautier, MS | 3.46 | ||||
Lacy Longhorn | Farmers Branch, TX | 4.86 | ||||
Lake Shore Villas | Humble, TX | 1.35 | ||||
Lubbock | Lubbock, TX | 2.87 | ||||
McKinney 36 | Collin County, TX | 17.89 | ||||
Minivest | Dallas, TX | 0.23 | ||||
Nicholson Croslin | Dallas, TX | 0.80 | ||||
Nicholson Mendoza | Dallas, TX | 0.35 | ||||
Ocean Estates | Gulfport, MS | 11.79 | ||||
T Palm Desert | Riverside, California | 1.27 | ||||
Travis Ranch | Kaufman County, TX | 8.66 | ||||
Union Pacific Railroad | Dallas, TX | 0.04 | ||||
Willowick | Pensacola, FL | 39.78 | ||||
Mercer Crossing | Farmers Branch, TX | 19.00 | ||||
Windmills Farm | ||||||
Kaufman County, TX | 1,701.05 | |||||
Total Land/Development | 1,828.59 |
Land Subject to Sales Contract | Location | Acres | ||||
Mercer Crossing | ||||||
Farmers Branch, TX | 41.62 | |||||
Windmill Farms | Kaufman County, TX | 80.78 | ||||
Total Land Subject to Sales Contract | 122.40 | |||||
Total Land | 1,950.99 |
1518
LEGAL PROCEEDINGS |
ART and ART Midwest, Inc.
While the Company and all entities in which the Company has a direct or indirect equity interest are not parties to or obligated in any way for the outcome, aA formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been engaged since 1999 inparties to a litigation with Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. (“ART”)“ART” and ART Midwest, Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74 million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties, but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.
The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. (“EQK”)“EQK”, and ART. The Clapper Parties seek damages from ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI. Management isIn February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated the case. We continue to vigorously defending this Litigation.defend the case and management believes it has defenses to the claims. The case has not been set for trial.
In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but ART has filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The application for Review is still pending with the Texas Supreme Court. In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.
Port Olpenitz
Dynex Capital, Inc.
ARL, through a foreign subsidiary, was involved in developing a maritime harbor town on the 420 acre site of the former naval base of Olpenitz in Kappeln, Germany. Disputes with the local partner related to his mismanagement of the project resulted in his being replaced as the managing partner which was followed by a filing for bankruptcy protection in Germany to completely remove him from the project. An insolvency manager was placed in control of the project in order to protect the creditors and as of December 31, 2013, had sold the vast majority of assets (almost all land) of the project. The Company no longer has any financial responsibility for the obligations of the creditors related to the project and has claims filed for loans relating to our investment in the project. Due to the questionable collectability of these loans from the proceeds of the project, the Company has written off the unreserved balance of $5.3 million in the project. As of December 13, 2013, ARL had filed two lawsuits in Germany to recover funds invested in the project. The lawsuits are against: 1) the former German partner and his company, and 2) against the law firm in Hamburg originally hired to protect ARL’s investment in the project. At this time it is unknown how much can be recovered or how successful the litigation will be.
Dynex Capital, Inc.
On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).
16
An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015.
19
The Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic was $0.256 million in damages, plus pre-judgment interest of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages arewere paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.
The CompanyTCI is working with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as explore possiblepursue additional claims, if any, against Dynex Capital, Inc. Post judgment interest continues to accrue.
Berger Litigation
On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filed alleges that the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remainder of the motions to dismiss are pending.
Litigation.Litigation. The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.
MINE SAFETY DISCLOSURES |
Not applicable.
1720
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ARL’s common stock is listed and traded on the NYSE American under the symbol “ARL”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE American for the quarters ended:
2016 | 2015 |
| 2019 |
|
| 2018 |
| |||||||||||||||||||||||||
High | Low | High | Low |
| High |
|
| Low |
|
| High |
|
| Low |
| |||||||||||||||||
First Quarter | $ | 5.83 | $ | 3.89 | $ | 5.90 | $ | 4.26 |
| $ | 13.51 |
|
| $ | 11.22 |
|
| $ | 21.57 |
|
| $ | 11.70 |
| ||||||||
Second Quarter | $ | 7.05 | $ | 4.44 | $ | 5.95 | $ | 4.66 |
| $ | 14.36 |
|
| $ | 11.19 |
|
| $ | 20.63 |
|
| $ | 12.26 |
| ||||||||
Third Quarter | $ | 7.81 | $ | 5.19 | $ | 7.49 | $ | 4.09 |
| $ | 17.89 |
|
| $ | 10.53 |
|
| $ | 19.00 |
|
| $ | 14.50 |
| ||||||||
Fourth Quarter | $ | 7.93 | $ | 4.92 | $ | 7.19 | $ | 4.75 |
| $ | 17.39 |
|
| $ | 12.25 |
|
| $ | 17.48 |
|
| $ | 12.04 |
|
On March 10, 2017,25, 2020, the closing market price of ARL’s common stock on the NYSE $6.67American $8.00 per share, and was held by approximately 3,0361,596 stockholders of record.
ARL’s Board of Directors has established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. In accordance with that policy, the Board determined not to pay any dividends on common stock in 2016, 20152019, 2018 or 2014.2017. Future distributions to common stockholders will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.
Under ARL’s Amended Articles of Incorporation, 15,000,000 shares of Series A 10.0% Cumulative Convertible Preferred Stock are authorized with a par value of $2.00 per share and a liquidation preference of $10.00 per share plus accrued and unpaid dividends. Dividends are payable at the annual rate of $1.00 per share, or $.25 per share quarterly, to stockholders of record on the last day of each March, June, September, and December, when and as declared by the Board of Directors. The Series A Preferred Stock may be converted into common stock at 90.0% of the average daily closing price of ARL’s common stock for the prior 20 trading days. At
On December 31, 2016, 2,000,6142018, a stock transfer agreement was entered into between Realty Advisors, Inc. (“RAI”) and TCI whereby TCI purchased from RAI 900,000 shares of Series A Preferred Stock were outstanding. Offor a total purchase price of approximately $9 million. Also, as part of the outstanding shares, 900,000 are held by ARL. Dividends are not paidagreement, TCI acquired accrued unpaid dividends on the 900,000 shares owned by ARL.of Series A Preferred Stock of approximately $9.9 million. At December 31, 2018, 1.8 million shares of Series A Convertible Preferred Stock have been eliminated in consolidation. Unpaid accrued dividends in the amount of $9.9 million have also been eliminated in consolidation. After these eliminations, there are 614 shares outstanding of Series A Preferred Stock at December 31, 2019, and 2018.
Under ARL’s Amended Articles of Incorporation, 91,000 shares of Series D 9.50% Cumulative Preferred Stock are authorized with a par value of $2.00 per share, and a liquidation preference of $20.00 per share. Dividends are payable at the annual rate of $1.90 per year or $0.475 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. The Series D Preferred Stock is reserved for the conversion of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A units may be exchanged for Series D Preferred Stock at the rate of 20 Class A units for each share of Series D Preferred Stock. There are no outstanding shares of Series D Preferred Stock. On January 12, 2018 Realty Advisors converted 200,000 preferred shares, plus accrued dividends into 482,716 shares of common stock.
21
Under ARL’s Amended Articles of Incorporation, 500,000 shares of Series E 6.0% Cumulative Preferred Stock are authorized with a par value $2.00 per share and a liquidation preference of $10.00 per share. Dividends are payable at the annual rate of $0.60 per share or $0.15 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. There are no Series E Preferred Stock outstanding. As an instrument amendatory to ARL’s Amended Articles of Incorporation, 100,000 shares of Series J 8% Cumulative Convertible Preferred Stock have been designated pursuant to a Certificate of Designation filed March 16, 2006, with a par value of $2.00 per share, and a liquidation preference of $1,000 per share. Dividends are payable at the annual rate of $80 per share, or $20 per quarter, to stockholders of record on the last day of each of March, June, September and December, when and as declared by the Board of Directors. Although the Series J 8% Cumulative Convertible Preferred Stock has been designated, no shares have been issued.
The Company had 135,000 shares of Series K convertible preferred stock, which were held by TCI and used as collateral on a note. The note has been paid in full and the Series K preferred stock was cancelled May 7, 2014.
On September 1, 2000, the Board of Directors approved a share repurchase program authorizing the repurchase of up to a total of 1,000,000 shares of ARL common stock. This repurchase program has no termination date. In August 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,250,000 shares. There were no shares repurchased during the yearyears ended December 31, 2016.2019, and 2018.
1822
ITEM 6. |
ITEM 6. SELECTED FINANCIAL DATAThe following table sets forth selected consolidated financial data derived from our audited financial statements for each of the five years in the period ended December 31, 2019. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Part II, Item 7 of this Annual Report and the consolidated financial statements and the accompanying notes set forth in Part II, Item 8 of this Annual Report.
AMERICAN REALTY INVESTORS, INC.
For the Years Ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
(dollars in thousands, except share and per share amounts) | ||||||||||||||||||||
EARNINGS DATA | ||||||||||||||||||||
Rental and other property revenues | $ | 119,663 | $ | 104,188 | $ | 79,412 | $ | 80,750 | $ | 81,849 | ||||||||||
Total operating expenses | 105,029 | 97,880 | 82,611 | 96,426 | 73,602 | |||||||||||||||
Operating income (loss) | 14,634 | 6,308 | (3,199 | ) | (15,676 | ) | 8,247 | |||||||||||||
Other expenses | (36,325 | ) | (31,622 | ) | (15,511 | ) | (35,264 | ) | (20,021 | ) | ||||||||||
Loss before gain on land sales, non-controlling interest, and taxes | (21,691 | ) | (25,314 | ) | (18,710 | ) | (50,940 | ) | (11,774 | ) | ||||||||||
Gain on sale of income-producing properties | 16,207 | — | — | — | — | |||||||||||||||
Gain (loss) on land sales | 3,121 | 21,648 | 561 | (455 | ) | 5,475 | ||||||||||||||
Income tax benefit (expense) | (46 | ) | (517 | ) | 20,413 | 40,513 | (144 | ) | ||||||||||||
Net income (loss) from continuing operations | (2,409 | ) | (4,183 | ) | 2,264 | (10,882 | ) | (6,443 | ) | |||||||||||
Net income (loss) from discontinuing operations | (1 | ) | 896 | 37,909 | 62,606 | (268 | ) | |||||||||||||
Net income (loss) | (2,410 | ) | (3,287 | ) | 40,173 | 51,724 | (6,711 | ) | ||||||||||||
Net income (loss) attributable to non-controlling interest | (322 | ) | 1,327 | (9,288 | ) | (10,448 | ) | 1,126 | ||||||||||||
Net income (loss) attributable to American Realty Investors, Inc. | (2,732 | ) | (1,960 | ) | 30,885 | 41,276 | (5,585 | ) | ||||||||||||
Preferred dividend requirement | (1,101 | ) | (1,216 | ) | (2,043 | ) | (2,452 | ) | (2,452 | ) | ||||||||||
Net income (loss) applicable to common shares | $ | (3,833 | ) | $ | (3,176 | ) | $ | 28,842 | $ | 38,824 | $ | (8,037 | ) | |||||||
PER SHARE DATA | ||||||||||||||||||||
Earnings per share - basic | ||||||||||||||||||||
Income (loss) from continuing operations | $ | (0.25 | ) | $ | (0.27 | ) | $ | (0.71 | ) | $ | (2.07 | ) | $ | (0.67 | ) | |||||
Income (loss) from discontinued operations | — | 0.06 | 2.99 | 5.43 | (0.02 | ) | ||||||||||||||
Net income (loss) applicable to common shares | $ | (0.25 | ) | $ | (0.21 | ) | $ | 2.28 | $ | 3.36 | $ | (0.69 | ) | |||||||
Weighted average common shares used in computing earnings per share | 15,514,360 | 15,111,107 | 12,683,956 | 11,525,389 | 11,525,389 | |||||||||||||||
Earnings per share - diluted | ||||||||||||||||||||
Income (loss) from continuing operations | $ | (0.25 | ) | $ | (0.27 | ) | $ | (0.71 | ) | $ | (2.07 | ) | $ | (0.67 | ) | |||||
Income (loss) from discontinued operations | — | 0.06 | 2.99 | 5.43 | (0.02 | ) | ||||||||||||||
Net income (loss) applicable to common shares | $ | (0.25 | ) | $ | (0.21 | ) | $ | 2.28 | $ | 3.36 | $ | (0.69 | ) | |||||||
Weighted average common shares used in computing diluted earnings per share | 15,514,360 | 15,111,107 | 12,683,956 | 11,525,389 | 11,525,389 | |||||||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||
Real estate, net | $ | 901,006 | $ | 853,507 | $ | 699,763 | $ | 700,294 | $ | 930,433 | ||||||||||
Notes and interest receivable, net | 126,564 | 120,243 | 134,366 | 136,815 | 103,469 | |||||||||||||||
Total assets | 1,174,909 | 1,117,368 | 965,498 | 943,322 | 1,135,345 | |||||||||||||||
Notes and interest payables | 851,095 | 804,760 | 659,059 | 659,042 | 869,857 | |||||||||||||||
Shareholders’ equity | 176,131 | 176,889 | 179,588 | 134,861 | 85,104 | |||||||||||||||
Book value per share | 11.35 | 11.71 | 14.16 | 11.70 | 7.38 |
|
| For the Years Ended December 31, |
| |||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||
|
| (dollars in thousands, except share and per share amounts) |
| |||||||||||||||||
EARNINGS DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other property revenues |
| $ | 47,970 |
|
| $ | 120,956 |
|
| $ | 126,221 |
|
| $ | 119,663 |
|
| $ | 104,188 |
|
Total operating expenses |
|
| 59,378 |
|
|
| 107,071 |
|
|
| 108,793 |
|
|
| 105,029 |
|
|
| 97,880 |
|
Operating (loss) income |
|
| (11,408 | ) |
|
| 13,885 |
|
|
| 17,428 |
|
|
| 14,634 |
|
|
| 6,308 |
|
Other expenses |
|
| (25,527 | ) |
|
| (1,513 | ) |
|
| (47,706 | ) |
|
| (36,325 | ) |
|
| (31,622 | ) |
(Loss) income before gain on dispositioin of 50% interest in VAA, gain on land sales, non-controlling interest, and taxes |
|
| (36,935 | ) |
|
| 12,372 |
|
|
| (30,278 | ) |
|
| (21,691 | ) |
|
| (25,314 | ) |
Gain on disposition of 50% interest in VAA |
|
| — |
|
|
| 154,126 |
|
|
| — |
|
|
| — |
|
|
| — |
|
(Loss) gain on income producing properties |
|
| (80 | ) |
|
| — |
|
|
| 16,698 |
|
|
| 16,207 |
|
|
| — |
|
Gain on land sales |
|
| 15,272 |
|
|
| 17,404 |
|
|
| 4,884 |
|
|
| 3,121 |
|
|
| 21,648 |
|
Income tax (expense) benefit |
|
| — |
|
|
| (1,210 | ) |
|
| (180 | ) |
|
| (46 | ) |
|
| (517 | ) |
Net (loss) income from continuing operations |
|
| (21,743 | ) |
|
| 182,692 |
|
|
| (8,876 | ) |
|
| (2,409 | ) |
|
| (4,183 | ) |
Net (loss) income from discontinuing operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| 896 |
|
Net (loss) income |
|
| (21,743 | ) |
|
| 182,692 |
|
|
| (8,876 | ) |
|
| (2,410 | ) |
|
| (3,287 | ) |
Net (income) loss attributable to non-controlling interest |
|
| 5,785 |
|
|
| (8,993 | ) |
|
| 445 |
|
|
| (322 | ) |
|
| 1,327 |
|
Net (loss) income attributable to American Realty Investors, Inc. |
|
| (15,958 | ) |
|
| 173,699 |
|
|
| (8,431 | ) |
|
| (2,732 | ) |
|
| (1,960 | ) |
Preferred dividend requirement |
|
| (1 | ) |
|
| (901 | ) |
|
| (1,105 | ) |
|
| (1,101 | ) |
|
| (1,216 | ) |
Net (loss) income applicable to common shares |
| $ | (15,959 | ) |
| $ | 172,798 |
|
| $ | (9,536 | ) |
| $ | (3,833 | ) |
| $ | (3,176 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) income from continuing operations |
| $ | (1.36 | ) |
| $ | 11.37 |
|
| $ | (0.64 | ) |
| $ | (0.25 | ) |
| $ | (0.27 | ) |
Income from discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.06 |
|
Net (loss) income applicable to common shares |
| $ | (1.00 | ) |
| $ | 10.81 |
|
| $ | (0.61 | ) |
| $ | (0.25 | ) |
| $ | (0.21 | ) |
Weighted average common shares used in computing earnings per share |
|
| 15,997,076 |
|
|
| 15,982,528 |
|
|
| 15,514,360 |
|
|
| 15,514,360 |
|
|
| 15,111,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) income from continuing operations |
| $ | (1.36 | ) |
| $ | 10.89 |
|
| $ | (0.64 | ) |
| $ | (0.25 | ) |
| $ | (0.27 | ) |
Income from discontinued operations |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.06 |
|
Net (loss) income applicable to common shares |
| $ | (1.00 | ) |
| $ | 10.35 |
|
| $ | (0.61 | ) |
| $ | (0.25 | ) |
| $ | (0.21 | ) |
Weighted average common shares used in computing diluted earnings per share |
|
| 15,997,076 |
|
|
| 16,697,966 |
|
|
| 15,514,360 |
|
|
| 15,514,360 |
|
|
| 15,111,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate, net |
| $ | 387,790 |
|
| $ | 381,043 |
|
| $ | 988,117 |
|
| $ | 901,006 |
|
| $ | 853,507 |
|
Notes and interest receivable, net |
|
| 156,200 |
|
|
| 126,058 |
|
|
| 112,095 |
|
|
| 126,564 |
|
|
| 120,243 |
|
Investment in VAA |
|
| 59,148 |
|
|
| 68,399 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total assets |
|
| 830,641 |
|
|
| 826,149 |
|
|
| 1,296,720 |
|
|
| 1,174,909 |
|
|
| 1,117,368 |
|
Notes and interest payable |
|
| 254,873 |
|
|
| 286,968 |
|
|
| 901,083 |
|
|
| 851,095 |
|
|
| 804,760 |
|
Bonds and interest payable |
|
| 229,722 |
|
|
| 158,574 |
|
|
| 113,049 |
|
|
| — |
|
|
| — |
|
Shareholders’ equity |
|
| 296,516 |
|
|
| 321,136 |
|
|
| 165,883 |
|
|
| 176,131 |
|
|
| 176,889 |
|
Book value per share |
|
| 18.54 |
|
|
| 20.09 |
|
|
| 10.69 |
|
|
| 11.35 |
|
|
| 11.71 |
|
1923
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will”, “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
● | general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate); |
● | risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments; |
● | failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully; |
● | risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities); |
● | risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets; |
● | costs of compliance with the Americans with Disabilities Act and other similar laws and regulations; |
● | potential liability for uninsured losses and environmental contamination; |
● | risks associated with our dependence on key personnel whose continued service is not guaranteed; and |
● | the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.” |
The risks included here are not exhaustive. Other sections of this report, including Part I, Item 1A. “Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.
24
Overview
We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. OurThe Company’s portfolio of income-producing properties includes residential apartment communities, office buildings and a golf course.other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project.
We acquire land primarily in urban in-fill locations or high-growth suburban markets. We are an active buyer and seller of real estate and during 2016 we acquired $92.2estate.
During the year ended December 31, 2019, the Company sold 105.1 acres of land for an aggregate sales price of $30.0 million and sold $51.4 millionpurchased 41.9 acres for an aggregate purchase price of approximately $4.6 million. In addition, the Company acquired 1.27 acres of land in exchange for a note receivable with a face value of $1.8 million.
We sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million, and income-producing properties. recognized a loss on the sale of $0.08 million.
The Company purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer.
We advanced $21.4 million to several developers with the option to purchase the residential properties under construction at a future date, and sold fresh water district receivables related to infrastructure development work at Windmill Farms, located in Kaufman County, Texas for $12.0 million.
As of December 31, 2016,2019, we owned 8,2661,657 units in 50ten residential apartment communities, eightand seven commercial properties comprising of approximately 2.01.7 million rentable square feet and a golf course.feet. In addition, we own 3,666 acresapproximately 1,951acres of land held for development. The Company currently owns income-producing properties and land in ten states as well as in the U.S. Virgin Islands.eight states.
20
We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. We will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certainsome of our wholly owned properties. When we sell assets, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. We generate operating revenues primarily by leasing apartment units to residents and leasing office, retail and industrial space to commercial tenants.
We have historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.
25
Since April 30, 2011, Pillar is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for ARL’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOT.IOR. As the contractual Advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.
Effective since January 1, 2011, Regis manages our commercial properties and provides brokerage services. Regis is entitled to receive a fee for its property management and brokerage services. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. The Company contracts with third-party companies to lease and manage our apartment communities.
Critical Accounting Policies
We present our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.
For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities are included in consolidated net income. Our investment in Gruppa Florentina, LLC is accounted for under the equity method.
The Company, in accordance with the VIE guidance in ASC 810 “Consolidations,” consolidated 50 and 48ten multifamily residential properties at December 31, 2019 and nine at December 31, 2018, located throughout the United States at December 31, 2016 and 2015, respectively, ranging from 321,657 units to 2601,489 units. Assets totaling approximately $442$478 million and approximately $457$464 million at December 31, 20162019 and 2015,2018, respectively, are consolidated and included in “Real estate, at cost” on the balance sheet and are all collateral for their respective mortgage notes payable, none of which are recourse to the partnership in which they are in or to the Company.
21
Real Estate
Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-market” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with ASC Topic 805 “Business Combinations”, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.
We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.
We record acquired “above-market” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.
26
Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.
Depreciation and Impairment
Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other direct project costs incurred during the period of development.
A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1)that is substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. Fair value is determined by a recent appraisal, comparable based upon prices for similar assets, executed sales contract, a present value and/or a valuation technique based upon a multiple of earnings or revenue. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. If we determine that impairment has occurred, the affected assets must be reduced to their facefair value. We did not record any impairment charges for the years ended December 31, 2019 and 2018.
Real Estate Assets Held for Sale
We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 20162019 or 2015.
22
Effective as of January 1, 2015, we adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after January 1, 2015, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.2018.
Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”
27
Investment in Unconsolidated Real Estate Ventures
Except for ownership interests in variable interest entities, we account for our investments in unconsolidated real estate ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, we consolidate those in which we are the primary beneficiary.
Recognition of Rental Income
Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with ASC Topic 805, “Business Combinations”, we recognize rental revenue of acquired in-place “above-market” “above-”and “below-market” leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments actually received pursuant to the terms of the individual commercial lease agreements.
Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers,suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.
Rental incomerevenue for residentialmulti-family real estate property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generallynormally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.
Other revenue primarily consists of garage, parking, and utility-related fees; termination and late charge fees; non-refundable fees; and various other revenue amounts related to rental activities. Those revenue amounts are recognized when the service is provided.
Leases
The Company is party to leases as a lessor of residential apartment communities and commercial buildings. The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions of the new standard to existing leases as of the date of adoption.
Lessor Considerations
The Company evaluated leases in which it is the lessor, which are comprised of residential apartment community leases. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily related to the accounting for sales-type and direct financing leases. The Company evaluated its residential leases determining that they continue to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the non - cancelable term of the lease. The Company’s residential lease term is generally one year.
Additionally, for the Company’s residential leases, which are comprised of the lease component and common area maintenance as a non-lease component, the Company determined that (1) the leases are operating leases, (2) the lease component is the predominant component, and (3) that all components of its operating leases share the same timing and pattern of transfer.
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Implementation Considerations and Impact
As discussed above, the Company elected to apply certain lessor practical expedients allowed under the standard including:
● | by class of underlying asset for residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component; |
● | to exclude costs paid by lessees directly to third parties on behalf of the Company; and |
● | to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee. |
Revenue Recognition on the Sale of Real Estate
Sales and the associated gains or losses of real estate are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.
Non-performing Notes Receivable
We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.
Interest Recognition on Notes Receivable
We record interest income as earned in accordance with the terms of the related loan agreements.
23
Allowance for Estimated Losses
We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 35 “Notes and Interest Receivable” for details on our notes receivable.
Fair Value of Financial Instruments
We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
Level | Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets. | |
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Level | Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | |
Level | Unobservable inputs that are significant to the fair value measurement. |
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related parties
We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
Results of Operations
The discussion of our results of operations is based on management’s review of operations, which is based on our segments. Our segments consist of apartments, commercial buildings, hotels, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties, and developed properties in the lease-up phase. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared. Developed properties in the lease-up phase consist of completed projects that are being leased-up. As we complete each phase of the project, we lease-up that phase and include those revenues in our continued operations. Once a developed property becomes leased-up (80% or more) and is held the entire period for both years under comparison, it is considered to be included in the same property portfolio. Income-producing properties that we have sold during the year are reclassified to discontinuing operations for all periods presented. The other segment consists of revenue and operating expenses related to the notes receivable and corporate entities.
The following discussion is based on our Consolidated Statements of Operations for the yearyears ended December 31, 2016, 20152019, 2018, and 20142017 as included in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data.” The prior year’s property portfolios have been adjusted for subsequent sales. ContinuedData”. Continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years.
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At December 31, 2016, 2015 and 2014, we owned or had interests in a portfolioThe following table shows the total number of 59, 58 and 47 income-producing properties, respectively. The total property portfolio represents all income-producing properties heldand other key financial measures as of December 31, for the year presented. Sales subsequent to year end represent properties that were held as of year end for the years presented, but sold in subsequent years. Continued operations represents all properties that have not been reclassed to discontinued operations as of December 31, 2016 for the year presented. The table below shows the number of income-producing properties held by year.2019, 218 and 2017:
2016 | 2015 | 2014 | ||||||||||
Continued operations | 59 | 58 | 46 | |||||||||
Sales subsequent to year end | — | — | 1 | |||||||||
Total property portfolio | 59 | 58 | 47 |
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
Residential properties (Company owned) |
|
| 10 |
|
|
| 9 |
|
|
| 51 |
|
Residential properties (total apartment units) |
|
| 1,657 |
|
|
| 1,489 |
|
|
| 8,606 |
|
Residential - average annual rental revenue per sqf |
| $ | 13.36 |
|
| $ | 6.53 |
|
| $ | 11.83 |
|
VAA joint venture - residential properties |
|
| 51 |
|
|
| 49 |
|
|
| — |
|
VAA residential properties (total apartment units) |
|
| 9,888 |
|
|
| 9,192 |
|
|
| — |
|
VAA residential - average annual rental revenue per sqf |
| $ | 14.74 |
|
| $ | 12.83 |
|
| $ | — |
|
Commercial properties (Company owned) |
|
| 7 |
|
|
| 7 |
|
|
| 7 |
|
Commercial properties - total sqf |
|
| 1,697,890 |
|
|
| 1,697,890 |
|
|
| 1,697,890 |
|
Commercial - average annual rental revenue per sqf |
| $ | 25.61 |
|
| $ | 19.80 |
|
| $ | 18.55 |
|
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Comparison of the year ended December 31, 20162019 to the year ended December 31, 2015:2018:
For the year ended December 31, 2016,2019, we reported net loss applicable to common shares of $3.8$15.9 million or ($0.25) per1.00) diluted earnings per share compared to a net lossincome applicable to common shares of $3.2$172.8 million or ($0.21) per$10.35 diluted earnings per share for the year ended December 31, 2015. The current year net loss applicable to common shares of $3.8 million includes gain on income-producing properties of $16.2 million and gain on land sales of $3.1 million compared to the prior year net loss applicable to common shares of $3.2 million which includes gain on land sales of $21.6 million, a provision on the impairment of real estate assets of $5.3 million and net income from discontinued operations of $0.9 million2018. .
Revenues
Rental and other property revenues were $119.7$47.9 million for the year ended December 31, 2016. This represents an increase of $15.5 million2019, compared to $121.0 million for the prior year revenues of $104.2 million.same period in 2018. The change by segment$73.1 million decrease is an increase in the apartment portfolio of $13.1 million and an increase in the commercial portfolio of $2.5 million, partially offset by a decrease of $0.1 million in the other portfolio. We purchased 12 apartment communities during the year ended December 31, 2015, which produced rental revenue of $21.7 million and $10.2 million during the years ended December 31, 2016 and 2015, respectively, for a net increase of $11.5 million. In addition, we purchased two apartment properties during 2016 that produced revenues of $2.0 million and we hadprimarily due to a decrease in rental revenuethe amount of approximately $0.9 million for twomultifamily residential apartment communities sold during 2016. The $2.5 million increasebuildings currently in revenuesour portfolio of ten as compared to forty-eight multifamily residential apartment buildings for the commercial portfolio was primarily due toperiod January 1 through November 19, 2018 as a result of the acquisitiondeconsolidation of a commercial building in Houston, Texas lateforty-nine residential apartment properties that were sold into the VAA Joint Venture on November 19, 2018. As the assets are now treated as unconsolidated investments, our share of rental revenues is part of income from unconsolidated investments in the second quarter of 2015.current period and are no longer treated as rental income (Refer to Note 2).
Expenses
Property operating expenses were $63.0decreased by $33.9 million to $25.7 million for the year ended December 31, 2016. This represents an increase of $9.0 million2019 as compared to $59.6 million for the prior yearsame period in 2018. The decrease in property operating expenses is primarily due to the deconsolidation of $54.0 million. The change by segment is an increaseforty-nine residential apartment properties that were sold into the VAA Joint Venture during the fourth quarter of 2018 which resulted in the apartment portfolioa decrease in salary and related payroll expenses of $5.8$6.7 million, an increase in the commercial portfolioreal estate taxes of approximately $11.4 million, management fees paid to third parties of $2.6 million and an increase in the land portfolioother general property operating and maintenance expenses of $0.7 million, partially offset by a decrease in the other portfolio of $0.2$13.2 million. The Company added a net 2,145 apartment units during 2015 and 723 units during 2016. Property operating expenses for our commercial portfolio increased $2.6 million due to the acquisition of an office building in Houston, Texas late in the second quarter of 2015.
Depreciation and amortization expenses were $23.8decreased by $9.3 million to $13.4 million during the year ended December 31, 2019 as compared to $22.7 million for the same period in 2018. This decrease is primarily due to the deconsolidation of the residential apartments in connection with our previous sale and contribution of our interests to the VAA Joint Venture.
General and administrative expense was $13.3 million for the year ended December 31, 2016. This represents an2019, compared to $12.7 million for the same period in 2018. The increase of $2.4$0.6 million compared to prior year depreciation of $21.4 million. The increasein general and administrative expenses is primarily due to the growthincreases in fees paid to our apartment portfolio which had an increaseAdvisors of $2.3$0.5 million, year-over-year.
General and administrative expenses were $7.1 million dollars for the year ended December 31, 2016. This represents an increase of $0.2 million compared to the prior yearother general and administrative expenses of $6.9$0.1 million.
There was no provision for impairment of real estate assets for the year ended December 31, 2016 compared to the prior year provision of $5.3 million, related to the golf course and related assets located in the U.S. Virgin Islands.
Net income fee was $0.3$0.4 million for the year ended December 31, 2016.2019. This represents ana decrease of $0.2 million compared to the prior year net income fee of $0.5$0.6 million. The net income fee paid to Pillar is calculated at 7.5% of net income.
Advisory fees were $10.9$6.6 million for the year ended December 31, 2016.2019. This represents an increasea decrease of $1.1$4.9 million compared to the prior year advisory fees of $9.8$11.5 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.
Other income (expense)
Interest income was $20.5$25.9 million for the year ending December 31, 2016. This represents an2019, compared to $21.6 million for the same period in 2018. The increase of $3.8$4.3 million compared to the prior year interest income of $16.7 million dollars. This increase was primarily due to the year-over-yearan increase in the receivableinterest income of approximately $3.2 million on receivables owed from our Advisor.Advisors and $1.1 million on note receivables owed by related parties.
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Other income was $11.0 million for the year ending December 31, 2019, compared to $28.9 million for the same period in 2018, a decrease of $17.9 million. For the year ending December 31, 2019, we recognized a gain of approximately $9.2 million as a result of deferred income associated with the sale of property in previous years, received cash proceeds of $3.1 million from the collection of tax increment incentives from the city of Farmers Branch, Texas related to infrastructure development work at Mercer Crossing, and recognized miscellaneous income of approximately $2.4 million, offset by general expenses of approximately $3.7 million. For the same period a year ago, we received insurance proceeds of $7.6 million on Mahogany Run Golf Course, recognized a gain of $17.6 million as a result of deferred income related to the sale of land, and recognized miscellaneous income of approximately $2.2 million.
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Mortgage and loan interest expense was $39.9 million for the year ending December 31, 2019, as compared to $66.1 million for the same period in 2018. The decrease of $26.2 million is primarily due to the deconsolidation of residential apartment properties into the VAA Joint Venture which were encumbered by mortgage debt.
Foreign currency transaction was a loss of $15.1 million for the year ending December 31, 2019, as compared to a gain of $12.4 million for the same period in 2018. The loss is due to the unfavorable exchange rate between the Israel Shekels and the U.S. Dollar related to our Israel Shekels denominated bonds and the increase in our bonds obligations during the year ended December 31, 2019 as compared to the same period a year ago.
Loss on debt extinguishment was $5.2 million with no comparable amount in 2018. The loss is the result of debt issuance costs write-off of $1.4 million and prepayment penalty of approximately $3.9 million associated with the payment of $41.5 million of mortgage debt for one of our commercial building.
Loss from unconsolidated investments was a net of $2.3 million for the year ending December 31, 2019, as compared to net earnings of $1.5 million for the year ended December 31, 2018. The loss from unconsolidated investments during the year ended December 31, 2019, was driven primarily from our share in the losses reported by our joint venture VAA of $2.8 million (Refer to Note 2).
Loss from the sale of income-producing property increased for the year ending December 31, 2019 as compared to the same period a year ago. During the year ended December 31, 2019, we sold a multifamily residential property for a sales price of $3.1 million and recorded a loss of $0.08 million. During year ended December 31, 2018, we sold six multifamily residential properties at an aggregate sales price of $8.5 million and recorded no gain or loss from the sale.
Gain on land sales decreased by $2.1 million for the year ending December 31, 2016. This represents a decrease of $2.02019, to $15.3 million as compared to prior year other income of $4.1 million. The increase is primarily due to a property with a negotiated settlement of a debt with the lender during 2015.
Mortgage and loan interest expense was $59.4$17.4 million for the same period a year endedago. During the year ending December 31, 2016. This represents an increase of $6.9 million compared to the prior year expense of $52.5 million. The change by segment is an increase in the other portfolio of $7.4 million, an increase in the apartment portfolio of $1.7 million and an increase in the commercial portfolio of $0.3 million, partially offset by a decrease in the land portfolio of $2.5 million. Within the other portfolio, the increase is due to incurring new mezzanine debt obligations during 2015. The increase in the apartment portfolio was primarily due to the acquisition of new properties, partially offset by the refinancing of five loans during 2016 at lower rates.
Gain on sale of income-producing properties was $16.2 million for the year ended December 31, 2016. During 2016, the Company sold one apartment community located in Irving, Texas to an independent third party for a total sales price of $8.1 million and one apartment community located in Topeka, Kansas to an independent third party for a total sales price of $12.3 million. We recorded an aggregate gain of $16.2 million from the sale of these two properties. The Company also sold an industrial warehouse consisting of approximately 177,805 square feet. The sale resulted in a loss of approximately $0.2 million.
Gain on land sales was $3.1 million and $21.6 million for the years ended December 31, 2016 and 2015, respectively. During 2016,2019, we sold a combined 129.7 acres of land located in Forney, Texas, McKinney, Texas, Farmers Branch, Texas and Nashville, Tennessee to independent third parties for a total sales price of $29.1 million. We recorded an aggregate $3.1 million gain from the land sales. During 2015, we sold approximately 595105.1 acres of land for aan aggregate sales price of $107.3$30.0 million and recorded a gain of $18.9$17.4 million. In addition,For the same period a year ago, we recognized $2.7sold approximately 112.2 acres of land for an aggregate sales price of $43.3 million in deferredand recorded a gain from prior years land sales during the year ended December 31, 2015.of $17.4 million.
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Comparison of the year ended December 31, 20152018 to the year ended December 31, 2014:2017:
For the year ended December 31, 2015,2018, we reported net income applicable to common shares of $172.8 million or $10.35 diluted earnings per share compared to a net loss applicable to common shares of $3.2$9.5 million or ($0.21) per0.61) diluted earnings per share compared to afor the year ended December 31, 2017. The current year net income applicable to common shares of $28.8$172.8 million or $2.28 per diluted earnings per share forincludes a gain of approximately $154.1 million from the same period ended 2014. Thedisposition of 50% interest in VAA. Current year net income also includes gain on sales of land of $17.4 million and no gain on sales of income-producing properties, compared to the prior year net loss applicable to common shareswhich included gain on sales of $3.2income producing properties of $16.7 million during the year ended December 31, 2015 includedand gain on land sales of $21.6 million, a provision on the impairment of real estate assets of $5.3 million and net income from discontinued operations of $0.9 million compared to net income applicable to common shares of $28.8 million for the year ended December 31, 2014, which included a gain on land sales of $0.6 million and net income from discontinued operations of $37.9$4.9 million.
Revenues
Rental and other property revenues were $104.2$121.0 million for the year ended December 31, 2015.2018. This represents an increasea decrease of $24.8$5.2 million as compared to the prior year revenues of $79.4$126.2 million. The change by segmentdecrease is an increase in the apartment portfolio of $14.7 million and an increase in the commercial portfolio of $10.1 million. The increase in the apartment and commercial portfolios is mainlyprimarily due to the acquisitioncontribution of new properties. Our apartment portfolio continues to excel in the current economic conditions with occupancies averaging over 94% and increasing rental rates. We have been able to surpass expectations duefifty-two properties to the high-quality product offered, strength of our management team and our commitment to our tenants. The increase in the commercial segment is also due to a high rise in the occupancy rate of the commercial complexes, in 2015 the average occupancy rate was over 86%. Our commercial portfolio is performing significantly better than in previous periods and we anticipate that it will continue to improve as the Company has been successful in attracting high-quality tenants and expects to continue to see the benefits of those new leases in the future. We continue to work aggressively to attract new tenants and strive for continuous improvement of our properties in order to maintain our existing tenants.joint venture VAA on November 19, 2018.
Expenses
Property operating expenses were $54.0$59.6 million for the year ended December 31, 2015.2018. This represents an increasea decrease of $11.9$4.5 million, as compared to the prior year operating expenses of $42.1$64.1 million. The change by segmentdecrease is an increase in the apartment portfolio of $7.4 million, an increase in the commercial portfolio of $4.7 million. Within the apartment portfolio there was an increase of $5.9 million in the acquired properties portfolio, and an increase of $1.5 million in the same property portfolio. Within the commercial portfolio there was an increase of $3.6 million in the acquired properties portfolio and an increase of $1.1 million in the same store properties. The increase in the apartment portfolio wasprimarily due to the acquisitioncontribution of newfifty-two properties throughoutto the year. The increase in the commercial portfolio was due to an acquisition of a property within the year and an increase in real estate taxes.joint venture VAA on November 19, 2018.
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Depreciation and amortization expenses were $21.4$22.7 million for the year ended December 31, 2015.2018. This represents an increasea decrease of $3.8$3.0 million compared to prior year depreciation of $17.6$25.7 million. Within the apartment and commercial portfolios, the majority of this changeThe decrease is primarily due to the acquisitioncontribution of newfifty-two properties and an increase in tenant improvements and repairs projects.to the joint venture VAA on November 19, 2018.
General and administrative expenses were $6.9 million dollars for the year ended December 31, 2015. This represents a decrease of $3.4 million compared to the prior year general and administrative expenses of $10.3 million. The majority of this change is due to decreases in legal expenses and franchise taxes in the current year.
The provision for impairment of real estate assets was $5.3$12.7 million for the year ended December 31, 2015. There was no provision for impairment expense in2018. This represents an increase of $5.0 million compared to the prior year. During 2015, the Company recorded an impairmentyear expenses of $5.3 million for the golf course$7.7 million. The increase in general and related assets located in the U.S. Virgin Islands. This impairmentadministrative expenses was due primarily to an increase in fees paid to our Advisors of approximately $1.5 million, general fees of approximately $1.5 million associated with finalizing the decision to sell the development parcels in the U.S. Virgin Islands which resulted in a decrease in the estimated fair valueformation of the remaining assets.joint venture, legal and regulatory fees of $0.8 million and general and professional fees of approximately $1.0 million.
Net income fee was $0.5$0.6 million for the year ended December 31, 2015.2018. This represents a decreasean increase of $3.2$0.3 million compared to the prior year net income fee of $3.7$0.3 million. The net income fee paid to Pillar is calculated at 7.5% of net income.
Advisory fees were $9.8$11.5 million for the year ended December 31, 2015.2018. This represents an increase of $0.9$0.4 million compared to the prior year advisory fees of $8.9$11.1 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.
Other income (expense)
Interest income was $16.7$21.6 million for the year ending December 31, 2015. This represents a decrease of $3.4 million2018 compared to the prior year interest income of $20.1 million dollars. The majority of this decrease is due to the recognition of uncollectable interest in the prior year on notes receivable.
Other income was $4.1$18.9 million for the year endingended December 31, 2015. This represents2017, an increase of $2.7 million compared to the prior year other income of $1.4 million. TheThis increase iswas primarily due to an increase of $3.6 million in interest on receivable owed from our Advisors, offset by a property with a negotiated settlementdecrease of a debt with the lender.$0.9 in interest on notes receivable from other related parties.
Mortgage and loan interest expense was $52.5$66.1 million for the year ended December 31, 2015.2018. This represents an increase of $9.5$0.1 million compared to the prior year expense of $40.8$66.2 million. The change by segmentdecrease is an increase in the apartment portfolio of $4.3 million, an increase in the commercial portfolio of $0.8 million, and an increase in the other portfolio of $6.6 million. Within the apartment and commercial portfolios, the majority of the increase isprimarily due to the acquisitioncontribution of newfifty-two properties offset by loan refinancings at lower rates. Withinto the other portfolio, the majority of the increase is due to incurring two new mezzanine debt obligations during 2015.joint venture VAA on November 19, 2018.
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Litigation settlement expenses were $0.4No gain on sales of income producing properties was recognized during the year ended December 31, 2018. Gain on sale of income-producing properties was $16.7 million for the year ended December 31, 2015. This represents an increase of $3.9 million compared to the prior year credit of $3.6 million. This variance is due to the settlement of a debt resulting in a gain of $3.5 million in the prior year.2017.
Gain on land sales was $21.6$17.4 million and $4.9 million for the years ended December 31, 2018 and 2017, respectively. The increase of approximately $12.5 million was primarily due to sales of land at Mercer Crossing recognized in 2018.
Other income was $28.9 million and $4.1 million for the years ended December 31, 2018 and 2017, respectively. The increase of $24.8 million was primarily due to a $17.6 million gain recognized in September 2018 for deferred income associated with the sale of assets, as well as insurance proceeds of approximately $7.6 million received subsequent to the sale of Mahogany Run Golf Course.
Gain on disposition of 50% interest in VAA was $154.1 million for the year ended December 31, 2015. During 2015, we sold approximately 595 acres2018 as a result of landthe contribution of fifty-two properties to the joint venture VAA (Refer to Note 2 “Investment in eleven transactions for a sales price of $107.3 million and recorded a gain of $18.9 million. In addition, we recognized $2.7 million in deferred gain from prior years land sales. During the year ended December 31, 2014, we recorded a gain on land sales of $0.6 million.VAA”).
Discontinued Operations
Prior to January 1, 2015, we applied the provisions of ASC 360, “Property, Plant and Equipment,” which requires that long-lived assets that are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions.
Effective January 1, 2015, the Company adopted the provisions of ASU 2014-08, which changed the criteria of ASC 360 related to determining which disposals qualify to be accounted for as discontinued operations and modified related reporting and disclosure requirements. Disposals representing a strategic shift in operations that have a major effect on a company’s operations and financial results will be presented as discontinued operations.
There were no sales of income-producing properties during 2016 or 2015 that met the criteria for discontinued operations. Amounts included in discontinued operations represent the residual amounts from sales classified as discontinued operations prior to January 1, 2015. The following table summarizes revenue and expense information for the properties sold that qualified as discontinued operations (dollars in thousands):
For the Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenues: | |||||||||||
Rental and other property revenues | $ | — | $ | 355 | $ | 5,612 | |||||
— | 355 | 5,612 | |||||||||
Expenses: | |||||||||||
Property operating expenses | 2 | (345 | ) | 2,350 | |||||||
Depreciation | — | — | 751 | ||||||||
General and administrative | — | 99 | 451 | ||||||||
Total operating expenses | 2 | (246 | ) | 3,552 | |||||||
Other income (expense): | |||||||||||
Other income (expense) | — | 45 | (507 | ) | |||||||
Mortgage and loan interest | — | (2 | ) | (3,204 | ) | ||||||
Loan charges and prepayment penalties | — | — | (1,656 | ) | |||||||
Litigation settlement | — | — | (250 | ) | |||||||
Total other expenses | — | 43 | (5,617 | ) | |||||||
Income (loss) from discontinued operations before gain on sale of real estate and taxes | (2 | ) | 644 | (3,557 | ) | ||||||
Gain on sale of real estate from discontinued operations | — | 735 | 61,879 | ||||||||
Income tax expense | 1 | (483 | ) | (20,413 | ) | ||||||
Income from discontinued operations | $ | (1 | ) | $ | 896 | $ | 37,909 |
28
Liquidity and Capital Resources
General
Our principal liquidity needs are:
● | fund normal recurring expenses; |
● | meet debt service and principal repayment obligations including balloon payments on maturing debt; |
33
● | fund capital expenditures, including tenant improvements and leasing costs; |
● | fund development costs not covered under construction loans; and |
● | fund possible property acquisitions. |
Our principal sources of cash have been and will continue to be:
● | property operations; |
● | proceeds from land and income-producing property sales; |
● | collection of mortgage notes receivable; |
● | collections of receivables from related companies; |
● | refinancing of existing debt; and |
● | additional borrowings, including mortgage notes payable, and lines of credit. |
It is important to realize that the current status of the banking industry has had a significant effect on our industry. The banks’ willingness and/or ability to originate loans affects our ability to buy and sell property, and refinance existing debt. We are unable to foresee the extent and length of this down-turn. A continued and extended decline could materially impact our cash flows. We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans, which are converted to traditional mortgages upon completion of the project.
We may also issue additional equity securities, including common stock and preferred stock. Management anticipates that our cash atas of December 31, 2016,2019, along with cash that will be generated in 20172020 from property operations, may notnotes and interest receivables, will be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet its liquidity requirements. Historically, management hasAlthough history cannot predict the future, historically, we have been successful at refinancing and extending a portion of the Company’s current maturity obligations and selling assets as necessary to meet current obligations.
Management reviews the carrying values of ARL’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. The property review generally includes: (1) selective property inspections, (2) a review of the property’s current rents compared to market rents, (3) a review of the property’s expenses, (4) a review of maintenance requirements, (5) a review of the property’s cash flow, (6) discussions with the manager of the property, and (7) a review of properties in the surrounding area. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings to the extent that the investment in the note exceeds management’s estimate of the fair value of the collateral securing such note. The mortgage note receivable review includes an evaluation of the collateral property securing each note.
34
Cash Flow Summary
The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):
2016 | 2015 | Variance | ||||||||||
Net cash provided by (used in) operating activities | $ | 17,446 | $ | (34,509 | ) | $ | 34,509 | |||||
Net cash used in investing activities | (61,100 | ) | (130,348 | ) | 130,348 | |||||||
Net cash provided by financing activities | 45,944 | 167,790 | (167,790 | ) |
29
|
| December 31, |
|
|
|
| ||||||
|
| 2019 |
|
| 2018 |
|
| Incr /(Decr) |
| |||
Net cash (used in) operating activities |
| $ | (40,641 | ) |
| $ | (172,332 | ) |
| $ | 131,691 |
|
Net cash (used in) provided by investing activities |
| $ | (3,705 | ) |
| $ | 147,625 |
|
| $ | (151,330 | ) |
Net cash provided by financing activities |
| $ | 21,042 |
|
| $ | 42,784 |
|
| $ | (21,742 | ) |
The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties.
Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties.
Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the year ended December 31, 2016,2019, we acquired 4 apartmentadvanced $21.4 million toward various notes receivable, purchased land for development for $3.4 million, and invested approximately $33.7 million for the construction and development of new properties and 4 developmentalimprovement of income producing properties. For the year ended December 31, 2018, we advanced $16.8 million toward various notes receivable and invested $85.1 million for development of new properties and improvement of income producing properties.
Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the year ended December 31, 2019, we received aggregate sales proceeds of $27.3 million from the sale of 105.1 acres of land, received $19.8 million in payments from related party note receivables, and recorded a gain of $15.3 million and sold a residential property for which we received cash proceeds of $1.3 million and a plot of land valued at $1.8 million. For the year ended December 31, 2018, we received aggregate sales proceeds of $11.9 million from the sale of approximately 112 acres of land and recorded a gain on the sale of $17.4 million. In addition, we received aggregate sale proceeds of $4.9 million from the sale of seven income producing properties and a golf course, $236.8 million from the formation of the joint venture with Macquarie, and collected $6.5 million from a related party note receivable.
Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.
For the year ended December 31, 2019, the increase in cash flow from financing activities was due to proceeds from borrowings of $25.7 million, and $78.1 million from the sale of nonconvertible Series C Bonds by Southern, offset by payments to our notes payable of $52.9 million and bond payments of $21.7 million.
For the year ended December 31, 2018, the increase in cash flow from financing activities was due primarily to proceeds from borrowings of $123.3 million, and proceeds received from the sale of nonconvertible Series B Bonds by Southern of $59.2 million, offset by payments to our notes payable of $124.6 million.
Equity Investments.
ARL has from time to time purchased shares of IOTIOR and TCI. The Company may purchase additional equity securities of IOTIOR and TCI through open market and negotiated transactions to the extent ARL’s liquidity permits.
Equity securities of TCI held by ARL (and of IOTIOR held by TCI) may be deemed “restricted securities” under Rule 144 of the Securities Act of 1933 (“Securities Act”). Accordingly, ARL may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under the Securities Act for a one-year period after they are acquired. Such restrictions may reduce ARL’s ability to realize the full fair value of such investments if ARL attempted to dispose of such securities in a short period of time.
35
Contractual Obligations
We have contractual obligations and commitments primarily with regards to the payment of mortgages. The following table aggregatesrepresents our expected contractual obligations and commitments and includes items not accrued, per GAAP, through the term of the obligation such as interest expense and operating leases. Our aggregate obligations subsequent toat December 31, 2016 are shown in the table below (dollars in2019 (in thousands):
Total | 2017 | 2018 | 2019-2021 | Thereafter | ||||||||||||||||
Long-term debt obligation (1) | $ | 1,333,106 | $ | 180,432 | $ | 91,162 | $ | 215,058 | $ | 846,454 | ||||||||||
Operating lease obligation | 32,695 | 536 | 545 | 1,695 | 29,919 | |||||||||||||||
Total | $ | 1,365,801 | $ | 180,968 | $ | 91,707 | $ | 216,753 | $ | 876,373 |
|
| Total |
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| Thereafter |
| |||||||
Notes and interest payable (1) |
| $ | 342,903 |
|
| $ | 45,363 |
|
| $ | 63,775 |
|
| $ | 18,920 |
|
| $ | 41,951 |
|
| $ | 5,401 |
|
| $ | 167,493 |
|
Bonds and interest payable (1) |
|
| 276,642 |
|
|
| 37,317 |
|
|
| 47,573 |
|
|
| 45,057 |
|
|
| 120,324 |
|
|
| 13,599 |
|
|
| 12,772 |
|
Total |
| $ | 619,545 |
|
| $ | 82,680 |
|
| $ | 111,348 |
|
| $ | 63,977 |
|
| $ | 162,275 |
|
| $ | 19,000 |
|
| $ | 180,265 |
|
(1) | The notes and bonds contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the |
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, ARL may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.
Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on ARL’s business, assets or results of operations.
Inflation
The effects of inflation on ARL’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings as well as the cost of variable interest rate debt will be affected.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
ARL’s primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates and maturing debt that has to be refinanced. ARL’s future operations, cash flow and fair values of financial instruments are also partially dependent on the then existing market interest rates and market equity prices.
As of December 31, 2016,2019, our $867.7 million debt portfoliooutstanding notes payable consisted of approximately $827.9$261.4 million, out of fixed-rate debt and approximately $39.8which $257.5 million of variable-rate debtwere notes with fixed interest rates ranging from 4.75% to 12.0%and $3.9 million represented a note with a variable interest rate of 9.75%. Our overall weighted average interest rate at December 31, 20162019 and 20152018 was 4.91%5.04% and 4.66%7.29%, respectively.
30
ARL’s interest rate sensitivity position is managed by the capital markets department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. ARL’s earnings are affected as changes in short-term interest rates affect its cost of variable-rate debt and maturing fixed-rate debt.
36
If market interest rates for variable-rate debt average 100 basis points more in 20162020 than they did during 2015,2019, ARL’s interest expense would increase and net income would decrease by $0.4approximately $0.002 million. This amount is determined by considering the impact of hypothetical interest rates on ARL’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in ARL’s financial structure.
The following table contains only those exposures that existed at December 31, 2016.2019. Anticipation of exposures ofor risk on positions that could possibly arise was not considered. ARL’sTCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars are in thousands):
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
Note Receivable | ||||||||||||||||||||||||||||
Fixed interest rate - fair value | $ | 134,230 | ||||||||||||||||||||||||||
Instrument’s maturities | $ | 37,966 | $ | 14,301 | $ | 5,896 | $ | 5,907 | $ | 174 | $ | 69,985 | $ | 134,230 | ||||||||||||||
Instrument’s amortization | — | — | — | — | — | — | — | |||||||||||||||||||||
Interest | 12,494 | 11,153 | 9,497 | 8,446 | 8,415 | 100,779 | 150,784 | |||||||||||||||||||||
Average Rate | 9.31 | % | 11.59 | % | 11.59 | % | 11.10 | % | 11.99 | % | 12.00 | % | ||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | ||||||||||||||||||||||
Notes Payable | ||||||||||||||||||||||||||||
Variable interest rate - fair value | $ | 39,779 | ||||||||||||||||||||||||||
Instrument’s maturities | $ | 1,995 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,995 | ||||||||||||||
Instrument’s amortization | 36,202 | 211 | 224 | 238 | 157 | 752 | 37,784 | |||||||||||||||||||||
Interest | 382 | 95 | 81 | 67 | 54 | 110 | 789 | |||||||||||||||||||||
Average Rate | 5.65 | % | 5.83 | % | 5.77 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||||||||
Fixed interest rate - fair value | $ | 827,932 | ||||||||||||||||||||||||||
Instrument’s maturities | $ | 11,640 | $ | 2,477 | $ | 18,649 | $ | 15,990 | $ | — | $ | 33,729 | $ | 82,484 | ||||||||||||||
Instrument’s amortization | 90,278 | 53,568 | 51,262 | 35,388 | 15,673 | 499,278 | 745,448 | |||||||||||||||||||||
Interest | 39,935 | 34,811 | 29,938 | 24,622 | 22,715 | 312,585 | 464,606 | |||||||||||||||||||||
Average Rate | 9.37 | % | 0.23 | % | 11.03 | % | 10.08 | % | 0.00 | % | 0.38 | % |
31
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
|
| Thereafter |
|
| Total |
| |||||||
Note Receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate - fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 156,185 |
|
Instrument’s maturities |
| $ | 61,807 |
|
| $ | 33,328 |
|
| $ | 25,483 |
|
| $ | — |
|
| $ | — |
|
| $ | 35,567 |
|
| $ | 156,185 |
|
Interest |
|
| 12,871 |
|
|
| 8,474 |
|
|
| 4,766 |
|
|
| 3,920 |
|
|
| 3,920 |
|
|
| 3,920 |
|
| $ | 37,871 |
|
Weighted Average Rate |
|
| 6.18 | % |
|
| 11.12 | % |
|
| 4.22 | % |
|
| 12.00 | % |
|
| 12.00 | % |
|
| 12.00 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate - fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 3,908 |
|
Instrument’s maturities |
| $ | 3,908 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 3,908 |
|
Interest |
|
| 347 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 347 |
|
Average interest rate (1) |
|
| 9.75 | % |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate - fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 257,528 |
|
Instrument’s maturities |
| $ | 30,396 |
|
| $ | 55,393 |
|
| $ | 13,437 |
|
| $ | 36,770 |
|
| $ | 1,995 |
|
| $ | 119,537 |
|
| $ | 257,528 |
|
Interest |
|
| 10,712 |
|
|
| 8,382 |
|
|
| 5,483 |
|
|
| 5,181 |
|
|
| 3,406 |
|
|
| 47,954 |
|
| $ | 81,118 |
|
Average interest rate |
|
| 8.51 | % |
|
| 5.90 | % |
|
| 3.99 | % |
|
| 5.22 | % |
|
| 3.63 | % |
|
| 3.74 | % |
|
|
|
|
(1) | Interest rates on variable rate notes payable are equal to the variable rates in effect on December 31, 2019. |
37
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO FINANCIAL STATEMENTS
Page | ||
Financial Statements | ||
39 | ||
Consolidated Balance Sheets—December 31, | 40 | |
Consolidated Statements of Operations—Years Ended December 31, | 41 | |
42 | ||
Consolidated Statements of Cash Flows—Years Ended December 31, | 43 | |
44 | ||
45 | ||
Financial Statement Schedules | ||
72 | ||
74 |
All other schedules are omitted because they are not required, are not applicable, or the information required is included in the Consolidated Financial Statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of and
Stockholders of American Realty Investors, Inc.
Dallas, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of American Realty Investors, Inc. and Subsidiaries as of December 31, 20162019 and 2015,2018, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016.2019, and the related notes and schedules collectively referred to as the “consolidated financial statements.” In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American Realty Investors, Inc.’s management is responsible as of December 31, 2019 and 2018 and the results of its operations and its cash flows for theseeach of the three years in the period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
Basis of Opinion
These consolidated financial statements.statements are the responsibility of Company’s management. Our responsibility is to express an opinion on thesethe Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits, we are required to obtain an understanding of internal control over financial reporting, as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidatedpresentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Liquidity
As described in the Note 16,17, American Realty Investors, Inc.’s management intends to sell land and income-producing properties and refinance or extend debt secured by real estate to meet the Company’s liquidity needs.
Supplemental Information
The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the consolidated financial statements referred to above presentsupplemental information is fairly stated, in all material respects, the financial position of American Realty Investors, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Schedules III and IV are presented for the purpose of complying with the Securities and Exchange Commission’s rules and are not a required part of the basic consolidated financial statements. American Realty Investors, Inc.’s management is responsible for these schedules. These schedules have been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, fairly state, in all material respects, the financial datadate required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
Farmer, FuquaFARMER, FUQUA & Huff,HUFF, PC
Richardson, Texas
March 31, 201730, 2020
We have served as the Company’s auditor since 2004.
AMERICAN REALTY INVESTORS, INC.
December 31, 2016 | December 31, 2015 | |||||||
(dollars in thousands, except share and par value amounts) | ||||||||
Assets | ||||||||
Real estate, at cost | $ | 1,017,684 | $ | 954,390 | ||||
Real estate subject to sales contracts at cost, net of depreciation | 48,919 | 49,155 | ||||||
Less accumulated depreciation | (165,597 | ) | (150,038 | ) | ||||
Total real estate | 901,006 | 853,507 | ||||||
Notes and interest receivable | ||||||||
Performing (including $125,799 in 2016 and $125,915 in 2015 from related parties) | 143,601 | 137,280 | ||||||
Less allowance for estimated losses (including $15,537 in 2016 and $15,537 in 2015 from related parties) | (17,037 | ) | (17,037 | ) | ||||
Total notes and interest receivable | 126,564 | 120,243 | ||||||
Cash and cash equivalents | 17,522 | 15,232 | ||||||
Restricted cash | 38,399 | 45,711 | ||||||
Investments in unconsolidated subsidiaries and investees | 6,087 | 8,365 | ||||||
Receivable from related party | 24,672 | 28,147 | ||||||
Other assets | 60,659 | 46,163 | ||||||
Total assets | $ | 1,174,909 | $ | 1,117,368 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities: | ||||||||
Notes and interest payable | $ | 845,107 | $ | 797,962 | ||||
Notes related to assets held for sale | 376 | 376 | ||||||
Notes related to assets subject to sales contracts | 5,612 | 6,422 | ||||||
Deferred revenue (including $70,935 in 2016 and $70,892 in 2015 from sales to related parties) | 91,380 | 91,336 | ||||||
Accounts payable and other liabilities (including $10,854 in 2016 and $7,236 in 2015 to related parties) | 56,303 | 44,383 | ||||||
998,778 | 940,479 | |||||||
Shareholders’ equity: | ||||||||
Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued and outstanding 2,000,614 shares in 2016 and 2015 (liquidation preference $10 per share), including 900,000 shares in 2016 and 2015 held by ARL | 2,205 | 2,205 | ||||||
Common stock, $0.01 par value, authorized 100,000,000 shares; issued 15,930,145 shares and outstanding 15,514,360 shares in 2016 and 2015, including 140,000 shares held by TCI (consolidated) in 2016 and 2015 | 159 | 156 | ||||||
Treasury stock at cost; 415,785 shares in 2016 and 2015, and 140,000 shares held by TCI (consolidated) as of 2016 and 2015 | (6,395 | ) | (6,395 | ) | ||||
Paid-in capital | 111,510 | 109,861 | ||||||
Retained earnings | 14,398 | 17,130 | ||||||
Total American Realty Investors, Inc. shareholders’ equity | 121,877 | 122,957 | ||||||
Non-controlling interest | 54,254 | 53,932 | ||||||
Total equity | 176,131 | 176,889 | ||||||
Total liabilities and equity | $ | 1,174,909 | $ | 1,117,368 |
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | |||||||||||||
2016 | 2015 | 2014 | |||||||||||
(dollars in thousands, except per share amounts) | |||||||||||||
Revenues: | |||||||||||||
Rental and other property revenues (including $708, $726 and $701 for the year ended 2016, 2015 and 2014, respectively, from related parties) | $ | 119,663 | $ | 104,188 | $ | 79,412 | |||||||
Expenses: | |||||||||||||
Property operating expenses (including $900, $770 and $645 for the year ended 2016, 2015 and 2014, respectively, from related parties) | 62,950 | 54,002 | 42,124 | ||||||||||
Depreciation | 23,785 | 21,418 | 17,593 | ||||||||||
General and administrative (including $4,053, $3,855 and $3,628 for the year ended 2016, 2015 and 2014, respectively, from related parties) | 7,119 | 6,893 | 10,282 | ||||||||||
Provision on impairment of real estate assets | — | 5,300 | — | ||||||||||
Net income fee to related party | 257 | 492 | 3,669 | ||||||||||
Advisory fee to related party | 10,918 | 9,775 | 8,943 | ||||||||||
Total operating expenses | 105,029 | 97,880 | 82,611 | ||||||||||
Operating income (loss) | 14,634 | 6,308 | (3,199 | ) | |||||||||
Other income (expense): | |||||||||||||
Interest income (including $18,864, $15,859 and $19,029 for the year ended 2016, 2015 and 2014, respectively, from related parties) | 20,453 | 16,674 | 20,054 | ||||||||||
Other income | 2,091 | 4,106 | 1,415 | ||||||||||
Mortgage and loan interest (including $5,300, $3,774 and $3,660 for the year ended 2016, 2015 and 2014, respectively, from related parties) | (59,362 | ) | (52,477 | ) | (40,826 | ) | |||||||
Loss on the sale of investments | — | (1 | ) | (92 | ) | ||||||||
Earnings from unconsolidated subsidiaries and investees | 493 | 428 | 347 | ||||||||||
Litigation settlement | — | (352 | ) | 3,591 | |||||||||
Total other expenses | (36,325 | ) | (31,622 | ) | (15,511 | ) | |||||||
Loss before gain on sales, non-controlling interest and taxes | (21,691 | ) | (25,314 | ) | (18,710 | ) | |||||||
Gain on sale of income-producing properties | 16,207 | — | — | ||||||||||
Gain on land sales | 3,121 | 21,648 | 561 | ||||||||||
Loss from continuing operations before tax | (2,363 | ) | (3,666 | ) | (18,149 | ) | |||||||
Income tax benefit (expense) | (46 | ) | (517 | ) | 20,413 | ||||||||
Net income (loss) from continuing operations | (2,409 | ) | (4,183 | ) | 2,264 | ||||||||
Discontinued operations: | |||||||||||||
Income (loss) from discontinued operations | (2 | ) | 644 | (3,557 | ) | ||||||||
Gain on sale of real estate from discontinued operations | — | 735 | 61,879 | ||||||||||
Income tax expense from discontinued operations | 1 | (483 | ) | (20,413 | ) | ||||||||
Net income (loss) from discontinued operations | (1 | ) | 896 | 37,909 | |||||||||
Net income (loss) | (2,410 | ) | (3,287 | ) | 40,173 | ||||||||
Net (income) loss attributable to non-controlling interests | (322 | ) | 1,327 | (9,288 | ) | ||||||||
Net income (loss) attributable to American Realty Investors, Inc. | (2,732 | ) | (1,960 | ) | 30,885 | ||||||||
Preferred dividend requirement | (1,101 | ) | (1,216 | ) | (2,043 | ) | |||||||
Net income (loss) applicable to common shares | $ | (3,833 | ) | $ | (3,176 | ) | $ | 28,842 | |||||
Earnings per share - basic | |||||||||||||
Loss from continuing operations | $ | (0.25 | ) | $ | (0.27 | ) | $ | (0.71 | ) | ||||
Income from discontinued operations | — | 0.06 | 2.99 | ||||||||||
Net income (loss) applicable to common shares | $ | (0.25 | ) | $ | (0.21 | ) | $ | 2.28 | |||||
Earnings per share - diluted | |||||||||||||
Loss from continuing operations | $ | (0.25 | ) | $ | (0.27 | ) | $ | (0.71 | ) | ||||
Income from discontinued operations | — | 0.06 | 2.99 | ||||||||||
Net income (loss) applicable to common shares | $ | (0.25 | ) | $ | (0.21 | ) | $ | 2.28 | |||||
Weighted average common shares used in computing earnings per share | 15,514,360 | 15,111,107 | 12,683,956 | ||||||||||
Weighted average common shares used in computing diluted earnings per share | 15,514,360 | 15,111,107 | 12,683,956 | ||||||||||
Amounts attributable to American Realty Investors, Inc. | |||||||||||||
Loss from continuing operations | $ | (2,731 | ) | $ | (2,856 | ) | $ | (7,024 | ) | ||||
Income (loss) from discontinued operations | (1 | ) | 896 | 37,909 | |||||||||
Net income (loss) | $ | (2,732 | ) | $ | (1,960 | ) | $ | 30,885 |
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Three Years Ended December 31, 2016
(dollars in thousands)
Common Stock | Non-controlling | |||||||||||||||||||||||||||||||||||
Total Capital | Comprehensive Loss | Preferred Stock | Shares | Amount | Treasury Stock | Paid-in Capital | Retained Earnings | Controlling Interest | ||||||||||||||||||||||||||||
Balance, December 31, 2013 | $ | 134,861 | $ | (93,213 | ) | $ | 4,908 | 11,941,174 | $ | 115 | $ | (6,395 | ) | $ | 102,974 | $ | (11,795 | ) | $ | 45,054 | ||||||||||||||||
Net income | 40,173 | 40,173 | — | — | — | — | — | 30,885 | 9,288 | |||||||||||||||||||||||||||
Distribution to non-controlling interests | (333 | ) | — | — | — | — | — | (302 | ) | — | (31 | ) | ||||||||||||||||||||||||
Sale of controlling interest | (289 | ) | — | — | — | — | — | (289 | ) | — | — | |||||||||||||||||||||||||
Conversion of preferred stock into common stock | 7,219 | — | (1,782 | ) | 2,502,230 | 26 | — | 8,038 | — | 937 | ||||||||||||||||||||||||||
Series A preferred stock cash dividend ($1.00 per share) | (2,043 | ) | — | — | — | — | — | (2,043 | ) | — | — | |||||||||||||||||||||||||
Balance, December 31, 2014 | $ | 179,588 | $ | (53,040 | ) | $ | 3,126 | 14,443,404 | $ | 141 | $ | (6,395 | ) | $ | 108,378 | $ | 19,090 | $ | 55,248 | |||||||||||||||||
Net loss | (3,287 | ) | (3,287 | ) | — | — | — | — | — | (1,960 | ) | (1,327 | ) | |||||||||||||||||||||||
Contribution from non-controlling interests | 11 | — | — | — | — | — | — | — | 11 | |||||||||||||||||||||||||||
Assumption of non-controlling interests | (470 | ) | — | — | — | — | — | (470 | ) | — | — | |||||||||||||||||||||||||
Conversion of preferred stock into common stock | 2,263 | — | (921 | ) | 1,486,741 | 15 | — | 3,169 | — | — | ||||||||||||||||||||||||||
Series A preferred stock cash dividend ($1.00 per share) | (1,216 | ) | — | — | — | — | — | (1,216 | ) | — | — | |||||||||||||||||||||||||
Balance, December 31, 2015 | $ | 176,889 | $ | (56,327 | ) | $ | 2,205 | 15,930,145 | $ | 156 | $ | (6,395 | ) | $ | 109,861 | $ | 17,130 | $ | 53,932 | |||||||||||||||||
Net loss | (2,410 | ) | (2,410 | ) | — | — | — | — | — | (2,732 | ) | 322 | ||||||||||||||||||||||||
Assumption of non-controlling interests | (268 | ) | — | — | — | — | — | (268 | ) | — | — | |||||||||||||||||||||||||
Sale of non-controlling interests | 3,021 | — | — | — | 3 | — | 3,018 | — | — | |||||||||||||||||||||||||||
Series A preferred stock cash dividend ($1.00 per share) | (1,101 | ) | — | — | — | — | — | (1,101 | ) | — | — | |||||||||||||||||||||||||
Balance, December 31, 2016 | $ | 176,131 | $ | (58,737 | ) | $ | 2,205 | 15,930,145 | $ | 159 | $ | (6,395 | ) | $ | 111,510 | $ | 14,398 | $ | 54,254 |
|
| December 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
| (dollars in thousands, except share and par value amounts) |
| |||||
Assets |
|
|
|
|
|
|
|
|
Real estate, at cost |
| $ | 469,997 |
|
| $ | 455,993 |
|
Real estate subject to sales contracts at cost |
|
| 7,966 |
|
|
| 3,149 |
|
Less accumulated depreciation |
|
| (90,173 | ) |
|
| (78,099 | ) |
Total real estate |
|
| 387,790 |
|
|
| 381,043 |
|
|
|
|
|
|
|
|
|
|
Notes and interest receivable (including $105,524 in 2019 and $105,803 in 2018 from related parties) |
|
| 169,299 |
|
|
| 140,327 |
|
Less allowance for estimated losses (including $13,099 and $14,269 in 2019 and 2018 from related parties) |
|
| (13,099 | ) |
|
| (14,269 | ) |
Total notes and interest receivable |
|
| 156,200 |
|
|
| 126,058 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 51,228 |
|
|
| 36,428 |
|
Restricted cash |
|
| 32,083 |
|
|
| 70,187 |
|
Investment in VAA |
|
| 59,148 |
|
|
| 68,399 |
|
Investment in other unconsolidated investees |
|
| 8,507 |
|
|
| 7,602 |
|
Receivable from related party |
|
| 85,996 |
|
|
| 70,377 |
|
Other assets |
|
| 49,689 |
|
|
| 66,055 |
|
Total assets |
| $ | 830,641 |
|
| $ | 826,149 |
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes and interest payable |
| $ | 254,873 |
|
| $ | 286,968 |
|
Bond and interest payable |
|
| 229,722 |
|
|
| 158,574 |
|
Deferred revenue (including $24,762 in 2019 and $33,904 in 2018 to related parties) |
|
| 24,762 |
|
|
| 33,904 |
|
Accounts payable and other liabilities (including $11,817 in 2019 and $9,984 in 2018 to related parties) |
|
| 24,768 |
|
|
| 25,576 |
|
Total liabilities |
|
| 534,125 |
|
|
| 505,022 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued 614 and outstanding 1,800,614 in 2019 and 2018 (liquidation preference $10 per share), including 1,800,000 shares held by ARL and its subsidiaries in 2019 and 2018. |
|
| 5 |
|
|
| 5 |
|
Common stock, $0.01 par value, 100,000,000 shares authorized; 16,412,861 shares issued and 15,997,076 outstanding as of 2019 and 2018 , including 140,000 shares held by TCI (consolidated) in 2019 and 2018. |
|
| 164 |
|
|
| 164 |
|
Treasury stock at cost; 415,785 shares in 2019 and 2018, and 140,000 shares held by TCI (consolidated) as of 2019 and 2018. |
|
| (6,395 | ) |
|
| (6,395 | ) |
Paid-in capital |
|
| 82,017 |
|
|
| 84,885 |
|
Retained earnings |
|
| 163,708 |
|
|
| 179,666 |
|
Total American Realty Investors, Inc. shareholders’ equity |
|
| 239,499 |
|
|
| 258,325 |
|
Non-controlling interest |
|
| 57,017 |
|
|
| 62,802 |
|
Total shareholders’ equity |
|
| 296,516 |
|
|
| 321,127 |
|
Total liabilities and shareholders’ equity |
| $ | 830,641 |
|
| $ | 826,149 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)OPERATIONS
For the Three Years Ended December 31,
2016 | 2015 | 2014 | ||||||||||
(dollars in thousands) | ||||||||||||
Net income (loss) | $ | (2,410 | ) | $ | (3,287 | ) | $ | 40,173 | ||||
Comprehensive (income) loss attributable to non-controlling interest | (322 | ) | 1,327 | (9,288 | ) | |||||||
Comprehensive income (loss) attributable to American Realty Investors, Inc. | $ | (2,732 | ) | $ | (1,960 | ) | $ | 30,885 |
|
| For the Years Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
| (dollars in thousands, except per share amounts) |
| |||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Rental and other property revenues (including $841, $144 and $839 for the year ended 2019, 2018 and 2017, respectively, from related parties) |
| $ | 47,970 |
|
| $ | 120,956 |
|
| $ | 126,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses (including $991, $254 and $959 for the year ended 2019, 2018 and 2017, respectively, from related parties) |
|
| 25,694 |
|
|
| 59,587 |
|
|
| 64,091 |
|
Depreciation and amortization |
|
| 13,379 |
|
|
| 22,670 |
|
|
| 25,679 |
|
General and administrative (including $4,429, $1,267and $3,225 for the year ended 2019, 2018 and 2017, respectively, from related parties) |
|
| 13,336 |
|
|
| 12,708 |
|
|
| 7,691 |
|
Net income fee to related party |
|
| 357 |
|
|
| 631 |
|
|
| 250 |
|
Advisory fee to related party |
|
| 6,612 |
|
|
| 11,475 |
|
|
| 11,082 |
|
Total operating expenses |
|
| 59,378 |
|
|
| 107,071 |
|
|
| 108,793 |
|
Net operating (loss) income |
|
| (11,408 | ) |
|
| 13,885 |
|
|
| 17,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (including $23,760, $5,406 and $16,298 for the year ended 2019, 2018 and 2017, respectively, from related parties) |
|
| 25,955 |
|
|
| 21,645 |
|
|
| 18,941 |
|
Other income |
|
| 11,018 |
|
|
| 28,993 |
|
|
| 4,082 |
|
Mortgage and loan interest (including $9,282, $2,240 and $6,695 for the year ended 2019, 2018 and 2017, respectively, from related parties) |
|
| (39,860 | ) |
|
| (66,063 | ) |
|
| (66,171 | ) |
Loss on the sale of investments |
|
| — |
|
|
| — |
|
|
| (331 | ) |
Foreign currency transaction gain (loss) |
|
| (15,108 | ) |
|
| 12,399 |
|
|
| (4,536 | ) |
Loss on extinguishment of debt |
|
| (5,219 | ) |
|
| — |
|
|
| — |
|
Equity (loss) earnings from VAA |
|
| (2,774 | ) |
|
| 44 |
|
|
| — |
|
Earnings from unconsolidated subsidiaries and investees |
|
| 461 |
|
|
| 1,469 |
|
|
| 309 |
|
Total other (expenses) |
|
| (25,527 | ) |
|
| (1,513 | ) |
|
| (47,706 | ) |
(Loss) income before gain on land sales, non-controlling interest, and taxes |
|
| (36,935 | ) |
|
| 12,372 |
|
|
| (30,278 | ) |
Gain on disposition of 50% interestt in VAA |
|
| — |
|
|
| 154,126 |
|
|
| — |
|
Gain on sale of income-producing properties |
|
| (80 | ) |
|
| — |
|
|
| 16,698 |
|
Gain on land sales |
|
| 15,272 |
|
|
| 17,404 |
|
|
| 4,884 |
|
Net (loss) income from continuing operations before taxes |
|
| (21,743 | ) |
|
| 183,902 |
|
|
| (8,696 | ) |
Income tax expense |
|
| — |
|
|
| (1,210 | ) |
|
| (180 | ) |
Net (loss) income from continuing operations |
|
| (21,743 | ) |
|
| 182,692 |
|
|
| (8,876 | ) |
Net (loss) income |
|
| (21,743 | ) |
|
| 182,692 |
|
|
| (8,876 | ) |
Net loss (income) attributable to non-controlling interest |
|
| 5,785 |
|
|
| (8,993 | ) |
|
| 445 |
|
Net (loss) income attributable to American Realty Investors, Inc. |
|
| (15,958 | ) |
|
| 173,699 |
|
|
| (8,431 | ) |
Preferred dividend requirement |
|
| (1 | ) |
|
| (901 | ) |
|
| (1,105 | ) |
Net (loss) income applicable to common shares |
| $ | (15,959 | ) |
| $ | 172,798 |
|
| $ | (9,536 | ) |
Earnings per share - basic |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
| $ | (1.36 | ) |
| $ | 11.37 |
|
| $ | (0.64 | ) |
Net (loss) income applicable to common shares |
| $ | (1.00 | ) |
| $ | 10.81 |
|
| $ | (0.61 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
| $ | (1.36 | ) |
| $ | 10.89 |
|
| $ | (0.64 | ) |
Net (loss) income applicable to common shares |
| $ | (1.00 | ) |
| $ | 10.35 |
|
| $ | (0.61 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing earnings per share |
|
| 15,997,076 |
|
|
| 15,982,528 |
|
|
| 15,514,360 |
|
Weighted average common shares used in computing diluted earnings per share |
|
| 15,997,076 |
|
|
| 16,697,966 |
|
|
| 15,514,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to American Realty Investors, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations |
| $ | (21,743 | ) |
| $ | 182,692 |
|
| $ | (8,876 | ) |
Net (loss) income applicable to common shares |
| $ | (15,959 | ) |
| $ | 172,798 |
|
| $ | (9,536 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWSSHAREHOLDERS’ EQUITY
For the Years Ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
(dollars in thousands) | ||||||||||||
Cash Flow From Operating Activities: | ||||||||||||
Net income (loss) | $ | (2,410 | ) | $ | (3,287 | ) | $ | 40,173 | ||||
Adjustments to reconcile net income (loss) applicable to common shares to net cash provided by (used in) operating activities: | ||||||||||||
Gain on sale of land | (3,121 | ) | (21,648 | ) | (561 | ) | ||||||
Gain on sale of income-producing properties | (16,207 | ) | (735 | ) | (61,879 | ) | ||||||
Depreciation and amortization | 23,785 | 21,418 | 18,345 | |||||||||
Provision on impairment of real estate assets | — | 5,300 | — | |||||||||
Amortization of deferred borrowing costs | 4,357 | 2,842 | 4,017 | |||||||||
Losses from unconsolidated subsidiaries and investees | 493 | 1,327 | 54 | |||||||||
(Increase) decrease in assets: | ||||||||||||
Accrued interest receivable | (1,151 | ) | (1,242 | ) | 10,095 | |||||||
Other assets | (2,343 | ) | 2,683 | 2,034 | ||||||||
Prepaid expense | (9,222 | ) | (13,851 | ) | (2,071 | ) | ||||||
Escrow | 7,584 | (1,261 | ) | (17,232 | ) | |||||||
Earnest money | (571 | ) | (1,193 | ) | 180 | |||||||
Rent receivables | 2,844 | (2,168 | ) | (1,384 | ) | |||||||
Increase (decrease) in liabilities: | ||||||||||||
Accrued interest payable | 3,475 | (255 | ) | 157 | ||||||||
Related party payables | (706 | ) | (11,027 | ) | (7,329 | ) | ||||||
Other liabilities | 10,639 | (11,412 | ) | (22,567 | ) | |||||||
Net cash provided by (used in) operating activities | 17,446 | (34,509 | ) | (37,968 | ) | |||||||
Cash Flow From Investing Activities: | ||||||||||||
Proceeds from notes receivables | 6,532 | 14,744 | 27,767 | |||||||||
Origination of notes receivables | (11,703 | ) | (18,055 | ) | (34,092 | ) | ||||||
Acquisition of land held for development | (12,508 | ) | — | (5,936 | ) | |||||||
Acquisition of income producing properties | (79,736 | ) | (207,313 | ) | (78,557 | ) | ||||||
Proceeds from sale of income producing properties | 21,850 | — | 132,917 | |||||||||
Proceeds from sale of land | 29,128 | 108,356 | 8,391 | |||||||||
Investment in unconsolidated real estate entities | 2,278 | 4,086 | (544 | ) | ||||||||
Improvement of land held for development | (3,023 | ) | (6,158 | ) | (3,137 | ) | ||||||
Improvement of income producing properties | (5,998 | ) | (8,955 | ) | (5,019 | ) | ||||||
Acquisition of non-controlling interest | — | — | — | |||||||||
Sale of non-controlling interest | — | (336 | ) | (289 | ) | |||||||
Sale of controlling interest | 3,021 | — | — | |||||||||
Construction and development of new properties | (10,941 | ) | (16,717 | ) | (3,016 | ) | ||||||
Net cash provided by (used in) investing activities | (61,100 | ) | (130,348 | ) | 38,485 | |||||||
Cash Flow From Financing Activities: | ||||||||||||
Proceeds from notes payable | 242,215 | 412,326 | 183,766 | |||||||||
Recurring amortization of principal on notes payable | (22,851 | ) | (26,668 | ) | (22,243 | ) | ||||||
Payments on maturing notes payable | (173,160 | ) | (195,549 | ) | (163,494 | ) | ||||||
Debt assumption by buyer | — | (16,688 | ) | — | ||||||||
Deferred financing costs | 841 | (6,734 | ) | (6,959 | ) | |||||||
Stock-secured borrowings | — | — | (568 | ) | ||||||||
Distributions to non-controlling interests | — | 11 | (333 | ) | ||||||||
Preferred stock dividends - Series A | (1,101 | ) | (1,216 | ) | (2,043 | ) | ||||||
Conversion of preferred stock into common stock | — | 2,308 | 7,219 | |||||||||
Net cash provided by (used in) financing activities | 45,944 | 167,790 | (4,655 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 2,290 | 2,933 | (4,138 | ) | ||||||||
Cash and cash equivalents, beginning of period | 15,232 | 12,299 | 16,437 | |||||||||
Cash and cash equivalents, end of period | $ | 17,522 | $ | 15,232 | $ | 12,299 | ||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid for interest | $ | 50,945 | $ | 44,672 | $ | 37,158 |
For the Three Years Ended December 31, 2019
(dollars in thousands, except share amounts)
|
| Total |
|
| Comprehensive |
|
| Preferred |
|
| Common Stock |
|
| Treasury |
|
| Paid-in |
|
| Retained |
|
| Non-controlling |
| ||||||||||||
|
| Equity |
|
| Income (Loss) |
|
| Stock |
|
| Shares |
|
| Amount |
|
| Stock |
|
| Capital |
|
| Earnings |
|
| Interest |
| |||||||||
Balance, December 31, 2016 |
| $ | 176,131 |
|
| $ | (58,737 | ) |
| $ | 2,205 |
|
|
| 15,930,145 |
|
| $ | 159 |
|
| $ | (6,395 | ) |
| $ | 111,510 |
|
| $ | 14,398 |
|
| $ | 54,254 |
|
Net loss |
|
| (8,876 | ) |
|
| (8,876 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (8,431 | ) |
|
| (445 | ) |
Assumption of non-controlling interests |
|
| (267 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (267 | ) |
|
| — |
|
|
| — |
|
Series A preferred stock cash dividend ($1.00 per share) |
|
| (1,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,105 | ) |
|
| — |
|
|
| — |
|
Balance, December 31, 2017 |
| $ | 165,883 |
|
| $ | (67,613 | ) |
| $ | 2,205 |
|
|
| 15,930,145 |
|
| $ | 159 |
|
| $ | (6,395 | ) |
| $ | 110,138 |
|
| $ | 5,967 |
|
| $ | 53,809 |
|
Net income |
|
| 182,692 |
|
|
| 173,699 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 173,699 |
|
|
| 8,993 |
|
Conversion of Series A preferred stock into common stock |
|
| (395 | ) |
|
| — |
|
|
| (400 | ) |
|
| 482,716 |
|
|
| 5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Redemption of Series D preferred stock |
|
| (10,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10,000 | ) |
|
| — |
|
|
| — |
|
Series D preferred dividend |
|
| (7,152 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,152 | ) |
|
| — |
|
|
| — |
|
Acquisition of Series A preferred stock by consolidated subsidiary |
|
| (9,000 | ) |
|
| — |
|
|
| (1,800 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,200 | ) |
|
| — |
|
|
| — |
|
Series A preferred stock cash dividend ($1.00 per share) |
|
| (901 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (901 | ) |
|
| — |
|
|
| — |
|
Balance, December 31, 2018 |
| $ | 321,127 |
|
| $ | 106,086 |
|
| $ | 5 |
|
| $ | 16,412,861 |
|
| $ | 164 |
|
| $ | (6,395 | ) |
| $ | 84,885 |
|
| $ | 179,666 |
|
| $ | 62,802 |
|
Net loss |
|
| (21,743 | ) |
|
| (15,958 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,958 | ) |
|
| (5,785 | ) |
Series A preferred stock cash dividend ($1.00 per share) |
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
Distribution to equity partner |
|
| (2,867 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,867 | ) |
|
| — |
|
|
| — |
|
Balance, December 31, 2019 |
| $ | 296,516 |
|
| $ | 90,128 |
|
| $ | 5 |
|
|
| 16,412,861 |
|
| $ | 164 |
|
| $ | (6,395 | ) |
| $ | 82,017 |
|
| $ | 163,708 |
|
| $ | 57,017 |
|
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| For the Years Ended December 31, |
| |||||||||
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
| (dollars in thousands) |
| |||||||||
Cash Flow From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (21,743 | ) |
| $ | 182,692 |
|
| $ | (8,876 | ) |
Adjustments to reconcile net (loss) income applicable to common shares to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on formation of VAA |
|
| — |
|
|
| (154,126 | ) |
|
| — |
|
Foreign currency transaction loss (gain) |
|
| 15,108 |
|
|
| (12,399 | ) |
|
| 4,536 |
|
Loss on debt extinguishment |
|
| 5,219 |
|
|
| — |
|
|
| — |
|
Gain on sale of land |
|
| (15,272 | ) |
|
| (17,404 | ) |
|
| (4,884 | ) |
Loss (gain) on sale of income-producing properties |
|
| 80 |
|
|
| — |
|
|
| (16,698 | ) |
Depreciation and amortization |
|
| 13,379 |
|
|
| 22,670 |
|
|
| 25,679 |
|
Provision on impairment of notes receivable and real estate assets |
|
| — |
|
|
| — |
|
|
| 558 |
|
Amortization of deferred borrowing costs |
|
| 665 |
|
|
| 4,994 |
|
|
| 3,591 |
|
Amortization of bond issuance costs |
|
| 1,544 |
|
|
| 2,994 |
|
|
| 971 |
|
Equity earnings from VAA |
|
| 2,774 |
|
|
| (44 | ) |
|
| — |
|
(Earnings) from unconsolidated subsidiaries and investees |
|
| (461 | ) |
|
| (1,469 | ) |
|
| (309 | ) |
(Increase) decrease in assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
| (5,792 | ) |
|
| (33,279 | ) |
|
| (581 | ) |
Other assets |
|
| 5,255 |
|
|
| (86,796 | ) |
|
| 11,751 |
|
Prepaid expense |
|
| 11,969 |
|
|
| 19,125 |
|
|
| (15,192 | ) |
Rent receivables |
|
| (618 | ) |
|
| (3,213 | ) |
|
| (425 | ) |
Related party receivables |
|
| (46,191 | ) |
|
| (11,894 | ) |
|
| (12,871 | ) |
Increase (decrease) in liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable |
|
| 2,338 |
|
|
| (2,316 | ) |
|
| 4,599 |
|
Other liabilities |
|
| (8,895 | ) |
|
| (81,867 | ) |
|
| (21,975 | ) |
Net cash (used in) operating activities |
|
| (40,641 | ) |
|
| (172,332 | ) |
|
| (30,126 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from disposition of 50% interest in VAA |
|
| — |
|
|
| 236,752 |
|
|
| — |
|
Proceeds from notes receivables |
|
| 19,755 |
|
|
| 6,541 |
|
|
| 30,233 |
|
Origination of notes receivables |
|
| (21,434 | ) |
|
| (16,801 | ) |
|
| (15,741 | ) |
Acquisition of land held for development |
|
| (3,422 | ) |
|
| — |
|
|
| — |
|
Acquisition of income producing properties |
|
| — |
|
|
| (10,558 | ) |
|
| (37,044 | ) |
Proceeds from sale of income producing properties |
|
| 1,296 |
|
|
| 4,889 |
|
|
| 4,623 |
|
Proceeds from sale of land |
|
| 27,326 |
|
|
| 11,857 |
|
|
| 6,301 |
|
Distribution from equity investee |
|
| 6,701 |
|
|
| — |
|
|
| — |
|
Distributions to equity partner |
|
| (197 | ) |
|
| — |
|
|
| — |
|
Investment in unconsolidated real estate entities |
|
| — |
|
|
| — |
|
|
| (267 | ) |
Improvement of income producing properties |
|
| (5,257 | ) |
|
| (3,688 | ) |
|
| (1,986 | ) |
Construction and development of new properties |
|
| (28,473 | ) |
|
| (81,367 | ) |
|
| (76,147 | ) |
Net cash (used in) provided by investing activities |
|
| (3,705 | ) |
|
| 147,625 |
|
|
| (90,028 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bonds |
|
| 78,125 |
|
|
| 59,213 |
|
|
| 115,337 |
|
Bond payments |
|
| (21,742 | ) |
|
| — |
|
|
| — |
|
Bond issuance costs |
|
| (4,241 | ) |
|
| (5,257 | ) |
|
| (6,887 | ) |
Proceeds from notes payable |
|
| 25,675 |
|
|
| 123,345 |
|
|
| 135,116 |
|
Recurring payment of principal on notes payable |
|
| (11,445 | ) |
|
| (124,616 | ) |
|
| (86,091 | ) |
Payment on commercial note payable |
|
| (41,531 | ) |
|
| — |
|
|
| — |
|
Debt extinguishment costs |
|
| (3,799 | ) |
|
| — |
|
|
| — |
|
Acquisition of Series A preferred stock by consolidated subsidiary |
|
| — |
|
|
| (9,000 | ) |
|
| — |
|
Deferred financing costs |
|
| — |
|
|
| — |
|
|
| (3,599 | ) |
Preferred stock dividends - Series A |
|
| — |
|
|
| (901 | ) |
|
| (1,105 | ) |
Net cash provided by financing activities |
|
| 21,042 |
|
|
| 42,784 |
|
|
| 152,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
| (23,304 | ) |
|
| 18,077 |
|
|
| 32,617 |
|
Cash and cash equivalents, beginning of period |
|
| 106,615 |
|
|
| 88,538 |
|
|
| 55,921 |
|
Cash and cash equivalents, end of period |
| $ | 83,311 |
|
| $ | 106,615 |
|
| $ | 88,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 38,904 |
|
| $ | 57,981 |
|
| $ | 39,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Land received in exchanged for note receivable |
| $ | 1,800 |
|
| $ | — |
|
| $ | — |
|
Notes receivable received from sale of income-producing properties |
| $ | — |
|
| $ | 1,735 |
|
| $ | — |
|
Seller financing note - acquisition of income-producing properties |
| $ | — |
|
| $ | 1,895 |
|
| $ | — |
|
Notes payable issued on acquisition of income-producing properties |
| $ | — |
|
| $ | 31,175 |
|
| $ | — |
|
Notes payable issued on acquisition of land |
| $ | 1,155 |
|
| $ | — |
|
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| 2019 |
|
| 2018 |
|
| 2017 |
| |||
|
| (dollars in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (21,743 | ) |
| $ | 182,692 |
|
| $ | (8,876 | ) |
Total comprehensive (loss) income |
|
| (21,743 | ) |
|
| 182,692 |
|
|
| (8,876 | ) |
Comprehensive loss (income) attributable to non-controlling interest |
|
| 5,785 |
|
|
| (8,993 | ) |
|
| 445 |
|
Comprehensive (loss) income attributable to American Realty Investors, Inc. |
| $ | (15,958 | ) |
| $ | 173,699 |
|
| $ | (8,431 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
AMERICAN REALTY INVESTORS, INC.
NOTES TO FINANCIALFINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of American Realty Investors, Inc. (“ARL”)“ARL” and consolidated entities have been prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in Note 1. “Organization and Summary of Significant Accounting Policies.” The Notes to Consolidated Financial Statements are an integral part of the Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 2015 and 2014prior year amounts have been reclassified to conform to the 2016 presentation.current year presentation on the consolidated statements of operations, consolidated balance sheets and the consolidated statements of cash flows.
NOTE 1. |
|
Organization and business.
The Company, a Nevada corporation that was formed in 1999, is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE American”) under the symbol “ARL”. Over 80% of ARL’s stock is owned by related party entities. ARL and a subsidiary own approximately 78.38% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. “TCI”, a Nevada corporation, whose common stock is traded on the NYSE American under the symbol “TCI”.
TCI, a subsidiary of ARL, owns approximately 81.23% of the common stock of Income Opportunity Realty Investors, Inc. “IOR”. Effective July 17, 2009, IOR’s financial results were consolidated with those of ARL and TCI and their subsidiaries. IOR’s common stock is traded on the New York Stock Exchange (“NYSE American”) under the symbol “IOR”.
ARL’s Board of Directors are responsible for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors of ARL are also directors of TCI and IOR. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board of Directors of TCI and IOR. The officers of ARL also serve as officers of TCI, IOR and Pillar.
Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. “RAI”, a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc. “RAMI”, effective August 7, 2014), a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOR. As the contractual advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.
Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial and provides brokerage services. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. ARL engages third-party companies to lease and manage its apartment properties.
45
On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. “UHF” a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
Southern Properties Capital Ltd. a British Virgin Island corporation (“Southern” or “SPC”), is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures that cannot be converted into shares on the Tel-Aviv Stock Exchange (“TASE”). Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI.
On November 19, 2018, we executed an agreement between the Macquarie Group (“Macquarie”) and Southern and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, Southern and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).
VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”). The remaining 2% of the profits interest is held by Daniel J. Moos, who serves as the President and Chief Executive officer of the Company (“Class B Member”) and Manager of the joint venture.
Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate revenues from gains on sales of income-producing properties and land. At December 31, 2019, we owned through our wholly owned subsidiaries ten residential apartment communities comprising of 1,657 units, seven commercial properties comprising an aggregate of approximately 1.7 million rentable square feet, and an investment in 1,951 acres of undeveloped and partially developed land. In addition, our joint venture VAA owns fifty-one residential apartment communities comprised of 9,888 units.
Basis of presentation.
The Company, a Nevada corporation that was formed in 1999, is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE”) under the symbol (“ARL”). Over 80% of ARL’s stock is owned by related party entities. ARL and a subsidiary own approximately 78% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, whose common stock is traded on the NYSE under the symbol (“TCI”).
TCI, a subsidiary of ARL, owns approximately 81.1% of the common stock of Income Opportunity Realty Investors, Inc. (“IOT”). Effective July 17, 2009, IOT’s financial results were consolidated with those of ARL and TCI and their subsidiaries. IOT’s common stock is traded on the New York Stock Exchange (“NYSE MKT”) under the symbol (“IOT”).
ARL’s Board of Directors is responsible for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors of ARL are also directors of TCI and IOT. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board of Directors of TCI and IOT. The officers of ARL also serve as officers of TCI, IOT and Pillar.
Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is May Realty Holdings, Inc. (“MRHI”, formerly known as Realty Advisors Management, Inc. “RAMI”, effective August 7, 2014), a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOT. As the contractual advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.
Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial and provides brokerage services. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. ARL engages third-party companies to lease and manage its apartment properties.
On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate revenues from gains on sales of income-producing properties and land. At December 31, 2016, we owned 50 residential apartment communities comprising of 8,266 units, eight commercial properties comprising an aggregate of approximately 2.0 million rentable square feet, and an investment in 3,666 acres of undeveloped and partially developed land, and a golf course comprising approximately 96.1 acres.
Basis of presentation. The Company presents its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (VIE), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
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In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors. Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs and general market conditions.
For entities in which we have less than a controlling financial interest or entities where it is not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income. Our investment in Gruppa Florentina, LLC is accounted for under the equity method.
The Company in accordance with the VIE guidance in ASC 810 “Consolidations” consolidates ten multifamily residential properties at December 31, 2019 and nine at December 31, 2018, located throughout the United States ranging from 1,657 units to 1,489 units. Assets totaling approximately $478 million and approximately $464 million at December 31, 2019 and 2018, respectively, are consolidated and included in “Real estate, at cost” on the balance sheet and are all collateral for their respective mortgage notes payable, none of which are recourse to the partnership in which they are in or to the Company.
Real estate, depreciation, and impairment.Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements—10-40 years; furniture, fixtures and equipment—5-10 years). We continually evaluate the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment,” Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.
Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in each sale transaction under Item 1 Significant Real Estate Acquisitions/Dispositions and Financing. Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets”.
Real estate held for sale.We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 2019 or 2018.
Effective as of January 1, 2015, we adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after January 1, 2015, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
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Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”
Cost capitalization. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to planning, developing, initial leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. Capitalized development costs include interest, property taxes, insurance, and other direct project costs incurred during the period of development.
A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.
We capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.
Fair value measurement. We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
Level 1 | — | Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets. | ||||||||||||||
Level 2 | — | Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial | ||||||||||||||
Level 3 | —
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A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related parties. We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
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Recognition of revenue.Our revenues, which are composed largely of rental income, include rents reported on a straight-line basis over the lease term. In accordance with ASC 805 “Business Combinations”, we recognize rental revenue of acquired in-place “above-” and “below-market” leases at their fair values over the terms of the respective leases.
Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.
Rental income for residential property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less. For hotel properties, revenues for room sales and guest services are recognized as rooms occupied and services rendered. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.
Sales and the associated gains or losses of real estate assets are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain recognition and accounts for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.
Foreign currency translation.Foreign currency denominated assets and liabilities of subsidiaries with local functional currencies are translated to United States dollars at year-end exchange rates. The effects of translation are recorded in the cumulative translation component of shareholders’ equity. Subsidiaries with a United States dollar functional currency re-measure monetary assets and liabilities at year-end exchange rates and non-monetary assets and liabilities at historical exchange rates. The effects of re-measurement are included in income. Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average exchange rates.
Non-performing notes receivable.ARL considers a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.
Interest recognition on notes receivable. We record interest income as earned in accordance with the terms of the related loan agreements.
Allowance for estimated losses.We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 5 “Notes and Interest Receivable” for details on our notes receivable.
Cash equivalents.For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.
Restricted cash. Restricted cash is comprised primarily of cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable.
Concentration of credit risk.The Company maintains its cash balances at commercial banks and through investment companies, the deposits of which are insured by the Federal Deposit Insurance Corporation (FDIC). At December 31, 2019 and 2018, the Company maintained balances in excess of the insured amount.
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Earnings per share.Income (loss) per share is presented in accordance with ASC 620 “Earnings per Share”. Income (loss) per share is computed based upon the weighted average number of shares of common stock outstanding during each year.
Use of estimates.In the preparation of Consolidated Financial Statements in conformity with GAAP, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates.
Income taxes.The Company is a “C” corporation for U.S. federal income tax purposes. For tax periods ending before August 31, 2012, the Company filed an annual consolidated income tax return with TCI and IOR and their subsidiaries. ARL was the common parent for the consolidated group. After that date, the Company and the rest of the ARL group joined the MRHI consolidated group for tax purposes. The income tax expense (benefit) for the 2012 tax period in the accompanying financial statement was calculated under a tax sharing and compensating agreement between ARL, TCI and IOR. That agreement continued until August 31, 2012, at which time a new tax sharing and compensating agreement was entered into by ARL, TCI, IOR and MRHI for the remainder of 2012 and subsequent years. The agreement specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group.
Recent accounting pronouncements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions from ASC 740. Also, the amendments in this Update simplify the accounting for income taxes by requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax, requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination, and other targeted changes. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company is currently evaluating the impact that the adoption of ASU 2019-12 may have on its consolidated financial statements.
In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The effective date of the amendments is for fiscal years, and interim periods within those years, beginning after December 15, 2019. The new standard must be adopted retrospectively with early adoption permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. ASU 2016-02 was effective for reporting periods beginning after December 15, 2018. The adoption of ASU 2016-02 did not have a material impact on the Company’s financial position and results of operations.
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In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. As the majority of the Company’s revenue is from rental revenue related to leases, the Company has determined that the adoption of this Standard was immaterial to the consolidated financial statements and related disclosures.
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On November 19, 2018, TCI executed an agreement with Macquarie Group (“Macquarie”) to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction. TCI received cash consideration of $236.8 million and recognized a gain of approximately $154.1 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).
VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of Southern and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”). The remaining 2% of the profit participation interest is held by Daniel J. Moos ARL’s President and Chief Executive Officer (“Class B Member”) who serves also as the Manager of the joint venture. In addition, upon the closing of the agreement the Class B Member received a one-time consideration payment of $1.9 million.
The Company accounts for its investment in VAA under the equity method of accounting. Under the equity method of accounting, our net equity in the investment is reflected within the Consolidated Balance Sheets in the caption ‘Investment in VAA’, and our share of the net income or loss from the joint venture is included within the Consolidated Statements of Operations in the caption ‘Earnings from VAA’. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds and other agreed upon adjustments.
The following is a summary of the financial position and results of operations of VAA (dollars in thousands):
As of December 31, | ||||||||
Balance Sheet | 2019 | 2018 | ||||||
Net real estate assets | $ | 1,242,957 | $ | 1,257,557 | ||||
Other assets | 62,222 | 67,020 | ||||||
Debt, net | (832,779 | ) | (791,225 | ) | ||||
Other liabilities | (271,291 | ) | (280,288 | ) | ||||
Total equity | (201,109 | ) | (253,064 | ) |
Results of Operations | For the Year Ended December 31, 2019 | For the period November 19 to December 31, 2018 | ||||||
Total revenue | $ | 115,377 | $ | 12,887 | ||||
Total property, operating, and maintenance expenses | (56,967 | ) | (4,507 | ) | ||||
Interest expense | (61,487 | ) | (5,818 | ) | ||||
Depreciation and Amortization | (43,942 | ) | (6,987 | ) | ||||
Total other expense | (3,377 | ) | (5,297 | ) | ||||
Net loss | $ | (50,396 | ) | $ | (9,722 | ) |
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The following is a reconciliation from VAA’s net loss to TCI’s equity in earnings from VAA (dollars in thousands):
For the Year Ended December 31, 2019 | For the period November 19 to December 31, 2018 | |||||||
VAA net loss | $ | (50,396 | ) | $ | (9,722 | ) | ||
Adjustments to reconcile to income (loss) from VAA | ||||||||
Interest expense on mezzanine loan | 25,014 | 2,815 | ||||||
In-place lease intangibles - amortization expense | 14,703 | 3,983 | ||||||
Depreciation basis differences | 5,132 | 3,012 | ||||||
Net loss | $ | (5,547 | ) | $ | 88 | |||
Percentage ownership in VAA | 50 | % | 50 | % | ||||
Loss from VAA | $ | (2,774 | ) | $ | 44 |
The following table sets forth the location of our real estate held for investment (income-producing properties only) by asset type as of December 31, 2019:
| Apartments |
| ||||||
Location |
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| No. |
|
|
| Units |
|
Alabama |
|
| 1 |
|
|
| 168 |
|
Arkansas |
|
| 5 |
|
|
| 1,122 |
|
Colorado |
|
| 2 |
|
|
| 260 |
|
Florida |
|
| 2 |
|
|
| 388 |
|
Georgia |
|
| 1 |
|
|
| 222 |
|
Louisiana |
|
| 3 |
|
|
| 464 |
|
Mississippi |
|
| 1 |
|
|
| 196 |
|
North Carolina |
|
| 1 |
|
|
| 201 |
|
Nevada |
|
| 1 |
|
|
| 308 |
|
Tennessee |
|
| 4 |
|
|
| 708 |
|
Texas-Greater Dallas-Ft Worth |
|
| 19 |
|
|
| 3,709 |
|
Texas-Greater Houston |
|
| 2 |
|
|
| 416 |
|
Texas-Other |
|
| 9 |
|
|
| 1,726 |
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Total |
|
| 51 |
|
|
| 9,888 |
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At December 31, 2019, our apartment projects in development included (dollars in thousands):
Property | Location | No. of Units | Costs to Date (1) | Total Projected Costs (1) | |||||||||||
Lakeside Lofts apartments | Farmers Branch, TX | 249 | $ | 50,357 | $ | 80,622 | |||||||||
Total | 249 | $ | 50,357 | $ | 80,622 |
(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.
During 2019, the Company received $19.4 million cash distribution from VAA as a result of the annual surplus cash computation from its HUD collaterized residential properties and other amounts owed to the Company as agreed to in the joint venture operating agreement.
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NOTE 3. |
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At December 31, 2019 and 2018, ARL’s real estate investment is comprised of the following (dollars in thousands):
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| December 31, |
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| 2019 |
|
| 2018 |
| ||
Apartments |
| $ | 156,173 |
|
| $ | 126,274 |
|
Apartments under construction |
|
| 22,363 |
|
|
| 21,916 |
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Commercial properties |
|
| 229,424 |
|
|
| 224,162 |
|
Land held for development |
|
| 62,037 |
|
|
| 83,641 |
|
Real estate subject to sales contract |
|
| 7,966 |
|
|
| 3 ,149 |
|
Total real estate, at cost, less impairment |
| $ | 477,963 |
|
| $ | 459,142 |
|
Less accumulated deprecation |
|
| (90,173 | ) |
|
| (78,099 | ) |
Total real estate, net of depreciation |
| $ | 387,790 |
|
| $ | 3 81,043 |
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Expenditures for repairs and maintenance are charged to operations as incurred. Significant betterments are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.
Depreciation is computed on a straight line basis over the estimated useful lives of the assets as follows:
2016 | 2015 | |||||||
Apartments | $ | 694,351 | $ | 622,761 | ||||
Apartments under construction | 25,288 | 18,230 | ||||||
Commercial properties | 218,857 | 215,609 | ||||||
Land held for development | 79,188 | 97,790 | ||||||
Real estate held for sale | — | — | ||||||
Real estate subject to sales contract | 48,919 | 49,155 | ||||||
Total real estate, at cost, less impairment | 1,066,603 | 1,003,545 | ||||||
Less accumulated deprecation | (165,597 | ) | (150,038 | ) | ||||
Total real estate, net of depreciation | $ | 901,006 | $ | 853,507 |
Land improvements | 25 to 40 years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Buildings and | 10 to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tenant improvements | Shorter of useful life or | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Furniture, fixtures and
Fair Value Measurement
The Company applies the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. The Company is required to assess the fair value of its consolidated real estate assets with indicators of impairment. The value of impaired real estate assets is determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flow of each asset, as well as the income capitalization approach, which considers prevailing market capitalization rates, analyses of recent comparable sales transactions, information from actual sales negotiations and bona fide purchase offers received from third parties. The methods used to measure fair value may produce an amount that may not be indicative of net realizable value or reflective of future values. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The fair value measurements used in these evaluations are considered to be Level 2 and 3 valuations within the fair value hierarchy in the accounting rules, as there are significant observable (Level 2) and unobservable inputs (Level 3). Examples of Level 2 inputs the Company utilizes in its fair value calculations are appraisals and bona fide purchase offers from third parties. Examples of Level 3 inputs the Company utilizes in its fair value calculations are discount rates, market capitalization rates, expected lease rental rates, timing of new leases, an estimate of future sales prices and comparable sales prices of similar assets, if available.
There was no provision for impairment during the years ended December 31,
53 The
For the years ended December 31, 2019 and 2018, the Company paid interest expense of approximately $38.9 million and $59.7 million, respectively. Cash and cash equivalents, and restricted cash for fiscal year ended 2019 and 2018 was $83.3 million and $106.6 million, respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total presented in the consolidated statement of cash flows:
Amounts included in restricted cash represent funds required to meet contractual obligations with certain financial institutions for the payment of reserve replacement deposits and tax and insurance escrow. In addition, restricted cash includes funds to the Bond’s Trustee for payment of principal and interests. 55 NOTE
A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity (dollars in thousands).
As of December 31,
As of December 31,
56 The Company has various notes receivable from Unified Housing
Investments in unconsolidated subsidiaries, jointly owned companies and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting.
The The following is a summary of the financial position and results of operations from our investees (dollars in thousands):
NOTE
Below is a summary of our notes and interest payable as of December 31,
The following table summarizes our contractual obligations for principal payments as of December 31,
Interest payable at December 31,
There are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note due to expiration of the loan. We are in constant contact with these lenders, working together in order to modify the terms of these loans and we anticipate a timely resolution that is similar to the existing agreement or subsequent modification.
In conjunction with the development of various apartment projects and other developments, we drew down NOTE 8.BONDS AND BONDS INTEREST PAYABLE In August 2016, Southern Properties Capital LTD (“Southern”), a British Virgin Islands corporation was incorporated for the purpose of raising funds by issuing Bonds to be traded on the Tel Aviv Stock Exchange (“TASE”). The Company transferred certain residential and commercial properties located in the United States to Southern, its wholly owned subsidiary. On February 13, 2017, Southern filed a final prospectus with the TASE for an offering and sale of nonconvertible Series A Bonds to be issued by Southern. The bonds are obligations of Southern. During the year ended December 31, 2017 on three separate occasions Southern issued nonconvertible Series A Bonds with a total value of approximately NIS400 million New Israeli Shekels (“NIS”) or approximately $115 million dollars. The Series A Bonds have a stated interest rate of 7.3%. At March 31, 2018 the effective interest rate is 9.17%. The bonds require semi-annual equal installments on January 31 and July 31 of each year from 2019 to 2023 (inclusive). The interest will be repaid on January 31 and July 31 of each of the years 2018 to 2023 (inclusive), with the first payment commencing on July 31, 2017. On January 25, 2018, interest payment of approximately NIS 14.6 million (or approximately $4.3 million) was paid to the Series A bondholders. On February 15, 2018, Southern issued Series B bonds in the amount of NIS 137.7 million par value (approximately $39.2 million as of February 15, 2018). The Series B bonds are registered on the TASE. The bonds are reported in NIS and bear annual interest rate of 6.8%. Interest shall be repaid January 31 and July 31 of each of the years 2019 to 2023 (inclusive), first payment commencing on July 31, 2018. The principal shall be repaid in ten equal installments on January 31 and July 31 of each of the years from 2021 to 2025 (inclusive). A total bond issuance cost of $1.4 million was incurred. The effective interest rate is 7.99%. On July 19, 2018, Southern closed a private placement of its Series B bonds in the amount of NIS 72.3 million (or approximately $19.8 million). The bonds are reported in NIS, are registered on the TASE, bear an annual interest rate of 6.8% and have an effective interest rate of 9.60%. Interest will be paid on January 31 and July 31 of each of the years 2019 and 2013 (inclusive). The principal will be repaid in ten equal installment on January 31 and July 31 of each of the years from 2021 to 2012 (inclusive). The Company incurred bonds issuance costs of approximately $1.9 million. On July 26, 2018, interest payment of approximately NIS 18.9 million (or approximately $5.2 million) was paid to the Series A and B bondholders. On July 28, 2019, SPC issued Series C bonds in the amount of NIS 275 million (or approximately $78.1 million). The bonds are reported in NIS, and registered on the TASE, and bear an annual interest of 4.65%. The interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, with the principal payment due in 2023. The Company incurred bond issuance costs of approximately $4.2 million. On September 23, 2019, Southern entered into a foreign exchange risk hedging transaction agreement with Bank Leumi with the aim of hedging the risk that the NIS exchange rate against the dollar will fall below 3, thereby reducing the exposure of the bonds (Series A, B and C) to exchange rate volatility. The term of the agreement is six months and the face value of the transaction is NIS 664 million ($ 221 million). The hedge transaction costs as well as the fair value as of December 31, 2019 are immaterial. During the year ended December 31, 2019, the Company made payments of $21.8 million and $11.6 million on bond principal and interests, respectively. On January 27, 2020, the Company made payments of NIS 60.6 million in bond principal on the Series A and interests on the Series A, B, C (or approximately $17.6 million). On February 2, 2020, S&P Global Ratings announced the increase of the Company's issuer rating to 'ilA-' from 'ilBBB+' for Bonds (Series A and B). In addition, Series C bond rating (secured by one of SPC’s commercial properties) increase to 'ilA' from 'ilA-' rating due to the expectation of continued improvement in coverage ratios and the expansion of Company’s portfolio. 59 The outstanding balance of these Bonds at December 31, 2019 and 2018 were as follows:
The aggregate maturities of the bonds are as follows:
The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment of principal and interest on the bonds is made. For the year ended December 31, 2019 and 2018, the Company recorded a loss on foreign currency transaction of approximately $15.1 million, and a gain of $12.4 million, respectively.
NOTE
We apply ASC Topic 805, “Business Combinations,” to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.
The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.
Since April 30, 2011, Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external Advisor and Cash Manager. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and
60 Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage.” ARL engages third-party companies to lease and manage its apartment properties.
Below is a description of the related party transactions and fees between Pillar and
Fees, expenses, and revenue paid to and/or received from our advisor:
Fees paid to Regis and related parties:
The Company received rental revenue of
As of December 31,
61 On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with UHF, a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
The Company is the primary guarantor, on a
The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and In addition, SPC is part of a management service agreement with the controlling shareholder owned company in which SPC for an annual payment of 0.5% on the value of the investment properties receives from the Advisor office space, administrative and management services. During 2019, SPC paid management fees to Pillar in the amount of $2.2 million.
The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties (Pillar) as of December 31,
NOTE 10. DEFERRED INCOME In previous years, the Company has sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such the Company has deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31,
62 NOTE
ARL’s Board of Directors established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. In accordance with that policy, no dividends on ARL’s common stock were declared for
NOTE
On December 31,
NOTE 13.INCOME TAXES We account for income taxes under the asset and liability method, which requires the recognition of For financial reporting purposes, income before income taxes were:
63 The (benefit) expense for income taxes consists of:
The reconciliation between the Company’s effective tax rate on income from continuing operations and the statutory rate is as follows:
The company is subject to taxation in the United States and various states and foreign jurisdictions. As of December
64 Operating Loss and Tax Credit Carryforwards We have federal income tax net operating losses (NOLs) carryforwards related to our domestic operations of approximately $53 million on a standalone basis, which have an indefinite life. We also have state NOLs in many of the
assets. At December 31,
NOTE
ARL’s operations include the leasing of commercial properties (office buildings, industrial warehouses and retail centers). The leases, thereon, expire at various dates through
NOTE
Our segments are based on management’s method of internal reporting which classifies its operations by property type. The segments are commercial, apartments, land and other. Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative and other expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their operating income and cash flow.
Items of income that are not reflected in the segments are interest, other income, equity in partnerships and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.
The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.
65 Presented below is the Company’s reportable segments’ operating income including segment assets and expenditures for the years
The table below
The table below reflects the reconciliation of the segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):
NOTE
The following is a tabulation of quarterly results of operations for the years
NOTE
Liquidity. Management believes that
Partnership Buyouts.
ART and ART Midwest,
The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but ART has filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The application for Review is still pending with the Texas Supreme Court. In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.
Dynex Capital, Inc.
On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).
69 An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015.
The Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic was $0.256 million in damages, plus pre-judgment interest of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages
Berger Litigation On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filed alleges that the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remainder of the motions to dismiss are pending.
Litigation. The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity. 70 NOTE
Earnings per share (“EPS”)
Prior to July 17, 2014, RAI owned 2,451,435 shares of the outstanding Series A 10.0.0% convertible preferred stock and had accrued dividends unpaid of $15.1 million. On July 17, 2014, RAI converted 890,797 shares, including $6.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common stock. This conversion resulted in the issuance of 2,502,230 new shares of ARL common stock. On April 9, 2015, RAI converted 460,638 shares including $2.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common stock. This conversion resulted in the issuance of 1,486,741 new shares of ARL common stock. As of December 31,
The Company had 135,000 shares of Series K convertible preferred stock, which were held by TCI and used as collateral on a note. The note has been paid in full and the Series K preferred stock was cancelled May 7, 2014.
Prior to January 1, 2015, the Company had 1,000 shares of stock options outstanding. These options expired unexercised January 1, 2015. The options are no longer included in the dilutive earnings per share calculation for the current period, but are considered in the computation for the prior periods if applying the “treasury stock” method is dilutive.
As of December 31,
NOTE On February 2, 2020, S&P Global Ratings announced the increase of the Company's issuer rating to 'ilA-' from 'ilBBB+' for Bonds (Series A and B). In addition, Series C bond rating (secured by one of SPC’s commercial properties) increase to 'ilA' from 'ilA-' rating due to the expectation of continued improvement in coverage ratios and the expansion of Company’s portfolio. During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – 19. At this point, the extent to which COVID – 19 may impact the global economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business and results of operations
The date to which events occurring after December 31,
TRANSCONTINENTAL REALTY INVESTORS, INC. REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2019
SCHEDULE III
AMERICAN REALTY INVESTORS, INC.
As of December 31,
SCHEDULE IV
AMERICAN REALTY INVESTORS, INC. MORTGAGE LOANS RECEIVABLE
(1) Fully reserved 74
AMERICAN REALTY INVESTORS, INC. MORTGAGE LOANS As of December 31,
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Principal Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal control over financial reporting. These limitations include the possibility of human error, the circumvention of overriding of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial report. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
In preparation for management’s report on internal control over financial reporting, we documented and tested the design and operating effectiveness of our internal control over financial reporting. There were no changes in our internal controls over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter ended December 31,
Not applicable. 76
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The affairs of ARL are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or are appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or appointed.
It is the Board’s objective that a majority of the Board consists of independent directors. For a Director to be considered independent, the Board must determine that the Director does not have any direct or indirect material relationship with ARL. The Board has established guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the New York Stock Exchange listing rules. The independence guidelines are set forth in ARL’s “Corporate Governance Guidelines”. The text of this document has been posted on ARL’s Internet website at (
ARL has adopted a code of conduct that applies to all Directors, officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. Stockholders may find our code of conduct on our website by going to our website address at (
Our Board of Directors has adopted charters for our Audit, Compensation, and Governance and Nominating Committees of the Board of Directors. Stockholders may find these documents on our website by going to the website address at (
American Realty Investors, Inc. Attn: Investor Relations 1603 LBJ Freeway, Suite 800 Dallas, Texas 75234 Telephone: 469-522-4200
All members of the Audit Committee and the Governance and Nominating Committee must be independent directors. Members of the Audit Committee must also satisfy additional independence requirements, which provide (i) that they may not accept, directly or indirectly, any consulting, advisory, or compensatory fee from ARL or any of its subsidiaries other than their Director’s compensation (other than in their capacity as a member of the Audit Committee, the Board of Directors, or any other committee of the Board), and (ii) no member of the Audit Committee may be an “affiliated person” of ARL or any of its subsidiaries, as defined by the Securities and Exchange Commission.
The current Directors of ARL are listed below, together with their ages, terms of service, all positions and offices with ARL and its advisor Pillar, their principal occupations, business experience, and directorships with other companies during the last five years or more. The designation “affiliated”, when used below with respect to a Director, means that the Director is an officer, director, or employee of Pillar, an officer of the Company, or an officer or director of a related party of the Company. The designation “independent,” when used below with respect to a Director, means that the Director is neither an officer of the Company nor a director, officer, or employee of Pillar (but may be a director of the Company), although the Company may have certain business or professional relationships with such Director as discussed in Part III, Item 13. “Certain Relationships and Related Transactions and Director Independence”.
HENRY A. BUTLER, age
Retired (since April 30, 2019); Mr. Butler 77 WILLIAM J. HOGAN, age 62, Director, Independent, since February 2020 Registered Representative and Investment Advisor Representative, employed (since January 2013) by Cetera Advisor Networks LLC, a general securities and investment advisory firm, with an office in San Antonio, Texas. From November 2009 through December 2012, Mr. Hogan was a registered representative, employed by Financial Network Investment Corp. in San Antonio, Texas. He holds Series 7 (General Securities Representative), Series 63 (Uniform Securities Agent State Law) and Series 65 (Investment Advisor) licenses issued by Financial Industry Regulatory Authority (“FINRA”). Mr. Hogan was elected as a director of the Company and TCI on January 28, 2020 effective February 1, 2020.
ROBERT A. JAKUSZEWSKI, age
Mr. Jakuszewski is currently has served as a Territory Manager for Artesa Labs since April 2015. He was a Medical Specialist from January 2014 to April 2015 for VAYA Pharma, Inc., Senior Medical Liaison from January 2013 to July 2013 for Vein Clinics of America, and the Vice President of Sales and Marketing from September 1998 to December 2012 for New Horizons Communications, Inc. Mr. Jakuszewski has been a Director of the Company since
TED R. MUNSELLE, age
Mr. Munselle has been Vice President and Chief Financial Officer of Landmark Nurseries, Inc. since October 1998. On February 17, 2012, he was appointed as a member of the Board of Directors for Spindletop Oil & Gas Company and as Chairman of their Audit Committee. Spindletop’s stock is traded on the Over-the-Counter (OTC) market. Mr. Munselle has been a Director of the Company since
RAYMOND
Mr. Roberts is currently retired. Mr. Roberts has served as Director of the Company since June 2, 2016. He has also served as Director of
Board Meetings and Committees
The Board of Directors held
Audit Committee. The current Audit Committee was formed on February 19, 2004, and its function is to review ARL’s operating and accounting procedures. The charter of the Audit Committee has also been adopted by the Board. The charter of the Audit Committee was adopted on February 19, 2004 and is available on the company’s investor relations website (
Governance and Nominating Committee. The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of ARL’s Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board’s annual review of director independence and the Board’s performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004. The current members of the Committee are Messrs. Jakuszewski (Chairman), Roberts and Munselle. The Governance and Nominating Committee met two times during Compensation Committee. The Compensation Committee is responsible for overseeing the policies of the Company relating to compensation to be paid by the Company to the Company’s principal executive officer and any other officers designated by the Board and make recommendations to the Board with respect to such policies, produce necessary reports and executive compensation for inclusion in the Company’s Proxy Statement in accordance with applicable rules and regulations and to monitor the development and implementation of succession plans for the principal executive officers and other key executives and make recommendations to the Board with respect to such plans. The charter of the Compensation Committee was adopted on March 22, 2004, and is available on the Company’s Investor Relations website (
The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:
Presiding Director
In March 2004, the Board created a new position of presiding director, whose primary responsibility is to preside over periodic executive sessions of the Board in which Management directors and other members of Management do not participate. The presiding director also advises the Chairman of the Board and, as appropriate, Committee Chairs with respect to agendas and information needs relating to Board and Committee meetings, provides advice with respect to the selection of Committee Chairs and performs other duties that the Board may from time to time delegate to assist the Board in fulfillment of its responsibilities.
The day following the annual meeting of stockholders held December
Determination of Director’s Independence
In February 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during that year by the New York Stock Exchange. The full text of the Guidelines can be found on the Company’s Investor Relations website (
Pursuant to the Guidelines, the Board undertook its annual review of director independence in March, As a result of
Executive Officers
Executive officers of the Company are listed below, all except one of whom are employed by Pillar.
DANIEL J. MOOS,
Mr. Moos has served as President since April 2007 and Chief Executive Officer since March 2010 of
LOUIS J. CORNA,
Mr. Corna has served as Executive Vice President, General Counsel/Tax Counsel and Secretary since February 2004 of ALLA DZYUBA, 43 Mrs. Dzyuba has served as Vice President and Chief Accounting Officer of ARL, TCI and Southern Properties Capital, Ltd (TCI wholly owned BVI subsidiary) (“SPC”) since July 2019 as well as Director for SPC since April 2018. Mrs. Dzyuba has been employed by Pillar since June 2004, she has over fifteen years of real estate accounting and financial reporting experience, including six years of broker-dealer regulatory reporting experience.
Code of Ethics
ARL has adopted a code of ethics entitled “Code of Business Conduct and Ethics” that applies to all directors, officers, and employees (including those of the contractual Advisor to ARL). In addition, ARL has adopted a code of ethics entitled “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller. The text of these documents has been posted on ARL’s internet website at (
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, ARL’s Directors, executive officers, and any persons holding more than 10% of ARL’s shares of common stock are required to report their ownership and any changes in that ownership to the Securities and Exchange Commission (the “Commission”). Specific due dates for these reports have been established and ARL is required to report any failure to file by these dates. All of these filing requirements were satisfied by ARL’s directors and executive officers and 10% holders during the fiscal year ended December 31, The Advisor
Pillar has been ARL’s Advisor and Cash Manager since April 30, 2011. Although the Board of Directors is directly responsible for managing the affairs of ARL, and for setting the policies which guide it, the day-to-day operations of ARL are performed by Pillar, as the contractual advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with ARL’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and
Pillar is a Nevada corporation, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust.
The May Trust is a Trust, the beneficiaries of which are the children of the late Gene E. Phillips.
Under the Advisory Agreement, Pillar is required to annually formulate and submit, for Board approval, a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, lending, foreclosure and borrowing activity, and other investments. Pillar is required to report quarterly to the Board on ARL’s performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to Pillar by the Board.
The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that Pillar shall be deemed to be in a fiduciary relationship to the ARL stockholders; contains a broad standard governing Pillar’s liability for losses incurred by ARL; and contains guidelines for Pillar’s allocation of investment opportunities as among itself, ARL and other entities it advises. Pillar is a company of which Messrs. Moos
The Advisory Agreement with Pillar provides for Pillar to be responsible for the day-to-day operations of ARL and for Pillar to receive, as compensation for basic management and advisory services, a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves).
In addition to base compensation, Pillar receives the following forms of additional compensation:
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The Advisory Agreement also provides that Pillar receive the following forms of compensation:
Under the ARL Advisory Agreement, all or a portion of the annual advisory fee must be refunded by the Advisor if the operating expenses of ARL (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value, and net income of ARL during the fiscal year.
The ARL Advisory Agreement requires Pillar to pay to ARL one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by ARL; provided, however, that the compensation retained by Pillar shall not exceed the lesser of (1) 2.0% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.
The ARL Advisory Agreement further provides that Pillar shall bear the cost of certain expenses of its employees, excluding fees paid to ARL’s Directors; rent and other office expenses of both Pillar and ARL (unless ARL maintains office space separate from that of Pillar); costs not directly identifiable to ARL’s assets, liabilities, operations, business or financial affairs; and miscellaneous administrative expenses relating to the performance by Pillar of its duties under the Advisory Agreement. If and to the extent that ARL shall request Pillar, or any director, officer, partner, or employee of Pillar, to render services for ARL other than those required to be rendered by the Advisory Agreement, Pillar separately would be compensated for such additional services on terms to be agreed upon between such party and ARL from time to time. As discussed below, under “Property Management and Real Estate Brokerage,” effective January 1, 2011, Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties and provides brokerage services under similar terms as the previous agreements with Triad and Regis Realty I.
ARL entered into a Cash Management Agreement with Pillar on April 30, 2011, to further define the administration of the Company’s day-to-day investment operations, relationship contacts, flow of funds and deposit and borrowing of funds. Under the Cash Management Agreement, all funds of the Company are delivered to Pillar which has a deposit liability to the Company and is responsible for payment of all payables and investment of all excess funds which earn interest at the Wall Street Journal prime rate plus 1.0% per annum, as set quarterly on the first day of each calendar quarter. Borrowings for the benefit of the Company bear the same interest rate. The term of the Cash Management Agreement is coterminous with the Advisory Agreement, and is automatically renewed each year unless terminated with the Advisory Agreement. ARL’s management believes that the terms of the Advisory Agreement are at least as fair as could be obtained from unaffiliated third parties.
Situations may develop in which the interests of ARL are in conflict with those of one or more directors or officers in their individual capacities, or of Pillar, or of their respective related parties. In addition to services performed for ARL, as described above, Pillar actively provides similar services as agent for, and advisor to, other real estate enterprises, including persons and entities involved in real estate development and financing, including TCI and
As Advisor, Pillar is a fiduciary of ARL’s public investors. In determining to which entity a particular investment opportunity will be allocated, Pillar will consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each such entity’s existing mortgage note and real estate portfolios and business plan. To the extent any particular investment opportunity is appropriate to more than one such entity, such investment opportunity will be allocated to the entity that has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among various entities. See Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence.”
The terms of TCI’s Advisory and Cash Management Agreements with Pillar are substantially the same as those of ARL’s Advisory and Cash Management Agreements.
Pillar may assign the Advisory Agreement only with the prior consent of ARL.
The principal executive officers and directors of Pillar are set forth below:
Property Management
Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.
ARL engages third-party companies to lease and manage our apartment properties for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under their management. Real Estate Brokerage
Regis provides real estate brokerage services to ARL and receives brokerage commissions of 3% or less of transaction amounts.
Regis also provides real estate brokerage services to TCI under terms which differ from ARL. TCI’s brokerage agreement is computed on a sliding scale as listed below:
ITEM 11. EXECUTIVE COMPENSATION
ARL has no employees, payroll, or benefit plans, and pays no compensation to its executive officers. The Directors and executive officers of ARL, who are also officers or employees of Pillar, ARL’s advisor, are compensated by Pillar. Such affiliated Directors and executive officers perform a variety of services for Pillar and the amount of their compensation is determined solely by Pillar. Pillar does not allocate the cash compensation of its officers among the various entities for which it serves as advisor. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance” for a more detailed discussion of compensation payable to Pillar by ARL.
The only remuneration paid by ARL is to those directors who are not officers or employees of Pillar or its related companies. The Independent Directors (1) review the business plan of ARL to determine that it is in the best interest of ARL’s stockholders, (2) review the advisory contract, (3) supervise the performance of the advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) review the reasonableness of the total fees and expenses of ARL and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties
Effective February 2011 each non-affiliated Director is entitled to receive an annual retainer of $20,000, with the Chairman of the Audit Committee to receive a one-time annual fee of $500. Directors who are also employees of the Company or its advisor receive no additional compensation for service as a Director.
During
$20,000.
Security Ownership of Certain Beneficial Owners
The following table sets forth the ownership of ARL’s common stock both beneficially and of record, both individually and in the aggregate, for those persons or entities known by ARL to be the owner of more than 5.0% of the shares of ARL’s common stock as of the close of business on March
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Security Ownership of Management. The following table sets forth the ownership of shares of ARL’s common stock, both beneficially and of record, both individually in the aggregate, for the Directors and executive officers of ARL, as of the close of business on March
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Policies with Respect to Certain Activities
Article 11 of ARL’s Articles of Incorporation provides that ARL shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of ARL, (2) any director, officer or employee of the advisor, (3) the advisor, or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by ARL’s Board of Directors or the appropriate committee thereof and (b) ARL’s Board of Directors or committee thereof determines that such contract or transaction is fair to ARL and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of ARL entitled to vote thereon.
Article 11 defines an “Independent Director” (for purposes of that Article) as one who is neither an officer or employee of ARL, nor a director, officer or employee of ARL’s advisor. This definition predates ARL’s director independence guidelines adopted in February 2004.
ARL’s policy is to have such contracts or transactions approved or ratified by a majority of the disinterested Directors with full knowledge of the character of such transactions, as being fair and reasonable to the stockholders at the time of such approval or ratification under the circumstances then prevailing. Such Directors also consider the fairness of such transactions to ARL. Management believes that, to date, such transactions have represented the best investments available at the time and they were at least as advantageous to ARL as other investments that could have been obtained.
ARL may enter into future transactions with entities, the officers, directors, or stockholders of which are also officers, directors, or stockholders of ARL, if such transactions would be beneficial to the operations of ARL and consistent with ARL’s then-current investment objectives and policies, subject to approval by a majority of disinterested Directors as discussed above.
ARL does not prohibit its officers, directors, stockholders, or related parties from engaging in business activities of the types conducted by ARL.
Certain Business Relationships
Pillar has been ARL’s Advisor and Cash Manager since April 30, 2011. Although the Board of Directors is directly responsible for managing the affairs of ARL, and for setting the policies which guide it, the day-to-day operations of ARL are performed by Pillar, as the contractual advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with ARL’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and
Pillar is a Nevada corporation, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is RAI, a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust.
All of ARL’s directors also serve as Directors of TCI and Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), the sole member of which is Realty Advisors, LLC, manages our commercial properties for a fee of 3.0% or less of the monthly gross rents collected on the commercial properties it manages, and leasing commissions of 6.0% or less in accordance with the terms of its property-level management agreement.
ARL engages third-party companies to lease and manage our apartment properties for a fee of 6.0% or less of the monthly gross rents collected on the residential properties under their management.
At December 31,
The Company is part of a tax sharing and compensating agreement with respect to federal income taxes between ARL, TCI and
The Company’s subsidiary, TCI, has a development agreement with Unified Housing Foundation, Inc.
TCI is the primary guarantor, on a
Related Party Transactions
The Company has historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interest of our company.
In
The Company paid property management fees, construction management fees and leasing commissions of
During 2019, the Company received $19.4 million cash distribution from VAA as a result of the annual surplus cash computation from its HUD collaterized residential properties and other amounts owed to the Company as agreed to in the joint venture operating agreement. In accordance with the provisions of the VAA Joint Venture Agreement dated November 19, 2018, Southern and TCI are expected to receive approximately $14 million ($6 million and $8 million, respectively) for the cash balances remaining in the transferred properties as of the date of the transaction. The cash balance was determined and agreed upon by the partners in the joint venture, and based on the estimated bank balances on the day of closing. Additionally, VAA did not purchase the accounts receivable or the utilities’ and other deposits. These items as well as the reconciliation of the expense pro-rations will result in additional adjustments being required, subject to the consent of both parties. On February 6, 2019, Abode JVP, LLC, a fully owned subsidiary of SPC, received $7.4 million related to the cash credit and transferred it to TCI. On May 15, 2019, Members of the Joint Venture agreed to record approximately $1.1 million of pro-ration adjustments and on July 25,2019, the remaining outstanding balance has been paid in full. As of December 31,
Operating Relationships
The Company received rental revenue of
Advances and Loans
From time to time, ARL and its related parties have made advances to each other, which generally have not had specific repayment terms, did not bear interest, are unsecured, and have been reflected in ARL’s financial statements as other assets or other liabilities. ARL and the
Director Independence See “Determination of Director Independence” under Item 10 above to which reference is made. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees for professional services rendered to ARL for the years
(*) Fees include $0.24 million and $0.59 million related to TCI in 2019 and 2018, respectively. (**) Fees related to IOT
The audit fees for
All services rendered by the principal auditors are permissible under applicable laws and regulations and were pre-approved by either the Board of Directors or the Audit Committee, as required by law. The fees paid to the principal auditors for the services described in the above table fall under the categories listed below:
Audit Fees. These are fees for professional services performed by the principal auditor for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s 10-Q filings and services that are normally provided in connection with statutory and regulatory filing or engagements.
Audit-Related Fees. These are fees for assurance and related services performed by the principal auditor that are reasonably related to the performance of the audit or review of the Company’s financial statements. These services include attestations by the principal auditor that are not required by statute or regulation and consulting on financial accounting/reporting standards. Tax Fees. These are fees for professional services performed by the principal auditor with respect to tax compliance, tax planning, tax consultation, returns preparation, and review of returns. The review of tax returns includes the Company and its consolidated subsidiaries. All other Fees. These are fees for other permissible work performed by the principal auditor that do not
These services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the principal auditor’s core work, which is the audit of the Company’s consolidated financial statements.
The Audit Committee has established policies and procedures for the approval and pre-approval of audit services and permitted non-audit services. The Audit Committee has the responsibility to engage and terminate ARL’s independent auditors, to pre-approve their performance of audit services and permitted non-audit services, to approve all audit and non-audit fees, and to set guidelines for permitted non-audit services and fees. All the fees for
Under the Sarbanes-Oxley Act of 2002 (the “SOX Act”) and the rules of the Securities and Exchange Commission (the “SEC”), the Audit Committee of the Board of Directors is responsible for the appointment, compensation, and oversight of the work of the independent auditor. The purpose of the provisions of the SOX Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation, and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SOX Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee’s administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor’s independence. Accordingly, the Audit Committee has adopted a pre-approval policy of audit and non-audit services (the “Policy”), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be pre-approved. Consistent with the SEC rules establishing two different approaches to pre-approving non-prohibited services, the Policy of the Audit Committee covers pre-approval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. Typically, in addition to the generally pre-approved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to pre-approve services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session. 90
Report of Independent Certified Public Accountants
Consolidated Balance Sheets—December 31,
Consolidated Statements of Operations—Years Ended December 31,
Consolidated Statements of Shareholders’ Equity—Years Ended December 31,
Consolidated Statements of Cash Flows—Years Ended December 31,
Consolidated Statements of Comprehensive Income (Loss) – Years Ended December 31,
Notes to Consolidated Financial Statements
Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loan Receivables on Real Estate
All other schedules are omitted because they are not applicable or because the required information is shown in the financial statements or the notes thereto.
Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. (Incorporated by reference to Item 8. of Income Opportunity Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31,
Consolidated Financial Statements of Transcontinental Realty Investors, Inc. (Incorporated by reference to Item 8. of Transcontinental Realty Investors, Inc.’s Annual Report on Form 10-K for the year ended December 31,
91 The following documents are filed as Exhibits to this Report:
Optional and not included herein.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX
For the Year Ended December 31,
94
* Filed herewith.
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