UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001
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Commission File Number 1-15663
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AMERICAN REALTY INVESTORS, INC.
-----------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 75-2847135
------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1800 Valley View Lane, Suite 300, Dallas, Texas 75234
---------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(469) 522-4200
------------------------------
(Registrant's Telephone Number,
Including Area Code)
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 X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 11,819,017
- ---------------------------- --------------------------------
(Class) (Outstanding at April 27, 2001)
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants but in the opinion of the management of
American Realty Investors, Inc. ("ARI"), all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of consolidated results of
operations, consolidated financial position and consolidated cash flows at the
dates and for the periods indicated, have been included.
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
--------- ---------
(dollars in thousands,
except per share)
Assets
------
Real estate held for investment....................... $ 547,101 $ 559,461
Less - accumulated depreciation....................... (144,973) (148,690)
--------- ---------
402,128 410,771
Real estate held for sale............................. 245,644 242,973
Notes and interest receivable
Performing ($23,574 in 2001 and $9,684 in 2000
from affiliates).................................. 27,424 13,346
Nonperforming ($1,555 in 2001 and $1,540 in 2000
from affiliates).................................. 2,673 3,062
--------- ---------
30,097 16,408
Less--allowance for estimated losses.................. (2,577) (2,577)
--------- ---------
27,520 13,831
Pizza parlor equipment................................ 10,529 10,191
Less - accumulated depreciation....................... (3,440) (3,164)
--------- ---------
7,089 7,027
Marketable equity securities, at market value......... 137 153
Cash and cash equivalents............................. 7,678 4,177
Investments in equity investees....................... 38,119 44,777
Intangibles, net of accumulated amortization ($2,348
in 2001 and $2,233 in 2000)......................... 16,067 16,075
Other assets.......................................... 48,703 47,231
--------- ---------
$ 793,085 $ 787,015
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS - Continued
March 31, December 31,
2001 2000
------------------------
(dollars in thousands,
except per share)
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable............................... $616,838 $616,331
Margin borrowings........................................ 15,948 13,485
Accounts payable and other liabilities ($8,710 in 2001
and $3,030 in 2000 to affiliate)....................... 45,175 41,221
-------- --------
677,961 671,037
Minority interest........................................ 40,107 42,576
Commitments and contingencies
Stockholders' equity
Preferred Stock, $2.00 par value, authorized 50,000,000
shares, issued and outstanding
Series A, 2,721,332 shares in 2001 and 2,600,000
shares in 2000 (liquidation preference $27,213)...... 4,843 4,843
Series E, 50,000 shares in 2001 and 2000 (liquidation
preference $5,000)................................... 100 100
Common Stock, $.01 par value, authorized 100,000,000
shares; issued 11,819,017 shares in 2001 and
11,829,217 shares in 2000.............................. 118 118
Paid-in capital.......................................... 112,168 112,301
Accumulated (deficit).................................... (42,195) (43,943)
Treasury stock at cost, 1,728,949 shares in 2001 and
1,718,749 shares in 2000............................... (17) (17)
-------- --------
75,017 73,402
-------- --------
$793,085 $787,015
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months
Ended March 31,
------------------------
2001 2000
----------- -----------
(dollars in thousands,
except per share)
Property revenue
Rents................................................... $ 33,213 $ 35,079
Property operations expenses............................ 23,451 23,965
----------- -----------
Operating income...................................... 9,762 11,114
Land operations
Sales................................................... 20,490 10,609
Cost of sales........................................... 16,701 8,160
----------- -----------
Gain on land sales.................................... 3,789 2,449
Pizza parlor operations
Sales................................................... 7,826 7,872
Cost of sales........................................... 6,422 6,488
----------- -----------
Gross margin.......................................... 1,404 1,384
Income from operations.................................... 14,955 14,947
Other income
Interest income......................................... 384 2,240
Equity in income (loss) of investees.................... (5) 202
Gain on sale of real estate............................. 16,426 16,154
Other................................................... 33 101
----------- -----------
16,838 18,697
Other expenses
Interest................................................ 18,070 20,182
Depreciation and amortization........................... 4,079 4,364
General and administrative.............................. 2,916 4,109
Advisory fee to affiliate............................... 1,242 1,341
Incentive fee to affiliate.............................. 1,521 --
Minority interest....................................... 1,575 9,371
----------- -----------
29,403 39,367
----------- -----------
Income (loss) before income taxes......................... 2,390 (5,723)
Provision for income taxes................................ -- --
----------- -----------
Net income (loss)......................................... 2,390 (5,723)
Preferred dividend requirement............................ (642) (508)
----------- -----------
Net income (loss) applicable to Common shares............. $ 1,748 $ (6,231)
=========== ===========
Earnings per share
Net income.............................................. $ .17 $ (.58)
=========== ===========
Weighted average Common shares used in computing earnings
per share............................................... 10,104,268 10,759,472
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2001
Series A Series E
Preferred Preferred Common Treasury Paid-in Accumulated Stockholders'
Stock Stock Stock Stock Capital (Deficit) Equity
--------- --------- ------ -------- --------- ----------- -------------
(dollars in thousands, except per share)
Balance, January 1, 2001............. $4,843 $100 $118 (17) $112,301 (43,943) $73,402
Preferred dividends
Series A Preferred Stock ($.25 per
share)............................ -- -- -- -- --
Series E Preferred Stock ($.15 per
share)............................ -- -- -- -- --
Repurchase of Common Stock........... -- -- -- -- (133) -- (133)
Net income........................... -- -- -- -- -- 2,390 2,390
--------- --------- ------ -------- -------- --------- -------
Balance, March 31, 2001.............. $4,843 $100 $118 $ (17) $112,168 $ (42,195) $75,017
========= ========= ====== ======== ======== ========= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months
Ended March 31,
----------------------
2001 2000
----------- ----------
(dollars in thousands)
Cash Flows From Operating Activities
Rents collected............................................. $ 33,070 $ 35,545
Pizza parlor sales collected................................ 7,848 7,905
Interest collected.......................................... 231 3,230
Distributions received from equity investees' operating
cash flow................................................. -- 639
Payments for property operations............................ (29,149) (30,347)
Payments for pizza parlor operations........................ (6,324) (6,217)
Interest paid............................................... (15,986) (17,215)
Advisory fee paid to affiliate.............................. (1,242) (1,341)
Distributions to minority interest holders.................. (574) (1,708)
General and administrative expenses paid.................... (2,916) (4,110)
Other....................................................... (881) (1,400)
-------- --------
Net cash (used in) operating activities.................. (15,923) (15,019)
Cash Flows From Investing Activities
Collections on notes receivable............................. 2,695 5,031
Pizza parlor equipment purchased............................ (292) (45)
Proceeds from sale of real estate........................... 30,771 12,384
Purchase of marketable equity securities.................... -- (859)
Proceeds from sale of marketable equity securities.......... -- 591
Notes receivable funded..................................... (13,654) (2,110)
Earnest money/escrow deposits............................... (4,347) (1,930)
Investment in real estate entities.......................... -- (149)
Acquisition of real estate.................................. -- (3,915)
Acquisition of partnership interest......................... (9,734) --
Real estate improvements.................................... (3,435) (8,152)
-------- --------
Net cash provided by investing activities................ 2,004 846
Cash Flows from Financing Activities
Proceeds from notes payable................................. 28,998 63,115
Payments on notes payable................................... (16,111) (41,026)
Deferred borrowing costs.................................... (1,858) (2,560)
Net (payments to)/advances from affiliates.................. 4,159 (7,182)
Issuance of Series E Preferred Stock........................ -- 500
Margin borrowings, net...................................... 2,402 3,277
Repurchase of Common Stock.................................. (133) --
Preferred dividends paid.................................... (37) (508)
-------- --------
Net cash provided by financing activities................ 17,420 15,616
Net increase in cash and cash equivalents................ 3,501 1,443
Cash and cash equivalents, beginning of period................ 4,177 2,479
-------- --------
Cash and cash equivalents, end of period...................... $ 7,678 $ 3,922
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
AMERICAN REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Three Months
Ended March 31,
----------------------
2001 2000
---------- ----------
(dollars in thousands)
Reconciliation of net income (loss) to net cash (used in)
operating activities
Net income (loss)........................................... $ 2,390 $ (5,723)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities
Depreciation and amortization............................ 4,079 4,364
Gain on sale of real estate.............................. (20,215) (18,603)
Distributions from equity investees' operating
cash flow............................................. -- 639
Distributions to minority interest holders............... 1,001 1,708
Equity in (income) loss of investees..................... 5 (202)
(Increase) decrease in accrued interest receivable....... (153) 990
(Increase) decrease in other assets...................... 1,187 (3,322)
Increase (decrease) in accrued interest payable.......... (199) 752
Increase (decrease) in accounts payable and other
liabilities........................................... (4,018) 4,378
-------- --------
Net cash (used in) operating activities............... $(15,923) $(15,019)
======== ========
Schedule of noncash investing and financing
Notes payable from acquisition of real estate............... $ -- $ 2,500
Notes payable assumed by buyer on sale of real estate....... 12,215 14,067
Exchange of real estate at carrying value................... -- 2,971
Notes receivable from sale of real estate................... 2,123 --
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- -------------------------------
The accompanying Consolidated Financial Statements have been prepared in
conformity with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Dollar amounts in tables are in thousands, except per share
amounts. Certain balances for 2000 have been reclassified to conform to the
2001 presentation.
Operating results for the three month period ended March 31, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the Consolidated Financial
Statements and Notes thereto included in ARI's Annual Report on Form 10-K for
the year ended December 31, 2000 (the "2000 Form 10-K").
NOTE 2. NOTES RECEIVABLE
- --------------------------
In April 2000, a loan with a then principal balance of $1.2 million, secured by
a pledge of a partnership interest in a partnership which owns real estate in
Addison, Texas, matured. In February 2001, the principal balance was increased
to $1.6 million, the interest rate was increased to 18.0% per annum, and the
maturity date was extended to June 2001.
At December 31, 2000, a loan with a principal balance of $404,000 to La Quinta
Partners, LLC, was in default. In March 2001, a settlement was reached, whereby
ARI collected $410,000 in full satisfaction of the note including accrued but
unpaid interest.
In July 2000, ARI sold a 749.1 acre tract of its Keller land parcel for $10.0
million, receiving $8.7 million in cash and providing purchase money financing
of the remaining $1.3 million of the sales price. The loan bears interest at
12.0% per annum. In September 2000, $500,000 in principal and interest was
collected. All remaining principal and interest was due July 31, 2001. The
loan was secured by 100% of the shares of DM Development, Inc. and an assignment
of land sales proceeds. The loan had a principal balance of $817,000 at December
31, 2000. In March 2001, the loan was collected in full, including accrued but
unpaid interest.
In August 2000, ARI sold a 20.5 acre tract of its Mason Goodrich land parcel for
$3.6 million, receiving $2.1 million in cash and providing purchase money
financing of the remaining $1.5 million of the sales price. The loan matured
in December 2000. In February 2001, the loan was collected in full, including
accrued but unpaid interest.
In March 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.8
million, receiving $700,000 in cash and providing purchase money
8
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 2. NOTES RECEIVABLE (Continued)
- --------------------------
financing of the remaining $2.1 million of the sales price. The loan bears
interest at 12.0% per annum and matures in July 2001. All principal and
interest are due at maturity.
In April 2001, ARI sold a 20.0 acre tract of its Katrina land parcel for $2.9
million receiving $700,000 in cash and providing purchase money financing of the
remaining $2.2 million of the sales price. The loan bears interest at 10.0% per
annum and matures in June 2001. All principal and accrued but unpaid interest
are due at maturity.
Related Party. In March 2001, ARI funded $13.6 million of a $15.0 million
unsecured line of credit to One Realco Corporation ("One Realco") which owns
approximately 12.8% of the outstanding shares of ARI's Common Stock. The line
of credit bears interest at 12.0% per annum. All principal and interest are due
at maturity in February 2002. The line of credit is guaranteed by Basic Capital
Management, Inc, ("BCM"), ARI's advisor.
In December 2000, an unsecured loan with a principal balance of $1.6 million to
Warwick of Summit, Inc. ("Warwick") matured. All principal and interest were
due at maturity. At March 2001, the loan remains unpaid. Richard D. Morgan, a
Warwick shareholder, serves as a director of ARI.
In December 2000, a loan with a principal balance of $1.5 million to Bordeaux
Investments Two, L.L.C. ("Bordeaux"), matured. The loan is secured by (1) a 100%
interest in Bordeaux, which owns a shopping center in Oklahoma City, Oklahoma;
(2) 100% of the stock of Bordeaux Investments One, Inc., which owns 6.5 acres of
undeveloped land in Oklahoma City, Oklahoma; and (3) the personal guarantees of
the Bordeaux members. At March 2001, the loan remains unpaid. Richard D. Morgan,
a Bordeaux member, serves as a director of ARI.
In March 2000, a loan with a principal balance of $2.1 million to Lordstown,
L.P., matured. The loan is secured by a second lien on land in Ohio and
Florida, by 100% of the general and limited partner interest in Partners
Capital, Ltd., the limited partner of Lordstown, L.P., and a profits interest in
subsequent land sales. At March 2001, the loan remains unpaid. A corporation
controlled by Richard D. Morgan is the general partner of Lordstown, L.P. Mr.
Morgan serves as a director of ARI.
NOTE 3. REAL ESTATE
- ----------------------
In 2001, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
- --------------- ---------- ------------ ------- -------- ---------- --------
First Quarter
Apartments
Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough Denver, CO 345 Units 16,675 3,654 12,215/(1)/ 13,471
9
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE (Continued)
- ---------------------
Units/ Sales Net Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
- ----------------- ------------------ ------------- ------- -------- ---------- ---------
Shopping Center
Regency Pointe Jacksonville, FL 67,063 Sq.Ft. $7,350 $5,126 $ 1,500 $ 2,292
Land
Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 -- /(2)/
Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181
Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969
Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75
Second Quarter
Apartments
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191/(1)/ 6,053
Land
Katrina Palm Desert, CA 20.0 Acres 2,940 173 -- -- /(2)/
- -----------------
(1) Debt assumed by purchaser.
(2) Gain deferred until ARI-provided financing is collected.
In 2000, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
- ------------------ ----------------- ------------- ------- -------- ------------- -------
First Quarter
Apartments
Summerwind Reseda, CA 172 Units $9,000 $3,082 $5,568 /(1)/ $6,684
Windtree Reseda, CA 159 Units 8,350 2,911 5,063 /(1)/ 6,170
Whispering Pines Canoga Park, CA 102 Units 5,300 1,597 3,437 /(1)/ 3,106
Shopping Center --
Katella Plaza Orange, CA 62,290 Sq.Ft. 1,814 283 1,188 194
Land
Duchense Duchense, UT 420 acres 43 42 -- 16
Frisco Bridges Collin County, TX 15.00 acres 2,675 706 2,000 297
Frisco Bridges Collin County, TX 19.74 acres 2,971 -- -- /(2)/ --
Mason/Goodrich Houston, TX 1.1 acres 129 -- 116 70
Mason/Goodrich Houston, TX 12.8 acres 2,536 -- 1,803 1,783
Nashville Nashville, TN 2.6 acres 405 -- 345 225
Rasor Plano, TX 43.01 acres 1,850 -- 1,604 58
(1) Debt assumed by purchaser.
(2) Exchanged for 3.25 acres of Clark land.
10
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE (Continued)
- ------- -----------
In 2000, ARI purchased the following properties:
Units/ Purchase Net Cash Debt Interest Maturity
Property Location Sq.Ft./Acres Price Paid Incurred Rate Date
- --------------- ------------------ ------------ -------- -------- ------------ --------- -----------
First Quarter
Land
Clark Farmers Branch, TX 3.25 acres $2,971 $ -- $ -- /(1)/ -- % --
Kelly Collin County, TX .75 acres 130 20 100 /(2)/ 10.0 03/10
Mastenbrook Collin County, TX 157.86 acres 3,200 704 2,400 /(2)/ 9.0 09/00/(3)/
- ------------
(1) Exchanged for 19.74 acres of Frisco Bridges land.
(2) Seller financing.
(3) Property sold in September 2000.
NOTE 4. INVESTMENTS IN EQUITY INVESTEES
- ------- -------------------------------
Real estate entities. ARI's investment in real estate entities at March 31,
2001, included equity securities of two publicly traded real estate companies,
Income Opportunity Realty Investors, Inc. ("IORI") and Transcontinental Realty
Investors, Inc. ("TCI"), and interests in real estate joint venture
partnerships. BCM, ARI's advisor, serves as advisor to IORI and TCI.
ARI accounts for its investment in IORI and TCI and the joint venture
partnerships using the equity method. The equity securities of IORI and TCI are
pledged as collateral for borrowings. See NOTE 7. "MARGIN BORROWINGS."
ARI's investment in real estate entities, accounted for using the equity method,
at March 31, 2001 was as follows:
Percentage Carrying Equivalent
of ARI's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee March 31, 2001 March 31, 2001 March 31, 2001 March 31, 2001
- -------- --------------- -------------- -------------- ----------------
IORI 27.08% $ 7,857 $10,637 $ 3,259
TCI 25.03% 30,648 50,162 21,403
------- -------
38,505 $24,662
=======
Other (386)
-------
$38,119
=======
Management continues to believe that the market value of both IORI and TCI
undervalues their assets, and, therefore, ARI may continue to increase its
ownership in these entities in 2001, as its liquidity permits. On October 3,
2000, ARI and IORI entered into a stock option agreement which provided IORI and
ARI with an option to purchase 1,858,900 shares of common stock of TCI from a
third party. On October 19, 2000, IORI assigned all of its rights to purchase
such shares to
11
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENTS IN EQUITY INVESTEES (Continued)
- ---------------------------------------
ARI. The total cost to purchase the TCI shares was $30.7 million. In October
2000, ARI paid $5.6 million of the option price. In April 2001, the remainder
of the option price was paid and ARI acquired the TCI shares.
Set forth below is summarized results of operations of equity investees for the
three months ended March 31, 2001:
Revenues........................................... $38,904
Equity in income of partnerships................... (224)
Property operating expenses........................ 26,190
Depreciation....................................... 5,642
Interest expense................................... 12,629
-------
(Loss) before gains on sale of real estate......... (5,781)
Gain on sale of real estate........................ 5,760
-------
Net income (loss).................................. $ (21)
=======
ARI's share of equity investees' loss before gains on the sale of real estate
was $1.5 million for the three months ended March 31, 2001, and its share of
equity investees' gains on sale of real estate was $1.4 million for the three
months ended March 31, 2001.
ARI's cash flow from IORI and TCI is dependent on the ability of each of them to
make distributions. In the fourth quarter of 2000, IORI and TCI suspended
distributions.
Elm Fork Ranch, L.P. In June 2000, ARI sold its partnership interests for $2.0
million in cash, retaining an option to repurchase its interests. In January
2001, ARI purchased 100% of the partnership interests for $9.2 million,
including financing of $9.0 million.
NOTE 5. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
- --------------------------------------------------------
Since 1994, ARI has been purchasing equity securities of entities other than
those of IORI and TCI to diversify and increase the liquidity of its margin
accounts. These equity securities are considered a trading portfolio and are
carried at market value. In the first quarter of 2001, ARI did not purchase or
sell any such securities. At March 31, 2001, ARI recognized an unrealized
decrease in the market value of its trading portfolio securities of $16,000.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.
12
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. NOTES PAYABLE
- ------------------------
In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:
Debt Debt Net Cash Interest Maturity
Property Location Acres Incurred Discharged Received Rate Date
- ------------------ ------------------ ----------- ------------ ---------- -------- ------------ --------
First Quarter
Land
Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $6,302 14.00% 01/02
Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02
Second Quarter
Land
Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 /(1)/ -- 1,916 9.00 04/03
Valwood Dallas County, TX 19.4 Acres -- /(1)/ -- -- -- --
Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 5,365 12.50 /(2)/ 10/01
- ------------------
(1) Single note, with all properties as collateral.
(2) Variable interest rate.
NOTE 7. MARGIN BORROWINGS
- -------------------------
ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing of up to 50% of the market value of marketable
equity securities. The borrowings under such margin arrangements are secured by
equity securities of IORI and TCI and ARI's trading portfolio securities and
bear interest rates ranging from 7.0% to 16.0%. Margin borrowing totaled $15.9
million at March 31, 2001.
In April 2000, ARI obtained a security loan in the amount of $5.0 million from a
financial institution. ARI received net cash of $4.6 million after paying
various closing costs. The loan bears interest at 1% above the prime rate
(currently 8.5% per annum), requires monthly payments of interest and matures in
September 2001. The loan is secured by 1,050,000 shares of ARI Common Stock
held by BCM, ARI's advisor.
In March 2001, ARI obtained a security loan in the amount of $3.5 million from a
financial institution. ARI received net cash of $3.5 million after paying
various closing costs. The loan bears interest at 16.0% per annum. In April
and May 2001, a total of $2.0 million in principal paydowns were made. The loan
is secured by 472,000 shares of TCI owned by ARI and 128,000 shares of ARI owned
by One Realco.
NOTE 8. INCOME TAXES
- ---------------------
Financial statement income varies from taxable income principally due to the
accounting for income and losses of investees, gains and losses from asset
sales, depreciation on owned properties, amortization of discounts on notes
receivable and payable and the difference in the allowance for estimated losses.
ARI had no taxable income or provision for income taxes in the three months
ended March 31, 2001 or 2000.
13
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 9. OPERATING SEGMENTS
- ---------------------------
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 expenses. Management evaluates the
performance of each of the operating segments and allocates resources to them
based on their net operating income and cash flow. Expenses that are not
reflected in the segments are $2.9 million of general and administrative
expenses for the three months ended March 31, 2001 and $4.1 million for 2000.
Excluded from operating segment assets are assets of $96.2 million in 2001 and
$94.7 million in 2000, which are not identifiable with an operating segment.
There are no intersegment revenues and expenses and ARI conducted all of its
business within the United States , with the exception of Hotel Sofia
(Bulgaria), which had operating revenues of $694,000 and operating expenses of
$534,000 in the first quarter of 2001.
Presented below are ARI's reportable segments operating income for the three
months ended March 31, and segment assets at March 31.
Commercial Pizza
2001 Properties Apartments Hotels Land Parlors Receivables Other Total
------ ---------- ---------- ------- -------- ------- ----------- ------ --------
Operating revenue..... $ 9,133 $ 16,126 $ 7,695 $ 63 $ 7,826 $ -- $ 196 $ 41,039
Interest income....... -- -- -- -- -- 384 -- 384
Operating expenses.... 5,146 9,826 6,584 1,919 6,422 -- (24) 29,873
-------- -------- ------- -------- ------- ------- ------ --------
Operating income
(loss)............. $ 3,987 $ 6,300 $ 1,111 $ (1,856) $ 1,404 $ 384 $ 220 $ 11,550
======== ======== ======= ======== ======= ======= ====== ========
Depreciation.......... $ 1,781 $ 1,339 $ 629 $ -- $ 329 $ -- $ 1 $ 4,079
Interest.............. 4,487 5,185 1,364 5,290 272 -- 1,472 18,070
Capital expenditures.. 2,218 -- 1,152 65 338 -- -- 3,773
Assets................ 161,996 141,926 98,206 245,644 21,598 27,520 -- 696,890
Commercial
Property Sales: Properties Apartments Land Total
---------- ---------- -------- --------
Sales price........... $7,350 $18,680 $20,490 $46,520
Cost of sale.......... 5,058 4,546 16,701 26,305
------ ------- ------- -------
Gain on sale.......... $2,292 $14,134 $ 3,789 $20,215
====== ======= ======= =======
Commercial Pizza
2000 Properties Apartments Hotels Land Parlors Receivables Total
----------- ---------- ---------- ------- --------- ------- ----------- --------
Operating revenue..... $ 9,430 $ 18,341 $ 6,854 $ 454 $ 7,872 $ -- $ 42,951
Interest income....... -- -- -- -- -- 2,240 2,240
Operating expenses.... 5,005 10,092 5,482 3,386 6,488 -- 30,453
-------- -------- ------- -------- ------- ------- --------
Operating income (loss) $ 4,425 $ 8,249 $ 1,372 $ (2,932) $ 1,384 $ 2,240 $ 14,738
======== ======== ======= ======== ======= ======= ========
Depreciation.......... $ 1,611 $ 1,831 $ 598 $ -- $ 324 $ -- $ 4,364
Interest.............. 3,567 5,348 1,230 7,095 278 -- 17,518
Capital expenditures.. 3,049 4,053 195 855 45 -- 8,197
Assets................ 193,126 186,109 70,943 317,565 21,106 34,641 823,490
Commercial
Properties Apartments Land Total
Property Sales: ---------- ---------- -------- --------
Sales price $1,814 $22,650 $10,609 $35,073
Cost of sale 1,620 6,690 8,160 16,470
------ ------- ------- -------
Gain on sale $ 194 $15,960 $ 2,449 $18,603
====== ======= ======= =======
14
AMERICAN REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. COMMITMENTS AND CONTINGENCIES
- -------- -----------------------------
Liquidity. Management expects that ARI will generate excess cash from
operations, due to increased rental rates and occupancy at its properties;
however, such excess will not be sufficient to discharge all of ARI's debt
obligations as they mature. ARI will rely on aggressive land sales, selected
income producing property sales and, to the extent necessary, additional
borrowings to meet its cash requirements.
Commitments. In March 1999, ARI reached an agreement with the Class A
unitholders of Valley Ranch, L.P. to acquire their eight million Class A units
for $1.00 per unit. In 1999, three million units were purchased, and an
additional one million units were purchased in January 2000. ARI has committed
to purchase an additional two million units in each of May 2001 and May 2002.
Litigation. ART is involved in various lawsuits arising in the ordinary course
of business. In the opinion of ARI's management, the outcome of these lawsuits
will not have a material impact on ARI's financial condition, results of
operations or liquidity.
----------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Introduction
- ------------
ARI's predecessor was organized in 1961 to provide investors with a
professionally managed, diversified portfolio of equity real estate and mortgage
loan investments selected to provide opportunities for capital appreciation as
well as current income.
Liquidity and Capital Resources
- -------------------------------
General. Cash and cash equivalents at March 31, 2001, totaled $7.7 million,
compared with $4.2 million at December 31, 2000. Although ARI anticipates that
during the remainder of 2001 it will generate excess cash flow from property
operations, as discussed below, such excess cash is not sufficient to discharge
all of ARI's debt obligations as they mature. ARI will therefore continue to
rely on externally generated funds, including borrowings against its investments
in various real estate entities, mortgage notes receivable, refinancing of
properties and borrowings against unencumbered properties to meet its debt
service obligations, pay taxes, interest and other non-property related
expenses.
At December 31, 2000, notes payable totaling $193.4 million had either scheduled
maturities or required principal reduction payments during 2001. During the
first quarter of 2001, ARI either extended,
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
refinanced, paid down, paid off or received commitments from lenders to extend
or refinance $38.7 million of the debt scheduled to mature in 2001.
Net cash used in operating activities increased to $15.9 million in the three
months ended March 31, 2001, from $15.0 million in the three months ended March
31, 2000. Fluctuations in the components of cash flow from operations are
discussed in the following paragraphs.
Net cash from property operations (rents collected less payments for expenses
applicable to rental income) decreased to $3.9 million in the three months ended
March 31, 2001 from $5.2 million in 2000. The decrease is primarily
attributable to the sale of nine apartments and four commercial properties in
2000. ARI expects a decrease in cash flow from property operations during the
remainder of 2001. Such decrease is expected to result from the continued
selective sale of income producing properties.
Net cash from pizza operations (sales less cost of sales) in the three months
ended March 31, 2001, was $1.5 million, comparable to $1.7 million in the three
months ended March 31, 2000.
Interest collected decreased to $231,000 in the three months ended March 31,
2001, from $3.2 million in 2000. The decrease was attributable to the collection
of $36.0 million of mortgage notes receivable in 2000.
Interest paid was $16.0 million in the three months ended March 31, 2001,
compared to $17.2 million in 2000. The decrease is attributable to the paydown
and payoff of mortgages on properties sold in 2000.
Advisory fees paid of $1.2 million in the three months ended March 31, 2001,
approximated the $1.3 million in 2000.
General and administrative expenses paid decreased to $2.9 million in the three
months ended March 31, 2001 from $4.1 million in 2000. The decrease is
primarily attributable to a decrease in state and local tax payments.
ARI's cash flow from its investments in IORI and TCI is dependent on the ability
of each of the entities to make distributions. In the fourth quarter of 2000,
IORI and TCI suspended distributions. Accordingly, ARI received no
distributions in the first quarter of 2001 compared to $639,000 in 2000.
Other cash from operating activities improved to a use of $881,000 in the three
months ended March 31, 2001, from a use of $1.4 million in 2000. The improvement
was due to a decrease in property prepaids, other miscellaneous property
receivables and property escrows.
In the first quarter of 2001, ARI received a total $2.7 million on the
collection of two mortgage notes receivable and partial paydown of an
additional mortgage note receivable.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
In the first quarter of 2001, ARI redeemed 2.5 million Class A limited partner
units of ART Palm, L.L.C. for $2.5 million in cash.
In 2001, ARI sold the following properties:
Units/ Sales Net Cash Debt Gain on
Property Location Sq.Ft./Acres Price Received Discharged Sale
- ----------------- ------------------ ------------- ------- -------- ------------- ---------
First Quarter
Apartments
Carriage Park Tampa, FL 46 Units $ 2,005 $ 757 $ 1,069 $ 663
Rockborough Denver, CO 345 Units 16,675 3,654 12,215/(1)/ 13,471
Shopping Center
Regency Pointe Jacksonville, FL 67,063 Sq.Ft. 7,350 5,126 1,500 2,292
Land
Frisco Bridges Collin County, TX 27.8 Acres 4,500 4,130 -- 25
Katrina Palm Desert, CA 20.0 Acres 2,831 (124) 596 -- /(2)/
Las Colinas Las Colinas, TX 1.7 Acres 825 233 400 539
Plano Parkway Plano, TX 11.3 Acres 1,445 312 950 --
Scoggins Tarrant County, TX 232.8 Acres 2,913 892 1,800 181
Scout Tarrant County, TX 408.0 Acres 5,087 1,586 3,200 2,969
Tree Farm Dallas County, TX 10.4 Acres 2,888 (87) 2,644 75
Second Quarter
Apartments
Kimberly Woods Tucson, AZ 279 Units 8,450 1,667 6,191/(1)/ 6,053
Land
Katrina Palm Desert, CA 20.0 Acres 2,940 173 -- -- /(2)/
- ---------------
(1) Debt assumed by purchaser.
(2) Gain deferred until ARI-provided financing is collected.
In 2001, ARI financed/refinanced or obtained second mortgage financing on the
following:
Debt Debt Net Cash Interest Maturity
Property Location Acres Incurred Discharged Received Rate Date
- ------------------ ------------------ ----------- ------------ ----------- -------- ------------ --------
First Quarter
Land
Mason/Goodrich Houston, TX 235.0 Acres $ 6,750 $ -- $6,302 14.00% 01/02
Pioneer Crossing Austin, TX 350.1 Acres 7,000 -- 6,855 16.90 03/05
Pioneer Crossing Austin, TX 14.5 Acres 2,500 -- 2,350 14.50 01/02
Second Quarter
Land
Hollywood Casino Farmers Branch, TX 51.7 Acres 2,500 /(1)/ -- 1,916 9.00 04/03
Valwood Dallas County, TX 19.4 Acres -- /(1)/ -- -- -- --
Katrina Palm Desert, CA 300.5 Acres 22,000 15,584 5,365 12.50/(2)/ 10/01
- -------------
(1) Single note, with all properties as collateral.
(2) Variable interest rate.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- --------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Liquidity and Capital Resources (Continued)
- -------------------------------
ARI has margin arrangements with various financial institutions and brokerage
firms which provide for borrowing up to 50% of the market value of ARI's
marketable equity securities. The borrowings under such margin arrangements are
secured by equity securities of IORI and TCI and ARI's trading portfolio and
bear interest rates ranging from 7.0% to 16.0%. Margin borrowing totaled $15.9
million at March 31, 2001.
Management expects that it will be necessary for ARI to sell $102.0 million,
$34.1 million and $1.2 million of its land holdings during each of the next
three years to satisfy the debt on such land as it matures. If ARI is unable to
sell at least the minimum amount of land to satisfy the debt obligations on such
land as it matures, or, if it was not able to extend such debt, ARI would either
sell other of its assets to pay such debt or transfer the property to the
lender.
Management reviews the carrying values of ARI'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. 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. In those instances
where impairment is found to exist, a provision for loss is recorded by a charge
against earnings. ARI's mortgage note receivable review includes an evaluation
of the collateral property securing such note. The property review generally
includes selective property inspections, a review of the property's current
rents compared to market rents, a review of the property's expenses, a review of
maintenance requirements, a review of the property's cash flow, discussions with
the manager of the property and a review of properties in the surrounding area.
Commitments and Contingencies
- -----------------------------
In March 1999, an agreement was reached with the Class A unitholders of Valley
Ranch, L.P. to acquire their eight million Class A units for $1.00 per unit. In
1999, three million units were purchased, and an additional one million units
were purchased in January 2000. ARI has committed to purchase an additional two
million units in each of May 2001 and May 2002.
Results of Operations
- ---------------------
For the three months ended March 31, 2001, ARI reported net income of $2.4
million, compared to the net loss of $5.7 million for the three months ended
March 31, 2000. The primary factors contributing to ARI's net income are
discussed in the following paragraphs.
Pizza parlor sales and cost of sales of $7.8 million and $6.4 million,
respectively, in the three months ended March 31, 2001 approximated the $7.9
million and $6.5 million in 2000.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
- ---------------------
Rents decreased to $33.2 million in the three months ended March 31, 2001, from
$35.1 million in 2000. Rents from commercial properties decreased to $9.1
million for the three months ended March 31, 2001, from $9.4 million in 2000,
rent from hotels increased to $7.7 million in the three months ended March 31,
2001, from $6.9 million in 2000 and rents from apartments decreased to $16.1
million in the three months ended March 31, 2001, from $18.3 million in 2000.
The decrease in commercial property rents was primarily attributable to the sale
of four commercial properties in 2000 and the decrease in apartment rent was due
to the sale of nine apartments in 2000. The increase in hotel rents was
primarily due to the Hotel Sofia, which commenced operations in 2001. Rental
income is expected to decrease significantly in the remainder of 2001 as a
result of the income producing properties sold in 2000 and 2001.
Property operations expense of $23.5 million in the three months ended March 31,
2001, approximated the $24.0 million in 2000. Property operations expense for
commercial properties of $5.1 million in the three months ended March 31, 2001,
approximated the $5.0 million in 2000. For hotels, property operations expense
increased to $6.6 million in the three months ended March 31, 2001, compared to
$5.5 million in 2000. For land, property operations expense decreased to $1.9
million in the three months ended March 31, 2001 from $3.4 million in 2000. For
apartments, property operations expense decreased to $9.8 million in the three
months ended March 31, 2001, compared to $10.1 million in 2000. The sale of nine
apartments in 2000 reduced property operations expense; however, expenses for
the three months ended March 31, 2001 increased over 2000 due to the completion
of apartment construction in 2000 and a fire loss recovery in 2000. The
increase in hotel operations expense was primarily due to the Hotel Sofia, which
commenced operations in 2001. The decrease for land was primarily due to the 26
land parcels sold in 2000. Property operations expense is expected to decrease
significantly in the remainder of 2001 as a result of the properties sold in
2000 and 2001.
Interest income from notes receivable decreased to $384,000 in the three months
ended March 31, 2001 from $2.2 million in 2000, due to the collection of $36.0
million of mortgage notes receivable in 2000.
Interest expense decreased to $18.1 million in the three months ended March 31,
2001 from $20.2 million in 2000. The decrease was attributable to the sale of
nine apartments, four commercial properties, and 26 parcels of land in 2000. In
the remainder of 2001, interest expense is expected to continue to decrease due
to the properties sold in 2000 and 2001.
Depreciation expense decreased to $4.1 million in the three months ended March
31, 2001 from $4.4 million in 2000. The decrease is due to the sale of nine
apartments and four commercial properties in 2000.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------
AND RESULTS OF OPERATIONS (Continued)
-------------------------
Results of Operations (Continued)
- ---------------------
Advisory fees of $1.2 million in the three months ended March 31, 2001
approximated the $1.3 million in 2000.
General and administrative expenses decreased to $2.9 million in the three
months ended March 31, 2001 compared to $4.1 million in 2000. The decrease is
primarily due to reduced state and local taxes.
Minority interest decreased to $1.6 million in the three months ended March 31,
2001 from $9.4 million in 2000. The decrease is attributable to the merger of
National Realty, L.P. into ARI in August 2000.
Equity in income of investees decreased to a loss of $5,000 in the three months
ended March 31, 2001 from income of $202,000 in 2000. The decrease in equity
income was attributable to reduced net income for IORI and TCI.
Environmental Matters
- ---------------------
Under various federal, state and local environmental laws, ordinances and
regulations, ARI 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 ARI's business, assets or
results of operations.
Inflation
- ---------
The effects of inflation on ARI's operations are not quantifiable. Revenues from
apartment operations 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 borrowings as well as the cost
of variable interest rate debt will be affected.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- --------------------------------------------------------------------
At March 31, 2001, ARI's exposure to a change in interest rates on its debt is
as follows:
Weighted Effect of 1%
Average Increase In
Balance Interest Rate Base Rates
-------- -------------- ------------
Notes payable:
Variable rate................. $127,512 11.328% $1,275
Total decrease in ARI's annual
net income.................... $1,275
======
Per share....................... $ .13
======
------------------------------------
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
None.
(b) Reports on Form 8-K as follows:
None.
21
SIGNATURE PAGE
Pursuant to the requirements 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.
AMERICAN REALTY INVESTORS, INC.
Date: May 15, 2001 By: /s/ Karl L. Blaha
------------------------- -----------------------------------
Karl L. Blaha
President
Date: May 15, 2001 By: /s/ Mark W. Branigan
-------------------------- -----------------------------------
Mark W. Branigan
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22