PART I. FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for the quarterly period ended March 31, 2022 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) The company's balance sheet shows a decrease in total assets and liabilities, with an increase in total equity - Total assets decreased to **$729.4 million** from $770.6 million, driven by lower real estate and cash balances[15](index=15&type=chunk) - Total liabilities decreased to **$378.0 million** from $433.7 million, mainly due to reduced mortgage and bond payables[16](index=16&type=chunk) - Total equity increased to **$351.4 million** from $336.9 million, supported by higher retained earnings[17](index=17&type=chunk) Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | **Assets** | | | | Real estate | $284,480 | $296,363 | | Cash and cash equivalents | $13,794 | $50,748 | | **Total Assets** | **$729,438** | **$770,569** | | **Liabilities** | | | | Mortgages and other notes payable | $169,205 | $183,392 | | Bonds payable | $163,571 | $189,452 | | **Total Liabilities** | **$378,020** | **$433,718** | | **Equity** | | | | Total shareholders' equity | $251,452 | $240,138 | | **Total Equity** | **$351,418** | **$336,851** | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Q1 2022 net income declined year-over-year due to lower total revenues and smaller gains on asset sales - Net income attributable to the Company decreased to **$11.3 million** in Q1 2022 from $18.1 million in Q1 2021[20](index=20&type=chunk) - The decline was driven by lower total revenues, which fell to **$7.8 million**, and a smaller gain on asset sales[20](index=20&type=chunk) Q1 2022 vs Q1 2021 Performance (in thousands, except per share) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Total Revenue | $7,787 | $11,828 | | Net Operating Loss | ($4,495) | ($3,002) | | Gain on sale or write-down of assets, net | $11,148 | $17,398 | | Net Income | $14,567 | $23,215 | | Net Income Attributable to the Company | $11,314 | $18,068 | | Basic and Diluted EPS | $0.70 | $1.12 | [Consolidated Statements of Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Equity) Total equity grew during Q1 2022, primarily driven by the period's net income - Total equity increased to **$351.4 million** in Q1 2022, primarily due to net income of $14.6 million[23](index=23&type=chunk) - Retained earnings grew by **$11.3 million** during the quarter, reaching $187.4 million[23](index=23&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) The company experienced negative cash flow from operations and financing, leading to a net decrease in cash - Net cash used in operating activities was **$4.2 million** in Q1 2022, an increase from $1.4 million in Q1 2021[27](index=27&type=chunk) - Net cash from investing activities decreased to **$5.6 million** from $14.6 million year-over-year, mainly due to lower collections on notes receivable[27](index=27&type=chunk) - Net cash used in financing activities increased to **$38.8 million**, driven by higher payments on mortgages, notes, and bonds[27](index=27&type=chunk) - The company saw a net decrease in cash of **$37.3 million**, ending the quarter with a $35.4 million balance[27](index=27&type=chunk) [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail business segments, significant property sales, joint venture activities, and related-party transactions - The company's primary business is income-producing properties, with significant ownership by related parties and a **78.4%** stake in TCI[30](index=30&type=chunk)[31](index=31&type=chunk) - The Multifamily and Commercial segments generated profits of **$1.5 million** and **$1.9 million** respectively in Q1 2022[46](index=46&type=chunk)[49](index=49&type=chunk) - A multifamily property was sold for **$26.75 million**, generating a **$9.4 million** gain on sale[59](index=59&type=chunk)[104](index=104&type=chunk) - The VAA joint venture portfolio, valued at approximately **$1.4 billion**, is being marketed for sale[69](index=69&type=chunk)[70](index=70&type=chunk)[109](index=109&type=chunk) - The company was non-compliant with the DSCR for one property loan, risking a 'Cash Trap' event[78](index=78&type=chunk) - Significant related-party transactions include **$3.2 million** in Q1 2022 advisory fees paid to Pillar[85](index=85&type=chunk)[86](index=86&type=chunk)[87](index=87&type=chunk) - The company faces ongoing litigation concerning property transfers, with a trial scheduled for November 2022[94](index=94&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial results, liquidity, capital resources, and the impact of recent transactions and COVID-19 - Management notes a temporary decline in commercial property occupancy due to COVID-19, with future impact remaining uncertain[100](index=100&type=chunk)[133](index=133&type=chunk) - Significant Q1 transactions include a property sale for **$26.8 million** generating a **$9.4 million** gain[104](index=104&type=chunk)[105](index=105&type=chunk) - The company plans to sell its VAA joint venture portfolio, appraised at approximately **$1.4 billion**, though realization of this value is not assured[109](index=109&type=chunk)[110](index=110&type=chunk) - The **$8.6 million** year-over-year decrease in net income is attributed to lower asset sale gains and foreign currency changes[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk) - Management is confident in meeting liquidity needs through operations, asset sales, and refinancing[121](index=121&type=chunk) FFO Reconciliation (in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net income attributable to the Company | $11,314 | $18,068 | | Depreciation and amortization | $2,349 | $3,327 | | Gain on sale or write down of assets | ($11,148) | ($17,398) | | FFO-Basic and Diluted | $1,925 | $8,084 | | FFO-adjusted (after currency & debt extinguishment) | ($208) | $467 | [Quantitative and Qualitative Disclosures About Market Risks](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risks) This section is included as a placeholder, but no specific market risk disclosures are provided - The report includes the heading for this item but does not contain any substantive disclosures[128](index=128&type=chunk) [Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of March 31, 2022 - Management concluded that disclosure controls and procedures were **effective** as of the quarter-end[128](index=128&type=chunk) - No material changes to internal controls over financial reporting occurred during the quarter[129](index=129&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in ongoing litigation, including an appeal and a lawsuit concerning property transfers - The company is defending an appeal in a case where a jury previously found in its favor[93](index=93&type=chunk) - A lawsuit alleging improper property sales is scheduled for trial in November 2022[94](index=94&type=chunk) [Risk Factors](index=25&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors are reported, except for ongoing uncertainty from the COVID-19 pandemic - The company highlights ongoing risks from the COVID-19 pandemic, particularly its unpredictable impact on commercial real estate[133](index=133&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No shares were repurchased during the quarter, with 263,250 shares remaining available under the program - No shares were repurchased during the three months ended March 31, 2022[134](index=134&type=chunk) - The company has authorization to repurchase an additional **263,250 shares** under its existing program[134](index=134&type=chunk) [Defaults Upon Senior Securities](index=26&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities during the period - No defaults were reported[135](index=135&type=chunk) [Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[135](index=135&type=chunk) [Other Information](index=26&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - No other information was reported[135](index=135&type=chunk) [Exhibits](index=27&type=section&id=Item%206.%20Exhibits) This section lists filed exhibits, including required SOX certifications and interactive data files - The filing includes officer certifications as required by Sarbanes-Oxley Act Rules 13a-14 and 15d-14[138](index=138&type=chunk) - A certification pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act) is also included[138](index=138&type=chunk) - Interactive Data Files (XBRL) are furnished as part of the filing[139](index=139&type=chunk)

[PART I. FINANCIAL INFORMATION](index=2&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This section provides the unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2021 [Item 1. Financial Statements](index=2&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of American Realty Investors, Inc. for the quarter ended March 31, 2021, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes explaining accounting policies, segment performance, real estate activities, debt, related party transactions, and commitments [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show a decrease in total assets and liabilities from December 31, 2020, to March 31, 2021, while total equity increased | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :---------------------- | :---------------------------- | :------------------------------- | | Total Assets | $823,137 | $865,764 | | Total Liabilities | $469,516 | $535,358 | | Total Equity | $353,621 | $330,406 | | Retained Earnings | $190,806 | $172,738 | | Non-controlling Interest | $98,762 | $93,615 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) The company reported a significant increase in net income attributable to the Company for Q1 2021, driven by asset sales and joint venture income | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Total Revenue | $11,828 | $13,130 | | Total Operating Expenses | $14,830 | $16,368 | | Net Operating Loss | $(3,002) | $(3,238) | | Gain on Sale or Write-Down of Assets, Net | $17,398 | $4,138 | | Equity in Income (Loss) from Unconsolidated Joint Ventures | $3,336 | $(260) | | Net Income Attributable to the Company | $18,068 | $2,946 | | Basic and Diluted EPS | $1.12 | $0.18 | [Consolidated Statement of Equity](index=5&type=section&id=Consolidated%20Statement%20of%20Equity) The consolidated statement of equity shows an increase in total equity from December 31, 2020, to March 31, 2021, primarily due to net income | Metric | December 31, 2020 (in thousands) | March 31, 2021 (in thousands) | | :------------------------------------ | :------------------------------- | :---------------------------- | | Total Shareholders' Equity | $236,791 | $254,859 | | Noncontrolling Interest | $93,615 | $98,762 | | Total Equity | $330,406 | $353,621 | | Net Income (attributable to Company) | N/A | $18,068 | | Net Income (attributable to Noncontrolling Interest) | N/A | $5,147 | [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Q1 2021 saw net cash used in operations, provided by investing, and used in financing, resulting in a net decrease in cash | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Net Cash Used in Operating Activities | $(1,449) | $(11,602) | | Net Cash Provided by Investing Activities | $14,645 | $5,434 | | Net Cash Used in Financing Activities | $(25,155) | $(9,039) | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(11,959) | $(15,207) | | Cash, Cash Equivalents and Restricted Cash, End of Period | $75,061 | $68,104 | [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed notes explain organization, accounting policies, EPS, cash flow, segments, real estate, debt, related parties, and contingencies [1. Organization](index=7&type=section&id=1.%20Organization) ARL is a Nevada corporation focused on acquiring, developing, and owning income-producing properties, managed by a related party - ARL's primary business involves the acquisition, development, and ownership of income-producing multifamily and commercial properties, and opportunistic land acquisition for future development[29](index=29&type=chunk) - The company owns approximately **78.4%** of Transcontinental Realty Investors, Inc. (TCI), and substantially all operations are conducted through TCI[30](index=30&type=chunk) | Property Type | Details | | :---------------------- | :--------------------------------------- | | Commercial Properties | 6 properties (5 office, 1 retail), ~1.58M sq ft | | Directly Owned Multifamily | 9 properties, 1,492 units | | Land | ~1,922 acres (developed & undeveloped) | | VAA Owned Multifamily | 52 properties, 10,032 units (50% owned investment) | - Operations are managed by Pillar Income Asset Management, Inc. and commercial properties by Regis Realty Prime, LLC, both considered related parties[31](index=31&type=chunk) [2. Summary of Significant Accounting Policies](index=7&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) Financial statements are unaudited, prepared under Form 10-Q, consolidating entities where the company is the primary beneficiary - Financial statements are unaudited and prepared in accordance with Form 10-Q and Article 10 of Regulation S-X, with certain GAAP disclosures condensed or omitted[32](index=32&type=chunk) - The company consolidates entities where it is the primary beneficiary of a variable interest entity (VIE) or has a majority voting interest[35](index=35&type=chunk) - Newly issued accounting standards, ASU 2020-04 (Reference Rate Reform) and FASB Staff Q&A on COVID-19 lease concessions, did not have a significant impact on the consolidated financial statements for the three months ended March 31, 2021 and 2020[37](index=37&type=chunk)[38](index=38&type=chunk) [3. Earnings Per Share](index=8&type=section&id=3.%20Earnings%20Per%20Share) Basic and diluted EPS significantly increased to $1.12 for Q1 2021 from $0.18 in the prior year, reflecting higher net income | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Income Attributable to the Company | $18,068 | $2,946 | | Weighted-Average Common Shares Outstanding | 16,152,043 | 15,997,076 | | EPS - Basic and Diluted | $1.12 | $0.18 | [4. Supplemental Cash Flow Information](index=9&type=section&id=4.%20Supplemental%20Cash%20Flow%20Information) Cash paid for interest decreased, with significant noncash investing activities involving asset contributions to a joint venture | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Cash Paid for Interest | $9,713 | $13,090 | | Cash and Cash Equivalents (End of Period) | $53,865 | $39,946 | | Restricted Cash (End of Period) | $21,196 | $28,158 | | Proceeds from Mortgages, Notes and Bonds Payable | $0 | $5,114 | | Payments of Mortgages, Notes and Bonds Payable | $25,133 | $14,153 | | Noncash Investing and Financing Activities | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Property Acquired for Note Payable | $0 | $3,350 | | Assets Contributed to Joint Venture | $18,608 | $0 | | Liabilities Assumed by Joint Venture | $17,592 | $0 | [5. Operating Segments](index=9&type=section&id=5.%20Operating%20Segments) The company operates in multifamily and commercial real estate segments, with overall segment profit declining in Q1 2021 - The company operates in two reportable segments: multifamily apartment communities and commercial real estate properties[46](index=46&type=chunk) | Segment | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------ | :----------------------------------------------- | :----------------------------------------------- | | Multifamily Revenue | $3,836 | $3,556 | | Multifamily Profit | $1,713 | $1,611 | | Commercial Revenue | $6,525 | $7,886 | | Commercial Profit | $2,816 | $3,522 | | Total Segment Profit | $4,529 | $5,133 | [6. Lease Revenue](index=10&type=section&id=6.%20Lease%20Revenue) Rental revenue from operating leases for multifamily and commercial properties decreased in Q1 2021 compared to the prior year - Lease revenue is generated from multifamily apartment communities and commercial properties under operating leases, with minimum rents recognized on a straight-line basis[50](index=50&type=chunk) | Component | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :--------------- | :----------------------------------------------- | :----------------------------------------------- | | Fixed Component | $9,863 | $10,812 | | Variable Component | $498 | $630 | | Total Rental Revenue | $10,361 | $11,442 | [7. Real Estate Activity](index=11&type=section&id=7.%20Real%20Estate%20Activity) Total real estate, net, decreased, with a significantly higher gain on asset sales in Q1 2021 from residential properties and land | Real Estate Component | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------------------ | :---------------------------- | :------------------------------- | | Land | $48,357 | $50,759 | | Buildings and Improvements | $281,115 | $297,644 | | Construction in Progress | $73,656 | $77,891 | | Total Real Estate, Net | $349,460 | $374,811 | | Property Held for Sale | $1,660 | $2,572 | | Total Real Estate | $351,120 | $377,383 | | Gain/Loss on Sale or Write-Down of Assets | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :---------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Land | $5,957 | $4,138 | | Residential Properties | $11,441 | $0 | | Total | $17,398 | $4,138 | - The gain on residential properties in 2021 includes **$1.417 million** from the Overlook at Allensville Phase II transaction and **$10.026 million** from the recognition of previously deferred gains on various multifamily properties sold to a non-related third party[57](index=57&type=chunk)[85](index=85&type=chunk) [8. Notes Receivable](index=12&type=section&id=8.%20Notes%20Receivable) The company holds various notes receivable from multiple borrowers, including related parties, with varying interest rates and maturity dates | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | | Notes Receivable (Total Carrying Value) | $137,718 | $130,626 | | Notes Receivable from Related Parties | $75,135 | $70,375 | - Several notes are convertible, at the company's option, into a **100% ownership interest** in the underlying development property and are collateralized by the property[60](index=60&type=chunk) - Unified Housing Foundation, Inc. (UHF) is a significant related party borrower, with principal and interest payments funded from surplus cash flow, property sales, or refinancing, and cross-collateralized across underlying properties[61](index=61&type=chunk) [9. Investment in Unconsolidated Joint Ventures](index=13&type=section&id=9.%20Investment%20in%20Unconsolidated%20Joint%20Ventures) The company's primary unconsolidated joint venture is VAA, formed with Macquarie Group, holding a 50% voting interest and 49% profit participation - The VAA joint venture, formed with Macquarie Group, holds 52 multifamily properties. The company has a **50% voting interest** and a **49% profit participation interest** (Class A interest)[63](index=63&type=chunk) - On March 30, 2021, the company sold a **50% ownership interest** in Overlook at Allensville Phase II to Macquarie for **$2.551 million**, resulting in a gain of **$1.417 million**, and then contributed both 50% interests into VAA[64](index=64&type=chunk) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | | Total Investment in Unconsolidated Joint Ventures | $55,764 | $60,425 | | Our Share of Net Income (Loss) from Unconsolidated Joint Ventures | $3,336 | $(260) | [10. Mortgages and Other Notes Payable](index=15&type=section&id=10.%20Mortgages%20and%20Other%20Notes%20Payable) The total carrying value of mortgages and other notes payable decreased, with several loans extended or assumed by joint ventures, and covenant compliance maintained | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------- | | Mortgages and Other Notes Payable (Total Carrying Value) | $224,817 | $242,711 | - The loan on Athens was extended to August 28, 2022, and the loan on Windmill Farms was extended to February 28, 2023, at a reduced interest rate of **5%**[72](index=72&type=chunk)[73](index=73&type=chunk) - The loan for Overlook at Allensville Phase II was assumed by VAA in connection with the property's contribution to the joint venture[73](index=73&type=chunk) - The company was in compliance with all loan covenants as of March 31, 2021[74](index=74&type=chunk) [11. Bonds Payable](index=16&type=section&id=11.%20Bonds%20Payable) Bonds payable, issued through SPC and traded on TASE, decreased, with a gain on foreign currency transactions recognized - The company has issued three series of nonconvertible bonds through Southern Properties Capital Ltd. (SPC), which are traded on the Tel-Aviv Stock Exchange (TASE)[76](index=76&type=chunk) | Bond Issuance | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------ | :---------------------------- | :------------------------------- | | Series A Bonds | $76,448 | $95,133 | | Series B Bonds | $56,688 | $65,318 | | Series C Bonds | $82,484 | $85,537 | | Total Bonds Payable (Net) | $208,021 | $237,888 | | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Gain on Foreign Currency Transactions | $7,617 | $7,843 | [12. Related Party Transactions](index=16&type=section&id=12.%20Related%20Party%20Transactions) The company engages in various transactions with related parties, including advisory fees and interest income/expense - Pillar Income Asset Management, Inc. and Regis Realty Prime, LLC are wholly owned by affiliates of MRHI, which owns approximately **90.8%** of the company, making them related parties[80](index=80&type=chunk) | Related Party Transaction Type | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :----------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Rental Income | $242 | $221 | | Property Operating Expenses | $382 | $242 | | General and Administrative Expense | $1,670 | $1,133 | | Advisory Fees Paid to Pillar | $2,436 | $2,373 | | Interest Income on Notes Receivable | $4,769 | $5,073 | | Interest Expense on Notes Payable to Pillar | $1,395 | $1,915 | - Related party receivables represent amounts outstanding from Pillar for loans and unreimbursed fees, expenses, and costs[82](index=82&type=chunk) [13. Noncontrolling Interests](index=17&type=section&id=13.%20Noncontrolling%20Interests) Noncontrolling interests represent third-party ownership in TCI and IOR, where the company holds majority stakes - Noncontrolling interest represents third-party ownership in TCI (**78.4%** owned by the company) and IOR (**81.1%** owned by the company) during the three months ended March 31, 2021 and 2020[83](index=83&type=chunk) [14. Deferred Income](index=17&type=section&id=14.%20Deferred%20Income) Deferred gains on property sales to related parties are recognized upon sale to non-related third parties, significantly decreasing in Q1 2021 - Gains on property sales to related parties are deferred until sales criteria for the full accrual method are met, typically when properties are sold to a non-related third party[84](index=84&type=chunk) - On January 29, 2021, the company recognized a gain of **$10.026 million** from the sale of three multifamily properties (El Dorado, Limestone Ranch, and Marquis) by UHF to a non-related third party, which had been previously deferred[85](index=85&type=chunk) | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | | :------------- | :---------------------------- | :------------------------------- | | Deferred Gain | $9,791 | $19,821 | [15. Income Taxes](index=17&type=section&id=15.%20Income%20Taxes) The income tax provision significantly decreased in Q1 2021, calculated based on losses absorbed by taxable income - The company is part of a tax sharing and compensating agreement with ARL, with expenses calculated based on losses absorbed by taxable income at a **21% statutory tax rate**[86](index=86&type=chunk) | Income Tax Provision | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :------------------- | :----------------------------------------------- | :----------------------------------------------- | | Current | $40 | $247 | | Deferred | $0 | $0 | | Total | $40 | $247 | [16. Commitments and Contingencies](index=17&type=section&id=16.%20Commitments%20and%20Contingencies) The company faces ongoing litigation, including a $59 million award against it, and a $10 million earn-out liability in arbitration - The company is a defendant in ongoing litigation with Mr. David Clapper regarding a 1988 multifamily property transaction, with a court ruling in 2016 awarding Clapper approximately **$59 million**. The case was remanded to trial, which began in May 2021[88](index=88&type=chunk) - A lawsuit brought by Paul Berger in February 2019 alleges improper sales and/or transfers of property with IOR, requesting the company pay off related party loans to IOR for distribution to shareholders[89](index=89&type=chunk) - As of March 31, 2021, the company recorded a **$10 million liability** for an earn-out provision related to properties contributed to the VAA joint venture, with arbitration initiated due to an inability to agree on the remeasured value[90](index=90&type=chunk) - The company believes it will generate excess cash from property operations and intends to sell assets, refinance debt, and obtain additional borrowings to meet liquidity requirements[88](index=88&type=chunk) [17. Subsequent Events](index=18&type=section&id=17.%20Subsequent%20Events) Subsequent events after March 31, 2021, were evaluated up to May 13, 2021, the financial statement issuance date - Events occurring after March 31, 2021, have been evaluated up to May 13, 2021, the date the consolidated financial statements were available to be issued[91](index=91&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition, operations, COVID-19 impact, acquisitions, financing, development, and critical accounting policies - The company is an externally advised and managed real estate investment company owning a diverse portfolio of income-producing properties and land for development across the Southern United States[97](index=97&type=chunk) - The COVID-19 pandemic's impact on financial condition, results of operations, and cash flows remains unpredictable due to ongoing uncertainties regarding its scope, severity, and economic effects[96](index=96&type=chunk)[130](index=130&type=chunk) [Management's Overview](index=20&type=section&id=Management's%20Overview) The company is an externally advised real estate investment company with a diverse portfolio, managed by a related party - The company's investment strategy includes acquiring existing income-producing properties and developing new properties on owned or acquired land[97](index=97&type=chunk) - Pillar Income Asset Management, Inc., a related party, manages the company's operations, including locating investment opportunities and arranging debt/equity financing[98](index=98&type=chunk) [Acquisitions and Dispositions](index=20&type=section&id=Acquisitions%20and%20Dispositions) Recent activities include a land acquisition in Ohio and significant gains from multifamily and land dispositions - Acquired a **49.2-acre** land parcel in Kent, Ohio, for **$5.4 million** in March 2020[98](index=98&type=chunk) | Disposition (Date) | Property Type | Sale Price (in millions) | Gain on Sale (in millions) | | :----------------------------- | :------------ | :----------------------- | :------------------------- | | Villager (May 1, 2020) | Multifamily | $2.4 | $1.0 | | Farnham Park (July 16, 2020) | Multifamily | $13.3 | $2.7 | | Bridge View Plaza (Sept 14, 2020) | Retail | $5.3 | $4.6 | | Overlook at Allensville Phase II (March 30, 2021) | Multifamily | $2.6 | $1.4 | | Windmill Farms (Q1 2021) | Land | $9.1 | $3.7 | | Mercer Crossing (Q1 2021) | Land | $3.3 | $2.3 | [Financing Activities](index=20&type=section&id=Financing%20Activities) Recent financing includes bond issuances and extensions of several loans, some with reduced interest rates - Issued **$39.2 million** in Series B bonds in February 2018 and an additional **$19.8 million** in Series B bonds in July 2018[100](index=100&type=chunk) - Issued **$78.1 million** of Series C bonds in July 2019, collateralized by Browning Place, bearing interest at **4.65%** and maturing on January 31, 2023[101](index=101&type=chunk) - Issued **$19.7 million** in additional Series A bonds in November 2020, generating **$18.8 million** in net proceeds[101](index=101&type=chunk) - Extended the **$14.7 million** loan from HSW Partners to June 17, 2021, the **$1.2 million** loan on Athens to August 28, 2022, and the **$8.8 million** loan on Windmill Farms to February 28, 2023, at a reduced **5% interest rate**[101](index=101&type=chunk)[102](index=102&type=chunk) [Development Activities](index=21&type=section&id=Development%20Activities) Completed construction of two multifamily phases in 2020, with two ongoing projects totaling 402 units - Completed construction of Parc at Denham Springs Phase II (**$17.2 million**) and Sugar Mill Phase III (**$14.2 million**) during 2020[103](index=103&type=chunk) | Property | Location | No. of Units | Costs to Date (in thousands) | Total Projected Costs (in thousands) | | :---------------- | :------------- | :----------- | :--------------------------- | :----------------------------------- | | Athens | Athens, AL | 232 | $289 | $34,800 | | Heritage McKinney | McKinney, TX | 170 | $318 | $24,650 | | Total | | 402 | $607 | $59,450 | [Critical Accounting Policies](index=21&type=section&id=Critical%20Accounting%20Policies) Policies involve significant estimates in revenue, accruals, impairment, purchase price allocation, and fair value measurements - Critical accounting policies include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, purchase price allocation, capitalization of costs, and fair value measurements[105](index=105&type=chunk)[106](index=106&type=chunk) - Fair value measurements are applied using ASC Topic 820, categorizing inputs into Level 1 (quoted prices in active markets), Level 2 (observable inputs for similar assets/liabilities), and Level 3 (unobservable inputs)[107](index=107&type=chunk)[108](index=108&type=chunk) - Related parties are evaluated under ASC Topic 805, recognizing that transactions with them may not always be on an arm's length basis[108](index=108&type=chunk) [Results of Operations](index=22&type=section&id=Results%20of%20Operations) Net income increased significantly in Q1 2021, driven by asset sale gains and improved joint venture income, despite commercial segment decline | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Variance (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :---------------------- | | Multifamily Segment Operating Income | $1,713 | $1,611 | $102 | | Commercial Segment Operating Income | $2,816 | $3,522 | $(706) | | Total Segment Operating Income | $4,529 | $5,133 | $(604) | | General, Administrative and Advisory | $(5,671) | $(6,665) | $994 | | Gain on Sale or Write-Down of Assets | $17,398 | $4,138 | $13,260 | | Income (Loss) from Joint Ventures | $3,336 | $(260) | $3,596 | | Net Income | $23,215 | $4,388 | $18,827 | - The **$0.1 million** increase in multifamily operating profits was due to a **$0.4 million** increase at Lease-Up Properties, partially offset by a **$0.3 million** decrease at Disposition Properties[114](index=114&type=chunk) - The **$0.7 million** decrease in commercial segment operating profits was primarily due to a **$0.9 million** revenue decline at Browning Place from decreased occupancy, following a tenant lease termination[114](index=114&type=chunk) - The **$13.3 million** increase in gain on sale of assets includes an **$11.4 million** gain on multifamily properties (Overlook at Allensville Phase II and previously deferred gains) and a **$1.8 million** increase in land sale gains[114](index=114&type=chunk) [Liquidity and Capital Resources](index=24&type=section&id=Liquidity%20and%20Capital%20Resources) Cash sources include operations, asset sales, and borrowings, with liquidity needs for expenses, debt, and capital expenditures - Principal cash sources are property operations, land/property sales, collection of notes receivable, related company receivables, refinancing, and additional borrowings[116](index=116&type=chunk) - Principal liquidity needs include normal expenses, debt service (including balloon payments), capital expenditures, development costs, and property acquisitions[116](index=116&type=chunk) | Cash Flow Activity | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | Variance (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | :---------------------- | | Net Cash Provided by (Used in) Operating Activities | $(1,449) | $(11,602) | $10,153 | | Net Cash Provided by (Used in) Investing Activities | $14,645 | $5,434 | $9,211 | | Net Cash (Used in) Provided by Financing Activities | $(25,155) | $(9,039) | $(16,116) | - The increase in cash from operating activities is primarily due to a **$3.5 million** increase from changes in other assets and **$3.2 million** from VAA income distributions[118](index=118&type=chunk) - The increase in cash from investing activities is mainly due to an **$8.8 million** increase in asset sale proceeds (Windmill Farms, Mercer Crossing) and a **$2.2 million** increase in VAA distributions, partially offset by a **$9.7 million** increase in notes receivable originations[119](index=119&type=chunk) [Funds From Operations ("FFO")](index=24&type=section&id=Funds%20From%20Operations%20%28%22FFO%22%29) FFO, a non-GAAP measure, improved significantly from a loss in 2020 to a positive figure in 2021, excluding property sales and depreciation - FFO is defined by Nareit as net income (loss) excluding gains/losses from property sales, plus real estate-related depreciation and amortization, impairment write-downs, and adjustments for unconsolidated joint ventures[120](index=120&type=chunk) - FFO and FFO-diluted are considered useful supplemental measures for comparing operating and financial results, especially as they exclude real estate depreciation and amortization[121](index=121&type=chunk) | Metric | Three Months Ended March 31, 2021 (in thousands) | Three Months Ended March 31, 2020 (in thousands) | | :-------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net Income Attributable to the Company | $18,068 | $2,946 | | Depreciation and Amortization on Consolidated Assets | $3,327 | $3,394 | | Gain on Sale or Write-Down of Assets | $(17,398) | $(4,138) | | FFO-Basic and Diluted | $8,084 | $6,715 | | Gain on Foreign Currency Transaction | $(7,617) | $(7,843) | | FFO-Adjusted | $467 | $(1,128) | [Item 3. Quantitative and Qualitative Disclosures About Market Risks](index=25&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risks) This optional section is not included in the report - This section is optional and not included in the report[124](index=124&type=chunk) [Item 4. Controls and Procedures](index=25&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls were effective as of March 31, 2021, with no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[125](index=125&type=chunk) - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[126](index=126&type=chunk) [PART II. OTHER INFORMATION](index=25&type=section&id=PART%20II.%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, exhibits, and signatures [Item 1. Legal Proceedings](index=25&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various litigation matters, but management expects no material adverse impact on financials - The company is involved in various litigation incidental to its ordinary course of business[127](index=127&type=chunk) - Management believes the outcome of such litigation will not have a material adverse impact on the company's financial condition, results of operation, or liquidity[127](index=127&type=chunk) [Item 1A. Risk Factors](index=26&type=section&id=Item%201A.%20Risk%20Factors) No material changes to risk factors from 2020 10-K, except for an updated discussion on the unpredictable COVID-19 pandemic impact - No material changes from risk factors disclosed in the 2020 10-K, except for an updated discussion on risks related to the COVID-19 pandemic[129](index=129&type=chunk) - The impact of the COVID-19 pandemic on the company's financial condition, results of operations, and cash flows remains unpredictable due to numerous uncertainties[130](index=130&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=26&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company has a share repurchase program, but no shares were purchased in Q1 2021, with 263,250 shares remaining - The company has a share repurchase program for up to **1,250,000 shares**[131](index=131&type=chunk) - No shares were purchased under the program during the three months ended March 31, 2021[131](index=131&type=chunk) - As of March 31, 2021, **986,750 shares** have been purchased, and **263,250 shares** may still be purchased under the program[131](index=131&type=chunk) [Item 3. Defaults Upon Senior Securities](index=26&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) No defaults upon senior securities were reported - No defaults upon senior securities were reported[131](index=131&type=chunk) [Item 4. Mine Safety Disclosures](index=26&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) No mine safety disclosures were reported - No mine safety disclosures were reported[131](index=131&type=chunk) [Item 5. Other Information](index=26&type=section&id=Item%205.%20Other%20Information) No other information was reported in this section - No other information was reported in this section[131](index=131&type=chunk) [Item 6. Exhibits](index=27&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including organizational documents, advisory agreements, and certifications - The exhibits include Certificate of Restatement of Articles of Incorporation, Bylaws, Certificates of Designation for various Preferred Stock series, and the Advisory Agreement with Pillar Income Asset Management, Inc[134](index=134&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer (31.1*) and pursuant to 18 U.S.C. 1350 (32.1*) are filed herewith[134](index=134&type=chunk) - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbase Documents are also included[135](index=135&type=chunk) [Signatures](index=29&type=section&id=Signatures) The report was signed by Erik L. Johnson, Executive Vice President and Chief Financial Officer, on May 13, 2021 - The report was signed by Erik L. Johnson, Executive Vice President and Chief Financial Officer (Principal Executive and Financial Officer), on May 13, 2021[137](index=137&type=chunk)

Financial Performance - The company reported a net income of $11.3 million for the year ended December 31, 2020, a significant increase of $33.0 million compared to a net loss of $21.7 million in 2019[115]. - The company reported a net income attributable to the Company of $9,030 for 2020, compared to a net loss of $(15,958) in 2019[129]. - Funds From Operations (FFO) for 2020 was $15,352, a significant recovery from $(2,261) in 2019[129]. - FFO-adjusted for 2020 was $28,730, compared to $18,066 in 2019, indicating improved operational performance[129]. Revenue Growth - Revenue from the multifamily segment increased to $14.7 million in 2020, up from $13.5 million in 2019, reflecting a variance of $1.2 million[115]. - The commercial segment revenue rose to $37.2 million in 2020, compared to $32.7 million in 2019, resulting in a variance of $4.5 million[115]. Asset Sales and Gains - The company achieved a gain on sale of assets of $36.9 million in 2020, an increase of $21.7 million from $15.2 million in 2019[115]. - The company sold a total of 58.8 acres of land for $12.9 million in 2020, resulting in gains of $11.1 million[97]. - The company reported a gain on the sale of land of $25,171 in 2020, compared to $15,272 in 2019[129]. Operating Profits - Operating profits in the multifamily segment increased by $1.5 million, primarily due to a $2.1 million increase at Lease-Up Properties[115]. - The company reported a $5.0 million increase in operating profits in the commercial segment, primarily due to a $6.0 million lease termination payment[115]. Cash Flow and Liquidity - Net cash provided by operating activities for the year ended December 31, 2020, was $3,498, compared to a net cash used of $(40,641) in 2019, representing an increase of $44,139[122]. - Net cash provided by investing activities increased to $4,196 in 2020 from $(3,705) in 2019, a change of $7,901[122]. - The increase in cash from operating activities was primarily due to a $45.9 million decrease in receivables from related parties in 2019[123]. - The company anticipates that cash and cash equivalents as of December 31, 2020, along with cash generated in 2021, will be sufficient to meet all cash requirements[120]. - The company plans to selectively sell land and income-producing assets to meet liquidity requirements[120]. Development Projects - The company has ongoing development projects with total projected costs of $59.5 million as of December 31, 2020[102]. - The company completed construction projects costing $17.2 million and $14.2 million for Parc at Denham Springs Phase II and Sugar Mill Phase III, respectively[101]. Debt and Financing - The company experienced a $73.1 million decrease in proceeds from mortgages, notes, and bonds payable in 2020[123]. - The company issued $19.7 million in additional Series A bonds on November 30, 2020, for net proceeds of $18.8 million[100].

[Filing Information](index=1&type=section&id=Filing%20Information) This section provides key administrative details about the company's Form 10-Q filing, including its corporate status, exchange listing, and share information [Form 10-Q Details](index=1&type=section&id=Form%2010-Q%20Details) This document is a Quarterly Report on Form 10-Q for American Realty Investors, Inc. (ARL) for the period ended September 30, 2020. The company is a Nevada corporation, listed on the NYSE, and is classified as a non-accelerated filer - Registrant: **AMERICAN REALTY INVESTORS, INC.** (Nevada corporation)[1](index=1&type=chunk) - Filing Type: **Quarterly Report on Form 10-Q** for the period ended **September 30, 2020**[1](index=1&type=chunk) Form 10-Q Key Indicators | Indicator | Value | | :--- | :--- | | Trading Symbol | ARL | | Exchange | NYSE | | Filer Status | Non-accelerated filer | | Shell Company | No | | Common Stock Outstanding (as of Nov 12, 2020) | 15,997,076 shares | [PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) This part presents the company's unaudited consolidated financial statements and management's discussion and analysis for the reporting period [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, along with comprehensive notes detailing accounting policies, segment information, real estate activities, debt, and related party transactions for the periods ended September 30, 2020 and December 31, 2019 [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) The consolidated balance sheets show a slight decrease in total assets and liabilities from December 31, 2019, to September 30, 2020, while total equity increased, primarily driven by an increase in retained earnings Consolidated Balance Sheet Summary (in thousands) | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Assets | $807,587 | $830,641 | $(23,054) | -2.78% | | Total Liabilities | $500,369 | $534,125 | $(33,756) | -6.32% | | Total Equity | $307,218 | $296,516 | $10,702 | 3.61% | | Real Estate, net | $380,715 | $387,790 | $(7,075) | -1.82% | | Notes Receivable | $151,310 | $143,086 | $8,224 | 5.75% | | Cash and cash equivalents | $32,986 | $51,228 | $(18,242) | -35.61% | | Mortgages and notes payable | $248,943 | $254,094 | $(5,151) | -2.03% | | Bonds payable | $203,192 | $223,265 | $(20,073) | -8.99% | | Retained earnings | $172,335 | $163,708 | $8,627 | 5.27% | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) The company reported a significant turnaround from a net loss in 2019 to net income in 2020 for both the three and nine-month periods, primarily driven by substantial gains on sales or write-down of assets and reduced interest expenses Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Revenues | $11,937 | $13,231 | $39,808 | $44,031 | | Total Operating Expenses | $14,240 | $13,809 | $43,858 | $43,690 | | Net Operating (Loss) Income | $(2,303) | $(578) | $(4,050) | $341 | | Interest Income | $5,421 | $6,856 | $16,459 | $19,514 | | Interest Expense | $(7,622) | $(10,420) | $(26,295) | $(29,796) | | (Loss) Gain on Foreign Currency Transaction | $(1,470) | $(5,153) | $774 | $(13,296) | | Gain on Sales or Write-down of Assets | $15,325 | $5,139 | $24,802 | $9,792 | | Net Income (Loss) | $9,638 | $(9,450) | $10,702 | $(19,799) | | Net Income (Loss) Attributable to Common Shares | $7,987 | $(7,571) | $8,627 | $(16,496) | | Basic and Diluted EPS | $0.50 | $(0.47) | $0.54 | $(1.03) | [Consolidated Statement of Equity](index=6&type=section&id=Consolidated%20Statement%20of%20Equity) The company's total equity increased from $296.5 million at December 31, 2019, to $307.2 million at September 30, 2020, primarily due to net income generated during the nine-month period Consolidated Statement of Equity (in thousands) | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | | :-------------------- | :----------- | :----------- | | Total Shareholders' Equity | $239,499 | $248,126 | | Non-controlling Interest | $57,017 | $59,092 | | Total Equity | $296,516 | $307,218 | | Net Income (9 months) | - | $10,702 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, the company experienced a net cash outflow from operating and financing activities, offset by a net cash inflow from investing activities, resulting in an overall decrease in cash, cash equivalents, and restricted cash Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(17,384) | $(8,801) | | Net cash provided by (used in) investing activities | $16,225 | $(16,782) | | Net cash (used in) provided by financing activities | $(21,136) | $18,908 | | Net decrease in cash, cash equivalents and restricted cash | $(22,295) | $(6,675) | | Cash, cash equivalents and restricted cash, end of period | $61,016 | $99,940 | [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed disclosures on the company's organization, significant accounting policies, earnings per share, cash flow information, operating segments, lease agreements, real estate activities, notes receivable, unconsolidated joint ventures, mortgages and bonds payable, deferred income, related party transactions, commitments, contingencies, and subsequent events [Note 1. Organization](index=8&type=section&id=Note%201.%20Organization) American Realty Investors, Inc. (ARL) is a Nevada corporation primarily engaged in the acquisition, development, and ownership of income-producing multifamily apartment communities and commercial real estate properties, as well as opportunistic land acquisitions. Its operations are managed by Pillar Income Asset Management, Inc. and Regis Realty Prime, LLC - Primary Business: Acquisition, development, and ownership of income-producing **multifamily apartment communities** and **commercial real estate properties**, and opportunistic land acquisition[19](index=19&type=chunk) - Property Portfolio (as of Sep 30, 2020): - **Six commercial properties** (5 office, 1 retail) totaling **~1.6 million sq ft** - **Ten directly owned multifamily apartment communities** (**1,639 units**) - Approximately **1,980 acres** of developed and undeveloped land - **Fifty-one multifamily apartment communities** (**10,137 units**) owned by **50% investee Victory Abode Apartments, LLC (VAA)**[20](index=20&type=chunk) - Management: Day-to-day operations managed by **Pillar Income Asset Management, Inc.**; commercial properties by **Regis Realty Prime, LLC**; multifamily by outside management companies[21](index=21&type=chunk)[22](index=22&type=chunk) [Note 2. Summary of Significant Accounting Policies](index=8&type=section&id=Note%202.%20Summary%20of%20Significant%20Accounting%20Policies) The financial statements are prepared in accordance with Form 10-Q and GAAP, with certain condensed disclosures. The company consolidates entities where it is the primary beneficiary of a VIE or has a majority voting interest, and uses the equity method for less than controlling interests. Recent accounting standard updates (ASU 2018-17, ASU 2020-04, FASB Staff Q&A on COVID-19 lease concessions) had no material impact on financial position or results of operations - Basis of Presentation: Unaudited consolidated financial statements prepared in accordance with **Form 10-Q** and **Article 10 of Regulation S-X**, with condensed GAAP disclosures[23](index=23&type=chunk) - Consolidation Policy: Consolidates entities where it is the **primary beneficiary of a VIE** or holds a **majority voting interest**; uses equity method for less than controlling interests[26](index=26&type=chunk)[27](index=27&type=chunk) - Newly Issued Accounting Standards: Adoption of **ASU 2018-17** (Consolidation) and **FASB Staff Q&A on COVID-19 lease concessions** had no material impact. **ASU 2020-04** (Reference Rate Reform) will be adopted when LIBOR is discontinued[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [Note 3. Earnings per Share](index=10&type=section&id=Note%203.%20Earnings%20per%20Share) Earnings per share (EPS) are calculated by dividing net income available to common shares by the weighted-average number of common shares outstanding. For the three and nine months ended September 30, 2020, basic and diluted EPS were $0.50 and $0.54, respectively, a significant improvement from losses in the prior year - EPS Calculation: Net income available to common shares, adjusted for preferred dividends, divided by weighted-average common shares outstanding[31](index=31&type=chunk) EPS Summary | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) Attributable to Common Shares (in thousands) | $7,987 | $(7,571) | $8,627 | $(16,496) | | Weighted-average Common Shares Outstanding | 15,997,076 | 15,997,076 | 15,997,076 | 15,997,076 | | EPS - Basic and Diluted | $0.50 | $(0.47) | $0.54 | $(1.03) | [Note 4. Supplemental Cash Flow Information](index=10&type=section&id=Note%204.%20Supplemental%20Cash%20Flow%20Information) The company's total cash, cash equivalents, and restricted cash decreased from $83.3 million at the beginning of the nine-month period to $61.0 million at September 30, 2020. Restricted cash is held for contractual obligations like reserve replacement, tax, insurance escrow, and bond payments Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric (in thousands) | Sep 30, 2020 | Sep 30, 2019 | | :------------------------------------ | :----------- | :----------- | | Cash and cash equivalents (End of period) | $32,986 | $63,075 | | Restricted cash (End of period) | $28,030 | $36,865 | | Total Cash, cash equivalents and restricted cash (End of period) | $61,016 | $99,940 | | Total Cash, cash equivalents and restricted cash (Beginning of period) | $83,311 | $106,615 | - Restricted cash is set aside for contractual obligations including **reserve replacement deposits**, **tax and insurance escrow**, and **bond principal and interest payments**[33](index=33&type=chunk) [Note 5. Operating Segments](index=10&type=section&id=Note%205.%20Operating%20Segments) The company operates in two reportable segments: multifamily and commercial real estate. For the nine months ended September 30, 2020, the multifamily segment saw increased profit, while the commercial segment experienced a slight decrease. Total segment profit increased year-over-year - Reportable Segments: (i) **multifamily apartment communities** and (ii) **commercial real estate properties**[34](index=34&type=chunk) Segment Performance (in thousands) | Segment (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | **Multifamily Segment** | | | | | | Revenues | $3,683 | $3,383 | $10,942 | $10,077 | | Profit from segment | $1,272 | $661 | $4,477 | $3,234 | | **Commercial Segment** | | | | | | Revenues | $7,770 | $8,024 | $23,518 | $24,275 | | Profit from segment | $3,794 | $4,863 | $11,476 | $11,915 | | **Total Profit from Segments** | $5,066 | $5,524 | $15,953 | $15,149 | [Note 6. Leases](index=12&type=section&id=Note%206.%20Leases) The company leases multifamily and commercial properties under operating leases, recognizing minimum rental revenues on a straight-line basis. Fixed rental components increased slightly for both three and nine-month periods in 2020 compared to 2019, while variable components decreased - Lease Classification: Multifamily and commercial properties are leased under **operating leases**[38](index=38&type=chunk) Rental Revenue Components (in thousands) | Rental Revenue Component (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Fixed component | $11,107 | $10,827 | $33,111 | $32,963 | | Variable component | $346 | $580 | $1,349 | $1,389 | | Total Rental Revenue | $11,453 | $11,407 | $34,460 | $34,352 | Future Rental Payments (in thousands) | Future Rental Payments (in thousands) | | :------------------------------------ | | 2021 | $6,444 | | 2022 | $23,155 | | 2023 | $20,038 | | 2024 | $14,606 | | 2025 | $8,737 | | Thereafter | $7,071 | | Total | $80,051 | [Note 7. Real Estate Activity](index=12&type=section&id=Note%207.%20Real%20Estate%20Activity) The company's total real estate, net, decreased slightly from $387.8 million at December 31, 2019, to $380.7 million at September 30, 2020. Significant gains on asset sales were realized in 2020, including land, a retail center, and multifamily apartment communities Real Estate Components (in thousands) | Real Estate Component (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Land | $50,759 | $49,887 | | Building and improvements | $297,068 | $286,280 | | Tenant improvements | $49,423 | $49,431 | | Construction in progress | $77,116 | $84,399 | | Less accumulated depreciation | $(97,883) | $(90,173) | | Property held for sale | $4,232 | $7,966 | | Total Real Estate, net | $380,715 | $387,790 | Gain (Loss) on Sale or Write-down of Assets (in thousands) | Gain (Loss) on Sale or Write-down of Assets (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Land | $5,771 | $5,139 | $15,248 | $9,872 | | Residential Properties | $3,704 | — | $3,704 | $(80) | | Commercial Properties | $4,609 | — | $4,609 | — | | Other | $1,241 | — | $1,241 | — | | Total | $15,325 | $5,139 | $24,802 | $9,792 | - Key Sales in 2020 (9 months): - **62.0 acres of land** for **$20.2 million** (gain of **$15.2 million**) - **Bridgeview Plaza retail center** for **$5.25 million** (gain of **$4.744 million**) - **Villager Apartments** for **$2.426 million** (gain of **$898 thousand**) - **Farnham Park Apartments** for **$13.3 million** (gain of **$2.684 million**)[43](index=43&type=chunk)[101](index=101&type=chunk) [Note 8. Notes Receivable](index=14&type=section&id=Note%208.%20Notes%20Receivable) Total notes receivable increased from $143.1 million at December 31, 2019, to $151.3 million at September 30, 2020. A significant portion of these notes are from related parties, including Unified Housing Foundation, Inc. (UHF) and Pillar Notes Receivable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total Notes Receivable | $151,310 | $143,086 | | Notes from related parties | $96,181 | $93,524 | - **Unified Housing Foundation, Inc. (UHF)** is a related party due to significant investment in the performance of collateral secured by the notes receivable[45](index=45&type=chunk) [Note 9. Investment in Unconsolidated Joint Ventures](index=15&type=section&id=Note%209.%20Investment%20in%20Unconsolidated%20Joint%20Ventures) The company's investment in unconsolidated joint ventures decreased from $67.7 million at December 31, 2019, to $57.1 million at September 30, 2020. For the nine months ended September 30, 2020, these joint ventures reported a net loss of $19.9 million, with the company's equity in net loss being $0.6 million Investment in Unconsolidated Joint Ventures (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :------------------------------------ | :----------- | :----------- | | Investment in unconsolidated joint ventures | $57,144 | $67,655 | | Company's capital in JVs | $97,456 | $108,815 | | Basis adjustments | $(40,312) | $(41,160) | JV Financials (in thousands) | JV Financials (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Revenue | $45,144 | $43,320 | $130,859 | $126,125 | | Total Expenses | $50,355 | $59,297 | $150,715 | $174,765 | | Net (Loss) Income | $(5,211) | $(15,977) | $(19,856) | $(48,640) | | Company's equity in net (loss) income | $337 | $(75) | $(642) | $(1,135) | [Note 10. Mortgages and Notes Payable](index=16&type=section&id=Note%2010.%20Mortgages%20and%20Notes%20Payable) Total mortgages and notes payable decreased from $254.1 million at December 31, 2019, to $248.9 million at September 30, 2020. Several loans were paid off or assumed by third parties in connection with property sales during the period Mortgages and Notes Payable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total Mortgages and Notes Payable | $248,943 | $254,094 | - Key Debt Changes: - **Bridgeview Plaza loan paid off** (**$3.375 million**) upon sale of property - **Farnham Apartments loan** (**$9.085 million**) assumed by third party upon sale - **Villager Apartments loan** (**$665 thousand**) assumed by third party upon sale - Acquired **49.2 acres of land in Kent, Ohio**, in exchange for a **$3.35 million note payable**[43](index=43&type=chunk)[50](index=50&type=chunk) [Note 11. Bonds Payable](index=17&type=section&id=Note%2011.%20Bonds%20Payable) The company's total outstanding bonds, net, decreased from $223.3 million at December 31, 2019, to $203.2 million at September 30, 2020. Foreign currency transactions related to these New Israeli Shekel-denominated bonds resulted in a gain for the nine months ended September 30, 2020, compared to a loss in the prior year, due to the strengthening of the US Dollar Bonds Payable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total outstanding bonds | $210,695 | $232,989 | | Less: unamortized deferred bond issuance costs | $(7,503) | $(9,724) | | Total outstanding bonds, net | $203,192 | $223,265 | Foreign Currency Transaction (in thousands) | Foreign Currency Transaction (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | (Loss) Gain on foreign currency transactions | $(1,470) | $(5,153) | $744 | $(13,296) | - Bonds are issued through subsidiary **Southern Properties Capital LTD** and trade on the **Tel Aviv Stock Exchange**, with payments denominated in **New Israeli Shekels**[51](index=51&type=chunk) [Note 12. Deferred Income](index=18&type=section&id=Note%2012.%20Deferred%20Income) Deferred gain from property sales to related parties, where sales criteria for full accrual method were not met due to continuing involvement, decreased from $24.8 million at December 31, 2019, to $21.6 million at September 30, 2020 Deferred Gain (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Deferred gain | $21,609 | $24,761 | - Deferred income represents gains on property sales to related parties where the full accrual method criteria were not met due to continuing involvement. Gains are deferred until properties are sold to non-related third parties[54](index=54&type=chunk) [Note 13. Related Party Transactions](index=18&type=section&id=Note%2013.%20Related%20Party%20Transactions) The company engages in various transactions with related parties, including rental income from Pillar, Regis, and VAA, property operating expenses paid to Regis, general and administrative expenses to Pillar, advisory fees, interest income on notes receivable from UHF and Pillar, and interest expense on notes payable to Pillar Related Party Transactions (in thousands) | Related Party Transaction (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Rental income from related parties | $262 | $212 | $808 | $527 | | Property operating expense to Regis | $253 | $237 | $750 | $741 | | General and administrative to Pillar | $1,094 | $1,002 | $2,991 | $3,680 | | Advisory fee to related party | $2,329 | $2,403 | $7,055 | $6,807 | | Interest income from related parties | $4,812 | $6,240 | $14,566 | $18,328 | | Interest expense to Pillar | $1,583 | $2,402 | $5,040 | $7,094 | [Note 14. Commitments and Contingencies](index=18&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) The company anticipates generating excess cash from property operations in 2020 but plans to sell assets, refinance debt, and obtain additional borrowings to meet liquidity needs. It is involved in ongoing litigation, including a $59 million judgment against it related to a 1988 property transaction and a lawsuit alleging improper property sales/transfers with a consolidated subsidiary - Liquidity Strategy: Intends to **sell income-producing assets**, **refinance real estate**, and obtain **additional borrowings** to meet liquidity requirements, as operating cash flow may not be sufficient[60](index=60&type=chunk) - Litigation: - Defendant in litigation with **Clapper Parties**, with a **$59 million judgment** against the company (appealed, trial set for May 2021) - Plaintiff in lawsuit against **Dynex Commercial, Inc.**, with a **$24.8 million judgment** awarded to the company (fully reserved due to collectability uncertainty) - Charged in a lawsuit by **Paul Berger** alleging improper property sales/transfers with consolidated subsidiary **IOR**[62](index=62&type=chunk)[63](index=63&type=chunk)[64](index=64&type=chunk) - Guarantees: Primary guarantor on a **$24.3 million mezzanine loan** between UHF and a lender[61](index=61&type=chunk) [Note 15. Subsequent Events](index=19&type=section&id=Note%2015.%20Subsequent%20Events) Events occurring after September 30, 2020, up to November 12, 2020 (the date the financial statements were available to be issued), have been evaluated for possible adjustment or disclosure - Evaluation Period: Subsequent events evaluated through **November 12, 2020**[65](index=65&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, including forward-looking statements, the impact of the COVID-19 pandemic, an overview of business and property portfolio, critical accounting policies, detailed analysis of results of operations for the three and nine months ended September 30, 2020, liquidity and capital resources, and other disclosures [Forward-Looking Statements and Risk Factors](index=20&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) The report contains forward-looking statements subject to various risks and uncertainties, including those related to the real estate industry, financing, market demand, property sales, growth management, development, economic downturns, compliance costs, environmental liabilities, and dependence on key personnel. Investors are cautioned against undue reliance on these statements - Forward-Looking Statements: Identified by words like '**anticipate**', '**believe**', '**expect**', '**intend**', '**may**', '**might**', '**plan**', '**estimate**', '**project**', '**should**', '**will**', '**result**'[68](index=68&type=chunk) - Key Risks: - General real estate industry risks (leases, tenant financial condition, competition) - Availability and terms of financing - Demand for properties, occupancy, and rental rates - Ability to obtain financing for development/acquisitions - Timing and amount of property sales - Managing growth and integrating acquisitions - Property development and construction risks - Economic downturns, interest rate increases, market volatility - Compliance costs (ADA), uninsured losses, environmental contamination - Dependence on key personnel[69](index=69&type=chunk) [COVID-19 Impact](index=21&type=section&id=COVID-19%20Impact) The company is monitoring the COVID-19 pandemic's impact, which has not caused significant disruptions for the three months ended September 30, 2020. Rent collections remained high (96%), occupancy stable (91%), and development work continued. The company believes its HUD-guaranteed mortgage notes mitigate financing risks - No significant disruptions from **COVID-19** during **Q3 2020**[70](index=70&type=chunk) - Rent Collection (Q3 2020): Approximately **96% collected** (**95% multifamily**, **97% office**)[71](index=71&type=chunk) - Occupancy: Stable at **91%** as of September 30, 2020 and 2019[71](index=71&type=chunk) - Leasing: **Positive leasing spreads** for new leases and renewals[72](index=72&type=chunk) - Development: Ground-up development work continues unabated without stoppages[72](index=72&type=chunk) - Financing: Not significantly impacted due to **HUD-guaranteed mortgage notes** with long-term maturities[72](index=72&type=chunk) [Management Overview and Summary](index=21&type=section&id=Management%20Overview%20and%20Summary) The company is an externally advised and managed real estate investment company with a diverse portfolio of income-producing properties and land for development across eight states. It actively buys and sells real estate, financing acquisitions through operating cash flow, property sales, and debt. Related party transactions are a historical part of its business - Business Model: Externally advised and managed real estate investment company owning diverse income-producing properties and land for development[75](index=75&type=chunk) - Investment Strategy: Acquiring existing income-producing properties, developing new properties on owned or acquired land, and active buying/selling of real estate[75](index=75&type=chunk)[76](index=76&type=chunk) - Property Portfolio (as of Sep 30, 2020): - **Six commercial properties** (**~1.6 million sq ft**) - **1,639 units** in **ten multifamily apartment communities** - **~1,980 acres** of developed and undeveloped land - **10,137 units** in **fifty-one multifamily apartment communities** owned by **50% investee VAA**[78](index=78&type=chunk) - Financing: Primarily through **operating cash flow**, proceeds from **property sales**, and **debt financing** (property-specific first-lien mortgage loans, construction loans)[79](index=79&type=chunk) - Related Party Transactions: Historically engaged in asset acquisition/dispositions and other business transactions with related parties, which may not always be on an arm's length basis[80](index=80&type=chunk) [Critical Accounting Policies](index=22&type=section&id=Critical%20Accounting%20Policies) The preparation of financial statements requires management estimates and assumptions, particularly for revenue recognition, accruals, bad debts, asset impairment, purchase price allocation, capitalization, and fair value measurements. Key policies include fair value measurements (using a three-level hierarchy) and related party evaluations (applying ASC Topic 805) - Key Estimates and Assumptions: Revenue recognition, common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, purchase price allocation, capitalization of costs, and fair value measurements[84](index=84&type=chunk) - Fair Value of Financial Instruments: Applies **ASC Topic 820**, using a **three-level hierarchy** (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[86](index=86&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk) - Related Parties: Applies **ASC Topic 805** to evaluate business relationships, considering control or significant influence over decision-making[89](index=89&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) For the three months ended September 30, 2020, the company reported net income of $7.9 million ($0.50 EPS) compared to a net loss of $7.6 million ($0.47 loss per share) in 2019, driven by a $15.3 million gain on asset sales and reduced interest expense. For the nine months ended September 30, 2020, net income was $8.6 million ($0.54 EPS) compared to a net loss of $16.5 million ($1.03 loss per share) in 2019, primarily due to a $24.8 million gain on asset sales and a favorable change in foreign currency transactions Results of Operations: 3 Months Ended September 30 (in thousands) | Metric (in thousands) | 2020 | 2019 | Change | % Change | | :------------------------------------ | :--- | :--- | :----- | :------- | | Net income (loss) attributable to common shares | $7,987 | $(7,571) | $15,558 | 205.49% | | Basic and diluted EPS | $0.50 | $(0.47) | $0.97 | 206.38% | | Rental revenues | $11,453 | $11,407 | $46 | 0.40% | | Property operating expenses | $6,387 | $5,883 | $504 | 8.57% | | General and administrative expense | $1,998 | $2,107 | $(109) | -5.17% | | Interest income | $5,421 | $6,856 | $(1,435) | -20.93% | | Mortgage and loan interest expense | $7,622 | $10,420 | $(2,798) | -26.85% | | Loss on foreign currency transactions | $(1,470) | $(5,153) | $3,683 | -71.47% | | Gain on sale or write-down of assets | $15,325 | $5,139 | $10,186 | 198.21% | Results of Operations: 9 Months Ended September 30 (in thousands) | Metric (in thousands) | 2020 | 2019 | Change | % Change | | :------------------------------------ | :--- | :--- | :----- | :------- | | Net income (loss) attributable to common shares | $8,627 | $(16,496) | $25,123 | 152.29% | | Basic and diluted EPS | $0.54 | $(1.03) | $1.57 | 152.43% | | Rental revenues | $34,460 | $34,352 | $108 | 0.31% | | Property operating expenses | $18,507 | $19,203 | $(696) | -3.62% | | General and administrative expense | $7,958 | $7,716 | $242 | 3.14% | | Interest income | $16,459 | $19,514 | $(3,055) | -15.66% | | Mortgage and loan interest expense | $26,295 | $29,796 | $(3,501) | -11.75% | | Gain (loss) on foreign currency transactions | $774 | $(13,296) | $14,070 | 105.82% | | Gain on sale or write-down of assets | $24,802 | $9,792 | $15,010 | 153.29% | [Liquidity and Capital Resources](index=25&type=section&id=Liquidity%20and%20Capital%20Resources) The company's primary liquidity needs include funding operating expenses, debt service, capital expenditures, and acquisitions. Cash sources are property operations, asset sales, and various borrowings. Management anticipates that operating cash flow may not be sufficient and plans to sell assets, refinance debt, and seek additional borrowings to meet liquidity requirements - Principal Liquidity Needs: Funding normal recurring expenses, debt service (including balloon payments), capital expenditures, development costs, and property acquisitions[102](index=102&type=chunk) - Principal Sources of Cash: Property operations, proceeds from land and income-producing property sales, collection of notes receivable, refinancing existing debt, and additional borrowings[102](index=102&type=chunk) - Liquidity Strategy: Management intends to selectively **sell assets**, **refinance/extend real estate debt**, and seek **additional borrowings** to meet cash requirements, as operating cash flow may be insufficient[103](index=103&type=chunk) Cash Flow Summary (9 Months Ended September 30, in thousands) | Cash Flow Activity (in thousands) | 2020 | 2019 | Change | | :-------------------------------- | :--- | :--- | :----- | | Net cash (used in) operating activities | $(17,384) | $(8,801) | $(8,583) | | Net cash provided by (used in) investing activities | $16,225 | $(16,782) | $33,007 | | Net cash (used in) provided by financing activities | $(21,136) | $18,908 | $(40,044) | - Investing Activities (9 months ended Sep 30, 2020): - Advanced **$15.7 million** on notes receivable - Purchased real estate for **$2.7 million** - Invested **$12.5 million** for development and renovation[107](index=107&type=chunk) - Financing Activities (9 months ended Sep 30, 2020): - Decrease primarily due to **$21.7 million bond principal payment** and **$9.6 million payments on notes** - Partially offset by **$10.2 million proceeds from borrowings**[110](index=110&type=chunk) [Other Disclosures](index=26&type=section&id=Other%20Disclosures) Management is not aware of any material environmental liabilities. The effects of inflation on operations are not quantifiable but impact revenues, property values, and financing costs. The company is part of the May Realty Holdings, Inc. consolidated group for federal income tax reporting, with financial statement income varying from taxable income due to differences in accounting for investees, asset sales, depreciation, and amortization - Environmental Matters: No material adverse effect on business, assets, or results of operations from environmental liabilities[112](index=112&type=chunk) - Inflation: Effects are not quantifiable but influence property revenues, sales values, and interest rates on investments and debt[113](index=113&type=chunk) - Tax Matters: Member of **May Realty Holdings, Inc. consolidated group** for federal income tax. Financial statement income differs from taxable income due to accounting for investees, asset sales, depreciation, and amortization[114](index=114&type=chunk)[115](index=115&type=chunk) - Income Before Income Taxes (Q3 2020): **$11.0 million**, primarily driven by **$24.8 million gains from asset sales**[116](index=116&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risks](index=27&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risks) The company is exposed to interest rate risk primarily from long-term debt. Management aims to limit this impact by borrowing at fixed rates or variable rates with conversion options. As of September 30, 2020, most of its notes payable were fixed-rate, with a small portion at variable rates. A 100 basis point increase in variable rates would have a minimal impact on annual interest cost and EPS - Exposure: Primarily to **interest rate changes** from long-term debt used for acquisitions and investments[117](index=117&type=chunk) - Objectives: Limit impact of interest rate changes on earnings/cash flows and lower borrowing costs[117](index=117&type=chunk) Debt Type (as of Sep 30, 2020) | Debt Type (as of Sep 30, 2020) | Amount (in millions) | Interest Rate | | :------------------------------- | :------------------- | :------------ | | Fixed interest rates | $241.8 | - | | Variable interest rate | $7.1 | 3.75% | | Total outstanding notes payable | $248.9 | - | - Sensitivity: A **100 basis point increase** in variable interest rates would increase annual interest cost by **$0.02 million** and decrease EPS by **$0.001**[118](index=118&type=chunk) - Mitigation: Variable rate exposure is mitigated by the ability to secure long-term fixed-rate **HUD financing** on multifamily properties (weighted average borrowing rate of **~5.35%** at Sep 30, 2020)[119](index=119&type=chunk) [Item 4. Controls and Procedures](index=27&type=section&id=Item%204.%20Controls%20and%20Procedures) As of September 30, 2020, management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective. There have been no material changes to internal control over financial reporting during the most recent fiscal quarter - Disclosure Controls and Procedures: Deemed **effective** as of **September 30, 2020**, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[120](index=120&type=chunk) - Internal Control Over Financial Reporting: **No material changes** during the most recent fiscal quarter[121](index=121&type=chunk) [PART II. OTHER INFORMATION](index=28&type=section&id=PART%20II.%20OTHER%20INFORMATION) This part covers other required disclosures, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits [Item 1. Legal Proceedings](index=28&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various litigation matters in the ordinary course of business, but management believes the outcome of such litigation will not have a material adverse impact on its financial condition, results of operations, or liquidity - Litigation: Involved in various items of litigation incidental to and in the ordinary course of business[123](index=123&type=chunk) - Management's Opinion: Outcome of litigation is not expected to have a **material adverse impact** on financial condition, results of operation, or liquidity[123](index=123&type=chunk) [Item 1A. Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) No material changes to previously disclosed risk factors from the 2019 10-K, except for an updated overview of risks related to the COVID-19 pandemic. The company has not experienced significant disruptions from COVID-19 in Q3 2020, maintaining high rent collections and stable occupancy, with development work continuing - No material changes to risk factors from the **2019 10-K**, except for **COVID-19 related risks**[124](index=124&type=chunk) - COVID-19 Impact (as of Sep 30, 2020): - No significant disruptions - **96% of Q3 rents collected** (**95% multifamily**, **97% office**) - Occupancy stable at **91%** - Positive leasing spreads - Ground-up development continues unabated - Financing activities not significantly impacted due to **HUD guarantees**[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=28&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company has an ongoing share repurchase program, authorized for up to 1,250,000 shares. No shares were purchased under this program during the first quarter of 2020. As of September 30, 2020, 986,750 shares have been repurchased, with 263,250 shares remaining authorized - Share Repurchase Program: Authorized for up to **1,250,000 shares** (increased in August 2010)[128](index=128&type=chunk) - Activity (Q1 2020): **No shares purchased**[128](index=128&type=chunk) Share Repurchase Program Status (as of Sep 30, 2020) | Metric (as of Sep 30, 2020) | Shares | | :-------------------------- | :----- | | Shares purchased under program | 986,750 | | Shares remaining authorized | 263,250 | [Item 3. Defaults Upon Senior Securities](index=29&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report - No defaults upon senior securities[130](index=130&type=chunk) [Item 4. Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[130](index=130&type=chunk) [Item 5. Other Information](index=29&type=section&id=Item%205.%20Other%20Information) There is no other information to report under this item - None[130](index=130&type=chunk) [Item 6. Exhibits](index=29&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various certificates of incorporation, bylaws, certificates of designation for preferred stock, advisory agreements, and certifications required by the Securities Exchange Act - Exhibits include: - Certificates of Restatement and Amendment of Articles of Incorporation - Bylaws - Certificates of Designation for various Series of Preferred Stock (F, I, J, K) - Advisory Agreement with Pillar Income Asset Management, Inc - Certifications by Principal Executive Officer and Principal Financial Officer (Rule 13a-14, 18 U.S.C. 1350) - XBRL Instance Document and Taxonomy Extension Documents[131](index=131&type=chunk)[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) [Signatures](index=32&type=section&id=Signatures) The report is duly signed on behalf of American Realty Investors, Inc. by Erik L. Johnson, Executive Vice President and Chief Financial Officer (Principal Financial Officer), on November 12, 2020 - Signed by **Erik L. Johnson**, Executive Vice President and Chief Financial Officer (Principal Financial Officer) on **November 12, 2020**[144](index=144&type=chunk)[145](index=145&type=chunk)

PART I. FINANCIAL INFORMATION This part presents the company's comprehensive financial statements and management's analysis of its financial performance [ITEM 1. FINANCIAL STATEMENTS](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements and related accounting notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This table presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific dates | Metric | June 30, 2020 (Unaudited) | December 31, 2019 (Audited) | | :--------------------------- | :------------------------ | :-------------------------- | | Total Assets | **$828,289** | **$830,641** | | Total Liabilities | **$530,709** | **$534,125** | | Total Shareholders' Equity | **$297,580** | **$296,516** | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) This table outlines the company's revenues, expenses, and net income or loss over specified periods | Metric (dollars in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Rental and other property revenues | **$11,947** | **$11,840** | **$23,865** | **$23,769** | | Total operating expenses | **$13,250** | **$16,217** | **$29,618** | **$29,881** | | Net operating loss | **$(1,303)** | **$(4,377)** | **$(5,753)** | **$(6,112)** | | Net income (loss) | **$(3,324)** | **$(3,867)** | **$1,064** | **$(10,349)** | | Net income (loss) attributable to American Realty Investors, Inc. | **$(2,306)** | **$(2,778)** | **$640** | **$(8,925)** | | (Loss) earnings per share - basic | **$(0.14)** | **$(0.17)** | **$0.04** | **$(0.56)** | [Consolidated Statement of Shareholders' Equity](index=6&type=section&id=Consolidated%20Statement%20of%20Shareholders'%20Equity) This table tracks changes in the company's shareholders' equity, including net income and non-controlling interests | Metric (dollars in thousands) | Balance, Dec 31, 2019 | Net Income (Loss) | Balance, Jun 30, 2020 | | :---------------------------- | :-------------------- | :---------------- | :-------------------- | | Total American Realty Investors, Inc. shareholders' equity | **$239,499** | **$640** | **$240,139** | | Non-controlling interest | **$57,017** | **$424** | **$57,441** | | Total shareholders' equity | **$296,516** | **$1,064** | **$297,580** | [Consolidated Statements of Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This table reports the company's net income or loss and other comprehensive income components for specified periods | Metric (dollars in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :---------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | **$(3,324)** | **$(3,867)** | **$1,064** | **$(10,349)** | | Total comprehensive income (loss) | **$(3,324)** | **$(3,867)** | **$1,064** | **$(10,349)** | | Comprehensive income (loss) attributable to American Realty Investors, Inc. | **$(2,306)** | **$(2,778)** | **$640** | **$(8,925)** | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities | Metric (dollars in thousands) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :---------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | **$(12,223)** | **$(15,490)** | | Net cash provided by (used in) investing activities | **$8,728** | **$(7,910)** | | Net cash used in financing activities | **$(7,241)** | **$(968)** | | Net decrease in cash, cash equivalents and restricted cash | **$(10,736)** | **$(24,368)** | | Cash, cash equivalents and restricted cash, end of period | **$72,575** | **$82,247** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures supporting the consolidated financial statements [NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION](index=10&type=section&id=NOTE%201.%20ORGANIZATION%20AND%20BASIS%20OF%20PRESENTATION) This note details the company's structure, subsidiaries, advisor, real estate, and accounting policies - American Realty Investors, Inc. (ARL) is a Nevada corporation, formed in **1999**, with over **90%** of its stock owned by related party entities, investing in real estate through direct ownership, leases, partnerships, and mortgage loans[22](index=22&type=chunk)[25](index=25&type=chunk) - ARL **owns** **78.38%** of Transcontinental Realty Investors, Inc. (TCI), which in turn **owns** **81.23%** of Income Opportunity Realty Investors, Inc. (IOR), with IOR's financial results consolidated since July **17**, **2009**[23](index=23&type=chunk) - Pillar Income Asset Management, Inc. (Pillar) **serves as the external Advisor and Cash Manager**, responsible for day-to-day operations, identifying investment opportunities, and arranging financing[24](index=24&type=chunk)[25](index=25&type=chunk) - As of June **30**, **2020**, the company's portfolio **includes** **seven** commercial properties (**1.7M sq ft**), **ten** residential apartment communities (**1,657 units**), **1,891 acres** of land, and **51** residential apartment communities (**10,137 units**) owned by its **50%** investee VAA[31](index=31&type=chunk) - The company **accounts for** entities with controlling interest or as primary beneficiary of Variable Interest Entities (VIEs) under consolidation, while investments with less than controlling interest (like VAA and Gruppa Florentina, LLC) are **accounted for** using the equity method[36](index=36&type=chunk)[38](index=38&type=chunk) - The company **adopted** ASU **2016-02** (Leases) on January **1**, **2019**, but it had no material impact as no significant lease arrangements were identified where the company was the lessee[53](index=53&type=chunk)[54](index=54&type=chunk) - The company is **evaluating the impact of** ASU **2019-12** (Income Taxes) and ASU **2020-03** (Codification Improvements to Financial Instruments), and will consider applying ASU **2020-04** (Reference Rate Reform) for LIBOR-referencing mortgage loan obligations[50](index=50&type=chunk)[57](index=57&type=chunk)[58](index=58&type=chunk) [NOTE 2. INVESTMENT IN VAA](index=16&type=section&id=NOTE%202.%20INVESTMENT%20IN%20VAA) This note details the company's **50%** equity investment in VAA, a multifamily joint venture, and its net loss contribution - The company **holds a** **50%** ownership interest in Victory Abode Apartments, LLC (VAA), a joint venture with Macquarie Group, accounted for under the equity method[59](index=59&type=chunk)[60](index=60&type=chunk)[63](index=63&type=chunk) | VAA Financials (dollars in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenue | **$29,725** | **$28,927** | **$59,284** | **$56,328** | | Net loss | **$(7,867)** | **$(16,035)** | **$(15,761)** | **$(33,781)** | | Company's Loss from VAA | **$(735)** | **$(236)** | **$(1,111)** | **$(1,291)** | [NOTE 3. REAL ESTATE ACTIVITY](index=17&type=section&id=NOTE%203.%20REAL%20ESTATE%20ACTIVITY) This note summarizes the company's real estate portfolio and significant property transactions | Real Estate (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------------------- | :------------ | :---------------- | | Apartments | **$178,240** | **$156,173** | | Commercial properties | **$230,365** | **$229,424** | | Land held for development | **$61,225** | **$62,037** | | Total real estate, net of depreciation | **$394,944** | **$387,790** | - During Q2 **2020**, the company **sold** **25.9 acres** of land for **$6.6 million**, **generating a gain of $5.3 million**, and **acquired** **2.0 acres** of land for **$0.6 million**[66](index=66&type=chunk) [NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION](index=18&type=section&id=NOTE%204.%20SUPPLEMENTAL%20CASH%20FLOW%20INFORMATION) This note provides supplemental cash flow details, including cash paid for interest and cash reconciliation | Cash Flow Information (dollars in thousands) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :------------------------------------------- | :-------------------------- | :-------------------------- | | Cash paid for interest | **$17,680** | **$16,879** | | Total cash, cash equivalents and restricted cash | **$72,575** | **$82,181** | [NOTE 5. NOTES AND INTEREST RECEIVABLE](index=18&type=section&id=NOTE%205.%20NOTES%20AND%20INTEREST%20RECEIVABLE) This note details the company's notes and interest receivable, primarily from related parties and secured by real estate | Metric (dollars in thousands) | June 30, 2020 | | :---------------------------- | :------------ | | Total notes and interest receivable | **$180,146** | | Less allowance for estimated losses | **$(12,557)** | | Total notes and interest receivable, net | **$167,589** | - As of June **30**, **2020**, mortgage loans and accrued interest receivable from related parties, net of allowances, **totaled** **$98.2 million**, **generating** **$4.4 million** in interest income[74](index=74&type=chunk) - The company **collected** **$4.7 million** and **purchased** **$10.9 million** of notes receivables from a related party during the quarter[74](index=74&type=chunk) [NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES](index=21&type=section&id=NOTE%206.%20INVESTMENT%20IN%20UNCONSOLIDATED%20INVESTEES) This note summarizes investments in unconsolidated entities, including Gruppa Florentina, LLC, and their financial performance - The company **holds a** **20%** interest in Gruppa Florentina, LLC, which **owns** Milano Restaurants International Corporation, operating **33** "Me-N-Ed's Pizza Parlors" and other restaurant brands[77](index=77&type=chunk) | Investee Financials (dollars in thousands) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | | Revenue | **$26,394** | **$27,869** | | Net income | **$1,118** | **$1,242** | | Company's **20%** proportionate share of earnings | **$224** | **$248** | [NOTE 7. NOTES AND INTEREST PAYABLE](index=22&type=section&id=NOTE%207.%20NOTES%20AND%20INTEREST%20PAYABLE) This note details the company's total notes payable, secured by various property types, and recent borrowing activities | Notes Payable (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Apartments | **$135,655** | **$120,024** | | Commercial | **$91,973** | **$92,838** | | Land | **$17,115** | **$19,128** | | Total outstanding notes payable, net | **$262,189** | **$254,094** | - During the six months ended June **30**, **2020**, the company **drew** **$7.4 million** in construction loans and issued a **$3.4 million** note payable for land acquisition[79](index=79&type=chunk) [NOTE 8. BONDS AND BONDS INTEREST PAYABLE](index=22&type=section&id=NOTE%208.%20BONDS%20AND%20BONDS%20INTEREST%20PAYABLE) This note details Southern Properties Capital Ltd.'s outstanding bonds and significant principal and interest payments made | Bonds Payable (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Total outstanding bonds, net | **$212,542** | **$223,265** | | Accrued Interest | **$5,674** | **$6,457** | | Total outstanding bonds, net and accrued interest | **$218,216** | **$229,722** | - The company **paid** **$11.6 million** in Series A bond principal and **$7.3 million** in interest payments in January **2020**, and **$11.7 million** in Series A bond principal and **$6.9 million** in interest payments in July **2020**[81](index=81&type=chunk)[82](index=82&type=chunk) [NOTE 9. RELATED PARTY TRANSACTIONS](index=23&type=section&id=NOTE%209.%20RELATED%20PARTY%20TRANSACTIONS) This note outlines the company's various transactions with related parties, including receivables and advisory fees - Related party transactions **include** rental income, interest income, interest expense, general and administrative costs, commissions, management fees, and property expenses[83](index=83&type=chunk) | Related Party Receivable (Pillar, dollars in thousands) | Amount | | :---------------------------------------------------- | :----- | | Related party receivable, December 31, 2019 | **$85,996** | | Cash transfers | **$5,550** | | Advisory fees | **$(3,277)** | | Notes receivable purchased | **$(7,368)** | | Related party receivable, June 30, 2020 | **$75,923** | [NOTE 10. DEFERRED INCOME](index=23&type=section&id=NOTE%2010.%20DEFERRED%20INCOME) This note explains the deferral of gain recognition on property sales to related parties due to continuing involvement - The company **defers gain recognition on sales to related parties** due to continuing involvement, applying finance, deposit, installment, or cost recovery methods[85](index=85&type=chunk) - As of June **30**, **2020**, **deferred gain from these transactions was $25.7 million**[85](index=85&type=chunk) [NOTE 11. OPERATING SEGMENTS](index=23&type=section&id=NOTE%2011.%20OPERATING%20SEGMENTS) This note reports the company's operations across commercial, apartments, land, and other segments, evaluated by net operating income - The company's operating segments are commercial properties, apartments, land, and other, with performance evaluated by net operating income and cash flow[86](index=86&type=chunk) | Segment Operating Income (3 Months Ended Jun 30, 2020, dollars in thousands) | Commercial Properties | Apartments | Land | Other | Total | | :------------------------------------------------------------------------- | :-------------------- | :--------- | :------ | :------ | :------ | | Rental and other property revenues | **$7,863** | **$4,084** | **$0** | **$0** | **$11,947** | | Gain on land sales | **$0** | **$0** | **$5,339** | **$0** | **$5,339** | | Segment operating (loss) income | **$(34)** | **$39** | **$4,951** | **$(685)** | **$4,271** | | Capital expenditures | **$232** | **$7,400** | **$664** | **$0** | **$8,296** | | Real estate assets | **$146,576** | **$180,835** | **$67,533** | **$0** | **$394,944** | | Segment Operating Income (6 Months Ended Jun 30, 2020, dollars in thousands) | Commercial Properties | Apartments | Land | Other | Total | | :------------------------------------------------------------------------- | :-------------------- | :--------- | :-------- | :-------- | :-------- | | Rental and other property revenues | **$15,747** | **$8,116** | **$0** | **$2** | **$23,865** | | Gain on land sales | **$0** | **$0** | **$9,477** | **$0** | **$9,477** | | Segment operating (loss) income | **$(153)** | **$97** | **$8,710** | **$(1,879)** | **$6,775** | | Capital expenditures | **$941** | **$14,433** | **$2,664** | **$0** | **$18,038** | | Assets | **$146,576** | **$180,835** | **$67,533** | **$0** | **$394,944** | [NOTE 12. COMMITMENTS, CONTINGENCIES, AND LIQUIDITY](index=26&type=section&id=NOTE%2012.%20COMMITMENTS,%20CONTINGENCIES,%20AND%20LIQUIDITY) This note discusses the company's liquidity plans, ongoing litigations, and guarantees for various obligations - Management expects to sell land and income-producing real estate, refinance, and obtain additional borrowings to meet liquidity requirements, as operating cash flow alone may not be sufficient[97](index=97&type=chunk) - The company is the primary guarantor on a **$24.3 million** mezzanine loan for UHF and is involved in several litigations, including the Clapper Parties lawsuit (recalculated judgment of **$59 million** against a formerly owned entity) and the Berger Litigation (alleging breach of fiduciary duty)[100](index=100&type=chunk)[101](index=101&type=chunk)[109](index=109&type=chunk) - The company is working to collect on a **$24.8 million** judgment awarded to ART and a **$19.5 million** judgment awarded to TCI against Dynex Commercial, Inc[107](index=107&type=chunk)[108](index=108&type=chunk) [NOTE 13. EARNINGS PER SHARE](index=28&type=section&id=NOTE%2013.%20EARNINGS%20PER%20SHARE) This note explains the calculation of basic and diluted EPS, detailing preferred stock and dividend policies - Basic **EPS** is calculated by dividing net income available to common shareholders by the weighted-average number of common shares outstanding[111](index=111&type=chunk) - The company has **1,800,614 shares** of Series A **10.0%** cumulative convertible preferred stock outstanding, with **1,800,000 shares** held by ARL and its subsidiaries, which do not receive dividends[112](index=112&type=chunk) [NOTE 14. SUBSEQUENT EVENTS](index=28&type=section&id=NOTE%2014.%20SUBSEQUENT%20EVENTS) This note addresses the COVID-19 pandemic's impact and significant post-period property sale agreements - The company is closely monitoring the COVID-**19** pandemic, acknowledging its unpredictable future impact despite no significant disruptions in Q2 **2020**[113](index=113&type=chunk) - On July **16**, **2020**, the company entered an agreement to sell a multi-family property for **$13.3 million**, with **$5.4 million** net cash proceeds and **$9.1 million** debt assumption[114](index=114&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=29&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial condition, operations, cash flows, and critical accounting policies [Forward-Looking Statements and Risk Factors](index=29&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) This section discusses potential future events and uncertainties that could materially affect the company's financial results - Forward-looking statements are based on management's beliefs and assumptions, but actual results may vary materially due to known and unknown risks, trends, uncertainties, and factors beyond control[117](index=117&type=chunk) - Key risks include general real estate industry risks (e.g., inability to renew leases, tenant financial condition, competition), financing availability and terms, demand for properties, ability to obtain financing for development, timing and amount of property sales, and economic downturns[118](index=118&type=chunk) [Impact of COVID-19](index=30&type=section&id=Impact%20of%20COVID-19) This section assesses the effects of the COVID-19 pandemic on the company's operations, occupancy, and financial activities - The company collected approximately **97%** of Q2 rents (**95%** from multi-family, **98%** from office tenants) and granted no significant abatements or deferments[121](index=121&type=chunk) - Occupancy at non-lease up properties remained stable at **87%** as of June **30**, **2020** (compared to **89%** in **2019**), and ground-up development work continued without stoppages[121](index=121&type=chunk) - Financing activity is not expected to be significantly impacted due to HUD-backed loans with long maturities and the ability to refinance and obtain new financing[122](index=122&type=chunk) [Overview](index=30&type=section&id=Overview) This section provides a general description of the company's business, real estate portfolio, and financing strategies - The company is an externally advised and managed real estate investment company owning a diverse portfolio of income-producing properties (residential apartments, office, commercial) and land for development[124](index=124&type=chunk) - During the six months ended June **30**, **2020**, the company sold **44.9 acres** of land for **$12.2 million**, recognizing a **$9.5 million** gain, and acquired approximately **51.2 acres** of land for development for **$6.0 million**[127](index=127&type=chunk) - As of June **30**, **2020**, the portfolio included **1,657 units** in **ten** residential apartment communities, **seven** commercial properties (**1.7 million sq ft**), and **1,891 acres** of land held for development across **eight** states[129](index=129&type=chunk) - Acquisitions are financed primarily through operating cash flow, proceeds from property sales, and debt financing (property-specific first-lien mortgage loans, construction loans)[130](index=130&type=chunk) - The company engages in business transactions with related parties, including asset acquisitions and dispositions, which may not always be on an arm's length basis[131](index=131&type=chunk) [Critical Accounting Policies](index=32&type=section&id=Critical%20Accounting%20Policies) This section describes the significant accounting policies and judgments used in preparing the financial statements [Consolidation](index=32&type=section&id=Consolidation) The company consolidates entities with controlling interest or as primary beneficiary of VIEs, using the equity method for others - The company consolidates accounts of wholly-owned subsidiaries and entities where it has a controlling interest or is the primary beneficiary of a VIE, eliminating all significant intercompany balances and transactions[136](index=136&type=chunk) - Investments with less than a controlling financial interest or where the company is not the primary beneficiary (e.g., VAA, Gruppa Florentina, LLC) are accounted for using the equity method[138](index=138&type=chunk) [Real Estate](index=32&type=section&id=Real%20Estate) Real estate acquisitions are allocated to assets and liabilities based on fair value, with development costs capitalized until completion - Purchase price for real estate acquisitions is allocated to acquired tangible and intangible assets (land, buildings, leases) and assumed liabilities based on fair value, considering estimated cash flow projections[139](index=139&type=chunk)[140](index=140&type=chunk) - Costs related to planning, developing, leasing, and constructing a property, including pre-construction, development, construction, interest, real estate taxes, and salaries, are capitalized until the building is substantially complete[141](index=141&type=chunk) [Depreciation and Impairment](index=33&type=section&id=Depreciation%20and%20Impairment) Real estate assets are stated at depreciated cost, with impairment losses recognized if carrying amount exceeds fair value - Real estate is stated at depreciated cost, with major replacements and betterments capitalized and depreciated over their useful lives (**10-40 years** for buildings, **5-10 years** for furniture/fixtures)[39](index=39&type=chunk)[143](index=143&type=chunk) - Impairment losses are recognized if the carrying amount of an asset is not recoverable and exceeds its fair value, based on estimated future undiscounted cash flows[39](index=39&type=chunk)[143](index=143&type=chunk) [Investments in Unconsolidated Real Estate Ventures](index=33&type=section&id=Investments%20in%20Unconsolidated%20Real%20Estate%20Ventures) Investments in unconsolidated ventures are accounted for under the equity method, adjusted for earnings and cash flows - Investments in unconsolidated real estate ventures are accounted for under the equity method, recorded at cost, and adjusted for equity in earnings and cash contributions/distributions[144](index=144&type=chunk) [Recognition of Rental Income](index=33&type=section&id=Recognition%20of%20Rental%20Income) Rental income from commercial leases is straight-line, while residential leases are recognized monthly on an accrual basis - Commercial property rental income is recognized on a straight-line basis over lease terms, with excess recognized over payments included as a receivable[145](index=145&type=chunk) - Residential property rental income is recognized monthly on an accrual basis, consistent with ASC **842**, for leases typically **12 months** or less[148](index=148&type=chunk) - The company elected the practical expedient under the leasing standard to not separate lease and non-lease components when timing and pattern of revenue recognition are the same and the combined component is an operating lease[148](index=148&type=chunk) [Revenue Recognition on the Sale of Real Estate](index=34&type=section&id=Revenue%20Recognition%20on%20the%20Sale%20of%20Real%20Estate) Revenue and gains from real estate sales are recognized per ASC Topic **360-20**, with deferrals for continuing involvement - Real estate sales and associated gains/losses are recognized per ASC Topic **360-20**, with timing based on transaction terms and continuing involvement[150](index=150&type=chunk) - If full accrual criteria are not met, gain recognition is deferred, and finance, leasing, deposit, installment, or cost recovery methods are applied until criteria are met[150](index=150&type=chunk) [Non-Performing Notes Receivable](index=34&type=section&id=Non-Performing%20Notes%20Receivable) A note is non-performing if principal repayment is overdue and interest payments are not made as per agreement - Notes receivable are considered non-performing if principal repayment is overdue and interest payments are not being made according to terms[151](index=151&type=chunk) [Interest Recognition on Notes Receivable](index=34&type=section&id=Interest%20Recognition%20on%20Notes%20Receivable) Interest income on notes receivable is recorded as earned, in accordance with loan agreement terms - Interest income on notes receivable is recognized as earned based on the terms of the loan agreements[152](index=152&type=chunk) [Allowance for Estimated Losses](index=34&type=section&id=Allowance%20for%20Estimated%20Losses) Collectability of notes is assessed periodically, with impairment losses based on the fair value of underlying real estate - Collectability of notes receivable is assessed periodically, and impairment losses are recognized when it's probable that principal and interest won't be received per contractual terms[153](index=153&type=chunk) - Impairment amount is generally based on the fair value of the partnership's real estate, which is the primary source of loan repayment[153](index=153&type=chunk) [Fair Value of Financial Instruments](index=34&type=section&id=Fair%20Value%20of%20Financial%20Instruments) Fair value is the price to sell an asset or transfer a liability, using a three-level hierarchy for valuation inputs - Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants[154](index=154&type=chunk) - A three-level hierarchy prioritizes valuation inputs: Level **1** (quoted prices in active markets), Level **2** (observable inputs for similar assets/liabilities), and Level **3** (significant unobservable inputs)[155](index=155&type=chunk)[156](index=156&type=chunk) [Related Parties](index=35&type=section&id=Related%20Parties) Related parties include entities with equity investments, trusts, management, and those with significant influence - Related parties include entities with equity investments, trusts for principal owners, management personnel, and parties where one can significantly influence the other's decision-making[159](index=159&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, comparing revenues and expenses over different periods [Comparison of the three months ended June 30, 2020 to the same period ended 2019](index=35&type=section&id=Comparison%20of%20the%20three%20months%20ended%20June%2030,%202020%20to%20the%20same%20period%20ended%202019) This section compares the company's financial performance for Q2 **2020** versus Q2 **2019**, highlighting changes in net loss and key expenses | Metric (dollars in thousands) | 3 Months Ended Jun 30, 2020 | 3 Months Ended Jun 30, 2019 | Change (YoY) | | :---------------------------- | :-------------------------- | :-------------------------- | :----------- | | Net loss applicable to common shares | **$(2,306)** | **$(2,778)** | **$(472)** | | Diluted EPS | **$(0.14)** | **$(0.17)** | **$0.03** | | Rental and other property revenues | **$11,947** | **$11,840** | **$107** | | Property operating expenses | **$5,810** | **$7,323** | **$(1,513)** | | General and administrative | **$1,669** | **$2,419** | **$(750)** | | Interest income | **$5,284** | **$6,505** | **$(1,221)** | | Foreign currency transaction (loss) | **$(5,599)** | **$(2,325)** | **$(3,274)** | | Gain on land sales | **$5,339** | **$2,517** | **$2,822** | - Property operating expenses **decreased by $1.5 million** due to reduced property replacement costs[163](index=163&type=chunk) - General and administrative expenses **decreased by $0.7 million**, primarily from lower professional and legal services[164](index=164&type=chunk) - Foreign currency transaction loss **increased by $3.3 million** due to the strengthening of the Israel Shekel against the US Dollar[168](index=168&type=chunk) - Gain on land sales **increased by $2.8 million**, driven by the sale of **25.9 acres** for **$6.6 million**[170](index=170&type=chunk) [Comparison of the six months ended June 30, 2020 to the same period ended 2019](index=36&type=section&id=Comparison%20of%20the%20six%20months%20ended%20June%2030,%202020%20to%20the%20same%20period%20ended%202019) This section compares the company's financial performance for H1 **2020** versus H1 **2019**, focusing on net income turnaround and key drivers | Metric (dollars in thousands) | 6 Months Ended Jun 30, 2020 | 6 Months Ended Jun 30, 2019 | Change (YoY) | | :---------------------------- | :-------------------------- | :-------------------------- | :----------- | | Net income applicable to common shares | **$640** | **$(8,925)** | **$9,565** | | Diluted EPS | **$0.04** | **$(0.56)** | **$0.60** | | Rental and other property revenues | **$23,865** | **$23,769** | **$96** | | Property operating expenses | **$12,120** | **$13,320** | **$(1,200)** | | Depreciation and amortization | **$6,812** | **$6,548** | **$264** | | General and administrative | **$4,464** | **$5,024** | **$(560)** | | Franchise taxes and other expenses | **$1,496** | **$585** | **$911** | | Interest income | **$11,038** | **$12,658** | **$(1,620)** | | Other income | **$4,006** | **$7,031** | **$(3,025)** | | Foreign currency transaction gain (loss) | **$2,244** | **$(8,143)** | **$10,387** | | Gain on land sales | **$9,477** | **$4,733** | **$4,744** | - Property operating expenses **decreased by $1.2 million** due to reduced property replacement costs[172](index=172&type=chunk) - Foreign currency transaction **shifted from an $8.1 million loss to a $2.2 million gain**, primarily due to the strengthening of the U.S. Dollar against the Israel Shekel[180](index=180&type=chunk) - Gain on land sales **increased by $4.7 million**, resulting from the sale of **44.9 acres** for **$12.2 million**[182](index=182&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's ability to meet its financial obligations and fund its operations and investments - Principal liquidity needs **include** funding operating expenses, debt service, capital expenditures, and property acquisitions[183](index=183&type=chunk) - Primary cash sources are property operations, proceeds from land/property sales, collection of mortgage notes, and additional borrowings (mortgage notes, mezzanine financing, lines of credit)[183](index=183&type=chunk) - Management anticipates operating cash flow may not be sufficient and plans to sell assets, refinance/extend debt, and seek additional borrowings to meet liquidity requirements[185](index=185&type=chunk) | Cash Flow Summary (6 Months Ended Jun 30, dollars in thousands) | 2020 | 2019 | | :------------------------------------------------------------ | :---------- | :---------- | | Net cash (used in) operating activities | **$(12,223)** | **$(15,490)** | | Net cash provided by (used in) investing activities | **$8,728** | **$(7,910)** | | Net cash (used in) financing activities | **$(7,241)** | **$(968)** | - Investing activities **included** advancing **$1.7 million** for notes receivable, purchasing **$2.7 million** in land, and investing **$8.0 million** in new property development and improvements in H1 **2020**[187](index=187&type=chunk) - Financing activities in H1 **2020** **saw a decrease in cash flow due to $11.6 million in bond principal payments and $20.2 million in note payments**, partially offset by **$24.7 million** in new borrowings[190](index=190&type=chunk) [Environmental Matters](index=38&type=section&id=Environmental%20Matters) This section addresses potential environmental liabilities and their impact on the company's business - The company may be liable for removal/remediation costs and other expenses related to hazardous substances under environmental laws[191](index=191&type=chunk) - Management is not aware of any environmental liability that would have a material adverse effect on the business, assets, or results of operations[193](index=193&type=chunk) [Inflation](index=39&type=section&id=Inflation) This section examines the effects of inflation on the company's revenues, costs, property values, and interest rates - The effects of inflation on operations are not quantifiable, with revenues and real estate costs tending to fluctuate proportionately[194](index=194&type=chunk) - Inflation also affects property sales values, gains from sales, and interest rates, impacting earnings from short-term investments and the cost of new/variable rate debt[194](index=194&type=chunk) [Tax Matters](index=39&type=section&id=Tax%20Matters) This section details the company's tax structure, income tax accounting, and significant tax-related items - ARL is part of the May Realty Holdings, Inc. (MRHI) consolidated group for federal income tax, with a tax sharing agreement among ARL, IOR, and TCI[195](index=195&type=chunk) - Financial statement income differs from taxable income due to accounting for investee income/losses, asset sales, depreciation, amortization, and allowance for estimated losses[196](index=196&type=chunk) - For Q2 **2020**, a **$2.2 million** unrealized foreign currency gain resulted in financial income before taxes but a tax loss, leading to no recognized tax expense[197](index=197&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS](index=39&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISKS) This section discusses the company's exposure to market risks, primarily interest rate changes on long-term debt - The company is exposed to interest rate changes due to long-term debt used for acquisitions and investments[198](index=198&type=chunk) - Management's objective is to limit interest rate impact by borrowing at fixed rates or variable rates with conversion options[198](index=198&type=chunk) - As of June **30**, **2020**, **$265.4 million** of **$269.1 million** outstanding notes payable were fixed-rate. A **100 basis point** increase in variable rates would increase annual interest cost by **$0.01 million**[199](index=199&type=chunk) - Variable rate exposure is mitigated by the ability to secure long-term fixed-rate HUD financing on residential apartment complexes, with a weighted average borrowing rate of approximately **5.1%** at June **30**, **2020**[200](index=200&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=39&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of disclosure controls and procedures and reports no material changes to internal controls - As of June **30**, **2020**, disclosure controls and procedures were deemed effective by the Principal Executive Officer and Principal Financial Officer[201](index=201&type=chunk) - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter[202](index=202&type=chunk) PART II. OTHER INFORMATION This part includes additional disclosures not covered in the financial statements, such as equity sales and exhibits [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=40&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details the company's share repurchase program and the number of shares remaining available for repurchase - A share repurchase program, authorized for up to **1,250,000 shares**, had no purchases in Q1 **2020**[204](index=204&type=chunk) - As of June **30**, **2020**, **986,750 shares** have been purchased, with **263,250 shares** remaining available under the program[204](index=204&type=chunk) [ITEM 6. EXHIBITS](index=40&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form **10-Q**, including corporate governance documents and executive certifications - The exhibits include various corporate governance documents such as Certificates of Restatement of Articles of Incorporation, Bylaws, and Certificates of Designation for different series of preferred stock[205](index=205&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk) - Key operational agreements like the Advisory Agreement with Pillar Income Asset Management, Inc. are also filed[208](index=208&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer (pursuant to Rules **13a-14** and **15d-14**, and **18** U.S.C. **1350**) are included[209](index=209&type=chunk)[210](index=210&type=chunk)

Real Estate Transactions - The company sold 18.7 acres of land for an aggregate sales price of $5.7 million, recognizing a gain of $4.1 million during the three months ended March 31, 2020[116]. - The company acquired 100% of the membership interest in EQK Portage, LLC for a total purchase price of $5.4 million, consisting of $2.0 million in cash and a $3.4 million note payable with a 10% interest rate[116]. - The company is actively involved in acquiring existing income-producing properties and developing new properties on owned or acquired land[115]. - The company’s investment strategy includes entering into partnerships with various investors to acquire income-producing properties or land[119]. - The company received aggregate sales proceeds of $5.6 million from the sale of land during the three months ended March 31, 2020, compared to $8.7 million for the same period in 2019[166]. Property Ownership and Development - As of March 31, 2020, the company owned 1,657 units in ten residential apartment communities and seven commercial properties, totaling approximately 1.7 million rentable square feet[118]. - The company owns approximately 1,982 acres of land held for development across eight states[118]. - The company advanced $0.768 million toward various notes receivable and invested approximately $7.7 million for the development of new properties during the three months ended March 31, 2020[165]. Financial Performance - For the three months ended March 31, 2020, the company reported net income applicable to common shares of $2.9 million or $0.18 per diluted earnings per share, compared to a net loss of $6.1 million or $0.38 per diluted earnings per share for the same period in 2019[147]. - Rental and other property revenues were $11.9 million for the three months ended March 31, 2020, with $7.9 million from commercial and $4.0 million from residential segments[149]. - For the quarter ended March 31, 2020, the company reported income before income taxes of $4.6 million, primarily driven by an unrealized gain in foreign currency of $7.8 million, which is not taxable[175]. Operating Expenses and Income - Property operating expenses increased by $0.3 million to $6.3 million for the three months ended March 31, 2020, primarily due to a $0.5 million increase in real estate taxes[150]. - Depreciation and amortization increased by $0.3 million to $3.4 million during the three months ended March 31, 2020, attributed to an increase in ownership of residential apartments[151]. - Interest income was $5.8 million for the three months ended March 31, 2020, a decrease of $0.4 million compared to the same period in 2019[154]. Debt and Financing - The company finances acquisitions primarily through operating cash flow, proceeds from land sales, and debt financing, mainly through property-specific first-lien mortgage loans[119]. - The company has no near-term debt maturities, which it believes mitigates adverse impacts on financing activities and credit ratings[112]. - As of March 31, 2020, the outstanding notes payable balance was $267.3 million, with $263.6 million at fixed interest rates and $3.7 million at a variable interest rate of 9.75%[177]. - A 100 basis point increase in variable interest rates is estimated to increase total annual interest costs by $0.01 million and decrease earnings per share by $0.001[177]. - The company mitigates variable rate exposure through long-term fixed rate HUD financing on residential apartment complexes, with a weighted average borrowing rate of approximately 5.1% as of March 31, 2020[178]. - The company aims to limit the impact of interest rate changes on earnings and cash flows by borrowing primarily at fixed rates or the lowest available variable rates[176]. Cash Flow and Liquidity - The decrease in cash flow from financing activities for the three months ended March 31, 2020, was primarily due to a payment on bond principal of $11.6 million[168]. - The company’s principal liquidity needs include funding normal recurring expenses, meeting debt service obligations, and funding capital expenditures[161]. Market Conditions - Revenues from property operations are expected to fluctuate with inflationary changes in real estate costs, affecting sales values and gains from property sales[171]. - The company engages in business transactions with related parties, which may not always be favorable due to the absence of arm's length negotiations[120].