[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)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock ARL NYSE FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 001-15663 AMERICAN REALTY I ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-15663 American Realty Investors, Inc. (Exact name of registrant as specified in its charter) Nevada 75-2847135 (State or other jurisdiction of Incorporation or organization) (IRS ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) The company's unaudited statements show a slight asset increase, a significant shift from net income to net loss, and negative operating cash flow Consolidated Balance Sheet Summary (in thousands) | Balance Sheet Items | September 30, 2019 (unaudited) | December 31, 2018 (audited) | | :--- | :--- | :--- | | Total real estate, net | $379,990 | $381,043 | | Total assets | $832,362 | $826,149 | | Total liabilities | $533,901 | $505,022 | | Total shareholders' equity | $298,461 | $321,127 | Consolidated Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Rental and other property revenues | $11,943 | $33,409 | $35,712 | $96,099 | | Net (loss) income | ($9,450) | $22,616 | ($19,799) | $28,526 | | Net (loss) income applicable to common shares | ($7,571) | $20,126 | ($16,496) | $24,870 | | (Loss) earnings per share - diluted | ($0.47) | $1.21 | ($1.03) | $1.50 | Consolidated Statement of Cash Flows Summary (Nine Months Ended, in thousands) | Cash Flow Activity | September 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Net cash (used in) operating activities | ($8,801) | ($11,215) | | Net cash (used in) investing activities | ($16,782) | ($71,916) | | Net cash provided by financing activities | $18,908 | $91,031 | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail the company's organization, accounting policies, the VAA joint venture's impact, real estate transactions, debt composition, and segment performance - The company is externally managed by Pillar Income Asset Management, Inc ("Pillar"), which handles day-to-day operations, including locating and recommending real estate investments and arranging financing[19](index=19&type=chunk) - In November 2018, the company's subsidiary TCI formed a joint venture, Victory Abode Apartments, LLC ("VAA"), with Macquarie Group, contributing a portfolio of 49 apartment complexes and now accounts for its **50% interest** using the equity method[23](index=23&type=chunk)[46](index=46&type=chunk) - During Q3 2019, the company sold 16.15 acres of land for a total of **$7.0 million**, recognizing a gain of approximately **$5.1 million**[53](index=53&type=chunk)[54](index=54&type=chunk) - As of September 30, 2019, the company had **$120.3 million** in notes and interest receivable from related parties, net of allowances[63](index=63&type=chunk) - In July 2019, the company's subsidiary SPC issued Series C bonds for **NIS 275 million (approx. $78.1 million)**, using proceeds to pay off **$41.5 million** in mortgage debt and incurring a **$5.2 million loss** on debt extinguishment[56](index=56&type=chunk)[71](index=71&type=chunk)[76](index=76&type=chunk) [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) Management attributes decreased revenue and a net loss to the VAA joint venture deconsolidation and a foreign currency loss, outlining a liquidity strategy involving asset sales and refinancing [Results of Operations](index=34&type=section&id=Results%20of%20Operations) The third quarter comparison shows significantly lower revenue and a net loss of $7.6 million, driven by the VAA deconsolidation, a foreign currency loss, and a loss on debt extinguishment Q3 2019 vs Q3 2018 Performance (in millions) | Metric | Q3 2019 | Q3 2018 | Change | | :--- | :--- | :--- | :--- | | Rental and other property revenues | $11.9 | $33.5 | ($21.6) | | Property operating expenses | $5.9 | $15.9 | ($10.0) | | Net (loss) income applicable to common shares | ($7.6) | $20.1 | ($27.7) | - The primary reason for the sharp decline in revenues and property operating expenses was the deconsolidation of 49 residential apartment properties sold into the VAA Joint Venture during the fourth quarter of 2018[152](index=152&type=chunk)[153](index=153&type=chunk) - A foreign currency transaction loss of **$5.2 million** was recorded in Q3 2019, an increase of **$3.9 million** from Q3 2018, due to the unfavorable exchange rate on its Israeli Shekel-denominated bonds[160](index=160&type=chunk) - The company recognized a **$5.2 million loss** on debt extinguishment in Q3 2019 related to the prepayment of a **$41.5 million** mortgage on a commercial building[161](index=161&type=chunk) [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) The company anticipates operating cash flow will be insufficient to meet all obligations and plans to sell assets and refinance debt to ensure liquidity - Management explicitly states that available cash from property operations may not be sufficient to meet all cash requirements and that the company intends to sell assets and refinance debt to meet its liquidity needs[180](index=180&type=chunk) Cash Flow Summary (Nine Months Ended, in thousands) | Cash Flow Activity | September 30, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Net cash (used in) operating activities | ($8,801) | ($11,215) | | Net cash (used in) investing activities | ($16,782) | ($71,916) | | Net cash provided by financing activities | $18,908 | $91,031 | - Financing activities in the first nine months of 2019 included receiving **$78.1 million** from a new bond issuance and making payments of **$21.7 million** on bond principal and **$41.5 million** on mortgage debt[185](index=185&type=chunk) [Quantitative and Qualitative Disclosures About Market Risks](index=39&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risks) The company's primary market risk is interest rate changes, which is mitigated as the vast majority of its debt is at fixed rates - The company's exposure to interest rate risk is limited, as only **$4.4 million** of its **$257 million** in notes payable carried variable interest rates as of September 30, 2019[192](index=192&type=chunk) - A 100 basis point increase in variable interest rates would increase total annual interest cost by an estimated **$0.05 million**[192](index=192&type=chunk) [Controls and Procedures](index=40&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were **effective** as of the end of the reporting period[195](index=195&type=chunk) - **No material changes** to the company's internal control over financial reporting were identified during the most recent fiscal quarter[196](index=196&type=chunk) PART II. OTHER INFORMATION [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, noting no shares were repurchased in Q1 2019 and 263,250 shares remain available for repurchase - The company has a share repurchase program with authorization for up to **1,250,000 shares**, which has no termination date[197](index=197&type=chunk) - **No shares were repurchased** during the first quarter of 2019, and as of September 30, 2019, **263,250 shares** may still be purchased under the program[197](index=197&type=chunk) [Exhibits](index=41&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, key agreements, and required officer certifications - The report includes a list of filed exhibits, such as corporate governance documents and the advisory agreement with Pillar Income Asset Management, Inc[199](index=199&type=chunk)[208](index=208&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to SEC rules and the Sarbanes-Oxley Act of 2002 are filed as exhibits[209](index=209&type=chunk)[210](index=210&type=chunk)

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Presents ARL's unaudited consolidated financial statements and notes for periods ended June 30, 2019, and December 31, 2018 [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) | Metric | June 30, 2019 (thousands) | December 31, 2018 (thousands) | Change (thousands) | | :---------------------- | :------------------------ | :---------------------------- | :----------------- | | Total Assets | $817,553 | $826,149 | $(8,596) | | Total Liabilities | $506,887 | $505,022 | $1,865 | | Total Shareholders' Equity | $310,666 | $321,127 | $(10,461) | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) | Metric (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Rental and other property revenues | $11,840 | $31,607 | $23,769 | $62,690 | | Net operating (loss) income | $(4,377) | $3,617 | $(6,112) | $8,535 | | Net (loss) income attributable to American Realty Investors, Inc. | $(2,778) | $5,854 | $(8,925) | $5,194 | | Net (loss) income applicable to common shares | $(2,778) | $5,629 | $(8,925) | $4,744 | | (Loss) earnings per share - basic | $(0.17) | $0.35 | $(0.56) | $0.30 | [Consolidated Statement of Shareholders' Equity](index=5&type=section&id=Consolidated%20Statement%20of%20Shareholders'%20Equity) | Metric (thousands) | December 31, 2018 | June 30, 2019 | | :----------------------------------------------- | :---------------- | :------------ | | Total Equity | $321,127 | $310,666 | | Net loss (6 months ended June 30, 2019) | N/A | $(10,349) | | Retained Earnings | $179,666 | $170,741 | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) | Metric (thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------------- | :----------------------------- | :----------------------------- | | Net (loss) income | $(10,349) | $5,910 | | Total comprehensive (loss) income | $(10,349) | $5,910 | | Comprehensive (loss) income attributable to American Realty Investors, Inc. | $(8,925) | $5,194 | [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) | Metric (thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash (used in) provided by operating activities | $(15,490) | $2,946 | | Net cash (used in) investing activities | $(7,910) | $(51,838) | | Net cash (used in) provided by financing activities | $(968) | $53,122 | | Net increase in cash and cash equivalents | $(24,368) | $4,230 | | Cash and cash equivalents, end of period | $82,247 | $92,768 | [Notes to Consolidated Financial Statements](index=8&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) [NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION](index=8&type=section&id=NOTE%201.%20ORGANIZATION%20AND%20BASIS%20OF%20PRESENTATION) ARL, a Nevada corporation, invests in real estate, is externally managed, has related party ownership, and presents unaudited 10-Q financials - ARL is a Nevada corporation, formed in **1999**, with common stock traded on the NYSE under "ARL". Over **80%** of ARL's stock is owned by related party entities[15](index=15&type=chunk) - ARL owns approximately **78%** of Transcontinental Realty Investors, Inc. (TCI), which in turn owns approximately **81.25%** of Income Opportunity Realty Investors, Inc. (IOR)[16](index=16&type=chunk) - Pillar Income Asset Management, Inc. ("Pillar") serves as the external Advisor and Cash Manager, responsible for day-to-day operations, investment opportunities, and financing arrangements[18](index=18&type=chunk) - The company's income-producing properties at June 30, 2019, included **seven commercial properties (1.7 million sq ft)**, **nine residential apartment communities (1,512 units)**, approximately **2,293 acres** of land, and **fifty-one residential apartment communities (9,643 units)** owned by its **50%** investee VAA[24](index=24&type=chunk) [NOTE 2. INVESTMENT IN VAA](index=12&type=section&id=NOTE%202.%20INVESTMENT%20IN%20VAA) ARL's TCI subsidiary formed a **50/50** VAA joint venture with Macquarie for multifamily housing, accounted for by equity method - TCI formed a **50/50** joint venture, Victory Abode Apartments, LLC (VAA), with Macquarie Group in November **2018**, contributing **49 income-producing apartment complexes** and **3 development projects**[22](index=22&type=chunk)[43](index=43&type=chunk) - The company accounts for its investment in VAA under the equity method, reflecting its share of VAA's net income or loss in its consolidated statements[44](index=44&type=chunk) | VAA Financials (thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :----------------------------- | | Total revenue | $28,927 | $56,328 | | Net loss | $(16,035) | $(33,781) | | Loss from VAA (ARL's share) | $(236) | $(1,291) | [NOTE 3. REAL ESTATE ACTIVITY](index=13&type=section&id=NOTE%203.%20REAL%20ESTATE%20ACTIVITY) Net real estate assets increased to **$383.4 million** by June 30, 2019, driven by land sale gains and a multifamily property loss | Real Estate Investment (thousands) | June 30, 2019 | December 31, 2018 | | :--------------------------------- | :------------ | :---------------- | | Apartments | $119,982 | $126,274 | | Commercial properties | $228,206 | $224,162 | | Land held for development | $77,245 | $83,641 | | Real estate held for sale | $14,737 | — | | Total real estate, net of depreciation | $383,422 | $381,043 | - During the three months ended June 30, 2019, the company sold **12.16 acres** of land in Farmers Branch, Texas for **$3.5 million** (gain of **$0.7 million**), **6.25 acres** in Nashville, Tennessee for **$2.3 million** (gain of **$0.9 million**), and **23.24 acres** in Fort Worth, Texas for **$1.8 million** (gain of **$0.5 million**)[47](index=47&type=chunk)[48](index=48&type=chunk) - A multifamily residential property in Mary Ester, Florida, was sold for **$3.1 million**, resulting in a loss of approximately **$0.08 million**[49](index=49&type=chunk) - TCI invested **$17.0 million** in apartment construction/predevelopment and capitalized **$0.4 million** in interest costs during the six months ended June 30, 2019[51](index=51&type=chunk) [NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION](index=14&type=section&id=NOTE%204.%20SUPPLEMENTAL%20CASH%20FLOW%20INFORMATION) Cash paid for interest significantly decreased to **$16.9 million** in H1 2019, while total cash and cash equivalents also decreased | Metric (thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------------- | :----------------------------- | :----------------------------- | | Cash paid for interest | $16,879 | $31,029 | | Cash and cash equivalents, and restricted cash | $82,247 | $92,768 | - Restricted cash includes funds for contractual obligations like reserve replacement deposits, tax and insurance escrow, and payments to the Bond's Trustee[53](index=53&type=chunk) [NOTE 5. NOTES AND INTEREST RECEIVABLE](index=14&type=section&id=NOTE%205.%20NOTES%20AND%20INTEREST%20RECEIVABLE) Net notes and interest receivable increased to **$159.6 million** by June 30, 2019, with **$12.3 million** interest income from related party notes | Metric (thousands) | June 30, 2019 | December 31, 2018 | | :---------------------------------- | :------------ | :---------------- | | Total notes and interest receivable | $173,851 | $140,327 | | Allowance for estimated losses | $(14,269) | $(14,269) | | Total, net | $159,582 | $126,058 | - At June 30, 2019, mortgage loans and accrued interest receivable from related parties totaled **$106.1 million**, generating **$12.3 million** in interest income[57](index=57&type=chunk) - During the quarter ended June 30, 2019, the company purchased **$31.9 million** in notes receivables from related parties[57](index=57&type=chunk) [NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES](index=16&type=section&id=NOTE%206.%20INVESTMENT%20IN%20UNCONSOLIDATED%20INVESTEES) ARL holds a **20% interest** in Gruppa Florentina, LLC, which generated **$1.2 million** net income in H1 2019, with ARL's share at **$0.25 million** - The company owns a **20% interest** in Gruppa Florentina, LLC, which is the sole shareholder of Milano Restaurants International Corporation, operating "Me-N-Ed's Pizza Parlors" and other restaurants[61](index=61&type=chunk) | Metric (thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------------------- | :----------------------------- | :----------------------------- | | Revenue (from investees) | $27,869 | $27,195 | | Net income (from investees) | $1,242 | $497 | | Company's 20% proportionate share of earnings | $248 | $99 | [NOTE 7. NOTES AND INTEREST PAYABLE](index=17&type=section&id=NOTE%207.%20NOTES%20AND%20INTEREST%20PAYABLE) Net notes and interest payable increased to **$293.1 million** by June 30, 2019, with **$12.9 million** drawn in construction loans | Metric (thousands) | June 30, 2019 | December 31, 2018 | | :----------------------------------------------- | :------------ | :---------------- | | Total notes payable | $301,231 | $295,535 | | Less: unamortized deferred borrowing costs | $(9,059) | $(9,428) | | Total outstanding notes payable, net | $292,172 | $286,107 | | Accrued Interest | $907 | $861 | | Total notes payable, net and accrued interest | $293,079 | $286,968 | - The company drew **$12.9 million** in construction loans during the six months ended June 30, 2019, for apartment and land developments[63](index=63&type=chunk) [NOTE 8. BONDS AND BONDS INTEREST PAYABLE](index=17&type=section&id=NOTE%208.%20BONDS%20AND%20BONDS%20INTEREST%20PAYABLE) Net outstanding bonds decreased to **$152.4 million** by June 30, 2019, with **$10.4 million** principal paid and an **$8.1 million** foreign currency loss | Metric (thousands) | June 30, 2019 | December 31, 2018 | | :----------------------------------------------- | :------------ | :---------------- | | Total outstanding bonds | $159,386 | $162,716 | | Less: deferred bond issuance costs | $(7,029) | $(8,179) | | Total outstanding bonds, net | $152,357 | $154,537 | | Accrued Interest | $4,971 | $4,037 | | Total outstanding bonds, net and accrued interest | $157,328 | $158,574 | - On January 31, 2019, the company paid **$10.4 million** on bond principal and **$5.8 million** on interest[66](index=66&type=chunk) - A foreign currency exchange loss of **$8.1 million** was recognized for the six months ended June 30, 2019, primarily due to a decrease in the exchange rate of NIS-denominated corporate bonds[66](index=66&type=chunk) [NOTE 9. DEFERRED INCOME](index=18&type=section&id=NOTE%209.%20DEFERRED%20INCOME) The company had **$30.2 million** in deferred gain from related party property sales as of June 30, 2019, due to continuing involvement - The company had **$30.2 million** in deferred gain as of June 30, 2019, from property sales to related parties where full gain recognition was deferred due to continuing involvement[67](index=67&type=chunk) [NOTE 10. RELATED PARTY TRANSACTIONS](index=18&type=section&id=NOTE%2010.%20RELATED%20PARTY%20TRANSACTIONS) The company engages in various related party transactions, with receivables decreasing to **$61.7 million** by June 30, 2019 - Related party transactions include rental income, interest income/expense, G&A costs, commissions, and management fees[68](index=68&type=chunk) | Metric (thousands) | December 31, 2018 | June 30, 2019 | | :---------------------------------- | :---------------- | :------------ | | Related party receivable, beginning | $70,377 | N/A | | Cash transfers | N/A | $17,994 | | Advisory fees | N/A | $(3,091) | | Notes receivable purchased | N/A | $(31,857) | | Related party receivable, ending | N/A | $61,676 | [NOTE 11. OPERATING SEGMENTS](index=18&type=section&id=NOTE%2011.%20OPERATING%20SEGMENTS) Operating segments include commercial, apartments, land, and other, with H1 2019 segment operating income at **$1.8 million** and total real estate assets at **$383.4 million** - The company's operating segments are commercial properties, apartments, land, and other, with performance evaluated based on net operating income and cash flow[70](index=70&type=chunk) | Segment Operating Income (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Commercial Properties | $(1,069) | $(1,050) | $(1,120) | $(1,385) | | Apartments | $10 | $3,465 | $(16) | $6,802 | | Land | $2,388 | $(70) | $4,318 | $1,072 | | Other | $(717) | $(3,817) | $(1,346) | $(6,973) | | Total Segment Operating Income (Loss) | $612 | $(1,472) | $1,836 | $(484) | | Real Estate Assets by Segment (thousands) | June 30, 2019 | June 30, 2018 | | :---------------------------------------- | :------------ | :------------ | | Commercial Properties | $152,863 | $135,288 | | Apartments | $151,688 | $762,410 | | Land | $78,871 | $111,899 | | Other | — | $647 | | Total Segment Assets | $383,422 | $1,010,244 | [NOTE 12. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY](index=21&type=section&id=NOTE%2012.%20COMMITMENTS%20AND%20CONTINGENCIES%20AND%20LIQUIDITY) Management plans asset sales, refinancing, and borrowings to meet liquidity needs, while facing litigations including a new breach of fiduciary duty lawsuit - Management intends to sell land and income-producing real estate, refinance, and obtain additional borrowings to meet liquidity requirements, as property operations may not generate sufficient cash[80](index=80&type=chunk)[166](index=166&type=chunk) - The company is the primary guarantor on a **$39.1 million** mezzanine loan between UHF and a lender[83](index=83&type=chunk) - A new lawsuit was filed on February 4, 2019, against TCI, ARL, Pillar, and certain officers/directors, alleging breach of fiduciary duty and seeking unspecified damages related to property sales/exchanges between the companies and IOR[91](index=91&type=chunk) - The company is vigorously defending against a lawsuit by the Clapper Parties seeking damages from ARL related to a stock exchange with a formerly owned entity, ART[85](index=85&type=chunk) [NOTE 13. EARNINGS PER SHARE](index=22&type=section&id=NOTE%2013.%20EARNINGS%20PER%20SHARE) Basic EPS is calculated from net income and common shares, with Series A preferred stock considered for diluted EPS, though **1.8 million** shares are non-dividend paying - Basic EPS is calculated by dividing net income available to common shareholders by the weighted-average common shares outstanding[92](index=92&type=chunk) - As of June 30, 2019, there are **1,800,614 shares** issued and **614 shares** outstanding of Series A **10.0%** cumulative convertible preferred stock, convertible into common stock at **90%** of the average daily closing price[93](index=93&type=chunk) - **1,800,000 shares** of Series A preferred stock are held by ARL and its subsidiaries, and no dividends are paid on these shares[93](index=93&type=chunk) [NOTE 14. SUBSEQUENT EVENTS](index=23&type=section&id=NOTE%2014.%20SUBSEQUENT%20EVENTS) On July 28, 2019, the company issued **$78 million** Series C bonds on TASE at **4.65%** interest, using **$42 million** to pay off a mortgage - On July 28, 2019, the company issued Series C bonds for NIS **275 million** (approx. **$78 million**) on the TASE, with a **4.65%** annual interest rate, collateralized by a commercial building[95](index=95&type=chunk) - Approximately **$42 million** of the Series C bond proceeds were used on August 9, 2019, to pay off a commercial building mortgage[95](index=95&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=24&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial condition, operational results, key drivers, accounting policies, and future outlook, including liquidity and market risks [Forward-Looking Statements and Risk Factors](index=24&type=section&id=Forward-Looking%20Statements%20and%20Risk%20Factors) - 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[98](index=98&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/acquisition, timing/amount of property sales, and managing growth[99](index=99&type=chunk) - There have been no changes from the risk factors previously described in the Company's Form 10-K for the fiscal year ended December 31, 2018[101](index=101&type=chunk) [Overview](index=25&type=section&id=Overview) - ARL is an externally advised and managed real estate investment company owning a diverse portfolio of income-producing properties (residential, office, commercial) and land for development[103](index=103&type=chunk) - During the six months ended June 30, 2019, the company sold **63.94 acres** of land for **$16.3 million** (purchased **9.41 acres** for **$2.8 million**) and sold a multifamily residential property for **$3.1 million** (loss of **$0.08 million**)[104](index=104&type=chunk) - As of June 30, 2019, the company owned **1,512 units** in **nine residential apartment communities**, **seven commercial properties (1.7 million sq ft)**, and approximately **2,293 acres** of land for development across **eight states**[107](index=107&type=chunk) - Acquisitions are primarily financed through operating cash flow, proceeds from property sales, and debt financing (property-specific first-lien mortgage loans)[108](index=108&type=chunk) - The company historically engages in related party transactions, which may not always be on an arm's length basis or beneficial to the business[110](index=110&type=chunk) [Critical Accounting Policies](index=26&type=section&id=Critical%20Accounting%20Policies) - Consolidated financial statements include the company, its subsidiaries, and entities where it has a controlling interest or is the primary beneficiary of a Variable Interest Entity (VIE)[114](index=114&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[116](index=116&type=chunk) - Real estate acquisitions involve assessing the fair value of tangible and intangible assets, allocating purchase price, and capitalizing costs related to planning, development, leasing, and construction[118](index=118&type=chunk)[120](index=120&type=chunk) - Impairment losses on long-lived assets are recognized if the carrying amount is not recoverable and exceeds fair value, based on estimated future cash flows[122](index=122&type=chunk) - Rental income for commercial leases is recognized on a straight-line basis, while residential leases are recognized monthly as earned. Revenue from real estate sales is recognized based on ASC Topic **360-20** criteria, deferring gains if continuing involvement exists[125](index=125&type=chunk)[127](index=127&type=chunk)[128](index=128&type=chunk) [Real Estate](index=27&type=section&id=Real%20Estate) - Upon acquisition, fair value is assessed for acquired tangible and intangible assets (land, buildings, tenant improvements, leases) and purchase price is allocated[118](index=118&type=chunk) - Costs related to planning, developing, leasing, and constructing a property are capitalized and classified as Real Estate, including pre-construction, development, construction, interest, and real estate taxes[120](index=120&type=chunk) - Capitalization ceases when a building is substantially complete and ready for its intended use, or no later than **one year** from the cessation of major construction activity[120](index=120&type=chunk) [Depreciation and Impairment](index=27&type=section&id=Depreciation%20and%20Impairment) - Real estate is stated at depreciated cost, with depreciation computed on a straight-line basis over useful lives (buildings/improvements: **10-40 years**; furniture/fixtures/equipment: **5-10 years**)[31](index=31&type=chunk)[121](index=121&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 cash flows[31](index=31&type=chunk)[122](index=122&type=chunk) [Investments in Unconsolidated Real Estate Ventures](index=27&type=section&id=Investments%20in%20Unconsolidated%20Real%20Estate%20Ventures) - Investments in unconsolidated real estate ventures are accounted for under the equity method when the company exercises significant influence but not control[123](index=123&type=chunk) - These investments are initially recorded at cost and subsequently adjusted for equity in earnings, cash contributions, and distributions[123](index=123&type=chunk) [Recognition of Rental Income](index=28&type=section&id=Recognition%20of%20Rental%20Income) - Rental income for commercial property leases is recognized on a straight-line basis over the lease terms[125](index=125&type=chunk) - Reimbursements of operating costs from commercial tenants (common area maintenance, real estate taxes) are recognized as revenue in the period incurred[126](index=126&type=chunk) - Rental income for residential property leases is recorded when due and recognized monthly as earned, which is not materially different from a straight-line basis for typical **one-year** leases[127](index=127&type=chunk) [Revenue Recognition on the Sale of Real Estate](index=28&type=section&id=Revenue%20Recognition%20on%20the%20Sale%20of%20Real%20Estate) - Sales and associated gains/losses of real estate are recognized in accordance with ASC Topic **360-20**, "Property, Plant and Equipment – Real Estate Sale"[128](index=128&type=chunk) - If sales criteria for the full accrual method are not met (e.g., due to continuing involvement), gain recognition is deferred, and alternative methods (finance, leasing, deposit, installment, cost recovery) are applied until criteria are met[128](index=128&type=chunk) [Non-Performing Notes Receivable](index=28&type=section&id=Non-Performing%20Notes%20Receivable) - A note receivable is considered non-performing when its maturity date has passed without principal repayment and the borrower is not making interest payments according to the agreement[129](index=129&type=chunk) [Interest Recognition on Notes Receivable](index=28&type=section&id=Interest%20Recognition%20on%20Notes%20Receivable) - Interest income on notes receivable is recorded as earned in accordance with the terms of the related loan agreements[130](index=130&type=chunk) [Allowance for Estimated Losses](index=28&type=section&id=Allowance%20for%20Estimated%20Losses) - The collectability of notes receivable is periodically assessed by evaluating borrower cash flow projections to determine repayment sufficiency[131](index=131&type=chunk) - Impairments are recognized when it is probable that principal and interest will not be received, with the amount based on the fair value of the partnership's real estate collateral[131](index=131&type=chunk) [Fair Value of Financial Instruments](index=28&type=section&id=Fair%20Value%20of%20Financial%20Instruments) - Fair value measurements follow ASC Topic **820**, defining fair value as the price to sell an asset or transfer a liability in an orderly transaction[132](index=132&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** (unobservable inputs significant to measurement)[134](index=134&type=chunk)[135](index=135&type=chunk) [Related Parties](index=29&type=section&id=Related%20Parties) - Related parties are defined by ASC Topic **805**, including entities with shared ownership, management, or significant influence, where one party might be prevented from fully pursuing its separate interests[136](index=136&type=chunk) [Results of Operations - Three Months Ended June 30, 2019 vs 2018](index=29&type=section&id=Results%20of%20Operations%20-%20Three%20Months%20Ended%20June%2030,%202019%20vs%202018) | Metric (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change (thousands) | | :----------------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Net (loss) income applicable to common shares | $(2,778) | $5,629 | $(8,407) | | (Loss) earnings per share - diluted | $(0.17) | $0.34 | $(0.51) | [Revenues](index=29&type=section&id=Revenues) | Metric (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Rental and other property revenues | $11,840 | $31,607 | $(19,767) | - The decrease in rental revenue is primarily due to the deconsolidation of **49 residential apartment properties** sold into the VAA Joint Venture in Q**4 2018**; these revenues are now part of income from unconsolidated investments[9](index=9&type=chunk)[139](index=139&type=chunk) [Expenses](index=29&type=section&id=Expenses) | Metric (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Property operating expenses | $7,323 | $15,550 | $(8,227) | | Depreciation and amortization | $3,439 | $6,504 | $(3,065) | | General and administrative | $4,127 | $2,954 | $1,173 | - Property operating expense decrease was driven by lower salary, real estate taxes, management fees, and other operating expenses due to VAA JV deconsolidation[9](index=9&type=chunk)[140](index=140&type=chunk) - General and administrative expense increase was due to higher fees paid to advisors (**$0.9 million**), franchise taxes (**$0.1 million**), and professional fees (**$0.2 million**)[9](index=9&type=chunk)[143](index=143&type=chunk) [Other Income (Expense)](index=30&type=section&id=Other%20Income%20(Expense)) | Metric (thousands) | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Interest income | $6,505 | $4,882 | $1,623 | | Other income | $3,364 | $7,537 | $(4,173) | | Mortgage and loan interest | $(9,408) | $(15,907) | $6,499 | | Foreign currency transaction (loss) gain | $(2,325) | $5,889 | $(8,214) | - Interest income increase was primarily from receivables owed by advisors (**$1.5 million**)[9](index=9&type=chunk)[144](index=144&type=chunk) - Other income decrease was due to **$3.1 million** from tax increment incentives in **2019** vs. **$6.6 million** insurance proceeds in **2018**[9](index=9&type=chunk)[145](index=145&type=chunk) - Foreign currency loss was due to a decrease in the NIS to USD exchange rate (**3.63 to 3.58**)[9](index=9&type=chunk)[147](index=147&type=chunk) [Loss/Gain on Property Sales](index=30&type=section&id=Loss/Gain%20on%20Property%20Sales) - A loss of **$0.08 million** was recorded from the sale of a multifamily residential property in Mary Ester, Florida, for **$3.1 million**[149](index=149&type=chunk) - Gain on land sales was **$2.5 million** from selling **41.6 acres** of land for **$7.6 million**, compared to no land sales in the prior period[150](index=150&type=chunk) [Results of Operations - Six Months Ended June 30, 2019 vs 2018](index=31&type=section&id=Results%20of%20Operations%20-%20Six%20Months%20Ended%20June%2030,%202019%20vs%202018) | Metric (thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change (thousands) | | :----------------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Net (loss) income applicable to common shares | $(8,925) | $4,744 | $(13,669) | | (Loss) earnings per share - diluted | $(0.56) | $0.28 | $(0.84) | [Revenues](index=31&type=section&id=Revenues) | Metric (thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Rental and other property revenues | $23,769 | $62,690 | $(38,921) | - The decrease in rental revenue is primarily due to the deconsolidation of **49 residential apartment properties** sold into the VAA Joint Venture in Q**4 2018**; these revenues are now part of income from unconsolidated investments[9](index=9&type=chunk)[153](index=153&type=chunk) [Expenses](index=31&type=section&id=Expenses) | Metric (thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Property operating expenses | $13,320 | $29,974 | $(16,654) | | Depreciation and amortization | $6,548 | $12,895 | $(6,347) | | General and administrative | $6,732 | $5,295 | $1,437 | - Property operating expense decrease was driven by lower salary, real estate taxes, management fees, and other operating expenses due to VAA JV deconsolidation[9](index=9&type=chunk)[154](index=154&type=chunk) - General and administrative expense increase was due to higher fees paid to advisors (**$1.3 million**) and franchise taxes (**$0.1 million**)[9](index=9&type=chunk)[156](index=156&type=chunk) [Other Income (Expense)](index=31&type=section&id=Other%20Income%20(Expense)) | Metric (thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Change (thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | :----------------- | | Interest income | $12,658 | $9,991 | $2,667 | | Other income | $7,031 | $9,438 | $(2,407) | | Mortgage and loan interest | $(19,376) | $(31,631) | $12,255 | | Foreign currency transaction (loss) gain | $(8,143) | $7,645 | $(15,788) | - Interest income increase was primarily from receivables owed by advisors (**$2.7 million**)[9](index=9&type=chunk)[157](index=157&type=chunk) - Other income included a **$3.6 million** gain from deferred income and **$3.1 million** from tax increment incentives in **2019**, compared to **$6.6 million** insurance proceeds and **$2.2 million** miscellaneous income in **2018**[9](index=9&type=chunk)[158](index=158&type=chunk) - Foreign currency loss was due to a decrease in the NIS to USD exchange rate (**3.64 to 3.58**)[9](index=9&type=chunk)[160](index=160&type=chunk) [Loss/Gain on Property Sales](index=32&type=section&id=Loss/Gain%20on%20Property%20Sales) - A loss of **$0.08 million** was recorded from the sale of a multifamily residential property for **$3.1 million**[163](index=163&type=chunk) - Gain on land sales increased by **$3.4 million** to **$4.7 million**, from selling **63.9 acres** for **$16.3 million**, compared to **$1.3 million** gain from selling **112.2 acres** for **$7.2 million** in the prior year[164](index=164&type=chunk) [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) - Primary liquidity needs include funding normal recurring expenses, debt service, capital expenditures, development costs, and property acquisitions[164](index=164&type=chunk) - Primary cash sources are property operations, proceeds from land/property sales, collection of notes/related party receivables, refinancing, and additional borrowings[165](index=165&type=chunk) - Management expects property operations may not be sufficient and plans to sell assets, refinance/extend debt, and seek additional borrowings to meet liquidity requirements[166](index=166&type=chunk) [Cash Flow Summary](index=33&type=section&id=Cash%20Flow%20Summary) | Metric (thousands) | 6 Months Ended June 30, 2019 | 6 Months Ended June 30, 2018 | Variance (thousands) | | :----------------------------------------------- | :--------------------------- | :--------------------------- | :------------------- | | Net cash (used in) provided by operating activities | $(15,490) | $2,946 | $(18,436) | | Net cash (used in) investing activities | $(7,910) | $(51,838) | $43,928 | | Net cash (used in) provided by financing activities | $(968) | $53,122 | $(54,090) | - Investing activities included **$0.95 million** advanced to notes receivables, **$2.8 million** for land acquisition, and **$21.5 million** for new property development/improvements in H**1 2019**[169](index=169&type=chunk) - Financing activities in H**1 2019** included **$10.4 million** bond principal payment and **$3.4 million** note payments, offset by **$12.9 million** in note proceeds. In H**1 2018**, it included **$39.4 million** from Series B Bonds and **$44.7 million** from notes, offset by **$28.5 million** in note payments[171](index=171&type=chunk) [Environmental Matters](index=33&type=section&id=Environmental%20Matters) - The company may be liable for environmental remediation costs related to hazardous substances, but management is not aware of any material adverse environmental liability[172](index=172&type=chunk)[173](index=173&type=chunk) [Inflation](index=33&type=section&id=Inflation) - The effects of inflation on operations are not quantifiable, but revenues from property operations and sales values tend to fluctuate proportionately[173](index=173&type=chunk) - Inflation also affects interest rates, earnings from short-term investments, and the cost of new financings and variable interest rate debt[173](index=173&type=chunk) [Tax Matters](index=34&type=section&id=Tax%20Matters) - ARL is a member of the May Realty Holdings, Inc. (MRHI) consolidated group for federal income tax reporting, with a tax sharing agreement with IOR and TCI[174](index=174&type=chunk) - Financial statement income differs from taxable income due to accounting for investees, asset sales, depreciation, amortization, and allowance for estimated losses[175](index=175&type=chunk) - ARL had a loss for federal income tax purposes for the six months ended June 30, 2019[175](index=175&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risks](index=34&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risks) The company faces interest rate risk from long-term debt, mitigated by fixed-rate borrowing; a **100 bps** increase would raise annual interest cost by **$0.2 million** - The company is exposed to interest rate changes primarily from long-term debt used for property acquisitions and loans[176](index=176&type=chunk) - Management's objectives are to limit interest rate impact on earnings/cash flows and lower borrowing costs, primarily by borrowing at fixed rates or variable rates with conversion options[176](index=176&type=chunk) | Metric | Value (June 30, 2019) | Impact of 100 bps increase | | :----------------------------------- | :-------------------- | :------------------------- | | Total notes payable | $301 million | N/A | | Debt subject to variable interest rates | $41.6 million | N/A | | Estimated annual interest cost increase | N/A | $0.2 million | | Estimated loss per share increase | N/A | $0.01 | - 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 **7.2%** at June 30, 2019[177](index=177&type=chunk) [Item 4. Controls and Procedures](index=34&type=section&id=Item%204.%20Controls%20and%20Procedures) As of June 30, 2019, disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - As of June 30, 2019, disclosure controls and procedures were effective in providing reasonable assurance for timely and accurate financial reporting[178](index=178&type=chunk) - There have been no material changes in internal control over financial reporting during the most recent fiscal quarter[179](index=179&type=chunk) PART II. OTHER INFORMATION [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=35&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) A share repurchase program authorizes up to **1,250,000** common shares; no shares were purchased in Q1 2019, leaving **263,250** available - A share repurchase program, authorized in **2000** and increased in **2010**, allows for the repurchase of up to **1,250,000 shares** of common stock[181](index=181&type=chunk) - No shares were purchased under this program during the first quarter of **2019**[181](index=181&type=chunk) - As of June 30, 2019, **986,750 shares** have been purchased, with **263,250 shares** remaining available under the program[181](index=181&type=chunk) [Item 6. Exhibits](index=36&type=section&id=Item%206.%20Exhibits) Lists Form 10-Q exhibits, including corporate governance documents, advisory agreements, and Sarbanes-Oxley Act certifications - The exhibits include corporate governance documents such as the Certificate of Restatement of Articles of Incorporation, Articles of Amendment, and Bylaws[183](index=183&type=chunk) - Key agreements like the Advisory Agreement between American Realty Investors, Inc. and Pillar Income Asset Management, Inc. are also listed[183](index=183&type=chunk) - Certifications by the Principal Executive Officer and Principal Financial Officer (**31.1***, **31.2***) and pursuant to **18 U.S.C. 1350** (**32.1***) are filed herewith[185](index=185&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 001-15663 Nevada 75-2847135 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 1 ...

PART I [Item 1. Business](index=4&type=section&id=Item%201.%20Business) ARL is a real estate investment company focused on acquiring, developing, and owning income-producing properties - ARL is a Nevada corporation, formed in 1999, headquartered in Dallas, Texas, and its common stock trades on the NYSE under the symbol 'ARL'[5](index=5&type=chunk) - ARL and a subsidiary own approximately **77.68%** of Transcontinental Realty Investors, Inc. (TCI), whose financial results are consolidated with ARL[6](index=6&type=chunk)[7](index=7&type=chunk) - Pillar Income Asset Management, Inc. (Pillar) serves as ARL's external Advisor and Cash Manager, responsible for identifying investment opportunities and arranging financing[8](index=8&type=chunk)[9](index=9&type=chunk) - ARL's primary business involves the acquisition, development, and ownership of income-producing residential and commercial real estate, as well as opportunistic land acquisition[16](index=16&type=chunk) - On November 19, 2018, TCI formed a joint venture, Victory Abode Apartments, LLC (VAA), with Macquarie Group, contributing 49 apartment complexes and 3 development projects, receiving **$236.8 million** cash and recognizing a gain of approximately **$154.1 million**[14](index=14&type=chunk)[26](index=26&type=chunk) Income-Producing Properties at December 31, 2018 | Property Type | Details | | :------------ | :------ | | Commercial | 7 properties (5 office, 2 retail), ~1.7 million sq ft | | Residential | 9 apartment communities, 1,489 units (company-owned) | | Joint Venture | 49 residential apartment communities, 9,192 units (50% owned VAA) | Apartment Projects in Development (December 31, 2018) | Property | Location | No. of Units | Costs to Date ($ thousands) | Total Projected Costs ($ thousands) | | :------- | :------- | :----------- | :-------------------------- | :---------------------------------- | | Sugar Mill III | Addis, LA | 72 | 787 | 11,862 | | Parc at Denham Springs Phase II | Denham Springs, LA | 144 | 6,532 | 18,768 | | Overlook at Allensville Phase II | Sevierville, TN | 144 | 12,646 | 20,244 | | **Total** | | **360** | **19,965** | **50,874** | Undeveloped and Partially Developed Land Holdings (December 31, 2018) | Location | Acquired | Acres | Cost ($ thousands) | Intended Use | | :------- | :------- | :---- | :----------------- | :----------- | | Dallas, TX | 1996-2013 | 20.59 | 1,008 | Mixed use | | Farmers Branch, TX | 2008 | 153.44 | 25,892 | Mixed use | | Kaufman County, TX | 2008 | 16.79 | 1,597 | Multi-family residential | | Kaufman County, TX | 2006 | 1,963.68 | 50,913 | Mixed use | | Various | 1990-2008 | 191.87 | 9,027 | Various | | **Total** | | **2,346.37** | **88,437** | | [Item 1A. Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from tenant health, competition, operating costs, development, and high financial leverage - Cash flow depends on leasing space on favorable terms, with risks including lack of demand, tenant defaults, and oversupply[50](index=50&type=chunk)[51](index=51&type=chunk)[52](index=52&type=chunk) - Competition is high in attracting tenants and acquiring land/properties, with other landlords potentially offering more attractive financial terms[53](index=53&type=chunk)[54](index=54&type=chunk) - Increased operating costs (insurance, utilities, maintenance) may not be offset by rent increases, adversely affecting cash flow and debt service ability[57](index=57&type=chunk) - Development risks include construction delays, cost overruns, failure to obtain permits, and projects not meeting profitability expectations[58](index=58&type=chunk) - Acquisition risks involve high competition, properties failing to perform as expected, and challenges in new markets[59](index=59&type=chunk)[60](index=60&type=chunk) - The company is highly leveraged with approximately **$445 million** in total indebtedness at December 31, 2018, increasing vulnerability to economic downturns[64](index=64&type=chunk) - Inability to access financial markets for capital or refinance maturing debt on favorable terms could adversely affect liquidity and operations[65](index=65&type=chunk)[68](index=68&type=chunk) - An increase in interest rates would raise interest costs on variable-rate debt and could hinder refinancing efforts[71](index=71&type=chunk)[72](index=72&type=chunk) - Real estate investments are illiquid, limiting the company's ability to quickly dispose of properties in response to changing economic conditions[75](index=75&type=chunk)[84](index=84&type=chunk) [Item 1B. Unresolved Staff Comments](index=16&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reported no unresolved staff comments from the SEC - There are no unresolved staff comments[86](index=86&type=chunk) [Item 2. Properties](index=16&type=section&id=Item%202.%20Properties) The company's portfolio includes directly owned properties, land for development, and a 50% interest in a large joint venture - As of December 31, 2018, the portfolio consisted of 16 income-producing properties: 9 apartment communities (1,489 units) and 7 commercial properties (5 office buildings, 2 retail centers)[87](index=87&type=chunk) - The company also owns or controls **2,346 acres** of improved and unimproved land for future development or sale[87](index=87&type=chunk) - Through the VAA joint venture, ARL has a **50% ownership interest** in 49 income-producing properties totaling 9,192 units[87](index=87&type=chunk) Average Annual Rental and Other Property Revenue per Square Foot (December 31, 2018) | Property Type | Revenue per Square Foot | | :------------ | :---------------------- | | Residential Apartment Portfolio | $6.53 | | Commercial Portfolio | $19.80 | | VAA Joint Venture (Residential) | $12.83 | Commercial Lease Expirations (December 31, 2018) | Year of Lease Expiration | Rentable Square Feet Subject to Expiring Leases | Percentage of Total Square Feet | | :----------------------- | :---------------------------------------------- | :------------------------------ | | 2019 | 250,228 | 14.7% | | 2020 | 132,376 | 7.8% | | 2021 | 135,017 | 8.0% | | 2022 | 237,489 | 14.0% | | 2023 | 339,701 | 20.0% | | 2024 | 237,549 | 14.0% | | 2025 | 113,829 | 6.7% | | 2026 | 23,432 | 1.4% | | Thereafter | 56,926 | 3.4% | | **Total** | **1,526,547** | **90%** | [Item 3. Legal Proceedings](index=19&type=section&id=Item%203.%20Legal%20Proceedings) ARL is involved in several legal proceedings, including long-standing litigation and a new breach of fiduciary duty lawsuit - A formerly owned entity has been in litigation since 1999, resulting in a recalculated judgment of approximately **$59 million** against it[94](index=94&type=chunk)[95](index=95&type=chunk)[375](index=375&type=chunk)[376](index=376&type=chunk) - ART filed a suit against a national law firm in 2005, which was dismissed on procedural grounds, and ART has filed an appeal[96](index=96&type=chunk)[377](index=377&type=chunk) - A Final Judgment was entered against Dynex Commercial, Inc., awarding Basic **$0.448 million**, ART **$24.8 million**, and TCI **$19.5 million**[99](index=99&type=chunk)[380](index=380&type=chunk) - In February 2019, the Berger Litigation was filed against TCI, ARL, Pillar, and certain officers/directors, alleging breach of fiduciary duty[102](index=102&type=chunk)[383](index=383&type=chunk) [Item 4. Mine Safety Disclosures](index=21&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) The company states that this item is not applicable - This item is not applicable[104](index=104&type=chunk) PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities](index=22&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%2C%20and%20Issuer%20Purchases%20of%20Equity%20Securities) ARL's common stock trades on the NYSE American, no dividends were paid in 2018, and a share repurchase program is in place - ARL's common stock is listed and traded on the NYSE American under the symbol 'ARL'[106](index=106&type=chunk) - As of March 29, 2019, there were **15,997,076 shares** of common stock outstanding, held by approximately 2,900 stockholders[3](index=3&type=chunk)[106](index=106&type=chunk) - **No dividends** were paid on common stock in 2018, 2017, or 2016, in accordance with the Board's annual dividend policy[107](index=107&type=chunk) - At December 31, 2018, **614 shares** of Series A Preferred Stock were outstanding after significant share purchases and conversions[109](index=109&type=chunk)[110](index=110&type=chunk) - A share repurchase program authorizes the repurchase of up to **1,250,000 shares** of common stock, but no shares were repurchased in 2018 or 2017[114](index=114&type=chunk) ARL Common Stock High and Low Sales Prices (2018 vs. 2017) | Quarter | 2018 High ($) | 2018 Low ($) | 2017 High ($) | 2017 Low ($) | | :------ | :------------ | :----------- | :------------ | :----------- | | First | 21.57 | 11.70 | 9.85 | 5.17 | | Second | 20.63 | 12.26 | 9.99 | 7.00 | | Third | 19.00 | 14.50 | 8.95 | 8.00 | | Fourth | 17.48 | 12.04 | 14.50 | 8.67 | [Item 6. Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year summary of key consolidated financial data, highlighting a significant increase in 2018 net income Selected Consolidated Financial Data (2014-2018, in thousands) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :-------------------------------------------------- | :----- | :----- | :----- | :----- | :----- | | **EARNINGS DATA** | | | | | | | Rental and other property revenues | $120,956 | $126,221 | $119,663 | $104,188 | $79,412 | | Total operating expenses | 107,071 | 108,793 | 105,029 | 97,880 | 82,611 | | Operating income (loss) | 13,885 | 17,428 | 14,634 | 6,308 | (3,199) | | Gain on disposition of 50% interest in VAA | 154,126 | — | — | — | — | | Gain on income producing properties | — | 16,698 | 16,207 | — | — | | Gain on land sales | 17,404 | 4,884 | 3,121 | 21,648 | 561 | | Net income (loss) attributable to American Realty Investors, Inc. | 173,699 | (8,431) | (2,732) | (1,960) | 30,885 | | Net income (loss) applicable to common shares | $172,798 | $(9,536) | $(3,833) | $(3,176) | $28,842 | | **PER SHARE DATA** | | | | | | | Earnings per share - basic (Net income (loss) applicable to common shares) | $10.81 | $(0.61) | $(0.25) | $(0.21) | $2.28 | | Weighted average common shares used in computing earnings per share | 15,982,528 | 15,514,360 | 15,514,360 | 15,111,107 | 12,683,956 | | **BALANCE SHEET DATA** | | | | | | | Real estate, net | $381,043 | $988,117 | $901,006 | $853,507 | $699,763 | | Total assets | 826,149 | 1,296,720 | 1,174,909 | 1,117,368 | 965,498 | | Notes and interest payable | 286,968 | 901,083 | 851,095 | 804,760 | 659,059 | | Bonds and interest payable | 158,574 | 113,049 | — | — | — | | Shareholders' equity | 321,127 | 165,883 | 176,131 | 176,889 | 179,588 | | Book value per share | 20.09 | 10.69 | 11.35 | 11.71 | 14.16 | [Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=25&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, investment strategy, accounting policies, and the impact of the VAA joint venture - ARL is an externally advised and managed real estate investment company with a diverse portfolio of properties and land[123](index=123&type=chunk) - The company's investment strategy includes acquiring existing properties, developing new ones, and opportunistically acquiring land[123](index=123&type=chunk) - Acquisitions are primarily financed through operating cash flow, property sales, and debt financing[124](index=124&type=chunk) - Related party transactions are a historical part of the business but are not presumed to be arm's length[125](index=125&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) ARL's primary market risk is exposure to interest rate changes on its variable-rate and maturing debt - ARL's primary market risk exposure is to changes in interest rates on variable-rate debt and maturing debt that needs refinancing[201](index=201&type=chunk) - The overall weighted average interest rate at December 31, 2018, was **7.29%**, compared to 4.91% in 2017[202](index=202&type=chunk) - A hypothetical **100 basis point increase** in market interest rates would decrease net income by approximately **$0.4 million**[204](index=204&type=chunk) Debt Structure (December 31, 2018, in millions) | Debt Type | Amount | | :---------- | :----- | | Fixed-rate debt | $253.6 | | Variable-rate debt | $41.9 | | **Total outstanding notes payable** | **$295.5** | [Item 8. Consolidated Financial Statements and Supplementary Data](index=37&type=section&id=Item%208.%20Consolidated%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the audited consolidated financial statements and supplementary data for the years 2016 through 2018 - The consolidated financial statements present fairly the financial position, results of operations, and cash flows in conformity with U.S. GAAP[209](index=209&type=chunk) - The report emphasizes liquidity, noting management's intent to sell properties and refinance or extend debt to meet liquidity needs[213](index=213&type=chunk) [Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=85&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reported no changes in or disagreements with its accountants - There were no changes in or disagreements with accountants on accounting and financial disclosure[401](index=401&type=chunk) [Item 9A. Controls and Procedures](index=85&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Disclosure controls and procedures were evaluated and deemed **effective** as of December 31, 2018[402](index=402&type=chunk) - Management concluded that the company's internal control over financial reporting was **effective** as of December 31, 2018, based on the COSO (2013) framework[404](index=404&type=chunk) - No changes in internal controls over financial reporting occurred during the fourth quarter of 2018 that materially affected internal controls[406](index=406&type=chunk) [Item 9B. Other Information](index=85&type=section&id=Item%209B.%20Other%20Information) The company reported no other information for this item - This item is not applicable[407](index=407&type=chunk) PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=86&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) This section details the company's board, executive officers, and the external advisory agreement with Pillar - ARL's Board of Directors manages the company's affairs and sets strategic policies, with a goal for a majority of independent directors[409](index=409&type=chunk)[410](index=410&type=chunk) - The Board has standing Audit, Compensation, and Governance and Nominating Committees, all with independent members[419](index=419&type=chunk)[420](index=420&type=chunk)[422](index=422&type=chunk)[423](index=423&type=chunk) - Executive officers are employed by Pillar and receive **no direct remuneration** from ARL[431](index=431&type=chunk)[432](index=432&type=chunk)[433](index=433&type=chunk)[461](index=461&type=chunk) - Pillar serves as ARL's external Advisor and Cash Manager, responsible for day-to-day operations and investment opportunities[438](index=438&type=chunk) - Pillar's compensation includes a monthly gross asset fee, an annual net income fee, an annual incentive sales fee, and other commissions[443](index=443&type=chunk)[445](index=445&type=chunk) - Regis Realty Prime, LLC manages commercial properties for a fee of **3.0% or less** of monthly gross rents and leasing commissions of **6.0% or less**[457](index=457&type=chunk)[458](index=458&type=chunk) [Item 11. Executive Compensation](index=94&type=section&id=Item%2011.%20Executive%20Compensation) ARL does not directly compensate its executive officers; only non-affiliated directors receive remuneration from the company - ARL has no employees, payroll, or benefit plans and pays **no compensation** to its executive officers, who are compensated by Pillar[461](index=461&type=chunk) - Non-affiliated directors receive an annual retainer of **$20,000**, with the Audit Committee Chairman receiving an additional **$500** annual fee[463](index=463&type=chunk) Non-Employee Director Fees Paid in 2018 | Director Name | Fees Paid ($) | | :------------ | :------------ | | Robert A. Jakuszewski | 20,000 | | Ted R. Munselle | 20,500 | | Raymond D. Roberts, Sr. | 20,000 | | **Total** | **60,500** | [Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=95&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) This section outlines the beneficial ownership of ARL's common stock, showing significant control by related parties - Percentages are based on **15,997,076 shares** outstanding as of March 31, 2019[467](index=467&type=chunk)[470](index=470&type=chunk) Security Ownership of Certain Beneficial Owners (March 31, 2019) | Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Approximate Percent of Class | | :----------------------------------- | :---------------------------------------- | :--------------------------- | | May Realty Holdings, Inc. | 13,929,271 | 87.07% | | RA Stock Holdings, Inc. | 1,459,828 | 9.13% | | Realty Advisors, Inc. | 13,929,271 | 87.07% | | Realty Advisors LLC | 3,929,828 | 24.57% | Security Ownership of Management (March 31, 2019) | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Approximate Percent of Class | | :----------------------- | :---------------------------------------- | :--------------------------- | | Gene S. Bertcher | 13,521,251 | 87.07% | | Henry A. Butler | 140,000 | 0.94% | | Louis J. Corna | 13,521,251 | 87.07% | | Robert A. Jakuszewski | 140,000 | 0.94% | | Daniel J. Moos | 13,526,251 | 87.07% | | Ted R. Munselle | 140,000 | 0.94% | | Raymond D. Roberts, Sr. | 140,000 | 0.94% | | All Directors and Executive Officers as a group (7 persons) | 13,526,251 | 87.09% | [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=97&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) ARL has extensive business relationships with related parties, including its advisor, property manager, and affiliated companies - ARL's Articles of Incorporation require disclosure and approval by independent directors for transactions with related parties to ensure fairness[472](index=472&type=chunk)[473](index=473&type=chunk) - Pillar serves as ARL's Advisor and Cash Manager, and also advises related entities TCI and IOR[477](index=477&type=chunk) - All ARL directors and executive officers also serve in the same capacities for TCI and IOR, creating overlapping fiduciary duties[479](index=479&type=chunk) - Regis Realty Prime, LLC manages commercial properties and provides brokerage services to ARL for fees and commissions[480](index=480&type=chunk) - ARL owned approximately **77.68%** of TCI's common stock and, through TCI, approximately **81.25%** of IOR's common stock as of December 31, 2018[482](index=482&type=chunk) - TCI has a development agreement with Unified Housing Foundation, Inc. (UHF), a related party, and is a primary guarantor on a **$39.1 million** mezzanine loan[483](index=483&type=chunk)[484](index=484&type=chunk) Related Party Transactions and Fees (2018, in millions) | Transaction Type | Amount ($) | | :--------------- | :--------- | | Advisory fees paid to Pillar | 11.5 | | Net income fees paid to Pillar | 0.6 | | Mortgage brokerage and equity refinancing fees paid to Pillar | 2.9 | | Cost reimbursements paid to Pillar | 4.4 | | Interest received from Pillar | 3.4 | | Property management, construction management, and leasing commissions paid to Regis | 0.5 | | Rental revenue received from Pillar and related parties | 1.2 | | Notes and interest receivables (net of allowances) from related parties | 97.5 (notes), 8.2 (interest) | | Pillar owes ARL | 70.6 | | Land subject to sales contract with related parties | 86 acres | | TCI received cash from VAA joint venture for transferred properties | 7.4 (as of Feb 6, 2019) | [Item 14. Principal Accounting Fees and Services](index=99&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) This section details the audit and tax fees paid to the company's principal accounting firms for 2018 and 2017 - Audit fees cover professional services for audits and reviews of consolidated financial statements and statutory/regulatory filings[494](index=494&type=chunk) - Tax fees cover professional services for federal and state tax compliance, planning, consultation, and return preparation/review[496](index=496&type=chunk) - All services rendered by the principal auditors were pre-approved by the Board of Directors or the Audit Committee[497](index=497&type=chunk) Aggregate Fees for Professional Services (2018 vs. 2017, in thousands) | Type of Fee | Farmer, Fuqua & Huff (2018) | Swalm & Associates (2018) | Farmer, Fuqua & Huff (2017) | Swalm & Associates (2017) | | :---------- | :-------------------------- | :------------------------ | :-------------------------- | :------------------------ | | Audit Fees | $821,200 | $72,210 | $881,183 | $72,136 | | Tax Fees | 54,600 | — | 39,760 | — | | **Total** | **$875,800** | **$72,210** | **$920,943** | **$72,136** | PART IV [Item 15. Exhibits, Financial Statement Schedules](index=101&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists all documents filed as part of the report, including financial statements, schedules, and various exhibits - The report includes consolidated financial statements, financial statement schedules, and incorporated financial statements of related entities[501](index=501&type=chunk)[502](index=502&type=chunk) - Exhibits include corporate governance documents, preferred stock designations, the Advisory Agreement with Pillar, and required certifications[503](index=503&type=chunk)[508](index=508&type=chunk)[512](index=512&type=chunk)[513](index=513&type=chunk)[514](index=514&type=chunk)