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)