American Realty Investors(ARL) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents ARL's unaudited consolidated financial statements and notes for periods ended June 30, 2019, and December 31, 2018 Consolidated Balance Sheets | 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 | 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 | 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 | 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 | 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 NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION 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] - 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] - 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] - 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] NOTE 2. INVESTMENT IN VAA 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][43] - 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] | 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 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][48] - A multifamily residential property in Mary Ester, Florida, was sold for $3.1 million, resulting in a loss of approximately $0.08 million[49] - 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] NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION 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] NOTE 5. NOTES AND INTEREST RECEIVABLE 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] - During the quarter ended June 30, 2019, the company purchased $31.9 million in notes receivables from related parties[57] NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES 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] | 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 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] NOTE 8. BONDS AND BONDS INTEREST PAYABLE 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] - 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] NOTE 9. DEFERRED INCOME 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] NOTE 10. RELATED PARTY TRANSACTIONS 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] | 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 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] | 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 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][166] - The company is the primary guarantor on a $39.1 million mezzanine loan between UHF and a lender[83] - 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] - 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] NOTE 13. EARNINGS PER SHARE 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] - 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] - 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] NOTE 14. SUBSEQUENT EVENTS 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] - Approximately $42 million of the Series C bond proceeds were used on August 9, 2019, to pay off a commercial building mortgage[95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operational results, key drivers, accounting policies, and future outlook, including liquidity and market risks Forward-Looking Statements and Risk Factors - 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] - 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] - 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] 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] - 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] - 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] - Acquisitions are primarily financed through operating cash flow, proceeds from property sales, and debt financing (property-specific first-lien mortgage loans)[108] - 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] Critical Accounting Policies - 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] - 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] - 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][120] - 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] - 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][127][128] Real Estate - Upon acquisition, fair value is assessed for acquired tangible and intangible assets (land, buildings, tenant improvements, leases) and purchase price is allocated[118] - 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] - 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] Depreciation and Impairment - 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][121] - 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][122] Investments in Unconsolidated Real Estate Ventures - Investments in unconsolidated real estate ventures are accounted for under the equity method when the company exercises significant influence but not control[123] - These investments are initially recorded at cost and subsequently adjusted for equity in earnings, cash contributions, and distributions[123] Recognition of Rental Income - Rental income for commercial property leases is recognized on a straight-line basis over the lease terms[125] - Reimbursements of operating costs from commercial tenants (common area maintenance, real estate taxes) are recognized as revenue in the period incurred[126] - 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] Revenue Recognition on the Sale of Real Estate - 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] - 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] Non-Performing Notes Receivable - 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] Interest Recognition on Notes Receivable - Interest income on notes receivable is recorded as earned in accordance with the terms of the related loan agreements[130] Allowance for Estimated Losses - The collectability of notes receivable is periodically assessed by evaluating borrower cash flow projections to determine repayment sufficiency[131] - 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] Fair Value of Financial Instruments - 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] - 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][135] Related Parties - 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] Results of Operations - Three Months Ended June 30, 2019 vs 2018 | 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 | 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 Q4 2018; these revenues are now part of income from unconsolidated investments[9][139] 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][140] - 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][143] Other Income (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][144] - Other income decrease was due to $3.1 million from tax increment incentives in 2019 vs. $6.6 million insurance proceeds in 2018[9][145] - Foreign currency loss was due to a decrease in the NIS to USD exchange rate (3.63 to 3.58)[9][147] Loss/Gain on Property Sales - 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] - 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] Results of Operations - Six Months Ended June 30, 2019 vs 2018 | 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 | 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 Q4 2018; these revenues are now part of income from unconsolidated investments[9][153] 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][154] - General and administrative expense increase was due to higher fees paid to advisors ($1.3 million) and franchise taxes ($0.1 million)[9][156] Other Income (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][157] - 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][158] - Foreign currency loss was due to a decrease in the NIS to USD exchange rate (3.64 to 3.58)[9][160] Loss/Gain on Property Sales - A loss of $0.08 million was recorded from the sale of a multifamily residential property for $3.1 million[163] - 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] Liquidity and Capital Resources - Primary liquidity needs include funding normal recurring expenses, debt service, capital expenditures, development costs, and property acquisitions[164] - Primary cash sources are property operations, proceeds from land/property sales, collection of notes/related party receivables, refinancing, and additional borrowings[165] - 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] Cash Flow Summary | 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 H1 2019[169] - Financing activities in H1 2019 included $10.4 million bond principal payment and $3.4 million note payments, offset by $12.9 million in note proceeds. In H1 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] Environmental Matters - 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][173] Inflation - The effects of inflation on operations are not quantifiable, but revenues from property operations and sales values tend to fluctuate proportionately[173] - Inflation also affects interest rates, earnings from short-term investments, and the cost of new financings and variable interest rate debt[173] Tax Matters - 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] - Financial statement income differs from taxable income due to accounting for investees, asset sales, depreciation, amortization, and allowance for estimated losses[175] - ARL had a loss for federal income tax purposes for the six months ended June 30, 2019[175] Item 3. Quantitative and Qualitative Disclosures About Market Risks 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] - 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] | 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] Item 4. Controls and Procedures 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] - There have been no material changes in internal control over financial reporting during the most recent fiscal quarter[179] PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - No shares were purchased under this program during the first quarter of 2019[181] - As of June 30, 2019, 986,750 shares have been purchased, with 263,250 shares remaining available under the program[181] Item 6. Exhibits 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] - Key agreements like the Advisory Agreement between American Realty Investors, Inc. and Pillar Income Asset Management, Inc. are also listed[183] - 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]