American Realty Investors(ARL) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements 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 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] - 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][46] - 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][54] - As of September 30, 2019, the company had $120.3 million in notes and interest receivable from related parties, net of allowances[63] - 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][71][76] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][153] - 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] - 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] Liquidity and Capital Resources 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] 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] Quantitative and Qualitative Disclosures About Market Risks 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] - A 100 basis point increase in variable interest rates would increase total annual interest cost by an estimated $0.05 million[192] Controls and Procedures 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] - No material changes to the company's internal control over financial reporting were identified during the most recent fiscal quarter[196] PART II. OTHER INFORMATION Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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] Exhibits 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][208] - 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][210]