American Realty Investors(ARL) - 2020 Q2 - Quarterly Report

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 This section presents the unaudited consolidated financial statements and related accounting notes Consolidated Balance Sheets 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 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 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 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 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 This section provides detailed explanations and disclosures supporting the consolidated financial statements NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION 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][25] - 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] - 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][25] - 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] - 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][38] - 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][54] - 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][57][58] NOTE 2. INVESTMENT IN VAA 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][60][63] | 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 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] NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION 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 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] - The company collected $4.7 million and purchased $10.9 million of notes receivables from a related party during the quarter[74] NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES 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] | 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 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] NOTE 8. BONDS AND BONDS INTEREST PAYABLE 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][82] NOTE 9. RELATED PARTY TRANSACTIONS 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] | 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 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] - As of June 30, 2020, deferred gain from these transactions was $25.7 million[85] NOTE 11. OPERATING SEGMENTS 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] | 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 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] - 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][101][109] - 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][108] NOTE 13. EARNINGS PER SHARE 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] - 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] NOTE 14. SUBSEQUENT EVENTS 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] - 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] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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] - 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] Impact of COVID-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] - 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] - 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] 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] - 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] - 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] - Acquisitions are financed primarily through operating cash flow, proceeds from property sales, and debt financing (property-specific first-lien mortgage loans, construction loans)[130] - 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] Critical Accounting Policies This section describes the significant accounting policies and judgments used in preparing the financial statements 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] - 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] Real Estate 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][140] - 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] Depreciation and Impairment 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][143] - 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][143] Investments in Unconsolidated Real Estate Ventures 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] Recognition of Rental Income 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] - Residential property rental income is recognized monthly on an accrual basis, consistent with ASC 842, for leases typically 12 months or less[148] - 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] Revenue Recognition on the Sale of Real Estate 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] - 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] Non-Performing Notes Receivable 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] Interest Recognition on Notes Receivable 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] Allowance for Estimated Losses 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] - Impairment amount is generally based on the fair value of the partnership's real estate, which is the primary source of loan repayment[153] Fair Value of Financial Instruments 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] - 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][156] Related Parties 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] Results of Operations 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 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] - General and administrative expenses decreased by $0.7 million, primarily from lower professional and legal services[164] - Foreign currency transaction loss increased by $3.3 million due to the strengthening of the Israel Shekel against the US Dollar[168] - Gain on land sales increased by $2.8 million, driven by the sale of 25.9 acres for $6.6 million[170] Comparison of the six months ended June 30, 2020 to the same period ended 2019 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] - 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] - Gain on land sales increased by $4.7 million, resulting from the sale of 44.9 acres for $12.2 million[182] Liquidity and Capital Resources 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] - 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] - 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] | 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] - 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] Environmental Matters 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] - Management is not aware of any environmental liability that would have a material adverse effect on the business, assets, or results of operations[193] 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] - 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] Tax Matters 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] - Financial statement income differs from taxable income due to accounting for investee income/losses, asset sales, depreciation, amortization, and allowance for estimated losses[196] - 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] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 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] - Management's objective is to limit interest rate impact by borrowing at fixed rates or variable rates with conversion options[198] - 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] - 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] ITEM 4. CONTROLS AND PROCEDURES 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] - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter[202] 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 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] - As of June 30, 2020, 986,750 shares have been purchased, with 263,250 shares remaining available under the program[204] ITEM 6. EXHIBITS 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][207][208] - Key operational agreements like the Advisory Agreement with Pillar Income Asset Management, Inc. are also filed[208] - 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][210]