American Realty Investors(ARL) - 2020 Q3 - Quarterly Report

Filing Information This section provides key administrative details about the company's Form 10-Q filing, including its corporate status, exchange listing, and share information Form 10-Q Details This document is a Quarterly Report on Form 10-Q for American Realty Investors, Inc. (ARL) for the period ended September 30, 2020. The company is a Nevada corporation, listed on the NYSE, and is classified as a non-accelerated filer - Registrant: AMERICAN REALTY INVESTORS, INC. (Nevada corporation)[1] - Filing Type: Quarterly Report on Form 10-Q for the period ended September 30, 2020[1] Form 10-Q Key Indicators | Indicator | Value | | :--- | :--- | | Trading Symbol | ARL | | Exchange | NYSE | | Filer Status | Non-accelerated filer | | Shell Company | No | | Common Stock Outstanding (as of Nov 12, 2020) | 15,997,076 shares | PART I. FINANCIAL INFORMATION This part presents the company's unaudited consolidated financial statements and management's discussion and analysis for the reporting period Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, along with comprehensive notes detailing accounting policies, segment information, real estate activities, debt, and related party transactions for the periods ended September 30, 2020 and December 31, 2019 Consolidated Balance Sheets The consolidated balance sheets show a slight decrease in total assets and liabilities from December 31, 2019, to September 30, 2020, while total equity increased, primarily driven by an increase in retained earnings Consolidated Balance Sheet Summary (in thousands) | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Assets | $807,587 | $830,641 | $(23,054) | -2.78% | | Total Liabilities | $500,369 | $534,125 | $(33,756) | -6.32% | | Total Equity | $307,218 | $296,516 | $10,702 | 3.61% | | Real Estate, net | $380,715 | $387,790 | $(7,075) | -1.82% | | Notes Receivable | $151,310 | $143,086 | $8,224 | 5.75% | | Cash and cash equivalents | $32,986 | $51,228 | $(18,242) | -35.61% | | Mortgages and notes payable | $248,943 | $254,094 | $(5,151) | -2.03% | | Bonds payable | $203,192 | $223,265 | $(20,073) | -8.99% | | Retained earnings | $172,335 | $163,708 | $8,627 | 5.27% | Consolidated Statements of Operations The company reported a significant turnaround from a net loss in 2019 to net income in 2020 for both the three and nine-month periods, primarily driven by substantial gains on sales or write-down of assets and reduced interest expenses Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Revenues | $11,937 | $13,231 | $39,808 | $44,031 | | Total Operating Expenses | $14,240 | $13,809 | $43,858 | $43,690 | | Net Operating (Loss) Income | $(2,303) | $(578) | $(4,050) | $341 | | Interest Income | $5,421 | $6,856 | $16,459 | $19,514 | | Interest Expense | $(7,622) | $(10,420) | $(26,295) | $(29,796) | | (Loss) Gain on Foreign Currency Transaction | $(1,470) | $(5,153) | $774 | $(13,296) | | Gain on Sales or Write-down of Assets | $15,325 | $5,139 | $24,802 | $9,792 | | Net Income (Loss) | $9,638 | $(9,450) | $10,702 | $(19,799) | | Net Income (Loss) Attributable to Common Shares | $7,987 | $(7,571) | $8,627 | $(16,496) | | Basic and Diluted EPS | $0.50 | $(0.47) | $0.54 | $(1.03) | Consolidated Statement of Equity The company's total equity increased from $296.5 million at December 31, 2019, to $307.2 million at September 30, 2020, primarily due to net income generated during the nine-month period Consolidated Statement of Equity (in thousands) | Metric (in thousands) | Dec 31, 2019 | Sep 30, 2020 | | :-------------------- | :----------- | :----------- | | Total Shareholders' Equity | $239,499 | $248,126 | | Non-controlling Interest | $57,017 | $59,092 | | Total Equity | $296,516 | $307,218 | | Net Income (9 months) | - | $10,702 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2020, the company experienced a net cash outflow from operating and financing activities, offset by a net cash inflow from investing activities, resulting in an overall decrease in cash, cash equivalents, and restricted cash Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash used in operating activities | $(17,384) | $(8,801) | | Net cash provided by (used in) investing activities | $16,225 | $(16,782) | | Net cash (used in) provided by financing activities | $(21,136) | $18,908 | | Net decrease in cash, cash equivalents and restricted cash | $(22,295) | $(6,675) | | Cash, cash equivalents and restricted cash, end of period | $61,016 | $99,940 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on the company's organization, significant accounting policies, earnings per share, cash flow information, operating segments, lease agreements, real estate activities, notes receivable, unconsolidated joint ventures, mortgages and bonds payable, deferred income, related party transactions, commitments, contingencies, and subsequent events Note 1. Organization American Realty Investors, Inc. (ARL) is a Nevada corporation primarily engaged in the acquisition, development, and ownership of income-producing multifamily apartment communities and commercial real estate properties, as well as opportunistic land acquisitions. Its operations are managed by Pillar Income Asset Management, Inc. and Regis Realty Prime, LLC - Primary Business: Acquisition, development, and ownership of income-producing multifamily apartment communities and commercial real estate properties, and opportunistic land acquisition[19] - Property Portfolio (as of Sep 30, 2020): - Six commercial properties (5 office, 1 retail) totaling ~1.6 million sq ft - Ten directly owned multifamily apartment communities (1,639 units) - Approximately 1,980 acres of developed and undeveloped land - Fifty-one multifamily apartment communities (10,137 units) owned by 50% investee Victory Abode Apartments, LLC (VAA)[20] - Management: Day-to-day operations managed by Pillar Income Asset Management, Inc.; commercial properties by Regis Realty Prime, LLC; multifamily by outside management companies[21][22] Note 2. Summary of Significant Accounting Policies The financial statements are prepared in accordance with Form 10-Q and GAAP, with certain condensed disclosures. The company consolidates entities where it is the primary beneficiary of a VIE or has a majority voting interest, and uses the equity method for less than controlling interests. Recent accounting standard updates (ASU 2018-17, ASU 2020-04, FASB Staff Q&A on COVID-19 lease concessions) had no material impact on financial position or results of operations - Basis of Presentation: Unaudited consolidated financial statements prepared in accordance with Form 10-Q and Article 10 of Regulation S-X, with condensed GAAP disclosures[23] - Consolidation Policy: Consolidates entities where it is the primary beneficiary of a VIE or holds a majority voting interest; uses equity method for less than controlling interests[26][27] - Newly Issued Accounting Standards: Adoption of ASU 2018-17 (Consolidation) and FASB Staff Q&A on COVID-19 lease concessions had no material impact. ASU 2020-04 (Reference Rate Reform) will be adopted when LIBOR is discontinued[27][28][29] Note 3. Earnings per Share Earnings per share (EPS) are calculated by dividing net income available to common shares by the weighted-average number of common shares outstanding. For the three and nine months ended September 30, 2020, basic and diluted EPS were $0.50 and $0.54, respectively, a significant improvement from losses in the prior year - EPS Calculation: Net income available to common shares, adjusted for preferred dividends, divided by weighted-average common shares outstanding[31] EPS Summary | Metric | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) Attributable to Common Shares (in thousands) | $7,987 | $(7,571) | $8,627 | $(16,496) | | Weighted-average Common Shares Outstanding | 15,997,076 | 15,997,076 | 15,997,076 | 15,997,076 | | EPS - Basic and Diluted | $0.50 | $(0.47) | $0.54 | $(1.03) | Note 4. Supplemental Cash Flow Information The company's total cash, cash equivalents, and restricted cash decreased from $83.3 million at the beginning of the nine-month period to $61.0 million at September 30, 2020. Restricted cash is held for contractual obligations like reserve replacement, tax, insurance escrow, and bond payments Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric (in thousands) | Sep 30, 2020 | Sep 30, 2019 | | :------------------------------------ | :----------- | :----------- | | Cash and cash equivalents (End of period) | $32,986 | $63,075 | | Restricted cash (End of period) | $28,030 | $36,865 | | Total Cash, cash equivalents and restricted cash (End of period) | $61,016 | $99,940 | | Total Cash, cash equivalents and restricted cash (Beginning of period) | $83,311 | $106,615 | - Restricted cash is set aside for contractual obligations including reserve replacement deposits, tax and insurance escrow, and bond principal and interest payments[33] Note 5. Operating Segments The company operates in two reportable segments: multifamily and commercial real estate. For the nine months ended September 30, 2020, the multifamily segment saw increased profit, while the commercial segment experienced a slight decrease. Total segment profit increased year-over-year - Reportable Segments: (i) multifamily apartment communities and (ii) commercial real estate properties[34] Segment Performance (in thousands) | Segment (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Multifamily Segment | | | | | | Revenues | $3,683 | $3,383 | $10,942 | $10,077 | | Profit from segment | $1,272 | $661 | $4,477 | $3,234 | | Commercial Segment | | | | | | Revenues | $7,770 | $8,024 | $23,518 | $24,275 | | Profit from segment | $3,794 | $4,863 | $11,476 | $11,915 | | Total Profit from Segments | $5,066 | $5,524 | $15,953 | $15,149 | Note 6. Leases The company leases multifamily and commercial properties under operating leases, recognizing minimum rental revenues on a straight-line basis. Fixed rental components increased slightly for both three and nine-month periods in 2020 compared to 2019, while variable components decreased - Lease Classification: Multifamily and commercial properties are leased under operating leases[38] Rental Revenue Components (in thousands) | Rental Revenue Component (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Fixed component | $11,107 | $10,827 | $33,111 | $32,963 | | Variable component | $346 | $580 | $1,349 | $1,389 | | Total Rental Revenue | $11,453 | $11,407 | $34,460 | $34,352 | Future Rental Payments (in thousands) | Future Rental Payments (in thousands) | | :------------------------------------ | | 2021 | $6,444 | | 2022 | $23,155 | | 2023 | $20,038 | | 2024 | $14,606 | | 2025 | $8,737 | | Thereafter | $7,071 | | Total | $80,051 | Note 7. Real Estate Activity The company's total real estate, net, decreased slightly from $387.8 million at December 31, 2019, to $380.7 million at September 30, 2020. Significant gains on asset sales were realized in 2020, including land, a retail center, and multifamily apartment communities Real Estate Components (in thousands) | Real Estate Component (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Land | $50,759 | $49,887 | | Building and improvements | $297,068 | $286,280 | | Tenant improvements | $49,423 | $49,431 | | Construction in progress | $77,116 | $84,399 | | Less accumulated depreciation | $(97,883) | $(90,173) | | Property held for sale | $4,232 | $7,966 | | Total Real Estate, net | $380,715 | $387,790 | Gain (Loss) on Sale or Write-down of Assets (in thousands) | Gain (Loss) on Sale or Write-down of Assets (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Land | $5,771 | $5,139 | $15,248 | $9,872 | | Residential Properties | $3,704 | — | $3,704 | $(80) | | Commercial Properties | $4,609 | — | $4,609 | — | | Other | $1,241 | — | $1,241 | — | | Total | $15,325 | $5,139 | $24,802 | $9,792 | - Key Sales in 2020 (9 months): - 62.0 acres of land for $20.2 million (gain of $15.2 million) - Bridgeview Plaza retail center for $5.25 million (gain of $4.744 million) - Villager Apartments for $2.426 million (gain of $898 thousand) - Farnham Park Apartments for $13.3 million (gain of $2.684 million)[43][101] Note 8. Notes Receivable Total notes receivable increased from $143.1 million at December 31, 2019, to $151.3 million at September 30, 2020. A significant portion of these notes are from related parties, including Unified Housing Foundation, Inc. (UHF) and Pillar Notes Receivable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total Notes Receivable | $151,310 | $143,086 | | Notes from related parties | $96,181 | $93,524 | - Unified Housing Foundation, Inc. (UHF) is a related party due to significant investment in the performance of collateral secured by the notes receivable[45] Note 9. Investment in Unconsolidated Joint Ventures The company's investment in unconsolidated joint ventures decreased from $67.7 million at December 31, 2019, to $57.1 million at September 30, 2020. For the nine months ended September 30, 2020, these joint ventures reported a net loss of $19.9 million, with the company's equity in net loss being $0.6 million Investment in Unconsolidated Joint Ventures (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :------------------------------------ | :----------- | :----------- | | Investment in unconsolidated joint ventures | $57,144 | $67,655 | | Company's capital in JVs | $97,456 | $108,815 | | Basis adjustments | $(40,312) | $(41,160) | JV Financials (in thousands) | JV Financials (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Revenue | $45,144 | $43,320 | $130,859 | $126,125 | | Total Expenses | $50,355 | $59,297 | $150,715 | $174,765 | | Net (Loss) Income | $(5,211) | $(15,977) | $(19,856) | $(48,640) | | Company's equity in net (loss) income | $337 | $(75) | $(642) | $(1,135) | Note 10. Mortgages and Notes Payable Total mortgages and notes payable decreased from $254.1 million at December 31, 2019, to $248.9 million at September 30, 2020. Several loans were paid off or assumed by third parties in connection with property sales during the period Mortgages and Notes Payable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total Mortgages and Notes Payable | $248,943 | $254,094 | - Key Debt Changes: - Bridgeview Plaza loan paid off ($3.375 million) upon sale of property - Farnham Apartments loan ($9.085 million) assumed by third party upon sale - Villager Apartments loan ($665 thousand) assumed by third party upon sale - Acquired 49.2 acres of land in Kent, Ohio, in exchange for a $3.35 million note payable[43][50] Note 11. Bonds Payable The company's total outstanding bonds, net, decreased from $223.3 million at December 31, 2019, to $203.2 million at September 30, 2020. Foreign currency transactions related to these New Israeli Shekel-denominated bonds resulted in a gain for the nine months ended September 30, 2020, compared to a loss in the prior year, due to the strengthening of the US Dollar Bonds Payable (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total outstanding bonds | $210,695 | $232,989 | | Less: unamortized deferred bond issuance costs | $(7,503) | $(9,724) | | Total outstanding bonds, net | $203,192 | $223,265 | Foreign Currency Transaction (in thousands) | Foreign Currency Transaction (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | (Loss) Gain on foreign currency transactions | $(1,470) | $(5,153) | $744 | $(13,296) | - Bonds are issued through subsidiary Southern Properties Capital LTD and trade on the Tel Aviv Stock Exchange, with payments denominated in New Israeli Shekels[51] Note 12. Deferred Income Deferred gain from property sales to related parties, where sales criteria for full accrual method were not met due to continuing involvement, decreased from $24.8 million at December 31, 2019, to $21.6 million at September 30, 2020 Deferred Gain (in thousands) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Deferred gain | $21,609 | $24,761 | - Deferred income represents gains on property sales to related parties where the full accrual method criteria were not met due to continuing involvement. Gains are deferred until properties are sold to non-related third parties[54] Note 13. Related Party Transactions The company engages in various transactions with related parties, including rental income from Pillar, Regis, and VAA, property operating expenses paid to Regis, general and administrative expenses to Pillar, advisory fees, interest income on notes receivable from UHF and Pillar, and interest expense on notes payable to Pillar Related Party Transactions (in thousands) | Related Party Transaction (in thousands) | 3 Months Ended Sep 30, 2020 | 3 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2019 | | :--------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Rental income from related parties | $262 | $212 | $808 | $527 | | Property operating expense to Regis | $253 | $237 | $750 | $741 | | General and administrative to Pillar | $1,094 | $1,002 | $2,991 | $3,680 | | Advisory fee to related party | $2,329 | $2,403 | $7,055 | $6,807 | | Interest income from related parties | $4,812 | $6,240 | $14,566 | $18,328 | | Interest expense to Pillar | $1,583 | $2,402 | $5,040 | $7,094 | Note 14. Commitments and Contingencies The company anticipates generating excess cash from property operations in 2020 but plans to sell assets, refinance debt, and obtain additional borrowings to meet liquidity needs. It is involved in ongoing litigation, including a $59 million judgment against it related to a 1988 property transaction and a lawsuit alleging improper property sales/transfers with a consolidated subsidiary - Liquidity Strategy: Intends to sell income-producing assets, refinance real estate, and obtain additional borrowings to meet liquidity requirements, as operating cash flow may not be sufficient[60] - Litigation: - Defendant in litigation with Clapper Parties, with a $59 million judgment against the company (appealed, trial set for May 2021) - Plaintiff in lawsuit against Dynex Commercial, Inc., with a $24.8 million judgment awarded to the company (fully reserved due to collectability uncertainty) - Charged in a lawsuit by Paul Berger alleging improper property sales/transfers with consolidated subsidiary IOR[62][63][64] - Guarantees: Primary guarantor on a $24.3 million mezzanine loan between UHF and a lender[61] Note 15. Subsequent Events Events occurring after September 30, 2020, up to November 12, 2020 (the date the financial statements were available to be issued), have been evaluated for possible adjustment or disclosure - Evaluation Period: Subsequent events evaluated through November 12, 2020[65] 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 and operational results, including forward-looking statements, the impact of the COVID-19 pandemic, an overview of business and property portfolio, critical accounting policies, detailed analysis of results of operations for the three and nine months ended September 30, 2020, liquidity and capital resources, and other disclosures Forward-Looking Statements and Risk Factors The report contains forward-looking statements subject to various risks and uncertainties, including those related to the real estate industry, financing, market demand, property sales, growth management, development, economic downturns, compliance costs, environmental liabilities, and dependence on key personnel. Investors are cautioned against undue reliance on these statements - Forward-Looking Statements: Identified by words like 'anticipate', 'believe', 'expect', 'intend', 'may', 'might', 'plan', 'estimate', 'project', 'should', 'will', 'result'[68] - Key Risks: - General real estate industry risks (leases, tenant financial condition, competition) - Availability and terms of financing - Demand for properties, occupancy, and rental rates - Ability to obtain financing for development/acquisitions - Timing and amount of property sales - Managing growth and integrating acquisitions - Property development and construction risks - Economic downturns, interest rate increases, market volatility - Compliance costs (ADA), uninsured losses, environmental contamination - Dependence on key personnel[69] COVID-19 Impact The company is monitoring the COVID-19 pandemic's impact, which has not caused significant disruptions for the three months ended September 30, 2020. Rent collections remained high (96%), occupancy stable (91%), and development work continued. The company believes its HUD-guaranteed mortgage notes mitigate financing risks - No significant disruptions from COVID-19 during Q3 2020[70] - Rent Collection (Q3 2020): Approximately 96% collected (95% multifamily, 97% office)[71] - Occupancy: Stable at 91% as of September 30, 2020 and 2019[71] - Leasing: Positive leasing spreads for new leases and renewals[72] - Development: Ground-up development work continues unabated without stoppages[72] - Financing: Not significantly impacted due to HUD-guaranteed mortgage notes with long-term maturities[72] Management Overview and Summary The company is an externally advised and managed real estate investment company with a diverse portfolio of income-producing properties and land for development across eight states. It actively buys and sells real estate, financing acquisitions through operating cash flow, property sales, and debt. Related party transactions are a historical part of its business - Business Model: Externally advised and managed real estate investment company owning diverse income-producing properties and land for development[75] - Investment Strategy: Acquiring existing income-producing properties, developing new properties on owned or acquired land, and active buying/selling of real estate[75][76] - Property Portfolio (as of Sep 30, 2020): - Six commercial properties (~1.6 million sq ft) - 1,639 units in ten multifamily apartment communities - ~1,980 acres of developed and undeveloped land - 10,137 units in fifty-one multifamily apartment communities owned by 50% investee VAA[78] - Financing: Primarily through operating cash flow, proceeds from property sales, and debt financing (property-specific first-lien mortgage loans, construction loans)[79] - Related Party Transactions: Historically engaged in asset acquisition/dispositions and other business transactions with related parties, which may not always be on an arm's length basis[80] Critical Accounting Policies The preparation of financial statements requires management estimates and assumptions, particularly for revenue recognition, accruals, bad debts, asset impairment, purchase price allocation, capitalization, and fair value measurements. Key policies include fair value measurements (using a three-level hierarchy) and related party evaluations (applying ASC Topic 805) - Key Estimates and Assumptions: Revenue recognition, common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, purchase price allocation, capitalization of costs, and fair value measurements[84] - Fair Value of Financial Instruments: Applies ASC Topic 820, using a three-level hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs; Level 3: unobservable inputs)[86][87][88] - Related Parties: Applies ASC Topic 805 to evaluate business relationships, considering control or significant influence over decision-making[89] Results of Operations For the three months ended September 30, 2020, the company reported net income of $7.9 million ($0.50 EPS) compared to a net loss of $7.6 million ($0.47 loss per share) in 2019, driven by a $15.3 million gain on asset sales and reduced interest expense. For the nine months ended September 30, 2020, net income was $8.6 million ($0.54 EPS) compared to a net loss of $16.5 million ($1.03 loss per share) in 2019, primarily due to a $24.8 million gain on asset sales and a favorable change in foreign currency transactions Results of Operations: 3 Months Ended September 30 (in thousands) | Metric (in thousands) | 2020 | 2019 | Change | % Change | | :------------------------------------ | :--- | :--- | :----- | :------- | | Net income (loss) attributable to common shares | $7,987 | $(7,571) | $15,558 | 205.49% | | Basic and diluted EPS | $0.50 | $(0.47) | $0.97 | 206.38% | | Rental revenues | $11,453 | $11,407 | $46 | 0.40% | | Property operating expenses | $6,387 | $5,883 | $504 | 8.57% | | General and administrative expense | $1,998 | $2,107 | $(109) | -5.17% | | Interest income | $5,421 | $6,856 | $(1,435) | -20.93% | | Mortgage and loan interest expense | $7,622 | $10,420 | $(2,798) | -26.85% | | Loss on foreign currency transactions | $(1,470) | $(5,153) | $3,683 | -71.47% | | Gain on sale or write-down of assets | $15,325 | $5,139 | $10,186 | 198.21% | Results of Operations: 9 Months Ended September 30 (in thousands) | Metric (in thousands) | 2020 | 2019 | Change | % Change | | :------------------------------------ | :--- | :--- | :----- | :------- | | Net income (loss) attributable to common shares | $8,627 | $(16,496) | $25,123 | 152.29% | | Basic and diluted EPS | $0.54 | $(1.03) | $1.57 | 152.43% | | Rental revenues | $34,460 | $34,352 | $108 | 0.31% | | Property operating expenses | $18,507 | $19,203 | $(696) | -3.62% | | General and administrative expense | $7,958 | $7,716 | $242 | 3.14% | | Interest income | $16,459 | $19,514 | $(3,055) | -15.66% | | Mortgage and loan interest expense | $26,295 | $29,796 | $(3,501) | -11.75% | | Gain (loss) on foreign currency transactions | $774 | $(13,296) | $14,070 | 105.82% | | Gain on sale or write-down of assets | $24,802 | $9,792 | $15,010 | 153.29% | Liquidity and Capital Resources The company's primary liquidity needs include funding operating expenses, debt service, capital expenditures, and acquisitions. Cash sources are property operations, asset sales, and various borrowings. Management anticipates that operating cash flow may not be sufficient and plans to sell assets, refinance debt, and seek additional borrowings to meet liquidity requirements - Principal Liquidity Needs: Funding normal recurring expenses, debt service (including balloon payments), capital expenditures, development costs, and property acquisitions[102] - Principal Sources of Cash: Property operations, proceeds from land and income-producing property sales, collection of notes receivable, refinancing existing debt, and additional borrowings[102] - Liquidity Strategy: Management intends to selectively sell assets, refinance/extend real estate debt, and seek additional borrowings to meet cash requirements, as operating cash flow may be insufficient[103] Cash Flow Summary (9 Months Ended September 30, in thousands) | Cash Flow Activity (in thousands) | 2020 | 2019 | Change | | :-------------------------------- | :--- | :--- | :----- | | Net cash (used in) operating activities | $(17,384) | $(8,801) | $(8,583) | | Net cash provided by (used in) investing activities | $16,225 | $(16,782) | $33,007 | | Net cash (used in) provided by financing activities | $(21,136) | $18,908 | $(40,044) | - Investing Activities (9 months ended Sep 30, 2020): - Advanced $15.7 million on notes receivable - Purchased real estate for $2.7 million - Invested $12.5 million for development and renovation[107] - Financing Activities (9 months ended Sep 30, 2020): - Decrease primarily due to $21.7 million bond principal payment and $9.6 million payments on notes - Partially offset by $10.2 million proceeds from borrowings[110] Other Disclosures Management is not aware of any material environmental liabilities. The effects of inflation on operations are not quantifiable but impact revenues, property values, and financing costs. The company is part of the May Realty Holdings, Inc. consolidated group for federal income tax reporting, with financial statement income varying from taxable income due to differences in accounting for investees, asset sales, depreciation, and amortization - Environmental Matters: No material adverse effect on business, assets, or results of operations from environmental liabilities[112] - Inflation: Effects are not quantifiable but influence property revenues, sales values, and interest rates on investments and debt[113] - Tax Matters: Member of May Realty Holdings, Inc. consolidated group for federal income tax. Financial statement income differs from taxable income due to accounting for investees, asset sales, depreciation, and amortization[114][115] - Income Before Income Taxes (Q3 2020): $11.0 million, primarily driven by $24.8 million gains from asset sales[116] Item 3. Quantitative and Qualitative Disclosures About Market Risks The company is exposed to interest rate risk primarily from long-term debt. Management aims to limit this impact by borrowing at fixed rates or variable rates with conversion options. As of September 30, 2020, most of its notes payable were fixed-rate, with a small portion at variable rates. A 100 basis point increase in variable rates would have a minimal impact on annual interest cost and EPS - Exposure: Primarily to interest rate changes from long-term debt used for acquisitions and investments[117] - Objectives: Limit impact of interest rate changes on earnings/cash flows and lower borrowing costs[117] Debt Type (as of Sep 30, 2020) | Debt Type (as of Sep 30, 2020) | Amount (in millions) | Interest Rate | | :------------------------------- | :------------------- | :------------ | | Fixed interest rates | $241.8 | - | | Variable interest rate | $7.1 | 3.75% | | Total outstanding notes payable | $248.9 | - | - Sensitivity: A 100 basis point increase in variable interest rates would increase annual interest cost by $0.02 million and decrease EPS by $0.001[118] - Mitigation: Variable rate exposure is mitigated by the ability to secure long-term fixed-rate HUD financing on multifamily properties (weighted average borrowing rate of ~5.35% at Sep 30, 2020)[119] Item 4. Controls and Procedures As of September 30, 2020, management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective. There have been no material changes to internal control over financial reporting during the most recent fiscal quarter - Disclosure Controls and Procedures: Deemed effective as of September 30, 2020, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[120] - Internal Control Over Financial Reporting: No material changes during the most recent fiscal quarter[121] PART II. OTHER INFORMATION This part covers other required disclosures, including legal proceedings, risk factors, equity sales, defaults, mine safety, and exhibits Item 1. Legal Proceedings The company is involved in various litigation matters in the ordinary course of business, but management believes the outcome of such litigation will not have a material adverse impact on its financial condition, results of operations, or liquidity - Litigation: Involved in various items of litigation incidental to and in the ordinary course of business[123] - Management's Opinion: Outcome of litigation is not expected to have a material adverse impact on financial condition, results of operation, or liquidity[123] Item 1A. Risk Factors No material changes to previously disclosed risk factors from the 2019 10-K, except for an updated overview of risks related to the COVID-19 pandemic. The company has not experienced significant disruptions from COVID-19 in Q3 2020, maintaining high rent collections and stable occupancy, with development work continuing - No material changes to risk factors from the 2019 10-K, except for COVID-19 related risks[124] - COVID-19 Impact (as of Sep 30, 2020): - No significant disruptions - 96% of Q3 rents collected (95% multifamily, 97% office) - Occupancy stable at 91% - Positive leasing spreads - Ground-up development continues unabated - Financing activities not significantly impacted due to HUD guarantees[125][126][127][128] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has an ongoing share repurchase program, authorized for up to 1,250,000 shares. No shares were purchased under this program during the first quarter of 2020. As of September 30, 2020, 986,750 shares have been repurchased, with 263,250 shares remaining authorized - Share Repurchase Program: Authorized for up to 1,250,000 shares (increased in August 2010)[128] - Activity (Q1 2020): No shares purchased[128] Share Repurchase Program Status (as of Sep 30, 2020) | Metric (as of Sep 30, 2020) | Shares | | :-------------------------- | :----- | | Shares purchased under program | 986,750 | | Shares remaining authorized | 263,250 | Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report - No defaults upon senior securities[130] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[130] Item 5. Other Information There is no other information to report under this item - None[130] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various certificates of incorporation, bylaws, certificates of designation for preferred stock, advisory agreements, and certifications required by the Securities Exchange Act - Exhibits include: - Certificates of Restatement and Amendment of Articles of Incorporation - Bylaws - Certificates of Designation for various Series of Preferred Stock (F, I, J, K) - Advisory Agreement with Pillar Income Asset Management, Inc - Certifications by Principal Executive Officer and Principal Financial Officer (Rule 13a-14, 18 U.S.C. 1350) - XBRL Instance Document and Taxonomy Extension Documents[131][132][133][134][135][136][137][138][139][140][141][142] Signatures The report is duly signed on behalf of American Realty Investors, Inc. by Erik L. Johnson, Executive Vice President and Chief Financial Officer (Principal Financial Officer), on November 12, 2020 - Signed by Erik L. Johnson, Executive Vice President and Chief Financial Officer (Principal Financial Officer) on November 12, 2020[144][145]