American Realty Investors(ARL) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's consolidated financial statements, including balance sheets, statements of operations, equity, and cash flows, along with detailed notes and management's discussion and analysis Item 1. Financial Statements The company's financial statements for the quarter ended March 31, 2023, show a decrease in total assets to $1.11 billion, primarily due to a significant reduction in liabilities from $385.3 million to $297.0 million following bond repayments, while total revenue increased to $11.7 million from $7.8 million year-over-year, net income attributable to the company fell sharply to $3.0 million from $11.3 million, largely because of a significant gain on asset sales in the prior-year period that did not recur, and cash flow from operations turned positive, but significant cash was used for investing and financing activities, including bond repayments Consolidated Balance Sheets Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $1,113,420 | $1,197,479 | ($84,059) | | Cash and cash equivalents | $55,340 | $113,445 | ($58,105) | | Real estate, net | $502,941 | $493,821 | $9,120 | | Total Liabilities | $297,033 | $385,311 | ($88,278) | | Mortgages and other notes payable | $187,179 | $188,004 | ($825) | | Bonds payable | $41,672 | $129,218 | ($87,546) | | Total Equity | $816,387 | $812,168 | $4,219 | Consolidated Statements of Operations Three Months Ended March 31, (in thousands, except per share) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $11,688 | $7,787 | +$3,901 | | Net Operating Loss | ($3,086) | ($4,495) | +$1,409 | | Gain on sale or write-down of assets, net | $0 | $11,148 | ($11,148) | | Net Income | $4,219 | $14,567 | ($10,348) | | Net Income Attributable to the Company | $2,978 | $11,314 | ($8,336) | | EPS - basic and diluted | $0.18 | $0.70 | ($0.52) | - The significant decrease in net income year-over-year is primarily attributable to a $11.1 million gain on the sale of assets in Q1 2022, which was not repeated in Q1 2023[21] Consolidated Statements of Equity - For the three months ended March 31, 2023, total equity increased from $812.2 million to $816.4 million, driven by a net income of $4.2 million for the period[24] Consolidated Statements of Cash Flows Cash Flow Summary for Three Months Ended March 31, (in thousands) | Cash Flow Category | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,539 | ($4,186) | +$5,725 | | Net cash (used in) provided by investing activities | ($24,212) | $5,646 | ($29,858) | | Net cash used in financing activities | ($89,127) | ($38,769) | ($50,358) | | Net decrease in cash | ($111,800) | ($37,309) | ($74,491) | - The significant increase in cash used for financing activities was primarily due to payments on bonds payable, which rose to $88.3 million in Q1 2023 from $22.9 million in Q1 2022[28][41] Notes to Consolidated Financial Statements The notes detail the company's business structure, segment performance, and significant transactions, including its portfolio composition of multifamily and commercial properties, a significant increase in multifamily segment profit, the initiation of a new $55.3 million development project, distributions from the VAA joint venture, and substantial bond repayments leading to a withdrawal from the Tel-Aviv Stock Exchange subsequent to the quarter's end - The company's primary business is the acquisition, development, and ownership of income-producing multifamily and commercial properties, with its portfolio as of March 31, 2023, including four office buildings, fourteen multifamily properties (2,328 units), and approximately 1,858 acres of land[31][32] Segment Profit (in thousands) | Segment | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Multifamily | $3,665 | $1,508 | +$2,157 | | Commercial | $1,238 | $1,945 | ($707) | | Total Profit from Segments | $4,903 | $3,453 | +$1,450 | - On March 15, 2023, the company began development of a 240-unit multifamily property in Lake Wales, Florida, with an expected total cost of $55.3 million, partially funded by a new $33.0 million construction loan[55][83] - The company received a final distribution of $17.976 million from its VAA joint venture on March 23, 2023, representing the remaining proceeds from the 2022 sale of the VAA Sale Portfolio[66] - In January 2023, the company repaid its Series C bonds totaling $88.3 million, and subsequent to the quarter end, on May 4, 2023, it paid off the remaining Series A and Series B Bonds and withdrew from the Tel-Aviv Stock Exchange (TASE)[89][101] - The company engages in significant transactions with related parties Pillar and Regis for advisory, management, and other services, with advisory fees to Pillar totaling $2.4 million and G&A expenses payable to Pillar totaling $1.5 million for Q1 2023[90][91][92] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the $10.3 million year-over-year decrease in net income primarily to the non-recurrence of an $11.1 million gain on asset sales and a $2.8 million decrease in income from joint ventures from the prior year, partially offset by improved performance in the multifamily segment and higher net interest income, while highlighting recent strategic activities including significant debt reduction through bond repayments, acquisition of seven multifamily properties, and the start of a new development project, despite the drop in net income, Funds From Operations (FFO) showed substantial growth, increasing from $1.9 million to $6.1 million Management's Overview - Recent financing activities include the full repayment of Series C bonds in January 2023 and the subsequent payoff of Series A and B bonds in May 2023, along with securing a new $33.0 million construction loan for a development project[112] - On November 1, 2022, the company acquired seven multifamily properties (the "VAA Holdback Portfolio") from its VAA joint venture[110][114] - A new development project for a 240-unit multifamily property in Lake Wales, Florida, began on March 15, 2023, with an expected completion in 2025 at a total cost of approximately $55.3 million[113] Results of Operations - The $10.3 million decrease in net income from Q1 2022 to Q1 2023 was primarily driven by the absence of a $9.4 million gain on the sale of the Toulon property and a $2.0 million gain on land sales that occurred in 2022[124] - Profit from the multifamily segment increased by $2.2 million, mainly due to contributions from newly acquired properties, while profit from the commercial segment decreased by $0.7 million due to lower occupancy at Stanford Center[124] - Net interest income improved by $4.5 million, resulting from a $4.0 million increase in interest income (due to higher rates and larger short-term investments) and a $1.0 million decrease in interest expense (due to debt repayments)[124] Liquidity and Capital Resources - Cash from operating activities increased by $5.7 million year-over-year, primarily due to higher interest income and rents from acquired properties[127] - Cash used in investing activities increased by $29.9 million, mainly because of $28.5 million in proceeds from real estate sales in 2022 and a net increase in short-term investment purchases in 2023[128] - Cash used in financing activities increased by $50.4 million, driven by the $67.4 million payoff of Series C Bonds in 2023[128] Funds From Operations (FFO) FFO Reconciliation (in thousands) | Metric | Q1 2023 | Q1 2022 | Change | | :--- | :--- | :--- | :--- | | Net income attributable to the Company | $2,978 | $11,314 | ($8,336) | | Adjustments (Depreciation, Gain on Sale, etc.) | $3,151 | ($11,389) | +$14,540 | | FFO-Basic and Diluted | $6,129 | $1,925 | +$4,204 | | FFO-adjusted | $5,158 | ($208) | +$5,366 | - Despite a sharp decline in net income, FFO increased significantly, which management believes provides a more meaningful measure of operating results by excluding items like real estate depreciation and gains/losses from property sales[130][131] Item 3. Quantitative and Qualitative Disclosures About Market Risks This section is optional for the registrant and was not included in the report - The company has elected not to include quantitative and qualitative disclosures about market risks in this report[135] Item 4. Controls and Procedures Management, including the Principal Executive Officer and Principal Financial Officer, evaluated the company's disclosure controls and procedures and concluded they were effective as of the end of the period, with no material changes to the company's internal control over financial reporting during the quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[136] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[137] PART II. OTHER INFORMATION This section covers other required disclosures, including legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits Item 1. Legal Proceedings The company reports no legal proceedings in this section, however, Note 18 in the financial statements discloses ongoing litigation with David Clapper, which is currently under appeal in the US Fifth Circuit Court of Appeals - The company reports "None" under this item[138] Item 1A. Risk Factors There have been no material changes from the risk factors that were previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes from the risk factors disclosed in the 2022 10-K were reported[139] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any of its shares during the three months ended March 31, 2023, and under its existing share repurchase program, 263,250 shares remain available for purchase - No shares were repurchased during the three months ended March 31, 2023, and as of the end of the quarter, 263,250 shares may still be purchased under the existing repurchase program[140] Item 6. Exhibits This section lists all exhibits filed with or incorporated by reference into the Form 10-Q, including corporate governance documents, material agreements, and officer certifications - A list of exhibits filed with the report is provided, including certifications by the Principal Executive and Financial Officer and XBRL data files[143][144]