UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  Commission File Number 001-15663 

 

American Realty Investors, Inc. 

(Exact name of registrant as specified in its charter)

 

Nevada

75-2847135

(State or other jurisdiction of

Incorporation or organization)

(IRS Employer

Identification Number)

 

 

1603 LBJ Freeway, Suite 800

Dallas, Texas

75234

(Address of principal executive offices)

(Zip Code)

 

 

 

(469) 522-4200

Registrant’s Telephone Number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

ARL

NYSE

 

Securities registered pursuant to Section 12(g) of the Act:

 

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes ☒    No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company   

 

Emerging growth Company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐    No ☒

 

Based on the last sale at the close of business on June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $17,795,030 The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing, would yield a different value.

 

As of March 25, 2020, there were 15,997,076 shares of common stock outstanding.

 

Documents Incorporated By Reference:

 

Consolidated Financial Statements of Income Opportunity Realty Investors, Inc.; Commission File No. 001-14784

 

Consolidated Financial Statements of Transcontinental Realty Investors, Inc.; Commission File No. 001-09240

 

 

 

 

INDEX TO 

ANNUAL REPORT ON FORM 10-K

 

 

 

Page

 

 

 

PART I

 

 

 

 

 

Item 1.

Business

 

3

Item 1A.

Risk Factors

 

9

Item 1B.

Unresolved Staff Comments

 

15

Item 2.

Properties

 

16

Item 3.

Legal Proceedings

 

19

Item 4.

Mine Safety Disclosures

 

20

 

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 

21

Item 6.

Selected Financial Data

 

23

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 8.

Consolidated Financial Statements and Supplementary Data

 

38

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

76

Item 9A.

Controls and Procedures

 

76

Item 9B.

Other Information

 

76

 

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

77

Item 11.

Executive Compensation

 

84

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

85

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

87

Item 14.

Principal Accounting Fees and Services

 

89

 

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

 

91

Item 16.  

Form 10-K Summary  

 

  92

Signature Page

 

93

 

2  

 

FORWARD-LOOKING STATEMENTS

 

Certain Statements in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. The forward-looking statements are found at various places throughout this Report and in the documents incorporated herein by reference. The Company disclaims any intention or obligations to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our expectations are based upon reasonable assumptions, we can give no assurance that our goals will be achieved. Important factors that could cause our actual results to differ from estimates or projections contained in any forward-looking statements are described in Part I, Item 1A. “Risk Factors”.

 

PART I

 

ITEM 1.

BUSINESS

 

General

 

As used herein, the terms “ARL,” “the Company,” “We,” “Our,” or “Us” refer to American Realty Investors, Inc., a Nevada corporation, which was formed in 1999.

 

The Company is headquartered in Dallas, Texas and its common stock is listed and trades on the New York Stock Exchange (“NYSE”) under the symbol “ARL”. Over 80% of ARL’s stock is owned by related parties. ARL and a subsidiary own approximately 78.38% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, which has its common stock listed and traded on the NYSE under the symbol “TCI”. TCI’s financial results are consolidated with those of ARL. In 2012, May Realty Holdings, Inc. (“MRHI”) subsidiaries acquired more than 80% of ARL stock and as a result, ARL is included in the MRHI consolidated group for federal income tax reporting. We have no employees.

 

TCI owns approximately 81.23% of the common stock of Income Opportunity Realty Investors, Inc. (“IOR”). IOR’s financial results are consolidated with those of TCI and its subsidiaries.  Shares of IOR are listed and traded on the NYSE American under the symbol “IOR”. 

 

ARL’s Board of Directors are responsible for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”), a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors of ARL are also directors of TCI and four are also directors of IOR. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board of Directors of TCI and IOR. The executive officers of ARL also serve as officers of TCI, IOR and Pillar.

 

Pillar, the sole shareholder of which is Realty Advisors, LLC, a Nevada limited liability company, the sole member of which is Realty Advisors, Inc. (“RAI”), a Nevada corporation, the sole shareholder of which is MRHI, a Nevada corporation, the sole shareholder of which is a trust known as the May Trust, became the Company’s external contractual Advisor and Cash Manager.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for the Company’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as the contractual Advisor and Cash Manager to TCI and IOR.  As the contractual advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”.  Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.

 

Regis Realty Prime, LLC, dba Regis Property Management, LLC (“Regis”), manages our commercial properties and provides brokerage services. Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement. Regis is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”.  ARL engages third-party companies to lease and manage its apartment properties.

 

3  

 

Southern Properties Capital Ltd. a British Virgin Island corporation (“Southern” or “SPC”), is a wholly owned subsidiary of TCI that was incorporated on August 16, 2016 for the purpose of raising funds by issuing debentures (that cannot be converted into any other security) listed and traded on the Tel-Aviv Stock Exchange(“TASE”). Southern operates in the United States and is primarily involved in investing in, developing, constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in the consolidated financial statements of TCI.

 

On January 1, 2012, the Company’s subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation that provides management services for the development of residential apartment projects in the future. This development agreement was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.

 

On November 19, 2018, TCI executed an agreement between the Macquarie Group (“Macquarie”) and SPC and TCI to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint venture, SPC and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development (“HUD”).

 

VAA is equally owned and controlled by Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned indirect subsidiary of Macquarie.  Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation rights of 50% and 49%, respectively (“Class A Members”).  The remaining 2% of the profit participation interest is held by Daniel J. Moos ARL’s President and Chief Executive Officer (“Class B Member”) who also serves as the Manager of the joint venture. 

 

ARL through subsidiaries invests in real estate through direct ownership, leases, and partnerships and also invests in mortgage loans on real estate. Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents; and by leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies.

 

 At December 31, 2019, our portfolio of income-producing properties consisted of:

 

Seven commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7 million square feet;

Ten residential apartment communities owned directly by us comprising in 1,657 units, excluding apartments being developed;

Approximately 1,951 acres of developed and undeveloped land; and

Fifty-one residential apartment communities totaling 9,888 units owned by our 50% owned investee VAA.

 

4  

 

The following table sets forth the location of our real estate held for investment (income-producing properties only) by asset type as of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Apartments
(Company owned)

 

 

Apartments
(VAA owned)

 

 

Commercial
(Company owned)

 

Location

 

No.

 

 

Units

 

 

No.

 

 

Units

 

 

No.

 

 

SF

 

Alabama

 

 

1

 

 

 

200

 

 

 

1

 

 

 

168

 

 

 

 

 

 

 

Arkansas

 

 

 

 

 

 

 

 

5

 

 

 

1,122

 

 

 

 

 

 

 

Colorado

 

 

 

 

 

 

 

 

2

 

 

 

260

 

 

 

 

 

 

 

Florida

 

 

1

 

 

 

33

 

 

 

2

 

 

 

388

 

 

 

1

 

 

 

6,722

 

Georgia

 

 

 

 

 

 

 

 

1

 

 

 

222

 

 

 

 

 

 

 

Louisiana

 

 

2

 

 

 

384

 

 

 

3

 

 

 

464

 

 

 

 

 

 

 

Mississippi

 

 

2

 

 

 

400

 

 

 

1

 

 

 

196

 

 

 

 

 

 

 

North Carolina

 

 

 

 

 

 

 

 

1

 

 

 

201

 

 

 

 

 

 

 

Nevada

 

 

 

 

 

 

 

 

1

 

 

 

308

 

 

 

 

 

 

 

Tennessee

 

 

1

 

 

 

144

 

 

 

4

 

 

 

708

 

 

 

 

 

 

 

Texas-Greater Dallas-Ft Worth

 

 

 

 

 

 

 

 

19

 

 

 

3,709

 

 

 

4

 

 

 

1,473,634

 

Texas-Greater Houston

 

 

 

 

 

 

 

 

2

 

 

 

416

 

 

 

1

 

 

 

95,329

 

Texas-Other

 

 

3

 

 

 

496

 

 

 

9

 

 

 

1,726

 

 

 

 

 

 

 

Wisconsin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

122,205

 

Total

 

 

10

 

 

 

1,657

 

 

 

51

 

 

 

9,888

 

 

 

7

 

 

 

1,697,890

 

 

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific, first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable-rate construction loans that are refinanced with the proceeds of long-term, fixed-rate amortizing mortgages when the development has been completed and occupancy has been stabilized. When we sell properties, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable, secured by the property being sold. We may also from time to time enter into partnerships or joint ventures with various investors to acquire land or income-producing properties or to sell interests in some of our properties.

 

We join with third-party development companies to construct residential apartment communities. At December 31, 2019, TCI and VAA had five and one apartment projects in development. The third-party developer typically holds a general partner, as well as a limited partner interest in a limited partnership formed for the purpose of building a single property, while we generally take a limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion, initial lease-up and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.

 

At December 31, 2019, our apartment projects in development included (dollars in thousands):

 

Property

 

Location

 

 

No. of Units

 

 

Costs to Date (1)

 

 

Total Projected Costs (1)

 

Sugar Mill III

 

Addis, LA

 

 

 

72

 

 

$

7,417,244

 

 

$

10,014,582

 

Parc at Denham Springs Phase II

 

Denham Springs, LA

 

 

 

144

 

 

 

17,791,765

 

 

 

18,767,871

 

Forest Pines II (Forest Grove)

 

Bryan, TX

 

 

 

84

 

 

 

4,843,342

 

 

 

11,258,990

 

LD Athens

 

Athens, Al

 

 

 

232

 

 

 

81,372

 

 

 

30,519,021

 

McKinney Heritage

 

McKinney, TX

 

 

 

176

 

 

 

88,931

 

 

 

24,767,176

 

Total

 

 

 

 

 

708

 

 

$

30,222,654

 

 

$

95,327,640

 

 

(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.

 

5  

 

We have made investments in a number of large tracts of undeveloped and partially developed land and intend to continue to improve these tracts of land for our own development purposes or make the improvements necessary to ready the land for sale to other developers.

 

At December 31, 2019, our investments in undeveloped and partially developed land consisted of the following (dollars in thousands): 

 

Location

 

Acquired

 

 

Acres

 

 

Cost

 

 

Intended Use

 

Dallas, TX

 

 

1996-2013

 

 

 

11.57

 

 

 

3,057

 

 

Mixed use

 

Farmers Branch, TX

 

 

2008

 

 

 

60.62

 

 

 

10,966

 

 

Mixed use

 

Kaufman County, TX

 

 

2011

 

 

 

1,781.83

 

 

 

49,238

 

 

Mixed use

 

Various

 

 

1990-2008

 

 

 

96.97

 

 

 

6,742

 

 

Various

 

Total Land Holdings

 

 

 

 

1,950.99

 

 

$

70,003

 

 

 

 

 

Significant Real Estate Acquisitions/Dispositions and Financings

 

The following is a description of the Company’s significant real estate and financing transactions (through TCI) during the year ended December 31 2019:

 

Sold 35.9 acres of land located in Farmers Branch, Texas for an aggregate sales price of $18.9 million and recognized a gain on the sale of $9.0 million.

 

Sold 29.4 acres of land located in Forney, Texas for a total sales price of $5.0 million and recognized a gain on the sale of approximately $4.1 million.

 

Sold 10.33 acres of land located in Dallas, Texas for a total sales price of $2.1 million and recognized a gain on the sale of approximately $0.4 million.

 

Sold 6.25 acres of land located in Nashville, Tennessee for a total sales price of $2.3 million and recognized a gain on the sale of approximately $0.9 million.

 

Sold 23.24 acres of land located in Fort Worth, Texas for a total sales price of $1.8 million and recognized a gain on the sale of approximately $0.5 million.

 

Sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million out of which $1.8 million represents land received with a total acreage of 1.27 acres located in Riverside, California in exchange for a note receivable of the same value. The Company recognized a loss from this sale of approximately $0.08 million.

 

Purchased 33.05 acres of land in Athens, Alabama for a total purchase price of $2.1 million, out of which $0.9 million was paid in cash and the remaining balance of $1.2 million was issued as a note payable. The note payable matures in eighteen months and bears an annual interest rate of 5.91%.

 

Purchased from a third party 8.94 acres of land located in Collin County, Texas for a total purchase price of $2.5 million.

 

Purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer.

 

Sold fresh water district receivables related to infrastructure development work, located in Kaufman County, Texas for $12.0 million. No gain or loss was recognized from the sale of these receivables.

 

6  

 

Purchased notes receivables from related parties for an aggregate purchase price of $29.0 million. No gain or loss was recognized from the purchase of the notes receivables (refer to Note 5).

 

Issued Series C bonds on the TASE in the amount of NIS 275 million (or approximately $78.1 million), bearing an annual interest of 4.65%. The interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, with the bond principal payment due in 2023.  From the proceeds from the sale of the Series C bonds the Company paid off the mortgage debt of $41.5 million related to one of its commercial buildings used as collateral for this issuance.

 

The Company continues to invest in the development of apartment projects. During the year ended December 31, 2019, ARL through its subsidiaries have invested $28.5 million related to the construction or predevelopment of various apartment complexes and capitalized $0.8 million of interest costs.

 

Business Plan and Investment Policy

 

Our business objective is to maximize long-term value for our stockholders by investing in residential and commercial real estate through the acquisition, development and ownership of apartments, commercial properties, and land. We intend to achieve this objective through acquiring and developing properties in multiple markets and operating as an industry-leading landlord. We believe this objective will provide the benefits of enhanced investment opportunities, economies of scale and risk diversification, both in terms of geographic market and real estate product type. We believe our objective will also result in continuing access to favorably priced debt and equity capital. In pursuing our business objective, we seek to achieve a combination of internal and external growth while maintaining a strong balance sheet and employing a strategy of financial flexibility. We maximize the value of our apartments and commercial properties by maintaining high occupancy levels while charging competitive rental rates, controlling costs and focusing on tenant retention. We also pursue attractive development opportunities either directly or in partnership with other investors.

 

For our portfolio of commercial properties, we generate increased operating cash flow through annual contractual increases in rental rates under existing leases. We also seek to identify best practices within our industry and across our business units in order to enhance cost savings and gain operating efficiencies. We employ capital improvement and preventive maintenance programs specifically designed to reduce operating costs and increase the long-term value of our real estate investments.

 

We seek to acquire properties consistent with our business objectives and strategies. We execute our acquisition strategy by purchasing properties which management believes will create stockholder value over the long-term. We will also sell properties when management believes value has been maximized or when a property is no longer considered an investment to be held long-term.

 

We are continuously in various stages of discussions and negotiations with respect to development, acquisition, and disposition projects. The consummation of any current or future development, acquisition, or disposition, if any, and the pace at which any may be completed cannot be assured or predicted.

 

Substantially all of our properties are owned by subsidiary companies, many of which are single-asset entities. This ownership structure permits greater access to financing for individual properties and permits flexibility in negotiating a sale of either the asset or the equity interests in the entity owning the asset. From time-to-time, our subsidiaries have invested in joint ventures with other investors, creating the possibility of risks that do not exist with properties solely owned by an ARL subsidiary. In those instances where other investors are involved, those other investors may have business, economic, or other objectives that are inconsistent with our objectives, which may in turn require us to make investment decisions different from those if we were the sole owner.

 

Real estate generally cannot be sold quickly. We may not be able to promptly dispose of properties in response to economic or other conditions. To offset this challenge, selective dispositions have been a part of our strategy to maintain an efficient investment portfolio and to provide additional sources of capital. We finance acquisitions through mortgages, internally generated funds, and, to a lesser extent, property sales. Those sources provide the bulk of funds for future acquisitions. We may purchase properties by assuming existing loans secured by the acquired property. When properties are acquired in such a manner, we customarily seek to refinance the asset in order to properly leverage the asset in a manner consistent with our investment objectives.

 

7  

 

Our businesses are not generally seasonal with regard to real estate investments. Our investment strategy seeks both current income and capital appreciation. Our plan of operation is to continue, to the extent our liquidity permits, to make equity investments in income-producing real estate such as apartments, and commercial properties. We may also invest in the debt or equity securities of real estate-related entities. We intend to pursue higher risk, higher reward investments, such as improved and unimproved land where we can obtain reasonably-priced financing for substantially all of a property’s purchase price. We intend to continue the development of apartment properties in selected markets in Texas and in other locations where we believe adequate levels of demand exist. We intend to pursue sales opportunities for properties in stabilized real estate markets where we believe our properties’ value has been maximized. We also intend to be an opportunistic seller of properties in markets where demand exceeds current supply. Although we no longer actively seek to fund or purchase mortgage loans, we may, in selected instances, originate mortgage loans or we may provide purchase money financing in conjunction with a property sale.

 

Our Board of Directors has broad authority under our governing documents to make all types of investments, and we may devote available resources to particular investments or types of investments without restriction on the amount or percentage of assets that may be allocated to a single investment or to any particular type of investment, and without limit on the percentage of securities of any one issuer that may be acquired. Investment objectives and policies may be changed at any time by the Board without stockholder approval.

 

The specific composition from time-to-time of our real estate portfolio owned by ARL directly and through our subsidiaries depends largely on the judgment of management to changing investment opportunities and the level of risk associated with specific investments or types of investments. We intend to maintain a real estate portfolio that is diversified by both location and type of property.

 

Competition

 

The real estate business is highly competitive and we compete with numerous companies engaged in real estate activities (including certain entities described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence”), some of which have greater financial resources than ARL. We believe that success against such competition is dependent upon the geographic location of a property, the performance of property-level managers in areas such as leasing and marketing, collection of rents and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors include ease of access to a property, the adequacy of related facilities such as parking and other amenities, and sensitivity to market conditions in determining rent levels. With respect to apartments, competition is also based upon the design and mix of the units and the ability to provide a community atmosphere for the residents. We believe that beyond general economic circumstances and trends, the degree to which properties are renovated or new properties are developed in the competing submarket are also competitive factors. See also Part I, Item 1A. “Risk Factors”.

 

To the extent that ARL seeks to sell any of its properties, the sales prices for the properties may be affected by competition from other real estate owners and financial institutions also attempting to sell properties in areas where ARL’s properties are located, as well as aggressive buyers attempting to dominate or penetrate a particular market.

 

As described above and in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence,” the officers and directors of ARL serve as officers and directors of TCI and IOR. TCI and IOR have business objectives similar to those of ARL. ARL’s officers and directors owe fiduciary duties to both IOR and TCI as well as to ARL under applicable law. In determining whether a particular investment opportunity will be allocated to ARL, IOR, or TCI, management considers the respective investment objectives of each Company and the appropriateness of a particular investment in light of each Company’s existing real estate and mortgage notes receivable portfolio. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all three or two of the entities.

 

In addition, as described in Part III, Item 13. “Certain Relationships and Related Transactions, and Director Independence,” ARL competes with related parties of Pillar having similar investment objectives related to the acquisition, development, disposition, leasing and financing of real estate and real estate-related investments. In resolving any potential conflicts of interest which may arise, Pillar has informed ARL that it intends to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.

 

8  

 

We have historically engaged in and will continue to engage in certain business transactions with related parties, including but not limited to asset acquisitions and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in the best interests of the Company.

 

Available Information

 

ARL maintains an Internet site at www.americanrealtyinvest.com. Available through the website, free of charge, are Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16, and amendments to those reports, as soon as reasonably practicable after they are electronically filed or furnished to the Securities and Exchange Commission. In addition, we have posted the charters for the Audit Committee, Compensation Committee, and Governance and Nominating Committee, as well as the Code of Business Conduct and Ethics, Corporate Governance Guidelines on Director Independence, and other information on the website. These charters and principles are not incorporated in this report by reference. We will also provide a copy of these documents free of charge to stockholders upon written request. The Company issues Annual Reports containing audited financial statements to its common shareholders.

 

ITEM 1A.

RISK FACTORS

 

An investment in our securities involves various risks. All investors should carefully consider the following risk factors applicable to ARL and its subsidiaries in conjunction with the other information in this report before trading our securities.

 

Risk Factors Related to our Business

 

Our business may be impacted as a result of the pandemic impact the coronavirus (“COVID 19”) may have in the U.S. and global economy.

During 2020, a strain of coronavirus (“COVID – 19”) was reported worldwide, resulting in decreased economic activity and concerns about the pandemic, which would adversely affect the broader global economy. The Company is taking all necessary steps to keep our business premises, tenants, vendors and employees in a safe environment and are constantly monitoring the impact of COVID – 19.  At this point, the extent to which COVID – 19 may impact the global economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business and results of operations.

 

Adverse events concerning our existing tenants or negative market conditions affecting our existing tenants could have an adverse impact on our ability to attract new tenants, release space, collect rent or renew leases, and thus could adversely affect cash flow from operations and inhibit growth.

 

Cash flow from operations depends in part on the ability to lease space to tenants on economically favorable terms. We could be adversely affected by various facts and events over which the Company has limited or no control, such as:

 

 

lack of demand for space in areas where the properties are located;

 

 

inability to retain existing tenants and attract new tenants;

 

 

oversupply of or reduced demand for space and changes in market rental rates;

 

 

defaults by tenants or failure to pay rent on a timely basis;

 

 

the need to periodically renovate and repair marketable space;

 

 

physical damage to properties;

 

 

economic or physical decline of the areas where properties are located; and

 

 

potential risk of functional obsolescence of properties over time.

 

9  

 

At any time, any tenant may experience a downturn in its business that may weaken its financial condition. As a result, a tenant may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent or declare bankruptcy. Any tenant bankruptcy or insolvency, leasing delay or failure to make rental payments when due could result in the termination of the tenant’s lease and material losses to the Company.

 

If tenants do not renew their leases as they expire, we may not be able to rent the space. Furthermore, leases that are renewed, and some new leases for space that is re-let, may have terms that are less economically favorable than expiring lease terms, or may require us to incur significant costs, such as renovations, tenant improvements or lease transaction costs. Any of these events could adversely affect cash flow from operations and our ability to make distributions to shareholders and service indebtedness. A significant portion of the costs of owning property, such as real estate taxes, insurance, and debt service payments, are not necessarily reduced when circumstances cause a decrease in rental income from the properties.

 

We may not be able to compete successfully with other entities that operate in our industry.

 

We experience a great deal of competition in attracting tenants for the properties and in locating land to develop and properties to acquire.

 

In our effort to lease properties, we compete for tenants with a broad spectrum of other landlords in each of the markets. These competitors include, among others, publicly-held REITs, privately-held entities, individual property owners and tenants who wish to sublease their space. Some of these competitors may be able to offer prospective tenants more attractive financial terms than we are able to offer.

 

If the availability of land or high quality properties in our markets diminishes, operating results could be adversely affected.

 

We may experience increased operating costs which could adversely affect our financial results and the value of our properties .

 

Our properties are subject to increases in operating expenses such as insurance, cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping, repairs, and maintenance of the properties. While some current tenants are obligated by their leases to reimburse us for a portion of these costs, there is no assurance that these tenants will make such payments or agree to pay these costs upon renewal or new tenants will agree to pay these costs. If operating expenses increase in our markets, we may not be able to increase rents or reimbursements in all of these markets to offset the increased expenses, without at the same time decreasing occupancy rates. If this occurs, our ability to make distributions to shareholders and service indebtedness could be adversely affected.

 

 Our ability to achieve growth in operating income depends in part on its ability to develop additional properties .

 

We intend to continue to develop properties where warranted by market conditions. We have a number of ongoing development and land projects being readied for commencement.

 

Additionally, general construction and development activities include the following risks:

 

 

construction and leasing of a property may not be completed on schedule, which could result in increased expenses and construction costs, and would result in reduced profitability for that property;

 

 

construction costs may exceed original estimates due to increases in interest rates and increased cost of materials, labor or other costs, possibly making the property less profitable because of inability to increase rents to compensate for the increase in construction costs;

 

 

some developments may fail to achieve expectations, possibly making them less profitable;

 

10  

 

 

we may be unable to obtain, or face delays in obtaining, required zoning, land-use, building, occupancy, and other governmental permits and authorizations, which could result in increased costs and could require us to abandon our activities entirely with respect to a project;

 

 

we may abandon development opportunities after the initial exploration, which may result in failure to recover costs already incurred. If we determine to alter or discontinue its development efforts, future costs of the investment may be expensed as incurred rather than capitalized and we may determine the investment is impaired resulting in a loss;

 

 

we may expend funds on and devote management’s time to projects which will not be completed; and

 

 

occupancy rates and rents at newly-completed properties may fluctuate depending on various factors including market and economic conditions, and may result in lower than projected rental rates and reduced income from operations.

 

We face risks associated with property acquisitions .

 

We acquire individual properties and various portfolios of properties and intend to continue to do so. Acquisition activities are subject to the following risks:

 

 

when we are able to locate a desired property, competition from other real estate investors may significantly increase the seller’s offering price;

 

 

acquired properties may fail to perform as expected;

 

 

the actual costs of repositioning or redeveloping acquired properties may be higher than original estimates;

 

 

acquired properties may be located in new markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and

 

 

we may be unable to quickly and efficiently integrate new acquisitions, particularly acquisitions of portfolios of properties, into existing operations, and results of operations and financial condition could be adversely affected.

 

We may acquire properties subject to liabilities and without any recourse, or with limited recourse, with respect to unknown liabilities. However, if an unknown liability was later asserted against the acquired properties, we might be required to pay substantial sums to settle it, which could adversely affect cash flow.

 

Many of our properties are concentrated in our primary markets and the Company may suffer economic harm as a result of adverse conditions in those markets.

 

Our properties are located principally in specific geographic areas in the southwestern, southeastern, and mid-western United States. The Company’s overall performance is largely dependent on economic conditions in those regions.

 

Our investments in joint ventures may decrease our ability to manage risk.

 

We conduct some of our operations through a joint venture in which we share control over certain economic and business interests with our joint venture partner. Our joint venture partner may have economic, business or legal interests or goals that are inconsistent with our goals and interests or may be unable to meet their obligations. Failure by us, or an entity in which we have a joint-venture interest, to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on the financial condition or results of operations of our joint ventures and adversely affect our business, financial condition, results of operations and cash flows.

 

11  

 

We are leveraged and may not be able to meet our debt service obligations.

 

We had total indebtedness, including bonds and notes payable, at December 31, 2019 of approximately  $501.7 million. Substantially all assets have been pledged to secure debt. These borrowings increase the risk of loss because they represent a prior claim on assets and most require fixed payments regardless of profitability. Our leveraged position makes us vulnerable to declines in the general economy and may limit the Company’s ability to pursue other business opportunities in the future.

 

We may not be able to access financial markets to obtain capital on a timely basis, or on acceptable terms.

 

We rely on proceeds from property dispositions and third party capital sources for a portion of our capital needs, including capital for acquisitions and development. The public debt and equity markets are also among the sources upon which the Company relies. There is no guarantee that we will be able to access these markets or any other source of capital. The ability to access the public debt and equity markets depends on a variety of factors, including:

 

 

general economic conditions affecting these markets;

 

 

our own financial structure and performance;

 

 

the market’s opinion of real estate companies in general; and

 

 

the market’s opinion of real estate companies that own similar properties.

 

We may suffer adverse effects as a result of terms and covenants relating to the Company’s indebtedness.

 

Required payments on our indebtedness generally are not reduced if the economic performance of the portfolio declines. If the economic performance declines, net income, cash flow from operations and cash available for distribution to stockholders may be reduced. If payments on debt cannot be made, we could sustain a loss or suffer judgments, or in the case of mortgages, suffer foreclosures by mortgagees. Further, some obligations contain cross-default and/or cross-acceleration provisions, which means that a default on one obligation may constitute a default on other obligations.

 

We anticipate only a small portion of the principal of our debt will be repaid prior to maturity. Therefore, we are likely to refinance a portion of our outstanding debt as it matures. There is a risk that we may not be able to refinance existing debt or the terms of any refinancing will not be as favorable as the terms of the maturing debt. If principal balances due at maturity cannot be refinanced, extended, or repaid with proceeds from other sources, such as the proceeds of sales of assets or new equity capital, cash flow may not be sufficient to repay all maturing debt in years when significant “balloon” payments come due.

 

Our credit facilities and unsecured debt contain customary restrictions, requirements and other limitations on the ability to incur indebtedness, including total debt to asset ratios, secured debt to total asset ratios, debt service coverage ratios, and minimum ratios of unencumbered assets to unsecured debt. Our continued ability to borrow is subject to compliance with financial and other covenants. In addition, failure to comply with such covenants could cause a default under credit facilities, and we may then be required to repay such debt with capital from other sources. Under those circumstances, other sources of capital may not be available, or be available only on terms that are detrimental to the Company.

 

Our degree of leverage could limit our ability to obtain additional financing or affect the market price of our common stock.

 

The degree of leverage could affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes. The degree of leverage could also make us more vulnerable to a downturn in business or the general economy.

 

12  

 

An increase in interest rates would increase interest costs on variable rate debt and could adversely impact the ability to refinance existing debt.

 

We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on our debt and the ability to make distributions to shareholders. Further, rising interest rates could limit our ability to refinance existing debt when it matures.

 

Unbudgeted capital expenditures or cost overruns could adversely affect business operations and cash flow .

 

If capital expenditures for ongoing or planned development projects or renovations exceed expectations, the additional cost of these expenditures could have an adverse effect on business operations and cash flow. In addition, we might not have access to funds on a timely basis to pay for the unexpected expenditures.

 

Construction costs are funded in large part through construction financing, which the Company may guarantee. The Company’s obligation to pay interest on this financing continues until the rental project is completed, leased-up and permanent financing is obtained, or the project is sold, or the construction loan is otherwise paid. Unexpected delays in completion of one or more ongoing projects could also have a significant adverse impact on business operations and cash flow.

 

We may need to sell properties from time to time for cash flow purposes.

 

Because of the lack of liquidity of real estate investments generally, our ability to respond to changing circumstances may be limited. Real estate investments generally cannot be sold quickly. In the event that we must sell assets to generate cash flow, we cannot predict whether there will be a market for those assets in the time period desired, or whether we will be able to sell the assets at a price that will allow the Company to fully recoup its investment. We may not be able to realize the full potential value of the assets and may incur costs related to the early extinguishment of the debt secured by such assets.

 

We intend to devote resources to the development of new projects.

 

We plan to continue developing new projects as opportunities arise in the future. Development and construction activities entail a number of risks, including but not limited to the following:

 

 

we may abandon a project after spending time and money determining its feasibility;

 

 

construction costs may materially exceed original estimates;

 

 

the revenue from a new project may not be enough to make it profitable or generate a positive cash flow;

 

 

we may not be able to obtain financing on favorable terms for development of a property, if at all;  

 

 

we may not complete construction and lease-ups on schedule, resulting in increased development or carrying costs; and

 

 

we may not be able to obtain, or may be delayed in obtaining, necessary governmental permits.

 

The overall business is subject to all of the risks associated with the real estate industry .

 

We are subject to all risks incident to investment in real estate, many of which relate to the general lack of liquidity of real estate investments, including, but not limited to:

 

 

our real estate assets are concentrated primarily in the southwest and any deterioration in the general economic conditions of this region could have an adverse effect;

 

 

changes in interest rates may make the ability to satisfy overall debt service requirements more burdensome;

 

13  

 

 

lack of availability of financing may render the purchase, sale or refinancing of a property more difficult or unattractive;

 

 

changes in real estate and zoning laws;

 

 

increases in real estate taxes and insurance costs;

 

 

federal or local regulations or rent controls;

 

 

acts of terrorism, and

 

 

hurricanes, tornadoes, floods, earthquakes and other similar natural disasters.

 

Our performance and value are subject to risks associated with our real estate assets and with the real estate industry.

 

Our economic performance and the value of our real estate assets, and consequently the value of our securities, are subject to the risk that if our properties do not generate revenues sufficient to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, among others, may adversely affect the income generated by our properties:

 

 

downturns in the national, regional and local economic conditions (particularly increases in unemployment);

 

 

 

 

competition from other office, apartment and commercial buildings;

 

 

local real estate market conditions, such as oversupply or reduction in demand for office, apartments or other commercial space;

 

 

 

 

changes in interest rates and availability of financing;

 

 

vacancies, changes in market rental rates and the need to periodically repair, renovate and re-let space;

 

 

increased operating costs, including insurance expense, utilities, real estate taxes, state and local taxes and heightened security costs;

 

 

civil disturbances, earthquakes and other natural disasters, or terrorist acts or acts of war which may result in uninsured or underinsured losses;

 

 

significant expenditures associated with each investment, such as debt service payments, real estate taxes, insurance and maintenance costs which are generally not reduced when circumstances cause a reduction in revenues from a property;

 

 

declines in the financial condition of our tenants and our ability to collect rents from our tenants; and

 

 

decreases in the underlying value of our real estate.

 

14  

 

Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on our results of operations, and financial condition.

 

Our business may be affected by market and economic challenges experienced by the U.S. economy or real estate industry as a whole or by the local economic conditions in the markets in which our properties are located, including the current dislocations in the credit markets and general global economic recession. These current conditions, or similar conditions existing in the future, may adversely affect our results of operations, and financial condition as a result of the following, among other potential consequences:

 

 

the financial condition of our tenants may be adversely affected which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

 

 

significant job losses within our tenants may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;

 

 

our ability to borrow on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

 

 

reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and

 

 

one or more lenders could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

 

Real estate investments are illiquid, and the Company may not be able to sell properties if and when it is appropriate to do so.

 

Real estate generally cannot be sold quickly. We may not be able to dispose of properties promptly in response to economic or other conditions. In addition, provisions of the Internal Revenue Code may limit our ability to sell properties (without incurring significant tax costs) in some situations when it may be otherwise economically advantageous to do so, thereby adversely affecting returns to stockholders and adversely impacting our ability to meet our obligations.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

None.

 

15  

 

ITEM 2.

PROPERTIES

 

On December 31, 2019, our portfolio consisted of sixteen income-producing properties consisting of ten apartment communities totaling 1,657 units, seven commercial properties consisting of five office buildings and two retail centers. In addition, we own or control 1,951 acres of improved and unimproved land held for future development or sale.

 

The average annual rental and other property revenue per square foot is $13.36 for the Company’s residential apartment portfolio and $25.61 for the commercial portfolio. Through our joint venture VAA we have a 50 percent ownership interest to a portfolio of fifty-one income-producing properties with a total of 9,888 units, which generated an average annual rental revenue of $14.74 per square foot.

 

The table below shows information relating to those properties in which we own or have an ownership interest through subsidiaries, all of which are suitable and adequate for the purpose for which each is utilized: 

 

Residential Apartments

 

Location

 

 

Units

 

 

Occupancy

 

Chelsea

 

Beaumont, TX

 

 

 

144

 

 

 

90.97

%

Farnham Park

 

Port Arthur, TX

 

 

 

144

 

 

 

95.83

%

Landing Bayou

 

Houma, LA

 

 

 

240

 

 

 

89.58

%

Legacy at Pleasant Grove

 

Texarkana, TX

 

 

 

208

 

 

 

88.94

%

Toulon

 

Gautier, MS

 

 

 

240

 

 

 

98.33

%

Villager

 

Fort Walton, FL

 

 

 

33

 

 

 

90.91

%

Villas at Bon Secour Apts

 

Gulf Shores, AL

 

 

 

200

 

 

 

92.00

%

Vista Ridge

 

Tupelo, MS

 

 

 

160

 

 

 

93.13

%

Overlook at Allensville Phase II

 

Sevierville, TN

 

 

 

144

 

 

 

89.58

%

Parc at Denham Springs Phase II

 

Denham Springs, LA

 

 

 

144

 

 

 

5.56

%

10

 

Total Apartment Units

 

 

 

1,657

 

 

 

 

 

 

Office Buildings

 

Location

 

 

SqFt

 

 

Occupancy

 

600 Las Colinas

 

Irving, TX

 

 

 

512,173

 

 

 

79.43

%

770 South Post Oak

 

Houston, TX

 

 

 

95,438

 

 

 

83.85

%

Browning Place (Park West I)

 

Farmers Branch, TX

 

 

 

625,297

 

 

 

87.03

%

Senlac (VHP)

 

Farmers Branch, TX

 

 

 

2,821

 

 

 

100.00

%

Stanford Center

 

Dallas, TX

 

 

 

333,234

 

 

 

90.91

%

5

 

Total Office Buildings

 

 

 

1,568,963

 

 

 

 

 

 

Retail Centers

 

Location

 

 

SqFt

 

 

Occupancy

 

Bridgeview Plaza

 

LaCrosse, WI

 

 

 

122,205

 

 

 

37.25

%

Fruitland Park

 

Fruitland Park, FL

 

 

 

6,722

 

 

 

100.00

%

2

 

Total Retail Centers

 

 

 

128,927

 

 

 

 

 

 

 

Total Commercial

 

 

 

1,697,890

 

 

 

 

 

 

16  

 

Our joint venture investee VAA, owns the following residential properties:

 

Residential Apartments   Location   Units   Occupancy
Abode Red Rock Apartments   Las Vegas, NV   308   83.04%
Apalachee Point Villas Apartments   Tallahassee, FL   200   91.88%
Blue Lake Villas Apartments   Waxahachie, TX   186   90.78%
Blue Lake Villas Apartments Phase II   Waxahachie, TX   70   89.02%
Breakwater Bay Apartments.   Beaumont, TX   176   97.53%
Bridgewood Ranch Apartments   Kaufman, TX   106   94.39%
Capitol Hill Apartments   Little Rock, AR   156   91.17%
Centennial Village Apartments   Oak Ridge,TN   252   94.83%
Crossings at Opelika Apartments   Opelika, AL   168   97.29%
Dakota Arms Apartments   Lubbock, TX   208   96.17%
Desoto Ranch Apartments   DeSoto, TX   248   92.61%
Eagle Crossing Apartments   Dallas, TX   150   97.63%
Falcon Lake Apartments   Arlington, TX   248   95.30%
Heather Creek Apartments   Mesquite, TX   200   96.64%
Lake Forest Apartments   Humble, TX   240   90.67%
Lakeside Lofts   Farmers Branch, TX   245   0.00%
Lodge at Pecan Creek Apartments   Denton, TX   192   95.04%
Lofts at Reynolds Apartments   Asheville, NC   201   93.87%
Mansions Of Mansfield Apartments   Mansfield, TX   208   96.38%
McKinney Point Apartments   McKinney, TX   198   91.96%
Metropolitan Apartments   Little Rock, AR   260   92.40%
Mission Oaks Apartments   San Antonio, TX   228   92.17%
Northside on Travis Apartments   Sherman, TX   200   90.03%
Oak Hollow Phase I Apartments   Seguin, TX   160   88.08%
Oak Hollow Phase II Apartments   Seguin, TX   96   86.61%
Oceanaire Apartments   Biloxi, MS   196   94.76%
Overlook At Allensville Square Apartments Phase I   Sevierville, TN   144   92.66%
Parc at Wylie Apartments   Wylie, TX   198   92.09%
Parc at Bentonville Apartments   Bentonville, AR   216   92.60%
Parc at Clarksville Apartments   Clarksville, TN   168   91.45%
Parc at Denham Springs Apartments Phase I   Denham Spring, LA   224   95.86%
Parc at Garland Apartments   Garland, TX   198   94.68%
Parc at Mansfield Apartments   Mansfield, TX   99   94.87%
Parc at Maumelle Apartments   Little Rock, AR   240   94.51%
Parc at Metro Center Apartments   Nashville, TN   144   97.48%
Parc at Rogers Apartments   Rogers, AR   250   92.99%
Preserve at Pecan Creek Apartments   Denton, TX   192   89.65%
Preserve at Prairie Pointe Apartments   Lubbock, TX   184   95.94%
Residences at Holland Lake Apartments   Weatherford, TX   208   94.45%
Sawgrass Creek Apartments    New Port Richey, FL   188   92.73%
Sonoma Court Apartments   Rockwall, TX   124   89.98%
Sugar Mill Apartments, Phase I   Baton Rouge, LA   160   76.24%
Sugar Mill Apartments, Phase II   Addis, LA   80   76.59%
Tattersall Village Apartments   Hinesville, GA   222   93.76%
Terra Lago Apartments   Rowlett, TX   451   69.45%
Tradewinds Apartments   Midland, TX   214   94.36%
Villas of Park West Apartments Phase I   Pueblo, CO   148   95.27%
Villas of Park West Apartments Phase II   Pueblo, CO   112   93.77%
Vistas Of Vance Jackson Apartments   San Antonio, TX   240   94.50%
Waterford at Summer Park Apartments   Rosenberg, TX   196   93.49%
Windsong Apartments   Fort Worth, TX   188   93.15%
51   Total Apartment Units                      9,888    
             
Development Project            
             
Lakeside Lofts Apartments   Farmers Branch, TX   249    
             
Grand total                         10,137    

 

  

17  

 

Commercial Lease Expirations

 

The table below shows the lease expirations of the commercial properties over a  nine-year period and thereafter:

 

Year of Lease
Expiration

 

Rentable Square Feet
Subject to Expiring Leases

 

 

Current Annualized(1)
Contractual Rent Under
Expiring Leases

 

 

Current Annualized(1)
Contractual
Rent Under Expiring
Leases (P.S.F.)

 

 

Percentage of Total
Square Feet

 

 

Percentage of Gross Rentals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

139,905

 

 

$

                     3,082,003

 

 

$

                           22.03

 

 

 

8.2

%

 

 

10.9

%

2021

 

 

123,629

 

 

 

2,344,184

 

 

 

18.96

 

 

 

7.3

%

 

 

8.3

%

2022

 

 

267,882

 

 

 

5,981,809

 

 

 

22.33

 

 

 

15.8

%

 

 

21.1

%

2023

 

 

362,224

 

 

 

6,035,138

 

 

 

16.66

 

 

 

21.3

%

 

 

21.3

%

2024

 

 

271,071

 

 

 

6,010,250

 

 

 

22.17

 

 

 

16.0

%

 

 

21.2

%

2025

 

 

125,667

 

 

 

2,909,360

 

 

 

23.15

 

 

 

7.4

%

 

 

10.3

%

2026

 

 

30,505

 

 

 

793,130

 

 

 

26.00

 

 

 

1.8

%

 

 

2.8

%

Thereafter

 

 

56,926

 

 

 

1,152,892

 

 

 

20.25

 

 

 

3.4

%

 

 

4.1

%

Total

 

 

1,377,809

 

 

$

                  28,308,766

 

 

 

 

 

 

 

81.2

%

 

 

100

%

 

(1)

 

Represents the monthly contractual base rent and recoveries from tenants under existing leases as of December 31, 2019, multiplied by twelve. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimates as of such date.

 

The table below shows information related to the land parcels we own as of December 31, 2019:

 

Land

 

Location

 

Acres

Dedeaux

 

Gulfport, MS

 

9.90

Dominion Mercer Phase II

 

Farmers Branch, TX

 

5.29

Gautier

 

Gautier, MS

 

3.46

Lacy Longhorn

 

Farmers Branch, TX

 

4.86

Lake Shore Villas

 

Humble, TX

 

1.35

Lubbock

 

Lubbock, TX

 

2.87

McKinney 36

 

Collin County, TX

 

17.89

Minivest

 

Dallas, TX

 

0.23

Nicholson Croslin

 

Dallas, TX

 

0.80

Nicholson Mendoza

 

Dallas, TX

 

0.35

Ocean Estates

 

Gulfport, MS

 

11.79

T Palm Desert

 

Riverside, California

 

1.27

Travis Ranch

 

Kaufman County, TX

 

8.66

Union Pacific Railroad

 

Dallas, TX

 

0.04

Willowick

 

Pensacola, FL

 

39.78

Mercer Crossing

 

Farmers Branch, TX

 

19.00

Windmills Farm

 

Kaufman County, TX

 

1,701.05

 

 

Total Land/Development

 

1,828.59

 

Land Subject to Sales Contract

 

Location

 

Acres

Mercer Crossing

 

Farmers Branch, TX

 

41.62

Windmill Farms

 

Kaufman County, TX

 

80.78

 

 

Total Land Subject to Sales Contract

 

122.40

 

 

Total Land

 

1,950.99

 

18  

 

ITEM 3.

LEGAL PROCEEDINGS

 

ART and ART Midwest, Inc.

 

A formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been parties  to a litigation with Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. “ART” and ART Midwest, Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74 million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties, but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.

 

The Clapper Parties subsequently filed a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. “EQK”, and ART. The Clapper Parties seek damages from ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI. In February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated the case. We continue to vigorously defend the case and management believes it has defenses to the claims. The case has not been set for trial.

 

 In 2005, ART filed suit against a major national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but ART has filed a notice of appeal. The appeal was heard in February 2018 and the case was subsequently appealed to the Texas Supreme Court. The application for Review is still pending with the Texas Supreme Court.  In January 2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.

 

Dynex Capital, Inc.

 

On July 20, 2015, the 68th Judicial District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc., American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).

 

An original trial in 2004, which also included Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.” The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict” (“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings. The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015.

 

19  

 

The Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic was $0.256 million in damages, plus pre-judgment interest of $0.192 million for a total amount of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interest of $10.6 million for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum from April 25, 2014 until the date their respective damages were paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.

 

TCI is working with counsel to identify assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as pursue additional claims, if any, against Dynex Capital, Inc. Post judgment interest continues to accrue. 

 

Berger Litigation

 

On February 4, 2019, an individual claiming to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors, Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”), ( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”) and two other individuals. The Complaint filed alleges that the sale and/or exchange of certain tangible and intangible property between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return to IOR of various funds and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe the allegations to be wholly without any merit. The Defendants have filed motions to dismiss the case in its entirety in June 2019. On February 26, 2020, the Court denied IOR’s demand futility motion. The remainder of the motions to dismiss are pending.

 

Litigation The ownership of property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition, results of operation or liquidity.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

20  

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

ARL’s common stock is listed and traded on the NYSE American under the symbol “ARL”. The following table sets forth the high and low sales prices as reported in the consolidated reporting system of the NYSE American for the quarters ended: 

 

 

 

2019

 

 

2018

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First Quarter

 

$

13.51

 

 

$

11.22

 

 

$

21.57

 

 

$

11.70

 

Second Quarter

 

$

14.36

 

 

$

11.19

 

 

$

20.63

 

 

$

12.26

 

Third Quarter

 

$

17.89

 

 

$

10.53

 

 

$

19.00

 

 

$

14.50

 

Fourth Quarter

 

$

17.39

 

 

$

12.25

 

 

$

17.48

 

 

$

12.04

 

 

On March 25, 2020, the closing market price of ARL’s common stock on the NYSE American  $8.00 per share, and was held by approximately  1,596 stockholders of record.

 

ARL’s Board of Directors has established a policy that dividend declarations on common stock would be determined on an annual basis following the end of each year. In accordance with that policy, the Board determined not to pay any dividends on common stock in 2019, 2018 or 2017. Future distributions to common stockholders will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board.

 

Under ARL’s Amended Articles of Incorporation, 15,000,000 shares of Series A 10.0% Cumulative Convertible Preferred Stock are authorized with a par value of $2.00 per share and a liquidation preference of $10.00 per share plus accrued and unpaid dividends. Dividends are payable at the annual rate of $1.00 per share, or $.25 per share quarterly, to stockholders of record on the last day of each March, June, September, and December, when and as declared by the Board of Directors. The Series A Preferred Stock may be converted into common stock at 90.0% of the average daily closing price of ARL’s common stock for the prior 20 trading days. 

 

On December 31, 2018, a stock transfer agreement was entered into between Realty Advisors, Inc. (“RAI”) and TCI whereby TCI purchased from RAI 900,000 shares of Series A Preferred Stock for a total purchase price of approximately $9 million.  Also, as part of the agreement, TCI acquired accrued unpaid dividends on the 900,000 shares of Series A Preferred Stock of approximately $9.9 million.  At December 31, 2018, 1.8 million shares of Series A Convertible Preferred Stock have been eliminated in consolidation.  Unpaid accrued dividends in the amount of $9.9 million have also been eliminated in consolidation.  After these eliminations, there are 614 shares outstanding of Series A Preferred Stock at December 31, 2019, and 2018.

 

Under ARL’s Amended Articles of Incorporation, 91,000 shares of Series D 9.50% Cumulative Preferred Stock are authorized with a par value of $2.00 per share, and a liquidation preference of $20.00 per share. Dividends are payable at the annual rate of $1.90 per year or $0.475 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. The Series D Preferred Stock is reserved for the conversion of the Class A limited partner units of Ocean Beach Partners, L.P. The Class A units may be exchanged for Series D Preferred Stock at the rate of 20 Class A units for each share of Series D Preferred Stock. There are no outstanding shares of Series D Preferred Stock. On January 12, 2018 Realty Advisors converted 200,000 preferred shares, plus accrued dividends into 482,716 shares of common stock. 

 

21  

 

Under ARL’s Amended Articles of Incorporation, 500,000 shares of Series E 6.0% Cumulative Preferred Stock are authorized with a par value $2.00 per share and a liquidation preference of $10.00 per share. Dividends are payable at the annual rate of $0.60 per share or $0.15 per quarter to stockholders of record on the last day of each March, June, September and December when and as declared by the Board of Directors. There are no Series E Preferred Stock outstanding. As an instrument amendatory to ARL’s Amended Articles of Incorporation, 100,000 shares of Series J 8% Cumulative Convertible Preferred Stock have been designated pursuant to a Certificate of Designation filed March 16, 2006, with a par value of $2.00 per share, and a liquidation preference of $1,000 per share. Dividends are payable at the annual rate of $80 per share, or $20 per quarter, to stockholders of record on the last day of each of March, June, September and December, when and as declared by the Board of Directors. Although the Series J 8% Cumulative Convertible Preferred Stock has been designated, no shares have been issued.

 

The Company had 135,000 shares of Series K convertible preferred stock, which were held by TCI and used as collateral on a note. The note has been paid in full and the Series K preferred stock was cancelled May 7, 2014.

 

On September 1, 2000, the Board of Directors approved a share repurchase program authorizing the repurchase of up to a total of 1,000,000 shares of ARL common stock. This repurchase program has no termination date. In August 2010, the Board of Directors approved an increase in the share repurchase program for up to an additional 250,000 shares of common stock which results in a total authorization under the repurchase program for up to 1,250,000 shares.  There were no shares repurchased during the years ended December 31, 2019, and 2018.

 

22  

 

ITEM 6.

SELECTED FINANCIAL DATA

 

The following table sets forth selected consolidated financial data derived from our audited financial statements for each of the five years in the period ended December 31, 2019. The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Part II, Item 7 of this Annual Report and the consolidated financial statements and the accompanying notes set forth in Part II, Item 8 of this Annual Report.

 

 

 

For the Years Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(dollars in thousands, except share and per share amounts)

 

EARNINGS DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental and other property revenues

 

$

47,970

 

 

$

120,956

 

 

$

126,221

 

 

$

119,663

 

 

$

104,188

 

Total operating expenses

 

 

59,378

 

 

 

107,071

 

 

 

108,793

 

 

 

105,029

 

 

 

97,880

 

Operating (loss) income

 

 

(11,408

)

 

 

13,885

 

 

 

17,428

 

 

 

14,634

 

 

 

6,308

 

Other expenses

 

 

(25,527

)

 

 

(1,513

)

 

 

(47,706

)

 

 

(36,325

)

 

 

(31,622

)

(Loss) income before gain on dispositioin of 50% interest in VAA, gain on land sales, non-controlling interest, and taxes

 

 

(36,935

)

 

 

12,372

 

 

 

(30,278

)

 

 

(21,691

)

 

 

(25,314

)

Gain on disposition of 50% interest in VAA

 

 

 

 

 

154,126

 

 

 

 

 

 

 

 

 

 

(Loss) gain on income producing properties

 

 

(80

)

 

 

 

 

 

16,698

 

 

 

16,207

 

 

 

 

Gain on land sales

 

 

15,272

 

 

 

17,404

 

 

 

4,884

 

 

 

3,121

 

 

 

21,648

 

Income tax (expense) benefit

 

 

 

 

 

(1,210

)

 

 

(180

)

 

 

(46

)

 

 

(517

)

Net (loss) income from continuing operations

 

 

(21,743

)

 

 

182,692

 

 

 

(8,876

)

 

 

(2,409

)

 

 

(4,183

)

Net (loss) income from discontinuing operations

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

896

 

Net (loss) income

 

 

(21,743

)

 

 

182,692

 

 

 

(8,876

)

 

 

(2,410

)

 

 

(3,287

)

Net (income) loss attributable to non-controlling interest

 

 

5,785

 

 

 

(8,993

)

 

 

445

 

 

 

(322

)

 

 

1,327

 

Net (loss) income attributable to American Realty Investors, Inc.

 

 

(15,958

)

 

 

173,699

 

 

 

(8,431

)

 

 

(2,732

)

 

 

(1,960

)

Preferred dividend requirement

 

 

(1

)

 

 

(901

)

 

 

(1,105

)

 

 

(1,101

)

 

 

(1,216

)

Net (loss) income applicable to common shares

 

$

(15,959

)

 

$

172,798

 

 

$

(9,536

)

 

$

(3,833

)

 

$

(3,176

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(loss) income from continuing operations

 

$

(1.36

)

 

$

11.37

 

 

$

(0.64

)

 

$

(0.25

)

 

$

(0.27

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.06

 

Net (loss) income applicable to common shares

 

$

(1.00

)

 

$

10.81

 

 

$

(0.61

)

 

$

(0.25

)

 

$

(0.21

)

Weighted average common shares used in computing earnings per share

 

 

15,997,076

 

 

 

15,982,528

 

 

 

15,514,360

 

 

 

15,514,360

 

 

 

15,111,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(loss) income from continuing operations

 

$

(1.36

)

 

$

10.89

 

 

$

(0.64

)

 

$

(0.25

)

 

$

(0.27

)

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.06

 

Net (loss) income applicable to common shares

 

$

(1.00

)

 

$

10.35

 

 

$

(0.61

)

 

$

(0.25

)

 

$

(0.21

)

Weighted average common shares used in computing diluted earnings per share

 

 

15,997,076

 

 

 

16,697,966

 

 

 

15,514,360

 

 

 

15,514,360

 

 

 

15,111,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate, net

 

$

387,790

 

 

$

381,043

 

 

$

988,117

 

 

$

901,006

 

 

$

853,507

 

Notes and interest receivable, net

 

 

156,200

 

 

 

126,058

 

 

 

112,095

 

 

 

126,564

 

 

 

120,243

 

Investment in VAA

 

 

59,148

 

 

 

68,399

 

 

 

 

 

 

 

 

 

 

Total assets

 

 

830,641

 

 

 

826,149

 

 

 

1,296,720

 

 

 

1,174,909

 

 

 

1,117,368

 

Notes and interest payable

 

 

254,873

 

 

 

286,968

 

 

 

901,083

 

 

 

851,095

 

 

 

804,760

 

Bonds and interest payable

 

 

229,722

 

 

 

158,574

 

 

 

113,049

 

 

 

 

 

 

 

Shareholders’ equity

 

 

296,516

 

 

 

321,136

 

 

 

165,883

 

 

 

176,131

 

 

 

176,889

 

Book value per share

 

 

18.54

 

 

 

20.09

 

 

 

10.69

 

 

 

11.35

 

 

 

11.71

 

 

23  

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and on assumptions made by, and information currently available to, management. When used, the words “anticipate”, “believe”, “expect”, “intend”, “may”, “might”, “plan”, “estimate”, “project”, “should”, “will”, “result” and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors, that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

 

general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants’ financial condition, and competition from other developers, owners and operators of real estate);

 

risks associated with the availability and terms of financing and the use of debt to fund acquisitions and developments;

 

failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;

 

risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);

 

risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;

 

costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;

 

potential liability for uninsured losses and environmental contamination;

 

risks associated with our dependence on key personnel whose continued service is not guaranteed; and

 

the other risk factors identified in this Form 10-K, including those described under the caption “Risk Factors.”

 

The risks included here are not exhaustive. Other sections of this report, including Part I, Item 1A. “Risk Factors,” include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and current reports on Form 8-K as we file them with the SEC, and to other materials we may furnish to the public from time to time through Forms 8-K or otherwise.

 

24  

 

Overview

 

We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development. The Company’s portfolio of income-producing properties includes residential apartment communities, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project.

 

We acquire land primarily in urban in-fill locations or high-growth suburban markets. We are an active buyer and seller of real estate.

 

During the year ended December 31, 2019, the Company sold 105.1 acres of land for an aggregate sales price of $30.0 million and purchased 41.9 acres for an aggregate purchase price of approximately $4.6 million. In addition, the Company acquired 1.27 acres of land in exchange for a note receivable with a face value of $1.8 million.

 

We sold a multifamily residential property, located in Mary Ester, Florida for a total sales price of $3.1 million, and recognized a loss on the sale of $0.08 million.

 

The Company purchased an option to buy 37.8 acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from a third party land developer.

 

We advanced $21.4 million to several developers with the option to purchase the residential properties under construction at a future date, and sold fresh water district receivables related to infrastructure development work at Windmill Farms, located in Kaufman County, Texas for $12.0 million.

 

As of December 31, 2019, we owned 1,657 units in ten residential apartment communities, and seven commercial properties comprising of approximately 1.7 million rentable square feet.  In addition, we own approximately 1,951acres of land held for development. The Company currently owns income-producing properties and land in eight states.

 

We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with short-term, variable interest rate construction loans that are converted to long-term, fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized. We will, from time to time, also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in some of our wholly owned properties. When we sell assets, we may carry a portion of the sales price generally in the form of a short-term, interest bearing seller-financed note receivable. We generate operating revenues primarily by leasing apartment units to residents and leasing office, retail and industrial space to commercial tenants.

 

We have historically engaged in and may continue to engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest.

 

25  

 

Since April 30, 2011, Pillar is the Company’s external Advisor and Cash Manager under a contractual arrangement that is reviewed annually by our Board of Directors. Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges, for ARL’s benefit, debt and equity financing with third party lenders and investors. Pillar also serves as an Advisor and Cash Manager to TCI and IOR. As the contractual Advisor, Pillar is compensated by ARL under an Advisory Agreement that is more fully described in Part III, Item 10. “Directors, Executive Officers and Corporate Governance – The Advisor”. ARL has no employees. Employees of Pillar render services to ARL in accordance with the terms of the Advisory Agreement.

 

Effective since January 1, 2011, Regis manages our commercial properties and provides brokerage services.  Regis is entitled to receive a fee for its property management and brokerage services. See Part III, Item 10. “Directors, Executive Officers and Corporate Governance – Property Management and Real Estate Brokerage”. The Company contracts with third-party companies to lease and manage our apartment communities. 

 

Critical Accounting Policies

 

We present our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). The accompanying Consolidated Financial Statements include our accounts, our subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest.

 

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities are included in consolidated net income. Our investment in Gruppa Florentina, LLC is accounted for under the equity method.

 

The Company, in accordance with the VIE guidance in ASC 810 “Consolidations,” consolidated ten multifamily residential properties at December 31, 2019 and nine at December 31, 2018, located throughout the United States ranging from 1,657 units to 1,489 units.  Assets totaling approximately $478 million and approximately $464 million at December 31, 2019 and 2018, respectively, are consolidated and included in “Real estate, at cost” on the balance sheet and are all collateral for their respective mortgage notes payable, none of which are recourse to the partnership in which they are in or to the Company. 

 

Real Estate

 

Upon acquisitions of real estate, we assess the fair value of acquired tangible and intangible assets, including land, buildings, tenant improvements, “above-market” and “below-market” leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with ASC Topic 805 “Business Combinations”, and allocate the purchase price to the acquired assets and assumed liabilities, including land at appraised value and buildings at replacement cost.

 

We assess and consider fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates, as well as available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. We also consider an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on our acquisitions to date, our allocation to customer relationship intangible assets has been immaterial.

 

We record acquired “above-market” and “below-market” leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.

 

26  

 

Other intangible assets acquired include amounts for in-place lease values that are based on our evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses.

 

Depreciation and Impairment

 

Real estate is stated at depreciated cost. The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. Costs directly related to the development of properties are capitalized. Capitalized development costs include interest, property taxes, insurance, and other direct project costs incurred during the period of development.

 

A variety of costs are incurred in the acquisition, development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on development properties is guided by ASC Topic 835-20 “Interest – Capitalization of Interest” and ASC Topic 970 “Real Estate - General”. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion that is substantially completed and occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction.

 

Management reviews its long-lived assets used in operations for impairment when there is an event or change in circumstances that indicates impairment in value. An impairment loss is recognized if the carrying amount of its assets is not recoverable and exceeds its fair value. Fair value is determined by a recent appraisal, comparable based upon prices for similar assets, executed sales contract, a present value and/or a valuation technique based upon a multiple of earnings or revenue. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. If we determine that impairment has occurred, the affected assets must be reduced to their fair value.  We did not record any impairment charges for the years ended December 31, 2019 and 2018.

 

Real Estate Assets Held for Sale

 

We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 2019 or 2018.

 

Any properties that are treated as “subject to sales contract” on the Consolidated Balance Sheets and are listed in detail in Schedule III, “Real Estate and Accumulated Depreciation” are those in which we have not recognized the legal sale according to the guidance in ASC 360-20 due to various factors, disclosed in Item 1 “Significant Real Estate Acquisitions/Dispositions and Financing.” Any sale transaction where the guidance reflects that a sale had not occurred, the asset involved in the transaction, including the debt, if appropriate, and property operations, remained on the books of the Company. We continue to charge depreciation to expense as a period costs for the property until such time as the property has been classified as held for sale in accordance with guidance reflected in ASC 360-10-45 “Impairment or Disposal of Long-Lived Assets.”

 

27  

 

Investment in Unconsolidated Real Estate Ventures

 

Except for ownership interests in variable interest entities, we account for our investments in unconsolidated real estate ventures under the equity method of accounting because we exercise significant influence over, but do not control, these entities. These investments are recorded initially at cost, as investments in unconsolidated real estate ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in earnings of unconsolidated real estate ventures over the life of the related asset. Under the equity method of accounting, our net equity is reflected within the Consolidated Balance Sheets, and our share of net income or loss from the joint ventures is included within the Consolidated Statements of Operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds. For ownership interests in variable interest entities, we consolidate those in which we are the primary beneficiary.

 

Recognition of Rental Income

 

Rental income for commercial property leases is recognized on a straight-line basis over the respective lease terms. In accordance with ASC Topic 805, we recognize rental revenue of acquired in-place “above-”and “below-market” leases at their fair values over the terms of the respective leases. On our Consolidated Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments received pursuant to the terms of the individual commercial lease agreements.

 

Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier.

 

Rental revenue for multi-family real estate property leases is recorded when due from residents and is recognized monthly as earned, which is not materially different than on a straight-line basis as lease terms are normally for periods of one year or less. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible.

 

Other revenue primarily consists of garage, parking, and utility-related fees; termination and late charge fees; non-refundable fees; and various other revenue amounts related to rental activities. Those revenue amounts are recognized when the service is provided.

 

Leases

 

The Company is party to leases as a lessor of residential apartment communities and commercial buildings. The Company adopted ASU 2016-02, Leases, as of January 1, 2019 using the prospective adoption approach, applying the provisions of the new standard to existing leases as of the date of adoption.

 

Lessor Considerations

 

The Company evaluated leases in which it is the lessor, which are comprised of residential apartment community leases. The accounting model for lessors did not significantly change as a result of ASU 2016-02, with the impacts primarily related to the accounting for sales-type and direct financing leases. The Company evaluated its residential leases determining that they continue to be operating leases. For lease agreements that provide for rent concessions and/or scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the non - cancelable term of the lease. The Company’s residential lease term is generally one year.

 

Additionally, for the Company’s residential leases, which are comprised of the lease component and common area maintenance as a non-lease component, the Company determined that (1) the leases are operating leases, (2) the lease component is the predominant component, and (3) that all components of its operating leases share the same timing and pattern of transfer.

 

28  

 

Implementation Considerations and Impact

 

As discussed above, the Company elected to apply certain lessor practical expedients allowed under the standard including:

 

by class of underlying asset for residential leases, to not separate non-lease components from lease components and instead to account for each separate lease and non-lease component as a single lease component;

to exclude costs paid by lessees directly to third parties on behalf of the Company; and

to exclude sales taxes and other similar taxes assessed by a government authority and collected by the Company from the lessee.

 

Revenue Recognition on the Sale of Real Estate

 

Sales and the associated gains or losses of real estate are recognized in accordance with the provisions of ASC Topic 360-20, “Property, Plant and Equipment – Real Estate Sale”. The specific timing of a sale is measured against various criteria in ASC 360-20 related to the terms of the transaction and any continuing involvement in the form of management or financial assistance associated with the properties. If the sales criteria for the full accrual method are not met, we defer some or all of the gain recognition and account for the continued operations of the property by applying the finance, leasing, deposit, installment or cost recovery methods, as appropriate, until the sales criteria are met.

 

Non-performing Notes Receivable

 

We consider a note receivable to be non-performing when the maturity date has passed without principal repayment and the borrower is not making interest payments in accordance with the terms of the agreement.

 

Interest Recognition on Notes Receivable

 

We record interest income as earned in accordance with the terms of the related loan agreements.

 

Allowance for Estimated Losses

 

We assess the collectability of notes receivable on a periodic basis, of which the assessment consists primarily of an evaluation of cash flow projections of the borrower to determine whether estimated cash flows are sufficient to repay principal and interest in accordance with the contractual terms of the note. We recognize impairments on notes receivable when it is probable that principal and interest will not be received in accordance with the contractual terms of the loan. The amount of the impairment to be recognized generally is based on the fair value of the partnership’s real estate that represents the primary source of loan repayment. See Note 5 “Notes and Interest Receivable” for details on our notes receivable.

 

Fair Value of Financial Instruments

 

We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

 

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:

 

Level 1— Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.

 

29  

 

Level 2— Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3— Unobservable inputs that are significant to the fair value measurement.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

Related parties

 

We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests, or affiliates of the entity.

 

Results of Operations

 

The discussion of our results of operations is based on management’s review of operations, which is based on our segments. Our segments consist of apartments, commercial buildings, hotels, land and other. For discussion purposes, we break these segments down into the following sub-categories; same property portfolio, acquired properties, and developed properties in the lease-up phase. The same property portfolio consists of properties that were held by us for the entire period for both years being compared. The acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared. Developed properties in the lease-up phase consist of completed projects that are being leased-up. As we complete each phase of the project, we lease-up that phase and include those revenues in our continued operations. Once a developed property becomes leased-up (80% or more) and is held the entire period for both years under comparison, it is considered to be included in the same property portfolio. Income-producing properties that we have sold during the year are reclassified to discontinuing operations for all periods presented. The other segment consists of revenue and operating expenses related to the notes receivable and corporate entities.

 

The following discussion is based on our Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 as included in Item 8. “Consolidated Financial Statements and Supplementary Data”. Continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years.

 

The following table shows the total number of income-producing properties, and other key financial measures as of December 31, 2019, 218 and 2017:

 

 

 

2019

 

 

2018

 

 

2017

 

Residential properties (Company owned)

 

 

10

 

 

 

9

 

 

 

51

 

Residential properties (total apartment units)

 

 

1,657

 

 

 

1,489

 

 

 

8,606

 

Residential - average annual rental revenue per sqf

 

$

13.36

 

 

$

6.53

 

 

$

11.83

 

VAA joint venture - residential properties

 

 

51

 

 

 

49

 

 

 

 

VAA residential properties (total apartment units)

 

 

9,888

 

 

 

9,192

 

 

 

 

VAA residential - average annual rental revenue per sqf

 

$

14.74

 

 

$

12.83

 

 

$

 

Commercial properties (Company owned)

 

 

7

 

 

 

7

 

 

 

7

 

Commercial properties - total sqf

 

 

1,697,890

 

 

 

1,697,890

 

 

 

1,697,890

 

Commercial - average annual rental revenue per sqf

 

$

25.61

 

 

$

19.80

 

 

$

18.55

 

 

30  

 

Comparison of the year ended December 31, 2019 to the year ended December 31, 2018:

 

For the year ended December 31, 2019, we reported net loss applicable to common shares of $15.9 million or ($1.00) diluted earnings per share compared to a net income applicable to common shares of $172.8 million or $10.35 diluted earnings per share for the year ended December 31, 2018.  

 

Revenues

 

Rental and other property revenues were $47.9 million for the year ended December 31, 2019, compared to $121.0 million for the same period in 2018. The $73.1 million decrease is primarily due to a decrease in the amount of multifamily residential apartment buildings currently in our portfolio of ten as compared to forty-eight multifamily residential apartment buildings for the period January 1 through November 19, 2018 as a result of the deconsolidation of forty-nine residential apartment properties that were sold into the VAA Joint Venture on November 19, 2018. As the assets are now treated as unconsolidated investments, our share of rental revenues is part of income from unconsolidated investments in the current period and are no longer treated as rental income (Refer to Note 2). 

 

Expenses

 

Property operating expenses decreased by $33.9 million to $25.7 million for the year ended December 31, 2019 as compared to $59.6 million for the same period in 2018. The decrease in property operating expenses is primarily due to the deconsolidation of forty-nine residential apartment properties that were sold into the VAA Joint Venture during the fourth quarter of 2018 which resulted in a decrease in salary and related payroll expenses of $6.7 million, real estate taxes of approximately $11.4 million, management fees paid to third parties of $2.6 million and other general property operating and maintenance expenses of $13.2 million.

 

Depreciation and amortization decreased by $9.3 million to $13.4 million during the year ended December 31, 2019 as compared to $22.7 million for the same period in 2018. This decrease is primarily due to the deconsolidation of the residential apartments in connection with our previous sale and contribution of our interests to the VAA Joint Venture.

 

General and administrative expense was $13.3 million for the year ended December 31, 2019, compared to $12.7 million for the same period in 2018. The increase of $0.6 million in general and administrative expenses is primarily due to increases in fees paid to our Advisors of $0.5 million, and other general and administrative expenses of $0.1 million.

 

Net income fee was $0.4 million for the year ended December 31, 2019. This represents a decrease of $0.2 million compared to the prior year net income fee of $0.6 million. The net income fee paid to Pillar is calculated at 7.5% of net income.

 

Advisory fees were $6.6 million for the year ended December 31, 2019. This represents a decrease of $4.9 million compared to the prior year advisory fees of $11.5 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

Other income (expense)

 

Interest income was $25.9 million for the year ending December 31, 2019, compared to $21.6 million for the same period in 2018. The increase of $4.3 million was primarily due to an increase in interest income of approximately $3.2 million on receivables owed from our Advisors and $1.1 million on note receivables owed by related parties.

 

Other income was $11.0 million for the year ending December 31, 2019, compared to $28.9 million for the same period in 2018, a decrease of $17.9 million. For the year ending December 31, 2019, we recognized a gain of approximately $9.2 million as a result of deferred income associated with the sale of property in previous years, received cash proceeds of $3.1 million from the collection of tax increment incentives from the city of Farmers Branch, Texas related to infrastructure development work at Mercer Crossing, and recognized miscellaneous income of approximately $2.4 million, offset by general expenses of approximately $3.7 million.  For the same period a year ago, we received insurance proceeds of $7.6 million on Mahogany Run Golf Course, recognized a gain of $17.6 million as a result of deferred income related to the sale of land, and recognized miscellaneous income of approximately $2.2 million.

 

31  

 

Mortgage and loan interest expense was $39.9 million for the year ending December 31, 2019, as compared to $66.1 million for the same period in 2018. The decrease of $26.2 million is primarily due to the deconsolidation of residential apartment properties into the VAA Joint Venture which were encumbered by mortgage debt.

 

Foreign currency transaction was a loss of $15.1 million for the year ending December 31, 2019, as compared to a gain of $12.4 million for the same period in 2018. The loss is due to the unfavorable exchange rate between the Israel Shekels and the U.S. Dollar related to our Israel Shekels denominated bonds and the increase in our bonds obligations during the year ended December 31, 2019 as compared to the same period a year ago.

 

Loss on debt extinguishment was $5.2 million with no comparable amount in 2018. The loss is the result of debt issuance costs write-off of $1.4 million and prepayment penalty of approximately $3.9 million associated with the payment of $41.5 million of mortgage debt for one of our commercial building.   

 

Loss from unconsolidated investments was a net of $2.3 million for the year ending December 31, 2019, as compared to net earnings of $1.5 million for the year ended December 31, 2018. The loss from unconsolidated investments during the year ended December 31, 2019, was driven primarily from our share in the losses reported by our joint venture VAA of $2.8 million (Refer to Note 2).

 

Loss from the sale of income-producing property increased for the year ending December 31, 2019 as compared to the same period a year ago. During the year ended December 31, 2019, we sold a multifamily residential property for a sales price of $3.1 million and recorded a loss of $0.08 million. During year ended December 31, 2018, we sold six multifamily residential properties at an aggregate sales price of $8.5 million and recorded no gain or loss from the sale.

 

Gain on land sales decreased by $2.1 million for the year ending December 31, 2019, to $15.3 million as compared to $17.4 million for the same period a year ago. During the year ending December 31, 2019, we sold 105.1 acres of land for an aggregate sales price of $30.0 million and recorded a gain of $17.4 million.  For the same period a year ago, we sold approximately 112.2 acres of land for an aggregate sales price of $43.3 million and recorded a gain of $17.4 million. 

 

Comparison of the year ended December 31, 2018 to the year ended December 31, 2017:

 

For the year ended December 31, 2018, we reported net income applicable to common shares of $172.8 million or $10.35 diluted earnings per share compared to a net loss applicable to common shares of $9.5 million or ($0.61) diluted earnings per share for the year ended December 31, 2017. The current year net income applicable to common shares of $172.8 million includes a gain of approximately $154.1 million from the disposition of 50% interest in VAA. Current year net income also includes gain on sales of land of $17.4 million and no gain on sales of income-producing properties, compared to the prior year net loss which included gain on sales of income producing properties of $16.7 million and gain on land sales of $4.9 million.

 

Revenues

 

Rental and other property revenues were $121.0 million for the year ended December 31, 2018. This represents a decrease of $5.2 million compared to the prior year revenues of $126.2 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

 

Expenses

 

Property operating expenses were $59.6 million for the year ended December 31, 2018. This represents a decrease of $4.5 million, compared to prior year operating expenses of $64.1 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

 

32  

 

Depreciation and amortization expenses were $22.7 million for the year ended December 31, 2018. This represents a decrease of $3.0 million compared to prior year depreciation of $25.7 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

 

General and administrative expenses were $12.7 million for the year ended December 31, 2018. This represents an increase of $5.0 million compared to the prior year expenses of $7.7 million. The increase in general and administrative expenses was due primarily to an increase in fees paid to our Advisors of approximately $1.5 million, general fees of approximately $1.5 million associated with finalizing the formation of the joint venture, legal and regulatory fees of $0.8 million and general and professional fees of approximately $1.0 million.

 

Net income fee was $0.6 million for the year ended December 31, 2018. This represents an increase of $0.3 million compared to the prior year net income fee of $0.3 million. The net income fee paid to Pillar is calculated at 7.5% of net income.

 

Advisory fees were $11.5 million for the year ended December 31, 2018. This represents an increase of $0.4 million compared to the prior year advisory fees of $11.1 million. Advisory fees are computed based on a gross asset fee of 0.0625% per month (0.75% per annum) of the average of the gross asset value.

 

Other income (expense)

 

Interest income was $21.6 million for the year ending December 31, 2018 compared to $18.9 million for the year ended December 31, 2017, an increase of $2.7 million. This increase was primarily due to an increase of $3.6 million in interest on receivable owed from our Advisors, offset by a decrease of $0.9 in interest on notes receivable from other related parties.

 

Mortgage and loan interest expense was $66.1 million for the year ended December 31, 2018. This represents an increase of $0.1 million compared to the prior year expense of $66.2 million. The decrease is primarily due to the contribution of fifty-two properties to the joint venture VAA on November 19, 2018. 

 

No gain on sales of income producing properties was recognized during the year ended December 31, 2018. Gain on sale of income-producing properties was $16.7 million for the year ended December 31, 2017.

 

Gain on land sales was $17.4 million and $4.9 million for the years ended December 31, 2018 and 2017, respectively. The increase of approximately $12.5 million was primarily due to sales of land at Mercer Crossing recognized in 2018.

 

Other income was $28.9 million and $4.1 million for the years ended December 31, 2018 and 2017, respectively. The increase of $24.8 million was primarily due to a  $17.6 million gain recognized in September 2018 for deferred income associated with the sale of assets, as well as insurance proceeds of approximately $7.6 million received subsequent to the sale of Mahogany Run Golf Course.

 

Gain on disposition of 50% interest in VAA was $154.1 million for the year ended December 31, 2018 as a result of the contribution of fifty-two properties to the joint venture VAA (Refer to Note 2 “Investment in VAA”).

 

Liquidity and Capital Resources

 

General

 

Our principal liquidity needs are:

 

fund normal recurring expenses;

 

meet debt service and principal repayment obligations including balloon payments on maturing debt;

 

33  

 

fund capital expenditures, including tenant improvements and leasing costs;

 

fund development costs not covered under construction loans; and

 

fund possible property acquisitions.

 

Our principal sources of cash have been and will continue to be:

 

property operations;

 

proceeds from land and income-producing property sales;

 

collection of mortgage notes receivable;

 

collections of receivables from related companies;

 

refinancing of existing debt; and

 

additional borrowings, including mortgage notes payable, and lines of credit.

 

It is important to realize that the current status of the banking industry has had a significant effect on our industry. The banks’ willingness and/or ability to originate loans affects our ability to buy and sell property, and refinance existing debt. We are unable to foresee the extent and length of this down-turn. A continued and extended decline could materially impact our cash flows. We draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction loans, which are converted to traditional mortgages upon completion of the project.

 

We may also issue additional equity securities, including common stock. Management anticipates that our cash as of December 31, 2019, along with cash that will be generated in 2020 from notes and interest receivables, will be sufficient to meet all of our cash requirements. Management intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet its liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of the Company’s current maturity obligations.

 

Management reviews the carrying values of ARL’s properties and mortgage notes receivable at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if, in the case of a property, the future cash flow from the property (undiscounted and without interest) is less than the carrying amount of the property. The property review generally includes: (1) selective property inspections, (2) a review of the property’s current rents compared to market rents, (3) a review of the property’s expenses, (4) a review of maintenance requirements, (5) a review of the property’s cash flow, (6) discussions with the manager of the property, and (7) a review of properties in the surrounding area. For notes receivable, impairment is considered to exist if it is probable that all amounts due under the terms of the note will not be collected. If impairment is found to exist, a provision for loss is recorded by a charge against earnings to the extent that the investment in the note exceeds management’s estimate of the fair value of the collateral securing such note. The mortgage note receivable review includes an evaluation of the collateral property securing each note.

 

34  

 

Cash Flow Summary

 

The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands):

 

 

 

December 31,

 

 

 

 

 

 

2019

 

 

2018

 

 

Incr /(Decr)

 

Net cash (used in) operating activities

 

$

(40,641

)

 

$

(172,332

)

 

$

131,691

 

Net cash (used in) provided by investing activities

 

$

(3,705

)

 

$

147,625

 

 

$

(151,330

)

Net cash provided by financing activities

 

$

21,042

 

 

$

42,784

 

 

$

(21,742

)

 

The primary use of cash for operations is daily operating costs, general and administrative expenses, advisory fees, and land holding costs. Our primary source of cash from operating activities is from rental income on properties. Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties.

 

Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the year ended December 31, 2019, we advanced $21.4 million toward various notes receivable, purchased land for development for $3.4 million, and invested approximately $33.7 million for the construction and development of new properties and improvement of income producing properties. For the year ended December 31, 2018, we advanced $16.8 million toward various notes receivable and invested $85.1 million for development of new properties and improvement of income producing properties. 

 

Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the year ended December 31, 2019, we received aggregate sales proceeds of $27.3 million from the sale of 105.1 acres of land, received $19.8 million in payments from related party note receivables,  and recorded a gain of $15.3 million and sold a residential property for which we received cash proceeds of $1.3 million and a plot of land valued at $1.8 million. For the year ended December 31, 2018, we received aggregate sales proceeds of $11.9 million from the sale of approximately 112 acres of land and recorded a gain on the sale of $17.4 million. In addition, we received aggregate sale proceeds of $4.9 million from the sale of seven income producing properties and a golf course, $236.8 million from the formation of the joint venture with Macquarie, and collected $6.5 million from a related party note receivable.

 

Our primary sources of cash from financing activities are from proceeds on notes payables. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.

 

For the year ended December 31, 2019, the increase in cash flow from financing activities was due to proceeds from borrowings of $25.7 million, and $78.1 million from the sale of nonconvertible Series C Bonds by Southern, offset by payments to our notes payable of $52.9 million and bond payments of $21.7 million. 

 

For the year ended December 31, 2018, the increase in cash flow from financing activities was due primarily to proceeds from borrowings of $123.3 million, and proceeds received from the sale of nonconvertible Series B Bonds by Southern of $59.2 million, offset by payments to our notes payable of $124.6 million.

 

Equity Investments.

 

ARL has from time to time purchased shares of IOR and TCI. The Company may purchase additional equity securities of IOR and TCI through open market and negotiated transactions to the extent ARL’s liquidity permits.

 

Equity securities of TCI held by ARL (and of IOR held by TCI) may be deemed “restricted securities” under Rule 144 of the Securities Act of 1933 (“Securities Act”). Accordingly, ARL may be unable to sell such equity securities other than in a registered public offering or pursuant to an exemption under the Securities Act for a one-year period after they are acquired. Such restrictions may reduce ARL’s ability to realize the full fair value of such investments if ARL attempted to dispose of such securities in a short period of time.

 

35  

 

Contractual Obligations

 

The following table represents our contractual obligations at December 31, 2019 (in thousands):

 

 

 

Total

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

Notes and interest payable (1)

 

$

342,903

 

 

$

45,363

 

 

$

63,775

 

 

$

18,920

 

 

$

41,951

 

 

$

5,401

 

 

$

167,493

 

Bonds and interest payable (1)

 

 

276,642

 

 

 

37,317

 

 

 

47,573

 

 

 

45,057

 

 

 

120,324

 

 

 

13,599

 

 

 

12,772

 

Total

 

$

619,545

 

 

$

82,680

 

 

$

111,348

 

 

$

63,977

 

 

$

162,275

 

 

$

19,000

 

 

$

180,265

 

 

(1)

The notes and bonds contain financial covenants that, if certain thresholds are not met, could allow the lender to accelerate principal payments or cause the notes to become due immediately.

 

Environmental Matters

 

Under various federal, state and local environmental laws, ordinances and regulations, ARL may be potentially liable for removal or remediation costs, as well as certain other potential costs relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.

 

Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on ARL’s business, assets or results of operations.

 

Inflation

 

The effects of inflation on ARL’s operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gains to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments and the cost of new financings as well as the cost of variable interest rate debt will be affected.

 

ITEM 7A. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

ARL’s primary market risk exposure consists of changes in interest rates on borrowings under our debt instruments that bear interest at variable rates that fluctuate with market interest rates and maturing debt that has to be refinanced. ARL’s future operations, cash flow and fair values of financial instruments are also partially dependent on the then existing market interest rates and market equity prices.

 

As of December 31, 2019, our outstanding notes payable consisted of approximately $261.4 million, out of which $257.5 million were notes with fixed interest rates and $3.9 million represented a note with a variable interest rate of 9.75%. Our overall weighted average interest rate at December 31, 2019 and 2018 was 5.04% and 7.29%, respectively.

 

ARL’s interest rate sensitivity position is managed by the capital markets department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. ARL’s earnings are affected as changes in short-term interest rates affect its cost of variable-rate debt and maturing fixed-rate debt.

 

36  

 

If market interest rates for variable-rate debt average 100 basis points more in 2020 than they did during 2019, ARL’s interest expense would increase and net income would decrease by approximately $0.002 million. This amount is determined by considering the impact of hypothetical interest rates on ARL’s borrowing cost. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in ARL’s financial structure.

 

The following table contains exposures that existed at December 31, 2019. Anticipation of exposures or risk on positions that could possibly arise was not considered. TCI’s ultimate interest rate risk and its effect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level (dollars in thousands):

 

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

Total

 

Note Receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed interest rate - fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

156,185

 

Instrument’s maturities

 

$

61,807

 

 

$

33,328

 

 

$

25,483

 

 

$

 

 

$

 

 

$

35,567

 

 

$

156,185

 

Interest

 

 

12,871

 

 

 

8,474

 

 

 

4,766

 

 

 

3,920

 

 

 

3,920

 

 

 

3,920

 

 

$

37,871

 

Weighted Average Rate

 

 

6.18

%

 

 

11.12

%

 

 

4.22

%

 

 

12.00

%

 

 

12.00

%

 

 

12.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes Payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Rate - fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

   3,908

 

Instrument’s maturities

 

$

3,908

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

   3,908

 

Interest

 

 

347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

347

 

Average interest rate (1)

 

 

9.75

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed interest rate - fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

257,528

 

Instrument’s maturities

 

$

30,396

 

 

$

55,393

 

 

$

13,437

 

 

$

36,770

 

 

$

   1,995

 

 

$

119,537

 

 

$

257,528

 

Interest

 

 

10,712

 

 

 

8,382

 

 

 

5,483

 

 

 

5,181

 

 

 

3,406

 

 

 

47,954

 

 

$

81,118

 

Average interest rate

 

 

8.51

%

 

 

5.90

%

 

 

3.99

%

 

 

5.22

%

 

 

3.63

%

 

 

3.74

%

 

 

 

 

 

(1) Interest rates on variable rate notes payable are equal to the variable rates in effect on December 31, 2019.

37