UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended September 30, 2015
or
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the transition period from ______ to ______
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)
|
(I.R.S.
Employer
Identification
No.)
|
1603
Lyndon B. Johnson Freeway, Suite 800, Dallas, Texas 75234
(Address
of principal executive offices)
(Zip
Code)
(469)
522-4200
(Registrant’s
telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) ☒
Yes ☐ No.
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ☐ |
Accelerated filer |
☐ |
|
|
|
Non-accelerated filer ☐
(Do not check if a smaller reporting company) |
Smaller reporting company |
☒ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
☒ No.
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value |
15,514,360 |
(Class) |
(Outstanding at November 6, 2015) |
AMERICAN
REALTY INVESTORS, INC.
FORM
10-Q
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
AMERICAN
REALTY INVESTORS, INC.
CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
September
30, |
|
December
31, |
|
|
2015 |
|
2014 |
|
|
(dollars
in thousands, except share and par value amounts) |
Assets |
|
|
|
|
Real estate, at cost |
|
$ |
961,099 |
|
|
$ |
810,214 |
|
Real estate subject to sales contracts at
cost, net of depreciation ($194 for 2015 and $2,300 for 2014) |
|
|
9,213 |
|
|
|
19,026 |
|
Less
accumulated depreciation |
|
|
(145,101 |
) |
|
|
(129,477 |
) |
Total real estate |
|
|
825,211 |
|
|
|
699,763 |
|
Notes and interest receivable |
|
|
|
|
|
|
|
|
Performing (including
$121,099 in 2015 and $139,466 in 2014 from related parties) |
|
|
132,452 |
|
|
|
149,484 |
|
Non-performing |
|
|
— |
|
|
|
3,161 |
|
Less
allowance for doubtful accounts (including $15,537 in 2015 and 2014 from related parties) |
|
|
(17,037 |
) |
|
|
(18,279 |
) |
Total notes and interest
receivable |
|
|
115,415 |
|
|
|
134,366 |
|
Cash and cash equivalents |
|
|
11,989 |
|
|
|
12,299 |
|
Restricted cash |
|
|
42,214 |
|
|
|
49,266 |
|
Investments in unconsolidated subsidiaries
and investees |
|
|
5,152 |
|
|
|
4,279 |
|
Receivable from related party |
|
|
43,301 |
|
|
|
21,414 |
|
Other assets |
|
|
43,829 |
|
|
|
44,111 |
|
Total
assets |
|
$ |
1,087,111 |
|
|
$ |
965,498 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity |
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes and interest payable |
|
$ |
782,570 |
|
|
$ |
638,891 |
|
Notes related to subject
to sales contracts |
|
|
7,793 |
|
|
|
20,168 |
|
Deferred revenue (including
$71,603 in 2015 and $72,564 in 2014 from sales to related parties) |
|
|
71,672 |
|
|
|
74,409 |
|
Accounts
payable and other liabilities (including $7,001 in 2015 and $11,024 in 2014 to related parties) |
|
|
46,412 |
|
|
|
52,442 |
|
|
|
|
908,447 |
|
|
|
785,910 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, Series
A: $2.00 par value, authorized 15,000,000 shares, issued and outstanding 2,000,614 and 2,461,252 shares in 2015 and 2014 (liquidation
preference $10 per share), including 900,000 shares in 2015 and 2014 held by ARL or subsidiaries. |
|
|
2,205 |
|
|
|
3,126 |
|
Common stock, $0.01 par
value, authorized 100,000,000 shares; issued 15,930,145 and 14,443,404 shares; outstanding 15,514,360 and 14,027,619 shares in
2015 and 2014, respectively; including 140,000 shares held by TCI (consolidated) in 2015 and 2014. |
|
|
156 |
|
|
|
141 |
|
Treasury stock at cost;
415,785 shares |
|
|
(6,395 |
) |
|
|
(6,395 |
) |
Paid-in capital |
|
|
110,136 |
|
|
|
108,378 |
|
Retained
earnings |
|
|
18,435 |
|
|
|
19,090 |
|
Total American Realty
Investors, Inc. shareholders' equity |
|
|
124,537 |
|
|
|
124,340 |
|
Non-controlling interest |
|
|
54,127 |
|
|
|
55,248 |
|
Total
shareholders' equity |
|
|
178,664 |
|
|
|
179,588 |
|
Total
liabilities and shareholders' equity |
|
$ |
1,087,111 |
|
|
$ |
965,498 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
AMERICAN
REALTY INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
For
the Three Months Ended |
|
For
the Nine Months Ended |
|
|
September
30, |
|
September
30, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
|
|
(dollars
in thousands, except per share amounts) |
Revenues: |
|
|
|
|
|
|
Rental and
other property revenues (including $211 and $175 for the three months and $591 and $526 for the nine months ended 2015 and 2014,
respectively, from related parties) |
|
$ |
27,826 |
|
|
$ |
19,326 |
|
|
$ |
75,223 |
|
|
$ |
57,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses
(including $202 and $172 for the three months and $551 and $511 for the nine months ended 2015 and 2014, respectively, from related
parties) |
|
|
14,499 |
|
|
|
10,766 |
|
|
|
37,467 |
|
|
|
30,677 |
|
Depreciation and amortization |
|
|
6,569 |
|
|
|
4,463 |
|
|
|
16,410 |
|
|
|
13,099 |
|
General and administrative
(including $634 and $926 for the three months and $2,554 and $2,686 for the nine months ended 2015 and 2014, respectively, from
related parties) |
|
|
1,417 |
|
|
|
1,590 |
|
|
|
5,215 |
|
|
|
6,770 |
|
Net income fee to related
party |
|
|
232 |
|
|
|
(186 |
) |
|
|
567 |
|
|
|
514 |
|
Advisory
fee to related party |
|
|
3,024 |
|
|
|
2,225 |
|
|
|
7,625 |
|
|
|
6,670 |
|
Total
operating expenses |
|
|
25,741 |
|
|
|
18,858 |
|
|
|
67,284 |
|
|
|
57,730 |
|
Net operating income
(loss) |
|
|
2,085 |
|
|
|
468 |
|
|
|
7,939 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (including
$3,886 and $4,699 for the three months and $13,190 and $14,692 for the nine months ended 2015 and 2014, respectively, from related
parties) |
|
|
3,950 |
|
|
|
5,106 |
|
|
|
13,722 |
|
|
|
15,264 |
|
Other income |
|
|
(72 |
) |
|
|
1,332 |
|
|
|
4,040 |
|
|
|
1,738 |
|
Mortgage and loan interest
(including $982 and $978 for the three months and $2,797 and $2,709 for the nine months ended 2015 and 2014, respectively,
from related parties) |
|
|
(13,481 |
) |
|
|
(9,901 |
) |
|
|
(34,203 |
) |
|
|
(28,651 |
) |
Loan charges and prepayment
penalties |
|
|
(1,545 |
) |
|
|
(1,044 |
) |
|
|
(2,260 |
) |
|
|
(2,626 |
) |
Earnings from unconsolidated
subsidiaries and investees |
|
|
81 |
|
|
|
320 |
|
|
|
276 |
|
|
|
266 |
|
Litigation
settlement (expense) |
|
|
(85 |
) |
|
|
(86 |
) |
|
|
(203 |
) |
|
|
3,666 |
|
Total
other expenses |
|
|
(11,152 |
) |
|
|
(4,273 |
) |
|
|
(18,628 |
) |
|
|
(10,343 |
) |
Loss before gain on land
sales, non-controlling interest, and taxes |
|
|
(9,067 |
) |
|
|
(3,805 |
) |
|
|
(10,689 |
) |
|
|
(10,087 |
) |
Gain on sale of income
producing properties |
|
|
735 |
|
|
|
— |
|
|
|
735 |
|
|
|
— |
|
Gain
on land sales |
|
|
1,958 |
|
|
|
40 |
|
|
|
7,861 |
|
|
|
634 |
|
Net income (loss) from
continuing operations before taxes |
|
|
(6,374 |
) |
|
|
(3,765 |
) |
|
|
(2,093 |
) |
|
|
(9,453 |
) |
Income
tax benefit (expense) |
|
|
16 |
|
|
|
786 |
|
|
|
107 |
|
|
|
5,030 |
|
Net income (loss) from
continuing operations |
|
|
(6,358 |
) |
|
|
(2,979 |
) |
|
|
(1,986 |
) |
|
|
(4,423 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations |
|
|
47 |
|
|
|
477 |
|
|
|
306 |
|
|
|
(454 |
) |
Gain
on sale of real estate from discontinued operations |
|
|
— |
|
|
|
1,770 |
|
|
|
— |
|
|
|
14,826 |
|
Income
tax benefit (expense) from discontinued operations |
|
|
(16 |
) |
|
|
(786 |
) |
|
|
(107 |
) |
|
|
(5,030 |
) |
Net
income (loss) from discontinued operations |
|
|
31 |
|
|
|
1,461 |
|
|
|
199 |
|
|
|
9,342 |
|
Net income (loss) |
|
|
(6,327 |
) |
|
|
(1,518 |
) |
|
|
(1,787 |
) |
|
|
4,919 |
|
Net
income (loss) attributable to non-controlling interest |
|
|
1,164 |
|
|
|
200 |
|
|
|
1,132 |
|
|
|
(1,170 |
) |
Net income attributable
to American Realty Investors, Inc. |
|
|
(5,163 |
) |
|
|
(1,318 |
) |
|
|
(655 |
) |
|
|
3,749 |
|
Preferred
dividend requirement |
|
|
(275 |
) |
|
|
(428 |
) |
|
|
(941 |
) |
|
|
(1,653 |
) |
Net
income applicable to common shares |
|
$ |
(5,438 |
) |
|
$ |
(1,746 |
) |
|
$ |
(1,596 |
) |
|
$ |
2,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
- basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations |
|
$ |
(0.35 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.59 |
) |
Net
income from discontinued operations |
|
|
— |
|
|
|
0.11 |
|
|
|
0.01 |
|
|
|
0.76 |
|
Net
income applicable to common shares |
|
$ |
(0.35 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
- diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from continuing operations |
|
$ |
(0.35 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.12 |
) |
|
$ |
(0.59 |
) |
Net
income (loss) from discontinued operations |
|
|
— |
|
|
|
0.11 |
|
|
|
0.01 |
|
|
|
0.76 |
|
Net
income applicable to common shares |
|
$ |
(0.35 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.11 |
) |
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in
computing earnings per share |
|
|
15,514,360 |
|
|
|
13,619,647 |
|
|
|
14,975,212 |
|
|
|
12,231,146 |
|
Weighted average common shares used in
computing diluted earnings per share |
|
|
15,514,360 |
|
|
|
13,619,646 |
|
|
|
14,975,212 |
|
|
|
12,231,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
attributable to American Realty Investors, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from
continuing operations |
|
$ |
(5,194 |
) |
|
$ |
(2,779 |
) |
|
$ |
(854 |
) |
|
$ |
(5,593 |
) |
Net
income (loss) from discontinued operations |
|
|
31 |
|
|
|
1,461 |
|
|
|
199 |
|
|
|
9,342 |
|
Net
income applicable to American Realty Investors, Inc. |
|
$ |
(5,163 |
) |
|
$ |
(1,318 |
) |
|
$ |
(655 |
) |
|
$ |
3,749 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
AMERICAN
REALTY INVESTORS, INC.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY
For
the Nine Months Ended September 30, 2015
(unaudited,
dollars in thousands, except share amounts)
|
|
Total |
|
Comprehensive |
|
Preferred |
|
Common
Stock |
|
Treasury |
|
Paid-in |
|
Retained |
|
Non-controlling |
|
|
Equity |
|
Income
(Loss) |
|
Stock |
|
Shares |
|
Amount |
|
Stock |
|
Capital |
|
Earnings |
|
Interest |
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
$ |
179,588 |
|
|
$ |
(53,040 |
) |
|
$ |
3,126 |
|
|
|
14,443,404 |
|
|
$ |
141 |
|
|
$ |
(6,395 |
) |
|
$ |
108,378 |
|
|
$ |
19,090 |
|
|
$ |
55,248 |
|
Net income (loss) |
|
|
(1,787 |
) |
|
|
(1,787 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(655 |
) |
|
|
(1,132 |
) |
Acquisition of non-controlling
interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Contributions from
non-controlling interests |
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Distribution to non-controlling
interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Sale of controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Assumption of non-controlling
interests |
|
|
(470 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(470 |
) |
|
|
— |
|
|
|
— |
|
Sale of non-controlling interests |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Conversion of preferred
stock into common stock |
|
|
2,263 |
|
|
|
— |
|
|
|
(921 |
) |
|
|
1,070,956 |
|
|
|
15 |
|
|
|
— |
|
|
|
3,169 |
|
|
|
— |
|
|
|
— |
|
Series A preferred
stock dividend ($1.00 per share) |
|
|
(941 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(941 |
) |
|
|
— |
|
|
|
— |
|
Repurchase/sale of
treasury shares, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Balance, September
30, 2015 |
|
$ |
178,664 |
|
|
$ |
(54,827 |
) |
|
$ |
2,205 |
|
|
|
15,514,360 |
|
|
$ |
156 |
|
|
$ |
(6,395 |
) |
|
$ |
110,136 |
|
|
$ |
18,435 |
|
|
$ |
54,127 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
AMERICAN
REALTY INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
|
|
For the
Nine Months Ended |
|
|
September
30, |
|
|
2015 |
|
2014 |
|
|
(dollars
in thousands) |
|
|
|
|
|
Net income |
|
$ |
(1,787 |
) |
|
$ |
4,919 |
|
Other comprehensive
income (loss) |
|
|
— |
|
|
|
— |
|
Total comprehensive income |
|
|
(1,787 |
) |
|
|
4,919 |
|
Comprehensive
(income) loss attributable to non-controlling interest |
|
|
1,132 |
|
|
|
(1,170 |
) |
Comprehensive income
attributable to American Realty Investors, Inc. |
|
$ |
(655 |
) |
|
$ |
3,749 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
AMERICAN
REALTY INVESTORS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
|
For the
Nine Months Ended |
|
|
September
30, |
|
|
2015 |
|
2014 |
|
|
(dollars
in thousands) |
Cash Flow From Operating Activities: |
|
|
|
|
Net income |
|
$ |
(1,787 |
) |
|
$ |
4,919 |
|
Adjustments
to reconcile net income applicable to common shares to net cash flow from
operating activities: |
|
|
|
|
|
|
|
|
Gain
on sale of land |
|
|
(7,861 |
) |
|
|
(634 |
) |
Gain
on sale of income-producing properties |
|
|
(735 |
) |
|
|
(14,826 |
) |
Depreciation
and amortization |
|
|
16,410 |
|
|
|
13,763 |
|
Amortization
of deferred borrowing costs |
|
|
1,748 |
|
|
|
2,415 |
|
Earnings
from unconsolidated subsidiaries and investees |
|
|
(276 |
) |
|
|
54 |
|
Decrease
(increase) in assets: |
|
|
|
|
|
|
|
|
Accrued
interest receivable |
|
|
764 |
|
|
|
10,727 |
|
Other
assets |
|
|
1,397 |
|
|
|
2,002 |
|
Prepaid
expense |
|
|
(12,953 |
) |
|
|
(2,318 |
) |
Escrow |
|
|
5,845 |
|
|
|
3,556 |
|
Earnest
money |
|
|
(1,193 |
) |
|
|
(5 |
) |
Rent
receivables |
|
|
(1,384 |
) |
|
|
(15 |
) |
Related
party receivables |
|
|
(21,887 |
) |
|
|
— |
|
Increase
(decrease) in liabilities: |
|
|
|
|
|
|
|
|
Accrued
interest payable |
|
|
(242 |
) |
|
|
43 |
|
Payable
to related parties |
|
|
— |
|
|
|
(8,844 |
) |
Other
liabilities |
|
|
(6,030 |
) |
|
|
(17,294 |
) |
Net
cash used in operating activities |
|
|
(28,184 |
) |
|
|
(6,457 |
) |
|
|
|
|
|
|
|
|
|
Cash Flow From Investing
Activities: |
|
|
|
|
|
|
|
|
Proceeds
from notes receivable |
|
|
27,084 |
|
|
|
— |
|
Origination
or advances of notes receivable |
|
|
(7,655 |
) |
|
|
(20,798 |
) |
Acquisition
of land held for development |
|
|
— |
|
|
|
(3,425 |
) |
Acquisition
of income producing properties |
|
|
(131,220 |
) |
|
|
(19,534 |
) |
Proceeds
from sale of income-producing properties |
|
|
— |
|
|
|
41,666 |
|
Proceeds
from sale of land |
|
|
12,364 |
|
|
|
6,252 |
|
Investment
in unconsolidated real estate entities |
|
|
(597 |
) |
|
|
(402 |
) |
Improvement
of land held for development |
|
|
(2,930 |
) |
|
|
(1,654 |
) |
Improvement of income-producing
properties |
|
|
(7,945 |
) |
|
|
(3,625 |
) |
Sale of non-controlling interest |
|
|
(336 |
) |
|
|
(289 |
) |
Construction
and development of new properties |
|
|
(5,110 |
) |
|
|
(1,026 |
) |
Net
cash provided by (used in) investing activities |
|
|
(116,345 |
) |
|
|
(2,835 |
) |
|
|
|
|
|
|
|
|
|
Cash Flow From Financing
Activities: |
|
|
|
|
|
|
|
|
Proceeds
from notes payable |
|
|
225,950 |
|
|
|
110,308 |
|
Recurring
amortization of principal on notes payable |
|
|
(22,202 |
) |
|
|
(14,540 |
) |
Debt
assumption by buyer, part of seller proceeds |
|
|
(18,495 |
) |
|
|
— |
|
Payments
on maturing notes payable |
|
|
(33,860 |
) |
|
|
(97,564 |
) |
Stock-secured borrowings |
|
|
— |
|
|
|
(568 |
) |
Deferred
financing costs |
|
|
(8,552 |
) |
|
|
(5,707 |
) |
Distributions
to non-controlling interests |
|
|
11 |
|
|
|
(257 |
) |
Preferred
stock dividends - Series A |
|
|
(941 |
) |
|
|
(1,653 |
) |
Conversion
of preferred stock into common stock |
|
|
2,308 |
|
|
|
7,219 |
|
Net
cash provided by (used in) financing activities |
|
|
144,219 |
|
|
|
(2,762 |
) |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents |
|
|
(310 |
) |
|
|
(12,054 |
) |
Cash and cash equivalents,
beginning of period |
|
|
12,299 |
|
|
|
16,437 |
|
Cash and cash equivalents,
end of period |
|
$ |
11,989 |
|
|
$ |
4,383 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures
of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
9,193 |
|
|
$ |
28,004 |
|
The
accompanying notes are an integral part of these consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
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 trades on the New York Stock Exchange (“NYSE”) under
the symbol (“ARL”). Approximately 86.7% of ARL’s stock is owned by related parties. Subsidiaries of ARL own
approximately 80.9% 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”). Accordingly,
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,
a subsidiary of ARL, owns approximately 81.1% of the common stock of Income Opportunity Realty Investors, Inc. (“IOT”).
IOT’s financial results are consolidated with those of TCI and its subsidiaries. Shares of IOT are traded on the
New York Stock Exchange Euronext (“NYSE MKT”) under the symbol (“IOT”).
ARL
invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar
Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the
Board of Directors is directly responsible for managing the affairs of ARL, and for setting the policies which guide it, the day-to-day
operations of ARL are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s
duties include, but are not limited to: locating, evaluating and recommending real estate and real estate-related investment opportunities
and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves
as a consultant to the Board with regard to their decisions in connection with ARL’s business plan and investment policy.
Pillar also serves as an Advisor and Cash Manager to TCI and IOT.
Regis
Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services. ARL engages third-party
companies to lease and manage its apartment properties.
Properties
We
own or had interests in a total property portfolio of 55 income-producing properties as of September 30, 2015. The properties
consisted of:
|
• |
10 commercial properties consisting of
five office buildings, one industrial warehouse, three retail centers and a golf course, comprising in aggregate approximately
2.2 million rentable square feet; |
|
• |
45 apartment communities totaling 7,511
units, excluding apartments being developed; and |
|
• |
4,000 acres of developed and undeveloped
land. |
We
join with various third-party development companies to construct residential apartment communities. We are in the predevelopment
process on several residential apartment communities that have not yet begun construction. At September 30, 2015, we had two apartment
projects in development. The third-party developer typically holds a general partner as well as a majority limited partner interest
in a limited partnership formed for the purpose of building a single property, while we generally take a minority 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 necessary equity contributions while the
third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management,
successful completion 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.
Basis
of Presentation
The
accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been
condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate
to prevent the information presented from being misleading. In the opinion of management, all adjustments (consisting of normal
recurring matters) considered necessary for a fair presentation have been included. The results of operations for the nine months
ended September 30, 2015, are not necessarily indicative of the results that may be expected for other interim periods or for
the full fiscal year.
The
year-end Consolidated Balance Sheet at December 31, 2014 was derived from the audited Consolidated Financial Statements at
that date, but does not include all of the information and disclosures required by U.S. GAAP for complete financial statements.
For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2014. Certain 2014 Consolidated Financial Statement amounts have been
reclassified to conform to the 2015 presentation, including adjustments for discontinued operations.
Principles
of Consolidation
The
accompanying Consolidated Financial Statements include the accounts of the Company, its subsidiaries, generally all of which are
wholly-owned, and all entities in which we have a controlling interest. Arrangements that are not controlled through voting or
similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance
of ASC Topic 810, “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet
certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”)
Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner
and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity
to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate
decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that
are not proportional to their economic interests. The primary beneficiary is generally the entity that provides financial support
and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially
affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
In
determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but
not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide
financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE;
and the similarity with and significance to the business activities of us and the other investors. Significant judgments related
to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs
and general market conditions.
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 is included in consolidated net income. Our investment in Gruppa Florentina, LLC is accounted for under the equity
method.
Real
Estate, Depreciation and Impairment
Real
estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments
are capitalized and depreciated over their estimated useful lives. Depreciation is computed on a straight-line basis over the
useful lives of the properties (buildings and improvements: 10-40 years; furniture, fixtures and equipment: 5-10 years). The Company
continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC
Topic 360 (“ASC 360”), “Property, Plant and Equipment”. Factors considered by management in evaluating
impairment of its existing real estate assets held for investment include significant declines in property operating profits,
annually recurring property operating losses and other significant adverse changes in general market conditions that are considered
permanent in nature. Under ASC 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated
future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the
theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance
sheet date. If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value
of the asset to its estimated fair value.
Real
Estate Held For Sale
We
periodically classify real estate assets as “held for sale”. An asset is classified as held for sale after the approval
of our Board of Directors, after an active program to sell the asset has commenced and if the sale is probable. One of the deciding
factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is
probable within the year. Upon the classification of a real estate asset as held for sale, the carrying value of the asset is
reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset. Subsequent to the classification
of assets as held for sale, no further depreciation expense is recorded. Real estate assets held for sale are stated separately
on the accompanying Consolidated Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified
as an operating asset and depreciation expense is reinstated.
Prior
to January 1, 2015, the operating results of real estate assets held for sale and sold are reported as discontinued operations
in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses,
including depreciation and interest expense, associated with the assets. Subsequent to January 1, 2015, Accounting Standards Update
2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU
2014-08”) substantially changed the criteria for determining whether a disposition qualifies for discontinued operations
presentation. Adoption of this standard will result in substantially fewer of the Company’s dispositions meeting the discontinued
operations criteria.
Cost
Capitalization
Costs
related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated
Balance Sheets. We capitalize interest to qualifying assets under development based on average accumulated expenditures
outstanding during the period. In capitalizing interest to qualifying assets, we first use the interest incurred on specific
project debt, if any, and next use the weighted average interest rate of non-project specific debt. We capitalize interest,
real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready
for its intended use, but no later than one year from the cessation of major construction activity.
We
capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease
agreement and any internal costs that may be applicable. We allocate these costs to individual tenant leases and amortize them
over the related lease term.
Fair
Value Measurement
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. |
|
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.
Deferred
Costs
Costs
relating to the financing of properties are deferred and amortized over the life of the related financing agreement. Amortization
is reflected as interest expense in the Consolidated Statements of Operations, with remaining terms ranging from 6 months to 40
years. Unamortized financing costs are written off when the financing agreement is extinguished before the maturity date.
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.
Newly
Issued Accounting Standards
In
April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, ”Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity”, which changes the criteria for determining which disposals
qualify to be accounted for as discontinued operations and modifies related reporting and disclosure requirements.
Disposals
representing a strategic shift in operations, such as a change in a major line of business, a major geographical area or major
equity investment, that have a major effect on a company’s operations and financial results will be presented as discontinued
operations. If the disposal does qualify as a discontinued operation under ASU 2014-08, the Company will be required to expand
their disclosures about discontinued operations to provide more information on the assets, liabilities, income and expenses of
the disposed component. The classification of operating results as discontinued operations are applied retroactively for all periods
presented. The new standard was effective January 1, 2015. We adopted ASU 2014-08 as of January 1, 2015 and believe future sales
of our individual operating properties will no longer qualify as discontinued operations. Adoption of this standard has resulted
in substantially fewer of the Company’s dispositions meeting the discontinued operations criteria. See Note 8 below.
In
May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts
with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides
for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could
differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease
contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating
the impact the adoption of this guidance has on its financial position and results of operations, if any.
In
April 2015, the FASB issued ASU 2015-03, ”Simplifying the Presentation of Debt Issuance Costs” (“ASU
2015-03”). ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction
from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance
of the standard, debt issuance costs were required to be presented in the balance sheet as an asset. The Company has adopted this
standard effective June 30, 2015. The accompanying financials have been reclassified to reflect the adoption.
NOTE
2. REAL ESTATE ACTIVITY
Below
is a summary of the real estate owned as of September 30, 2015 (dollars in thousands):
Apartments |
|
$ |
578,838 |
|
Apartments under construction |
|
|
7,503 |
|
Commercial properties |
|
|
218,447 |
|
Land held for development |
|
|
156,310 |
|
Real estate subject
to sales contract |
|
|
9,408 |
|
Total real estate |
|
$ |
970,506 |
|
Less accumulated depreciation |
|
|
(145,295 |
) |
Total real estate,
net of depreciation |
|
$ |
825,211 |
|
The
highlights of our significant real estate transactions for the nine months ended September 30, 2015 are listed below:
Purchases
For
the nine months ended September 30, 2015, The Company acquired five income-producing apartment complexes from third parties in
the states of Texas (2), Tennessee (1) and Florida (2), increasing the total number of units by 761, for a combined purchase price
of $67.5 million. In addition, the Company acquired three income-producing apartment complexes from related parties in the states
of Texas (2) and Kansas (1), increasing the total number of units by 698, for a combined purchase price of $11.6 million. The
Company also purchased a commercial office building in Texas, comprised of 92,723 square feet for $16.8 million.
Sales
For
the nine months ended September 30, 2015, The Company sold approximately 198 acres of land located in Texas to independent third
parties for a total sales price of $12 million. We recorded a total gain of $5.1 million from the sales.
In
addition, one income-producing apartment complex consisting of 200 units located in Ohio was foreclosed upon. The Company recorded
a gain of $0.7 million related to the extinguishment of debt.
As
of September 30, 2015, The company has 110 acres of land, at various locations, that were sold to related parties in multiple
transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets.
Due to the related party nature of the transactions TCI has deferred the recording of the sales in accordance with ASC 360-20.
We
continue to invest in the development of apartment projects. During the nine months ended September 30, 2015, we have expended
$5.1 million related to the construction or predevelopment of various apartment complexes and capitalized $0.4 million of interest
costs.
NOTE
3. NOTES AND INTEREST RECEIVABLE
A
portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage
loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized
by real estate or interests in real estate and guarantees, unless noted otherwise, are so secured. Management intends to service
and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid
at maturity. Below is a summary of our notes receivable (dollars in thousands):
|
|
|
|
Maturity |
|
Interest |
|
|
|
|
Borrower |
|
Date |
|
Rate |
|
Amount |
|
Collateral |
Performing loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Foundation for Better Housing, Inc. (Overlook
at Allensville) (1) |
|
|
11/19 |
|
|
12.00 |
% |
|
|
2,472 |
|
|
Secured |
|
|
|
|
Foundation for Better Housing, Inc. (Vista
Ridge) (1) |
|
|
04/19 |
|
|
12.00 |
% |
|
|
3,923 |
|
|
Secured |
|
|
|
|
H198, LLC (Las Vegas Land) |
|
|
01/20 |
|
|
12.00 |
% |
|
|
5,907 |
|
|
Secured |
|
|
|
|
One Realco Corporation (1) (2) |
|
|
01/17 |
|
|
3.00 |
% |
|
|
7,000 |
|
|
Unsecured |
|
|
|
|
Realty Advisors Management, Inc. (1) |
|
|
12/16 |
|
|
2.28 |
% |
|
|
20,387 |
|
|
Unsecured |
|
|
|
|
Unified Housing Foundation, Inc. (Cliffs of
El Dorado) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
2,097 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Echo Station)
(1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
1,481 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Inwood on
the Park) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
5,059 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Kensington
Park) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
3,936 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Lakeshore
Villas) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
2,000 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Lakeshore
Villas) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
9,096 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Limestone
Canyon) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
3,057 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Limestone
Canyon) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
4,663 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Limestone
Ranch) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
2,250 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Limestone
Ranch) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
6,000 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Parkside
Crossing) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
1,936 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Reserve
at White Rock Phase I) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
2,485 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Reserve
at White Rock Phase II) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
2,555 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Sendero
Ridge) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
5,174 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Sendero
Ridge) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
4,812 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Timbers
at the Park) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
1,323 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Tivoli)
(1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
7,966 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (Trails at
White Rock) (1) |
|
|
12/32 |
|
|
12.00 |
% |
|
|
3,815 |
|
|
Secured |
|
|
|
|
Unified Housing Foundation, Inc. (1) |
|
|
06/17 |
|
|
12.00 |
% |
|
|
1,261 |
|
|
Unsecured |
|
|
|
|
Unified Housing Foundation, Inc. (1) |
|
|
12/17 |
|
|
12.00 |
% |
|
|
1,207 |
|
|
Unsecured |
|
|
|
|
Unified Housing Foundation, Inc. (1) |
|
|
12/15 |
|
|
12.00 |
% |
|
|
2,665 |
|
|
Unsecured |
|
|
|
|
Unified Housing Foundation, Inc. (1) |
|
|
12/16 |
|
|
12.00 |
% |
|
|
3,657 |
|
|
Unsecured |
|
|
|
|
Other related party notes (1) |
|
|
Various |
|
|
Various |
|
|
|
2,080 |
|
|
Various secured interests |
|
|
|
|
Other related party notes (1) |
|
|
Various |
|
|
Various |
|
|
|
1,420 |
|
|
Various unsecured interests |
|
|
|
|
Other non-related party notes |
|
|
Various |
|
|
Various |
|
|
|
3,166 |
|
|
Various secured interests |
|
|
|
|
Other non-related party notes |
|
|
Various |
|
|
Various |
|
|
|
503 |
|
|
Various unsecured interests |
|
|
|
|
Accrued interest |
|
|
|
|
|
|
|
|
|
|
7,099 |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
132,452 |
|
|
|
|
|
Allowance for doubtful accounts |
|
|
|
|
|
|
|
|
|
|
(17,037 |
) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
115,415 |
|
(1) |
Related
party note |
(2) |
An allowance was taken
for estimated losses at full value of note |
Junior
Mortgage Loans. We invest in junior mortgage loans, secured by mortgages that are subordinate to one or more prior liens either
on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan
is made, other collateral and guarantees.
At
September 30, 2015, we had junior mortgage loans and accrued interest receivable from related parties, net of allowances, totaling
$105.6 million. We recognized interest income of $9.4 million related to these notes receivables.
The
Company has various notes receivable from Unified Housing Foundation, Inc. (“UHF”) and Foundation for Better Housing,
Inc. (“FBH”). UHF and FBH are determined to be related parties due to our reliance upon the performance of the collateral
secured under the notes receivable. Payments are due from surplus cash flow of operations of the properties. A sale or refinance
of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes
for the specific borrower. These notes are cross-collateralized for the specific borrower, but to the extent cash is received
from a specific UHF or FBH property, it is applied first against any outstanding interest for the related-property note. The allowance
on the UHF notes was a purchase allowance that was netted against the notes when acquired.
NOTE
4. INVESTMENT IN UNCONSOLIDATED INVESTEES
Investments
in unconsolidated investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at
cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses under the equity method
of accounting.
Investments
in unconsolidated investees consist of the following:
|
|
|
|
Percentage
ownership as of |
|
|
|
|
September
30, 2015 |
|
September
30, 2014 |
Gruppa
Florentina, LLC |
|
|
|
|
|
|
|
20.00% |
|
20.00% |
Gruppa
Florentina, LLC is the sole shareholder of Milano Restaurants International Corporation, (“Milano”) which operates
33 pizza parlors under the trade name “Me-N-Ed’s Pizza Parlors” and four pizza parlors operating under the
trade name “Blast 825 Pizza”, located primarily in Central and Northern California. Milano has a 100% ownership
interest in Siena Corp, which operates two grills under the trade names “Me-N-Ed’s Victory Grill” and “Me-N-Ed’s
Coney Island Grill”. Milano has a 100% ownership interest in Piazza del Pane, Inc., which operates two restaurants located
in Central California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s
Pizzerias.
The
following is a summary of the financial position and results of operations from our investees (dollars in thousands):
As of September 30, |
|
2015 |
|
2014 |
Real estate, net of accumulated
depreciation |
|
$ |
13,435 |
|
|
$ |
11,014 |
|
Notes receivable |
|
|
8,255 |
|
|
|
7,122 |
|
Other assets |
|
|
29,393 |
|
|
|
30,398 |
|
Notes payable |
|
|
(10,307 |
) |
|
|
(10,521 |
) |
Other liabilities |
|
|
(7,173 |
) |
|
|
(6,386 |
) |
Shareholders' equity |
|
|
(33,603 |
) |
|
|
(31,627 |
) |
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended September 30, |
|
|
2015 |
|
|
|
2014 |
|
Revenue |
|
$ |
38,428 |
|
|
$ |
36,197 |
|
Depreciation |
|
|
(863 |
) |
|
|
(863 |
) |
Operating expenses |
|
|
(35,144 |
) |
|
|
(33,438 |
) |
Interest expense |
|
|
(605 |
) |
|
|
(661 |
) |
Income from continuing operations |
|
|
1,816 |
|
|
|
1,235 |
|
Income from discontinued
operations |
|
|
— |
|
|
|
— |
|
Net income |
|
$ |
1,816 |
|
|
$ |
1,235 |
|
|
|
|
|
|
|
|
|
|
Company's proportionate share of earnings |
|
$ |
363 |
|
|
$ |
247 |
|
NOTE
5. NOTES PAYABLE
Below
is a summary of our notes and interest payable as of September 30, 2015 (dollars in thousands):
|
|
Notes
Payable |
|
Accrued
Interest |
|
Total
Debt |
Apartments |
|
$ |
476,839 |
|
|
$ |
2,325 |
|
|
$ |
479,164 |
|
Commercial |
|
|
117,329 |
|
|
|
572 |
|
|
|
117,901 |
|
Land |
|
|
56,648 |
|
|
|
276 |
|
|
|
56,924 |
|
Real estate subject to sales contract |
|
|
7,755 |
|
|
|
38 |
|
|
|
7,793 |
|
Mezzanine financing |
|
|
123,400 |
|
|
|
— |
|
|
|
123,400 |
|
Other |
|
|
24,939 |
|
|
|
122 |
|
|
|
25,061 |
|
Total |
|
$ |
806,910 |
|
|
$ |
3,333 |
|
|
$ |
810,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized deferred
borrowing costs |
|
|
(19,880 |
) |
|
|
— |
|
|
|
(19,880 |
) |
Total |
|
$ |
787,030 |
|
|
$ |
3,333 |
|
|
$ |
790,363 |
|
The
segment labeled as “Other” consists of unsecured or stock-secured notes payable.
With
respect to the additional notes payable due to the acquisition of properties or refinancing of existing mortgages, a summary of
some of the more significant transactions is discussed below:
On
January 28, 2015, the Company modified the existing mortgage on a 200-unit complex located in Texas, to reduce the interest rate.
The modified note accrues interest at 3.24% and payments of interest and principal are due monthly, maturing August 1, 2050.
On
January 28, 2015, the Company modified the existing mortgage on a 240-unit complex located in Mississippi, to reduce the interest
rate. The modified note accrues interest at 3.24% and payments of interest and principal are due monthly, maturing December 1,
2051.
On
April 23, 2015, the Company refinanced the existing mortgage on a 250-unit complex located in Arkansas, for a new mortgage of
$21.0 million. We paid off the existing mortgage of $15.7 million and $0.6 million in closing costs. The note accrues interest
at 2.74% and payments of interest and principal are due monthly, maturing May 1, 2050.
On
April 29, 2015, the Company refinanced the existing mortgage on a 240-unit complex located in Texas, for a new mortgage of $15.4
million. We paid $0.7 million in closing costs. The note accrues interest at 3.28% and payments of interest and principal are
due monthly, maturing March 31, 2051.
On
May 28, 2015, the Company secured additional financing of $120.0 million from an independent third party. At closing $84.4
million was advanced to the Company. The financing can be used for general corporate purposes, acquisition of multi-family apartment
complexes and to reduce debt. The note has a term of five years at an interest rate of 30 day Libor plus 10.75%. The note
is interest only, payable monthly, with the principal due at the end of the five years. The loan is secured by various equity
interests in certain residential apartments. The note contains customary restrictions, representations, covenants, corporate and
officer guarantees, events of default and require the Company to meet certain financial covenants. The Company believes it is
in compliance with these financial covenants at September 30, 2015.
Simultaneous
with the closing of the above financing, the Company amended its existing financing of $40.0 million from an independent third
party. The note has a term of five years at an interest rate of 12.0%. The note is interest only for the first year
with quarterly principal payments due of $0.5 million starting April 1, 2015. As of September 30, 2015, the outstanding
balance on the loan was $39.5 million. The loan is secured by various equity interests in residential apartments and can be prepaid
at a penalty rate of 4% for year 1 with the penalty declining by 1% each year thereafter. The note contains customary restrictions,
representations, covenants, corporate and officer guarantees, events of default and require the Company to meet certain financial
covenants. The Company believes it is in compliance with these financial covenants at September 30, 2015.
There
are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note
due to expiration of the loan. We are in constant contact with these lenders, working together in order to modify the terms of
these loans and we anticipate a timely resolution that is similar to the existing agreement or subsequent modification.
In
conjunction with the development of various apartment projects and other developments, we drew down $1.7 million in construction
loans during the nine months ended September 30, 2015.
The
properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to
sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate
an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution.
These properties have mortgages that are secured by the property and many have corporate guarantees.
According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment
and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed
each asset and taken impairment to the extent we feel the value of the property was less than our current basis.
NOTE
6. RELATED PARTY TRANSACTIONS
The
following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties
as of September 30, 2015 (dollars in thousands):
|
|
Pillar |
|
Related
party receivable, December 31, 2014 |
|
|
$ |
21,414 |
|
|
Cash
transfers |
|
|
|
56,610 |
|
|
Advisory
fees |
|
|
|
(7,623 |
) |
|
Net
income fee |
|
|
|
(568 |
) |
|
Fees
and commissions |
|
|
|
(3,654 |
) |
|
Cost
reimbursements |
|
|
|
(2,593 |
) |
|
Interest
income |
|
|
|
809 |
|
|
Expenses
paid by Advisor |
|
|
|
(8,843 |
) |
|
Financing
(mortgage payments) |
|
|
|
(10,334 |
) |
|
Sales/purchases
transactions |
|
|
|
(1,917 |
) |
|
Related
party receivable, September 30, 2015 |
|
|
$ |
43,301 |
|
During
the ordinary course of business, we have related party transactions that include, but are not limited to, rent income, interest
income, interest expense, general and administrative costs, commissions, management fees and property expenses. In addition, we
have assets and liabilities that include related party amounts. The related party amounts included in assets and liabilities,
and the related party revenues and expenses received/paid are shown on the face of the Consolidated Financial Statements.
NOTE
7. OPERATING SEGMENTS
Our
segments are based on our method of internal reporting which classifies our operations by property type. Our property types are
grouped into commercial properties, apartments, hotels, land and other operating segments. Significant differences among the accounting
policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and
allocation of administrative and other expenses. Management evaluates the performance of each of the operating segments and allocates
resources to them based on their net operating income and cash flow.
Items
of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation
award, equity in partnerships and gains on sale of real estate. Expenses that are not reflected in the segments are provision
for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued
operations before gains on sale of real estate.
The
segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate
debt.
Presented
below is our reportable segments’ operating income for the three and nine months September 30, 2015 and 2014, including
segment assets and expenditures (dollars in thousands):
For
the Three Months Ended
September 30, 2015
|
|
Commercial
Properties
|
|
Apartments |
|
Hotels |
|
Land |
|
Other |
|
Total |
Rental and other property revenues |
|
$ |
8,107 |
|
|
$ |
19,671 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
48 |
|
|
$ |
27,826 |
|
Property operating expenses |
|
|
(4,434 |
) |
|
|
(9,373 |
) |
|
|
— |
|
|
|
(422 |
) |
|
|
(270 |
) |
|
|
(14,499 |
) |
Depreciation |
|
|
(2,358 |
) |
|
|
(4,229 |
) |
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
(6,569 |
) |
Mortgage and loan interest |
|
|
(1,871 |
) |
|
|
(6,299 |
) |
|
|
— |
|
|
|
(1,345 |
) |
|
|
(5,511 |
) |
|
|
(15,026 |
) |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,950 |
|
|
|
3,950 |
|
Gain on sale of income producing properties |
|
|
— |
|
|
|
735 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
735 |
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,958 |
|
|
|
— |
|
|
|
1,958 |
|
Segment operating
income (loss) |
|
$ |
(556 |
) |
|
$ |
505 |
|
|
$ |
— |
|
|
$ |
191 |
|
|
$ |
(1,765 |
) |
|
$ |
(1,625 |
) |
Capital expenditures |
|
|
1,404 |
|
|
|
(43 |
) |
|
|
— |
|
|
|
1,461 |
|
|
|
— |
|
|
|
2,822 |
|
Real estate assets |
|
|
161,876 |
|
|
|
496,329 |
|
|
|
— |
|
|
|
163,867 |
|
|
|
— |
|
|
|
822,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
— |
|
|
$ |
11,129 |
|
|
$ |
— |
|
|
$ |
2,851 |
|
|
$ |
— |
|
|
$ |
13,980 |
|
Cost of sale |
|
|
— |
|
|
|
(10,394 |
) |
|
|
— |
|
|
|
(1,854 |
) |
|
|
— |
|
|
|
(12,248 |
) |
Recognized prior deferred
gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
961 |
|
|
|
— |
|
|
|
961 |
|
Gain on sale |
|
$ |
— |
|
|
$ |
735 |
|
|
$ |
— |
|
|
$ |
1,958 |
|
|
$ |
— |
|
|
$ |
2,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended
September 30, 2014
|
|
Commercial
Properties
|
|
|
Apartments |
|
|
|
Hotels |
|
|
|
Land |
|
|
|
Other |
|
|
|
Total |
|
Rental and other property revenues |
|
$ |
4,609 |
|
|
$ |
14,704 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
13 |
|
|
$ |
19,326 |
|
Property operating expenses |
|
|
(2,890 |
) |
|
|
(7,284 |
) |
|
|
— |
|
|
|
(585 |
) |
|
|
(7 |
) |
|
|
(10,766 |
) |
Depreciation |
|
|
(1,944 |
) |
|
|
(2,537 |
) |
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
(4,463 |
) |
Mortgage and loan interest |
|
|
(1,325 |
) |
|
|
(5,334 |
) |
|
|
— |
|
|
|
(1,182 |
) |
|
|
(3,104 |
) |
|
|
(10,945 |
) |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,106 |
|
|
|
5,106 |
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
— |
|
|
|
40 |
|
Segment operating
income (loss) |
|
$ |
(1,550 |
) |
|
$ |
(451 |
) |
|
$ |
— |
|
|
$ |
(1,727 |
) |
|
$ |
2,026 |
|
|
$ |
(1,702 |
) |
Capital expenditures |
|
|
486 |
|
|
|
38 |
|
|
|
— |
|
|
|
1,435 |
|
|
|
— |
|
|
|
1,959 |
|
Real estate assets |
|
|
129,361 |
|
|
|
345,281 |
|
|
|
— |
|
|
|
165,144 |
|
|
|
— |
|
|
|
639,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
2,582 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,269 |
|
|
$ |
— |
|
|
$ |
6,851 |
|
Cost of sale |
|
|
(812 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,229 |
) |
|
|
— |
|
|
|
(5,041 |
) |
Gain (loss) on sale |
|
$ |
1,770 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
40 |
|
|
$ |
— |
|
|
$ |
1,810 |
|
The
table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations (dollars
in thousands):
|
|
For the Three Months Ended |
|
|
September 30, |
|
|
2015 |
|
2014 |
Segment operating income |
|
$ |
(1,625 |
) |
|
$ |
(1,702 |
) |
Other non-segment items of income (expense) |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(1,417 |
) |
|
|
(1,590 |
) |
Net income fee to related
party |
|
|
(232 |
) |
|
|
186 |
|
Advisory fee to related
party |
|
|
(3,024 |
) |
|
|
(2,225 |
) |
Other income |
|
|
(72 |
) |
|
|
1,332 |
|
Earnings from unconsolidated
investees |
|
|
81 |
|
|
|
320 |
|
Litigation settlement |
|
|
(85 |
) |
|
|
(86 |
) |
Income
tax benefit |
|
|
16 |
|
|
|
786 |
|
Net income (loss)
from continuing operations |
|
$ |
(6,358 |
) |
|
$ |
(2,979 |
) |
The
table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):
|
|
As of September 30, |
|
|
2015 |
|
2014 |
Segment assets |
|
$ |
822,072 |
|
|
$ |
639,786 |
|
Investments in unconsolidated investees |
|
|
5,152 |
|
|
|
4,137 |
|
Notes and interest receivable |
|
|
115,415 |
|
|
|
148,207 |
|
Other assets |
|
|
144,472 |
|
|
|
130,169 |
|
Total assets |
|
$ |
1,087,111 |
|
|
$ |
922,299 |
|
For
the Nine Months Ended
September 30, 2015
|
|
Commercial
Properties
|
|
Apartments |
|
Hotels |
|
Land |
|
Other |
|
Total |
Rental and other property revenues |
|
$ |
22,172 |
|
|
$ |
52,948 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
103 |
|
|
$ |
75,223 |
|
Property operating expenses |
|
|
(12,042 |
) |
|
|
(24,243 |
) |
|
|
— |
|
|
|
(936 |
) |
|
|
(246 |
) |
|
|
(37,467 |
) |
Depreciation |
|
|
(6,516 |
) |
|
|
(9,949 |
) |
|
|
— |
|
|
|
— |
|
|
|
55 |
|
|
|
(16,410 |
) |
Mortgage and loan interest |
|
|
(5,129 |
) |
|
|
(15,857 |
) |
|
|
— |
|
|
|
(3,766 |
) |
|
|
(11,711 |
) |
|
|
(36,463 |
) |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,722 |
|
|
|
13,722 |
|
Gain on sale of producing properties |
|
|
— |
|
|
|
735 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
735 |
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,861 |
|
|
|
— |
|
|
|
7,861 |
|
Segment operating
income (loss) |
|
$ |
(1,515 |
) |
|
$ |
3,634 |
|
|
$ |
— |
|
|
$ |
3,159 |
|
|
$ |
1,923 |
|
|
$ |
7,201 |
|
Capital expenditures |
|
|
7,539 |
|
|
|
438 |
|
|
|
— |
|
|
|
2,772 |
|
|
|
— |
|
|
|
10,749 |
|
Real estate assets |
|
|
161,876 |
|
|
|
496,329 |
|
|
|
— |
|
|
|
163,867 |
|
|
|
— |
|
|
|
822,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
— |
|
|
$ |
11,129 |
|
|
$ |
— |
|
|
$ |
11,987 |
|
|
$ |
— |
|
|
$ |
23,116 |
|
Cost of sale |
|
|
— |
|
|
|
(10,394 |
) |
|
|
— |
|
|
|
(6,863 |
) |
|
|
— |
|
|
|
(17,257 |
) |
Recognized prior deferred
gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,737 |
|
|
|
— |
|
|
|
2,737 |
|
Gain on sale |
|
$ |
— |
|
|
$ |
735 |
|
|
$ |
— |
|
|
$ |
7,861 |
|
|
$ |
— |
|
|
$ |
8,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the Nine Months Ended
September 30, 2014
|
|
Commercial
Properties
|
|
|
|
Apartments |
|
|
|
Hotels |
|
|
|
Land |
|
|
|
Other |
|
|
|
Total |
|
Rental and other property revenues |
|
$ |
14,166 |
|
|
$ |
43,779 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
41 |
|
|
$ |
57,986 |
|
Property operating expenses |
|
|
(9,206 |
) |
|
|
(20,284 |
) |
|
|
— |
|
|
|
(1,175 |
) |
|
|
(12 |
) |
|
|
(30,677 |
) |
Depreciation |
|
|
(5,515 |
) |
|
|
(7,656 |
) |
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
(13,099 |
) |
Mortgage and loan interest |
|
|
(4,469 |
) |
|
|
(15,512 |
) |
|
|
— |
|
|
|
(3,725 |
) |
|
|
(7,571 |
) |
|
|
(31,277 |
) |
Interest income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
15,264 |
|
|
|
15,264 |
|
Gain on land sales |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
634 |
|
|
|
— |
|
|
|
634 |
|
Segment operating
income (loss) |
|
$ |
(5,024 |
) |
|
$ |
327 |
|
|
$ |
— |
|
|
$ |
(4,266 |
) |
|
$ |
7,794 |
|
|
$ |
(1,169 |
) |
Capital expenditures |
|
|
3,476 |
|
|
|
137 |
|
|
|
— |
|
|
|
1,586 |
|
|
|
— |
|
|
|
5,199 |
|
Real estate assets |
|
|
129,361 |
|
|
|
345,281 |
|
|
|
— |
|
|
|
165,144 |
|
|
|
— |
|
|
|
639,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price |
|
$ |
19,182 |
|
|
$ |
23,131 |
|
|
$ |
— |
|
|
$ |
4,986 |
|
|
$ |
— |
|
|
$ |
47,299 |
|
Cost of sale |
|
|
(10,409 |
) |
|
|
(17,078 |
) |
|
|
— |
|
|
|
(4,352 |
) |
|
|
— |
|
|
|
(31,839 |
) |
Gain on sale |
|
$ |
8,773 |
|
|
$ |
6,053 |
|
|
$ |
— |
|
|
$ |
634 |
|
|
$ |
— |
|
|
$ |
15,460 |
|
The
table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:
|
|
For the Nine Months Ended |
|
|
September 30, |
|
|
2015 |
|
2014 |
Segment operating income (loss) |
|
$ |
7,201 |
|
|
$ |
(1,169 |
) |
Other non-segment items of income (expense) |
|
|
|
|
|
|
|
|
General and administrative |
|
|
(5,215 |
) |
|
|
(6,770 |
) |
Net income fee to related
party |
|
|
(567 |
) |
|
|
(514 |
) |
Advisory fee to related
party |
|
|
(7,625 |
) |
|
|
(6,670 |
) |
Other income |
|
|
4,040 |
|
|
|
1,738 |
|
Earnings from unconsolidated
investees |
|
|
276 |
|
|
|
266 |
|
Litigation settlement |
|
|
(203 |
) |
|
|
3,666 |
|
Income
tax benefit |
|
|
107 |
|
|
|
5,030 |
|
Net income (loss)
from continuing operations |
|
$ |
(1,986 |
) |
|
$ |
(4,423 |
) |
The
table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:
|
|
As of September 30, |
|
|
2015 |
|
2014 |
Segment assets |
|
$ |
822,072 |
|
|
$ |
639,786 |
|
Investments in unconsolidated investees |
|
|
5,152 |
|
|
|
4,137 |
|
Notes and interest receivable |
|
|
115,415 |
|
|
|
148,207 |
|
Other assets |
|
|
144,472 |
|
|
|
130,169 |
|
Total assets |
|
$ |
1,087,111 |
|
|
$ |
922,299 |
|
NOTE
8. DISCONTINUED OPERATIONS
Prior
to January 1, 2015, we applied the provisions of ASC 360, “Property, Plant and Equipment”, which required that long-lived
assets that are to be disposed of by sale be measured at the lesser of (1) book value or (2) fair value less cost to
sell. In addition, it requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens
the presentation of discontinued operations to include more disposal transactions.
Effective
January 1, 2015, the Company adopted the provisions of ASU 2014-08, ”Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity”, which changes the criteria of ASC 360 related to determining which disposals
qualify to be accounted for as discontinued operations and modifies related reporting and disclosure requirements.
Disposals
representing a strategic shift in operations that have a major effect on a company’s operations and financial results will
be presented as discontinued operations. Companies will be required to expand their disclosures about discontinued operations
to provide more information on the assets, liabilities, income and expenses of the discontinued operations. The new standard was
effective January 1, 2015. Adoption of this standard will result in substantially fewer of the Company’s dispositions meeting
the discontinued operations criteria.
There were
no sales of income-producing properties in the first nine months of 2015. In 2014, we sold two apartment complexes (both in Texas),
and two commercial properties (one in Louisiana and one in Alaska). The gain on sale of the properties is also included in discontinued
operations for those years. The following table summarizes revenue and expense information for the properties sold and held for
sale (dollars in thousands):
|
|
For the
Three Months Ended September 30, |
|
For the Nine Months
Ended September 30, |
|
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Revenues: |
|
|
|
|
|
|
|
|
Rental
and other property revenues |
|
$ |
— |
|
|
$ |
1,416 |
|
|
$ |
15 |
|
|
$ |
5,328 |
|
|
|
|
— |
|
|
|
1,416 |
|
|
|
15 |
|
|
|
5,328 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating
expenses |
|
|
2 |
|
|
|
326 |
|
|
|
(346 |
) |
|
|
2,201 |
|
Depreciation |
|
|
— |
|
|
|
155 |
|
|
|
— |
|
|
|
664 |
|
General
and administrative |
|
|
(4 |
) |
|
|
65 |
|
|
|
99 |
|
|
|
378 |
|
Total
operating expenses |
|
|
(2 |
) |
|
|
546 |
|
|
|
(247 |
) |
|
|
3,243 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
45 |
|
|
|
(36 |
) |
|
|
45 |
|
|
|
(522 |
) |
Mortgage and
loan interest |
|
|
— |
|
|
|
(357 |
) |
|
|
(1 |
) |
|
|
(1,767 |
) |
Litigation
settlement |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(250 |
) |
Total
other income (expenses) |
|
|
45 |
|
|
|
(393 |
) |
|
|
44 |
|
|
|
(2,539 |
) |
Gain (loss) from discontinued operations
before gain on sale of real estate and tax |
|
|
47 |
|
|
|
477 |
|
|
|
306 |
|
|
|
(454 |
) |
Gain on sale
of real estate from discontinued operations |
|
|
— |
|
|
|
1,770 |
|
|
|
— |
|
|
|
14,826 |
|
Income
tax benefit (expense) |
|
|
(16 |
) |
|
|
(786 |
) |
|
|
(107 |
) |
|
|
(5,030 |
) |
Income from discontinued
operations |
|
$ |
31 |
|
|
$ |
1,461 |
|
|
$ |
199 |
|
|
$ |
9,342 |
|
Our
application of ASC 360 results in the presentation of the net operating results of these qualifying properties sold or held for
sale during 2015 as income from discontinued operations. This does not have an impact on net income available to common shareholders
and only impacts the presentation of these properties within the Consolidated Statements of Operations.
NOTE
9. COMMITMENTS, CONTINGENCIES, AND LIQUIDITY
LK-Four
Hickory, LLC
In
conjunction with its sale of Four Hickory in November 2007, the Company agreed to fund amounts to satisfy its commitment to compensate
LK-Four Hickory, LLC for move-in discounts and other concessions to existing tenants at the time of sale. The Company also
has various agreements with LK-Four Hickory, LLC related to the funding of projection shortfalls, which, to date, they have not
had to provide any additional funding. In addition, related parties of the Company have active lease agreements with LK-Four
Hickory, LLC, and the Company has since guaranteed amounts related to certain of these leases.
On
December 17, 2007, both Limkwang Nevada, Inc., the majority owner of LK-Four Hickory, LLC, and ARL unconditionally guaranteed
the punctual payment when due, whether at stated maturity, by acceleration or hereafter, including all fees and expenses incurred
by the bank on collection of a $28.0 million note payable for LK-Four Hickory, LLC which has a current outstanding balance of
$22.1 million.
The
Company’s investment in LK-Four Hickory, LLC at January 17, 2012 was sold and the Company has additional reserves for estimated
potential amounts it could be liable for if various related parties are not able to meet their obligations to LK-Four Hickory,
LLC. The Company will continue to evaluate these potential estimates and also the likelihood of having to fund any of these and
adjust their reserves accordingly.
Liquidity.
Management believes that ARL will generate excess cash flow from property operations in 2015; such
excess, however, will not be sufficient to discharge all of ARL’s obligations as they became due. Management intends to
sell land and income-producing real estate, refinance real estate and obtain additional borrowings primarily secured by real estate
to meet its liquidity requirements.
Partnership
Buyouts. ARL is the limited partner in various partnerships related to the construction of residential
properties. As permitted in the respective partnership agreements, ARL intends to purchase the interests of the general and any
other limited partners in these partnerships subsequent to the completion of these projects. The amounts paid to buy out the non-affiliated
partners are limited to development fees earned by the non-affiliated partners and are outlined in the respective partnership
agreements.
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, unless otherwise noted below.
ART
and ART Midwest, Inc.
While
the Company and all entities in which the Company has a direct or indirect equity interest are not parties to or obligated in
any way for the outcome, a formerly owned entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have
been engaged since 1999 in 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.
ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.
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 and the action against the law firm
is expected to move forward. The only defendants in the litigation involving the Clapper Parties are ART and ART Midwest, Inc.,
which, together, had total assets and net worth, as of December 31, 2012, of approximately $10 million. 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.
Subsequently,
David M. Clapper and two entities related to Mr. Clapper (all, collectively, the “Clapper Parties”) filed a complaint
in the U. S. District Court against the Company, its directors and certain of its officers alleging purported transactions to
the detriment of the Clapper Parties and others by transferring assets, cash and diverting property. Management of the Company
believes there is no basis for this action against the Company and intends to vigorously defend itself. The complaint
does not allege any facts relating to the Company, except that the Company is a Nevada corporation, with its headquarters/principal
place of business in Dallas, Texas.
Management believes
that the Company has no liability for any ultimate judgment in the proceeding involving the Clapper Parties; however, Management
of the Company has serious reservations about the current collectability of the $10 million note and, accordingly, has reserved
the full amount of the note.
Port
Olpenitz
ARL,
through a foreign subsidiary, was involved in developing a maritime harbor town on the 420 acre site of the former naval base
of Olpenitz in Kappeln, Germany. Disputes with the local partner related to his mismanagement of the project resulted in his being
replaced as the managing partner which was followed by a filing for bankruptcy protection in Germany to completely remove him
from the project. An insolvency manager was placed in control of the project in order to protect the creditors and as of December
31, 2013, had sold the vast majority of assets (almost all land) of the project. The Company no longer has any financial responsibility
for the obligations of the creditors related to the project and has claims filed for loans relating to our investment in the project.
Due to the questionable collectability of these loans from the proceeds of the project, the Company has written off the unreserved
balance of $5.3 million in the project. As of December 13, 2013, ARL had filed two lawsuits in Germany to recover funds invested
in the project. The lawsuits are against: 1) the former German partner and his company, and 2) against the law firm in Hamburg
originally hired to protect ARL’s investment in the project. At this time it is unknown how much can be recovered or how
successful the litigation will be.
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.
The
Final Judgment entered against Dynex Commercial, Inc. on July 20, 2015 awarded Basic $.256 million in damages, plus pre-judgment
interest of $.192 million for a total amount of $.448 million. The Judgment awarded ART $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 $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 are paid. Lastly, the Judgement awarded Basic,
ART, and TCI $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.
The
Company is reviewing the Final Judgment with counsel to determine the appropriate steps moving forward now that they have obtained
this Final Judgment against Dynex Commercial, Inc.
NOTE
10. EARNINGS PER SHARE
Earnings
Per Share (“EPS”) have been computed pursuant to the provisions of ASC Topic 260, “Earnings Per Share”.
The computation of basic EPS is calculated by dividing net income available to common shareholders from continuing operations,
adjusted for preferred dividends, by the weighted-average number of common shares outstanding during the period. Shares issued
during the period shall be weighted for the portion of the period that they were outstanding.
As
of September 30, 2015, we have 2,000,614 shares of Series A 10.0% cumulative convertible preferred stock, which are outstanding.
These shares may be converted into common stock at 90% of the average daily closing price of the common stock for the prior 20
trading days. These are considered in the computation of diluted earnings per share if the effect of applying the if-converted
method is dilutive. Of the outstanding 2,000,614 shares of Series A 10.0% cumulative convertible preferred stock, 600,000 shares
were owned by ART Hotel Equities, Inc. and 300,000 shares were owned by ART Edina, Inc. a wholly owned subsidiary of ARL. As of
May 30, 2014, these 900,000 shares were transferred to ARL. Dividends are not paid on the shares owned by ARL subsidiaries.
Prior
to July 17, 2014, Realty Advisors, Inc. (“RAI”), a related party, owned 2,451,435 shares of the outstanding Series
A 10.0% convertible preferred stock and had accrued dividends unpaid of $15.1 million. On July 17, 2014, RAI converted 890,797
shares, including $6.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common
stock. This conversion resulted in the issuance of 2,502,230 new shares of ARL common stock. On April 9, 2015, RAI converted 460,638
shares, including $2.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common
stock. This conversion resulted in the issuance of 1,486,741 new shares of ARL common stock. As of September 30, 2015, RAI owns
1,100,000 shares of the outstanding Series A 10.0% convertible preferred stock and has accrued dividends unpaid of $8.3 million.
Prior
to January 1, 2015, the Company had 1,000 shares of stock options outstanding. These options expired unexercised January 1, 2015.
The options are no longer included in the dilutive earnings per share calculation for the current period, but are considered in
the computation for the prior periods if applying the “treasury stock” method is dilutive.
As
of September 30, 2015, the Series A convertible preferred stock and stock options were anti-dilutive and thus was not included
in the EPS calculation.
NOTE
11. SUBSEQUENT EVENTS
The
date to which events occurring after September 30, 2015, the date of the most recent balance sheet, have been evaluated for possible
adjustment to the Consolidated Financial Statements or disclosure is November 13, 2015, which is the date on which the Consolidated
Financial Statements were available to be issued.
The
Company has determined that there are no subsequent events to be reported.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere
in this report.
This
Report on Form 10-Q 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 construction and mortgage financing and the use of debt to fund acquisitions and developments; |
|
• |
demand for apartments and commercial properties
in the Company’s markets and the effect on occupancy and rental rates; |
|
• |
the Company’s ability to obtain
financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties; |
|
• |
risks associated with the timing and amount
of property sales and the resulting gains/losses associated with such sales; |
|
• |
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-Q, including those described under the caption “Risk Factors.” |
The
risks included here are not exhaustive. 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 factors
listed and described at Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K,
which investors should review. There have been no changes from the risk factors previously described in the Company’s Form
10-K for the fiscal year ended December 31, 2014.
Other
sections of this report may also include suggested factors that could adversely affect our business and financial performance.
Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time-to-time and it is not
possible for management to predict all such matters; nor can we assess the impact of all such matter 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 prediction
of actual results. Investors should also refer to our quarterly reports on Form 10-Q for future periods and to other materials
we may furnish to the public from time-to-time through Forms 8-K or otherwise as we file them with the SEC.
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. Our 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 and during the nine
months ended September 30, 2015, we sold $12 million of land. As of September 30, 2015, we owned 7,511 units in 45 residential
apartment communities and 10 commercial properties comprising approximately 2.2 million rentable square feet. In addition,
we owned 4,000 acres of land held for development.
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 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 certain 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 no employees.
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.
Pillar
Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager. Although the
Board of Directors is directly responsible for managing the affairs of ARL, and for setting the policies which guide it, the day-to-day
operations of ARL are performed by Pillar, as the contractual Advisor, under the supervision of the Board. Pillar’s
duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities
and arranging debt and equity financing for the Company with third party lenders and investors. Additionally, Pillar serves
as a consultant to the Board with regard to their decisions in connection with ARL’s business plan and investment policy.
Pillar also serves as an Advisor and Cash Manager to TCI and IOT.
Regis
Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services. ARL engages third-party
companies to lease and manage its apartment properties.
Critical
Accounting Policies
We
present our Consolidated Financial Statements in accordance with generally accepted accounting principles in the United States
of America (“U.S. GAAP”). The FASB Accounting Standards Codification (“ASC”) is the single source
of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. 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. Arrangements that are not controlled through voting or similar rights
are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic
810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria
of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”)
Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner
and the Limited Partners have Certain Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity
to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate
decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that
are not proportional to their economic interests. The primary beneficiary generally is the entity that provides financial support
and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially
affect the entity’s financial results. All significant intercompany balances and transactions have been eliminated in consolidation.
In
determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but
not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide
financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE;
and the similarity with and significance to the business activities of us and the other investors. Significant judgments related
to these determinations include estimates about the current future fair values and performance of real estate held by these VIEs
and general market conditions.
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.
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.
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 cease capitalization when a building is considered substantially complete and ready for its intended use,
but no later than one year from the cessation of major construction activity.
Prior
to January 1, 2015, the operating results of real estate assets held for sale and sold are reported as discontinued operations
in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses,
including depreciation and interest expense, associated with the assets. Subsequent to January 1, 2015, Accounting Standards Update
2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU
2014-08”) substantially changed the criteria for determining whether a disposition qualifies for discontinued operations
presentation. Adoption of this standard will result in substantially fewer of the Company’s dispositions meeting the discontinued
operations criteria.
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 project costs incurred during the period of development.
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. 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.
Investments
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. On our Consolidated
Balance Sheets, we include as a receivable the excess of rental income recognized over rental payments actually 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, have discretion in selecting the supplier and have the
credit risk with respect to paying the supplier.
Rental
income for residential 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 generally 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.
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 3 “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. |
|
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 properties, 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 been 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 continuing
operations. Once a developed property becomes leased up and is held the entire period for both periods under comparison,
it is considered to be included in the same property portfolio.
Prior
to January 1, 2015, the operating results of real estate assets held for sale and sold are reported as discontinued operations
in the accompanying Consolidated Statements of Operations. Income from discontinued operations includes the revenues and expenses,
including depreciation and interest expense, associated with the assets. Subsequent to January 1, 2015, Accounting Standards Update
2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU
2014-08”) substantially changed the criteria for determining whether a disposition qualifies for discontinued operations
presentation. Adoption of this standard will result in substantially fewer of the Company’s dispositions meeting the discontinued
operations criteria.
The
following discussion is based on our Consolidated Statements of Operations for the six months ended September 30, 2015 and 2014,
as included in Part I, Item 1. “Financial Statements” of this report. The prior year’s property portfolios
have been adjusted for subsequent sales. Continuing operations relates to income-producing properties that were held during those
years as adjusted for sales in the subsequent years.
At
September 30, 2015 and 2014, we owned or had interests in a portfolio of 55 and 45 income-producing properties, respectively.
The total property portfolio represents all income-producing properties held as of September 30 for the period presented. Sales
subsequent to the period ended represent properties that were held as of the period end for the periods presented, but sold in
a subsequent quarter. Continuing operations represents all properties that have not been reclassified to discontinued operations
as of September 30, 2015 for the periods presented. The table below shows the number of income-producing properties held at the
quarter ended:
|
September 30, |
|
|
2015 |
|
2014 |
Continuing operations |
|
|
55 |
|
|
|
43 |
|
Held for sale/subsequent
sales |
|
|
0 |
|
|
|
2 |
|
Total property portfolio |
|
|
55 |
|
|
|
45 |
|
Comparison
of the three months ended September 30, 2015 to the same period ended 2014:
For
the three months ended September 30, 2015, we reported a net loss applicable to common shares of $5.4 million or $0.35 per diluted
earnings per share, as compared to a net loss applicable to common shares of $1.7 million or $0.13 per diluted earnings per share
for the same period ended 2014.
Revenues
Rental
and other property revenues were $27.8 million for the three months ended September 30, 2015. This represents an increase of $8.5
million, as compared to the prior period revenues of $19.3 million. This change, by segment, is an increase in the apartment portfolio
of $5.0 million and an increase in the commercial portfolio of $3.5 million. Within the apartment portfolio there was an increase
of $4.8 million in the acquired property portfolio and an increase of $0.2 million in the same property portfolio. Our apartment
portfolio continues to thrive in the current economic conditions with occupancies averaging approximately 95%. We have been able
to surpass expectations due to the high-quality product offered, the strength of our management team and our commitment to our
tenants. This increase in apartment portfolio is also due to the acquisition of new properties. Within the commercial portfolio
there was an increase of $1.8 million in the acquired property portfolio and an increase of $1.7 million in the same store properties.
We are continuing to market our properties aggressively to attract new tenants and strive for continuous improvement of our properties
to maintain our existing tenants.
Expense
Property
operating expenses were $14.5 million for the three months ended September 30, 2015. This represents an increase of $3.7 million,
as compared to the prior period operating expenses of $10.8 million. This change, by segment, is an increase in the apartment
portfolio of $2.1 million and an increase in the commercial portfolio of $1.6 million. Within the apartment portfolio there was
an increase of $2.0 million in the acquired properties portfolio and an increase of $0.1 million in the same property portfolio.
Within the commercial portfolio there was an increase of $1.5 million in the acquired properties portfolio and an increase of
$0.1 million in the same store properties.
Depreciation
and amortization expense was $6.6 million for the three months ended September 30, 2015. This represents an increase of $2.1 million,
as compared to the prior period expense of $4.5 million. The majority of this change is in the apartment portfolio related to
an increase in the acquired properties portfolio.
Net
income fee increased $0.4 million for the three months ended September 30, 2015 as compared to the prior period. The net income
fee paid to our Advisor is calculated at 7.5% of net income.
Advisory
fees increased $0.8 million for the three months ended September 30, 2015 as compared to the prior period. Advisory fees are computed
based on a gross asset fee of 0.0625% per month (0.75% per annum) of the weighted average of the gross asset value.
Other
income (expense)
Interest
income was $3.95 million for the three months ended September 30, 2015. This represents a decrease of $1.2 million, as compared
to the prior year income of $5.1 million.
Mortgage
and loan interest expense was $15.0 million for the three months ended September 30, 2015. This represents an increase of $4.1
million, as compared to the prior period expense of $10.9 million. The majority of this increase is in the other portfolio and
is related to the securing of a new loan in 2015.
Gain
on land sales increased for the three months ended September 30, 2015, as compared to the prior period. In the current period
we sold 155.16 acres of land in two transactions for a sales price of $2.9 million and recorded a gain of $1.0 million. We also
recognized a deferred gain of $0.9 million on a prior sale.
The
debt on one income-producing apartment complex, consisting of 200 units, located in Ohio, was settled, which resulted in the property
being transferred to the lender. The Company recorded a gain of $0.7 million related to the extinguishment of the debt.
There
were no sales of income-producing properties in the first nine months of 2015. In 2014, we sold two apartment complexes (both
in Texas), and two commercial properties (one in Louisiana and one in Alaska). The gain on sale of the properties is also included
in discontinued operations for those years. The following table summarizes revenue and expense information for the properties
sold and held for sale (dollars in thousands):
|
|
For the Three Months Ended
September 30, |
|
|
2015 |
|
2014 |
Revenues: |
|
|
|
|
Rental
and other property revenues |
|
$ |
— |
|
|
$ |
1,416 |
|
|
|
|
— |
|
|
|
1,416 |
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating
expenses |
|
|
2 |
|
|
|
326 |
|
Depreciation |
|
|
— |
|
|
|
155 |
|
General
and administrative |
|
|
(4 |
) |
|
|
65 |
|
Total
operating expenses |
|
|
(2 |
) |
|
|
546 |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Other income |
|
|
45 |
|
|
|
(36 |
) |
Mortgage and
loan interest |
|
|
— |
|
|
|
(357 |
) |
Litigation
settlement |
|
|
— |
|
|
|
— |
|
Total
other income (expenses) |
|
|
45 |
|
|
|
(393 |
) |
Gain (loss) from discontinued operations
before gain on sale of real estate and tax |
|
|
47 |
|
|
|
477 |
|
Gain on sale
of real estate from discontinued operations |
|
|
— |
|
|
|
1,770 |
|
Income
tax benefit (expense) |
|
|
(16 |
) |
|
|
(786 |
) |
Income from discontinued
operations |
|
$ |
31 |
|
|
$ |
1,461 |
|
Comparison
of the nine months ended September 30, 2015 to the same period ended 2014:
For
the nine months ended September 30, 2015, we reported a net loss applicable to common shares of $2.1 million or $0.12 per diluted
earnings per share, as compared to a net income applicable to common shares of $2.1 million or $0.17 per diluted earnings per
share for the same period ended 2014.
Revenues
Rental
and other property revenues were $75.2 million for the nine months ended September 30, 2015. This represents an increase of $17.2
million, as compared to the prior period revenues of $58.0 million. This change, by segment, is an increase in the apartment portfolio
of $9.2 million and an increase in the commercial portfolio of $8.0 million. Within the apartment portfolio there was an increase
of $8.3 million in the acquired property portfolio and an increase of $0.9 million in the same property portfolio. Our apartment
portfolio continues to thrive in the current economic conditions with occupancies averaging approximately 95%. We have been able
to surpass expectations due to the high-quality product offered, the strength of our management team and our commitment to our
tenants. This increase in apartment portfolio is also due to the acquisition of new properties. Within the commercial portfolio
there was an increase of $4.3 million in the acquired property portfolio and increase of $3.7 million in the same store properties.
We are continuing to market our properties aggressively to attract new tenants and strive for continuous improvement of our properties
to maintain our existing tenants.
Expense
Property
operating expenses were $37.5 million for the nine months ended September 30, 2015. This represents an increase of $6.8 million,
as compared to the prior period operating expenses of $30.7 million. This change, by segment, is an increase in the apartment
portfolio of $4.0 million and an increase in the commercial portfolio of $2.8 million. Within the apartment portfolio there was
an increase of $3.4 million in the acquired properties portfolio and an increase of $0.6 million in the same property portfolio.
Within the commercial portfolio there was an increase of $3.2 million in the acquired properties portfolio and a decrease of $0.4
million in the same store properties.
Depreciation
and amortization expenses were $16.4 million for the nine months ended September 30, 2015. This represents an increase of $3.3
million as compared to prior period depreciation of $13.1 million. The majority of this change is in the apartment portfolio related
to an increase in the acquired properties portfolio.
Net
income fee increased slightly for the nine months ended September 30, 2015 as compared to the prior period. The net income fee
paid to our Advisor is calculated at 7.5% of net income.
Advisory
fees increased $0.9 million for the nine months ended September 30, 2015 as compared to the prior period. Advisory fees are computed
based on a gross asset fee of 0.0625% per month (0.75% per annum) of the weighted average of the gross asset value.
Other
income (expense)
Interest
income was $13.7 million for the nine months ended September 30, 2015. This represents a decrease of $1.6 million, as compared
to the prior year income of $15.3 million.
Mortgage
and loan interest expense was $36.5 million for the nine months ended September 30, 2015. This represents an increase of $5.2
million, as compared to the prior period expense of $31.3 million. The majority of this increase is in the other portfolio and
is related to the securing of a new loan in 2015.
Gain
on land sales increased for the nine months ended September 30, 2015, as compared to the prior period. In the current period we
sold 198.29 acres of land in six transactions for a sales price of $12.0 million and recorded a gain of $5.1 million. We also
recognized deferred gain of $2.7 million on two prior sales.
The
debt on one income-producing apartment complex, consisting of 200 units, located in Ohio, was settled, which resulted in the property
being transferred to the lender. The Company recorded a gain of $0.7 million related to the extinguishment of the debt.
There
were no sales of income-producing properties in the first nine months of 2015. In 2014, we sold two apartment complexes (both
in Texas), and two commercial properties (one in Louisiana and one in Alaska). The gain on sale of the properties is also included
in discontinued operations for those years. The following table summarizes revenue and expense information for the properties
sold and held for sale (dollars in thousands):
|
|
For the Nine Months Ended
September 30, |
|
|
2015 |
|
2014 |
Revenues: |
|
|
|
|
Rental
and other property revenues |
|
$ |
15 |
|
|
$ |
5,328 |
|
|
|
|
15 |
|
|
|
5,328 |
|
Expenses: |
|
|
|
|
|
|
|
|
Property operating
expenses |
|
|
(346 |
) |
|
|
2,201 |
|
Depreciation |
|
|
— |
|
|
|
664 |
|
General
and administrative |
|
|
99 |
|
|
|
378 |
|
Total
operating expenses |
|
|
(247 |
) |
|
|
3,243 |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Other income |
|
|
45 |
|
|
|
(522 |
) |
Mortgage and
loan interest |
|
|
(1 |
) |
|
|
(1,767 |
) |
Litigation
settlement |
|
|
— |
|
|
|
(250 |
) |
Total
other income (expenses) |
|
|
44 |
|
|
|
(2,539 |
) |
Gain (loss) from discontinued operations
before gain on sale of real estate and tax |
|
|
306 |
|
|
|
(454 |
) |
Gain on sale
of real estate from discontinued operations |
|
|
— |
|
|
|
14,826 |
|
Income
tax expense |
|
|
(107 |
) |
|
|
(5,030 |
) |
Income from discontinued
operations |
|
$ |
199 |
|
|
$ |
9,342 |
|
Liquidity
and Capital Resources
Our
principal liquidity needs are:
|
• |
fund normal recurring expenses; |
|
• |
meet debt service and principal repayment
obligations including balloon payments on maturing debt; |
|
• |
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:
|
• |
proceeds from land and income-producing
property sales; |
|
• |
collection of mortgage notes receivable; |
|
• |
collection of receivables from related
party companies; |
|
• |
refinancing of existing debt; and |
|
• |
additional borrowing, including mortgage
notes, mezzanine financing and lines of credit. |
We
draw on multiple financing sources to fund our long-term capital needs. We generally fund our development projects with construction
loans. Management anticipates that our available cash from property operations may not 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
borrowing secured by real estate to meet its liquidity requirements. Although the past cannot predict the future, historically,
management has been successful at extending a portion of our current maturity obligations and selling assets as necessary to meet
current obligations.
Cash
Flow Summary
The
following summary discussion of our cash flows is based on the statements of cash flows as presented in Part I Item 1. “Financial
Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow (dollars in thousands):
|
|
September 30, |
|
|
|
|
2015 |
|
2014 |
|
Variance |
Net cash used in operating activities |
|
$ |
(28,184 |
) |
|
$ |
(6,457 |
) |
|
$ |
(21,727 |
) |
Net cash provided by used in investing activities |
|
$ |
(116,345 |
) |
|
$ |
(2,835 |
) |
|
$ |
(113,510 |
) |
Net cash provided by (used in) financing
activities |
|
$ |
144,219 |
|
|
$ |
(2,762 |
) |
|
$ |
146,981 |
|
Our
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. In addition, we have a related
party account in which excess cash is transferred to or from. The majority of the variance is due to gains on sale of income-producing
properties in the prior period and related party receivables.
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. The majority of the variance is due to the acquisition of income-producing properties
in the current period.
Our
primary sources of cash from financing activities are from proceeds on notes payables either through refinancing our existing
loans or by obtaining new financing. Our primary cash outlays are for recurring debt payments and payments on maturing notes payable.
The increase is due to proceeds received in the current period from new loans and refinancing.
Environmental
Matters
Under
various federal, state and local environmental laws, ordinances and regulations, we 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 our business,
assets or results of operations.
Inflation
The
effects of inflation on our operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately
with inflationary increases and decreases in real estate 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.
Tax
Matters
ARL
is more than 80% owned by May Realty Holdings, Inc. (“MRHI”). As a result, ARL is part of the tax sharing agreement
for the MRHI consolidated group for federal income tax reporting.
Financial
statement income varies from taxable income principally due to the accounting for income and losses of investees, gains and losses
from asset sales, depreciation on owned properties, amortization of discounts on notes receivable and payable and the difference
in the allowance for estimated losses. ARL had a loss for federal income tax purposes after the use of net operating loss carryforwards
in the first nine months of 2015 and a loss in 2014 and 2013, therefore, it recorded no provision for income taxes.
At
September 30, 2015, ARL had a net deferred tax asset of $96.0 million due to tax deductions available to it in future years. However,
as management cannot determine that it is more likely than not that ARI will realize the benefit of the deferred tax assets, a
100% valuation allowance has been established.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
At
September 30, 2015, our exposure to a change in interest rates on our debt is as follows (dollars in thousands, except per share):
|
|
|
|
Weighted |
|
Effect of 1% |
|
|
|
|
Average |
|
Increase In |
|
|
Balance |
|
Base
Rates |
|
Interest Rate |
Notes payable: |
|
|
|
|
|
|
Variable
rate |
|
$ |
143,312 |
|
|
|
8.68 |
% |
|
$ |
1,433 |
|
Total
decrease in ARL’s annual net income |
|
|
|
|
|
|
|
|
|
|
1,433 |
|
Per
share |
|
|
|
|
|
|
|
|
|
$ |
0.09 |
|
Our
variable rate exposure is mitigated through the ability to secure long-term fixed rate HUD financing with a weighted average borrowing
rate of 4.03% at September 30, 2015.
ITEM 4. CONTROLS
AND PROCEDURES
Based
on an evaluation by our management (with the participation of our Principal Executive Officer and Principal Financial Officer),
as of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), were effective to provide reasonable assurance that information required
to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management,
including our Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures.
There
has been no change in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
ITEM 5.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. The following table represents shares repurchased
on a monthly basis during the third quarter of 2015:
Period |
|
Total Number of
Shares Purchased
|
|
Average
Price
Paid per share
|
|
Total
Number of Shares Purchased
as Part of Publicly
Announced Program
|
|
Maximum
Number of
Shares that May Yet be Purchased
Under the Program |
Balance at June 30, 2015 |
|
|
|
|
|
|
|
|
|
|
|
986,750 |
|
|
|
263,250 |
|
|
July
31, 2015 |
|
|
|
— |
|
|
$ |
— |
|
|
|
986,750 |
|
|
|
263,250 |
|
|
August
31, 2015 |
|
|
|
— |
|
|
$ |
— |
|
|
|
986,750 |
|
|
|
263,250 |
|
|
September
30, 2015 |
|
|
|
— |
|
|
$ |
— |
|
|
|
986,750 |
|
|
|
263,250 |
|
Total |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 6.
EXHIBITS
The
following exhibits are filed herewith or incorporated by reference as indicated below:
Exhibit
Number |
|
Description
of Exhibit |
3.0 |
|
Certificate of
Restatement of Articles of Incorporation of American Realty Investors, Inc. dated August 3, 2000 (incorporated by reference
to Exhibit 3.0 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). |
|
|
|
3.1 |
|
Certificate of
Correction of Restated Articles of Incorporation of American Realty Investors, Inc. dated August 29, 2000 (incorporated
by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q dated September 30, 2000). |
|
|
|
3.2 |
|
Articles of Amendment
to the Restated Articles of Incorporation of American Realty Investors, Inc. decreasing the number of authorized shares of and
eliminating Series B Cumulative Convertible Preferred Stock dated August 23, 2003 (incorporated by reference to Exhibit
3.3 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). |
|
|
|
3.3 |
|
Articles of Amendment
to the Restated Articles of Incorporation of American Realty Investors, Inc., decreasing the number of authorized shares of and
eliminating Series I Cumulative Preferred Stock dated October 1, 2003 (incorporated by reference to Exhibit 3.4 to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2003). |
|
|
|
3.4 |
|
Bylaws of American
Realty Investors, Inc. (incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form S-4 filed
December 30, 1999). |
|
|
|
4.1 |
|
Certificate of
Designations, Preferences and Relative Participating or Optional or Other Special Rights, and Qualifications, Limitations or Restrictions
Thereof of Series F Redeemable Preferred Stock of American Realty Investors, Inc., dated June 11, 2001 (incorporated by reference
to Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2001). |
|
|
|
4.2 |
|
Certificate of
Withdrawal of Preferred Stock, Decreasing the Number of Authorized Shares of and Eliminating Series F Redeemable Preferred Stock,
dated June 18, 2002 (incorporated by reference to Exhibit 3.0 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002). |
|
|
|
4.3 |
|
Certificate of
Designation, Preferences and Rights of the Series I Cumulative Preferred Stock of American Realty Investors, Inc., dated February
3, 2003 (incorporated by reference to Exhibit 4.3 to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2002). |
|
|
|
4.4 |
|
Certificate of
Designation for Nevada Profit Corporations designating the Series J 8% Cumulative Convertible Preferred Stock as filed with the
Secretary of State of Nevada on March 16, 2006 (incorporated by reference to Registrant’s current report on Form 8-K for
event of March 16, 2006). |
|
|
|
4.5 |
|
Certificate
of Designation for Nevada Profit Corporation designating the Series K Convertible Preferred
Stock as filed with the Secretary of State of Nevada on May 6, 2013 (incorporated by reference
to Registrant’s current report on form 8-K for event of May 7, 2013).
|
10.1 |
|
Advisory Agreement
between American Realty Investors, Inc. and Pillar Income Asset Management, Inc., dated April 30, 2011 (incorporated by reference
to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, dated May 2, 2011). |
|
|
|
10.2 |
|
Second Amendment
to Modification of Stipulation of Settlement dated October 17, 2001 (incorporated by reference to Exhibit 10.1 to the Registrant’s
Registration Statement on Form S-4, dated February 24, 2002). |
|
|
|
31.1* |
|
Certification
by the Principal Executive Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. |
|
|
|
31.2* |
|
Certification
by the Principal Financial Officer pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended. |
|
|
|
32.1* |
|
Certification
pursuant to 18 U.S.C. 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase
Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase
Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase
Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation
Linkbase Document |
_______________
SIGNATURE
PAGE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
|
|
AMERICAN REALTY INVESTORS,
INC. |
|
|
|
Date: November 13, 2015 |
By: |
/s/
Daniel J. Moos |
|
|
Daniel J. Moos |
|
|
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
Date: November 13, 2015 |
By: |
/s/
Gene S. Bertcher |
|
|
Gene S. Bertcher |
|
|
Executive
Vice President and Chief Financial Officer
(Principal
Financial Officer)
|
American Realty Investors, Inc. 10-Q
Exhibit 31.1
CERTIFICATION
I, Daniel J. Moos, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of American Realty Investors, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
|
(d) |
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on the most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
|
|
Dated: November 13, 2015 |
|
/s/ Daniel J. Moos |
|
|
Daniel J. Moos
President and Chief Executive Officer
(Principal Executive Officer) |
American Realty Investors, Inc. 10-Q
Exhibit 31.2
CERTIFICATION
I, Gene S. Bertcher, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of American Realty Investors, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
|
(a) |
Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluations; and |
|
(d) |
Disclosed in the report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on the most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated: November 13, 2015 |
|
/s/ Gene S. Bertcher |
|
|
Gene S. Bertcher
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
American Realty Investors, Inc. 10-Q
Exhibit 32.1
Certification Pursuant to 18 U.S.C.
Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Each of the undersigned
officers of American Realty Investors, Inc., a Nevada corporation (the “Company”) hereby certifies pursuant to 18 U.S.C.
Section 1350 that:
| (i) | The Company’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2015,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and |
| (ii) | The information contained in the Company’s Quarterly Report on Form 10-Q for the ninemonths
ended September 30, 2015, fairly presents in all material respects, the financial condition and results of operations of the Company,
at and for the periods indicated. |
|
|
|
Dated: November 13, 2015 |
|
/s/ Daniel J. Moos |
|
|
Daniel J. Moos
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
Dated: November 13, 2015 |
|
/s/ Gene S. Bertcher |
|
|
Gene S. Bertcher
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
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