Company Quick10K Filing
American Realty Investors
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 16 $214
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-01 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-04-02 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-15 Quarter: 2017-06-30
10-Q 2017-05-16 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-13 Quarter: 2016-03-31
10-K 2016-03-30 Annual: 2015-12-31
10-Q 2015-11-13 Quarter: 2015-09-30
10-Q 2015-08-13 Quarter: 2015-06-30
10-Q 2015-05-13 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-13 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-31 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-20 Quarter: 2013-03-31
10-K 2013-04-08 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-04-04 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-16 Quarter: 2011-03-31
10-K 2011-03-31 Annual: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
10-Q 2010-08-16 Quarter: 2010-06-30
10-Q 2010-05-17 Quarter: 2010-03-31
10-K 2010-03-31 Annual: 2009-12-31
8-K 2019-12-11 Shareholder Vote
8-K 2019-11-14 Earnings, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-07-01 Officers
8-K 2019-04-04 Earnings, Exhibits
8-K 2019-03-15 Earnings, Exhibits
8-K 2018-12-14 Shareholder Vote
8-K 2018-11-14 Earnings, Exhibits
8-K 2018-08-15 Earnings, Exhibits
8-K 2018-05-15 Earnings, Exhibits
8-K 2018-04-03 Earnings, Exhibits
8-K 2017-10-20 Other Events
ARL 2019-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. Organization and Basis of Presentation
Note 2. Investment in Vaa
Note 3. Real Estate Activity
Note 4. Supplemental Cash Flow Information
Note 5. Notes and Interest Receivable
Note 6. Investment in Unconsolidated Investees
Note 7. Notes and Interest Payable
Note 8. Bonds and Bonds Interest Payable
Note 9. Deferred Income
Note 10. Related Party Transactions
Note 11. Operating Segments
Note 12. Commitments, Contingencies, and Liquidity
Note 13. Earnings per Share
Note 14. Edina Park Class A Plaza Limited Partners
Note 15. Subsequent Events
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm

American Realty Investors Earnings 2019-09-30

ARL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
NTP 340 318 90 0 0 0 0 340 0%
RFL 304 143 17 5 0 -3 -1 291 0% -259.0 -2%
CTO 302 578 380 84 59 29 57 522 71% 9.2 5%
PICO 228 177 2 17 0 1 1 219 0% 281.3 0%
ARL 214 818 507 82 0 168 223 433 0% 1.9 21%
MMAC 200 326 111 0 0 66 68 295 4.3 20%
GRIF 192 264 167 26 25 5 18 328 93% 18.5 2%
MLP 190 48 17 10 0 1 1 189 0% 250.5 2%
LEJU 166 417 175 0 0 0 0 18 0%
YRIV 99 393 220 0 0 -15 -2 93 -41.1 -4%

10-Q 1 arl-10q_093019.htm QUARTERLY REPORT arl-10q_093019.htm

 

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, 2019

 

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)

 

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock ARL NYSE

 

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 ☐ Smaller reporting company
     
Emerging growth 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 15,997,076
(Class) (Outstanding at November 14, 2019)

 

 

 

 

 

AMERICAN REALTY INVESTORS, INC.  

FORM 10-Q

 

TABLE OF CONTENTS

 

     
    PAGE
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
     
  Consolidated Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018 3
     
  Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) 4
     
  Consolidated Statement of Shareholders’ Equity for the nine months ended September 30, 2019 and 2018 (unaudited) 5
     
  Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2019 and 2018 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) 7
     
  Notes to Consolidated Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risks 34
     
Item 4. Controls and Procedures 35
     

PART II. OTHER INFORMATION

 
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 6. Exhibits 36

 

2  

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

AMERICAN REALTY INVESTORS, INC. 

CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2019     2018  
    (unaudited)     (audited)  
    (dollars in thousands, except share
and par value amounts)
 
Assets              
Real estate, at cost   $ 464,452     $ 455,993  
Real estate subject to sales contracts at cost     1,626       3,149  
Less accumulated depreciation     (86,088 )     (78,099 )
Total real estate     379,990       381,043  
                 
Notes and interest receivable (including $120,334 in 2019 and $105,803 in 2018 from related parties)     172,468       140,327  
Less allowance for estimated losses (including $14,269 in 2019 and 2018 from related parties)     (14,269 )     (14,269 )
Total notes and interest receivable     158,199       126,058  
                 
Cash and cash equivalents     63,075       36,428  
Restricted cash     36,865       70,187  
Investment in VAA     64,962       68,399  
Investment in other unconsolidated investees     7,947       7,602  
Receivable from related parties     71,147       70,377  
Other assets     50,177       66,055  
Total assets   $ 832,362     $ 826,149  
                 
Liabilities and Shareholders’ Equity                
Liabilities:                
Notes and interest payable   $ 250,725     $ 286,968  
Bond and interest payable     223,433       158,574  
Deferred revenue (including $28,847  in 2019 and $33,904 in 2018 to related parties)     28,847       33,904  
Accounts payable and other liabilities (including $11,589 in 2019 and $9,984 in 2018 to related parties)     30,896       25,576  
Total liabilities     533,901       505,022  
                 
Shareholders’ equity:                
Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued 1,800,614 and outstanding 614 in 2019 and 2018 (liquidation preference $10 per share), including 1,800,000 shares held by ARL and its subsidiaries in 2019 and 2018.     5       5  
Common stock, $0.01 par value, 100,000,000 shares authorized; 16,412,861 shares issued and 15,997,076 outstanding as of  2019 and 2018 , including 140,000 shares held by TCI (consolidated) in 2019 and 2018.     164       164  
Treasury stock at cost; 415,785 shares in 2019 and 2018, and 140,000 shares held by TCI (consolidated) as of 2019 and 2018.     (6,395 )     (6,395 )
Paid-in capital     82,018       84,885  
Retained earnings     163,170       179,666  
Total American Realty Investors, Inc. shareholders’ equity     238,962       258,325  
Non-controlling interest     59,499       62,802  
Total shareholders’ equity     298,461       321,127  
Total liabilities and shareholders’ equity   $ 832,362     $ 826,149  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3  

 

 

AMERICAN REALTY INVESTORS, INC. 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
Revenues:                        
Rental and other property revenues (including $212  and $207 for the three months and $527 and $623 for the nine months ended 2019 and 2018, respectively, from related parties)   $ 11,943     $ 33,409     $ 35,712     $ 96,099  
                                 
Expenses:                                
Property operating expenses (including $237 and $231 for the three months ended and $741 and $689 for the nine months ended 2019 and 2018, respectively, from related parties)     5,883       15,945       19,203       45,919  
Depreciation and amortization     3,416       6,873       9,964       19,768  
General and administrative (including $1,002 and $1,197 for the three months ended and $3,680 and $3,634 for the nine months ended 2019 and 2018, respectively, from related parties)     2,669       2,062       9,401       7,357  
Net income fee to related party     83       383       273       489  
Advisory fee to related party     1,758       2,936       4,849       8,821  
Total operating expenses     13,809       28,199       43,690       82,354  
Net operating (loss) income     (1,866 )     5,210       (7,978 )     13,745  
                                 
Other income (expenses):                                
Interest income (including $6,240 and $3,275 for the three months ended and $18,328 and $8,554 for the nine months ended 2019 and 2018, respectively, from related parties)     6,856       5,710       19,514       15,701  
Other income     1,288       18,750       8,319       28,188  
Mortgage and loan interest (including $2,402 and $2,072 for the three months ended and $7,094 and $5,780 for the nine months ended 2019 and 2018, respectively, from related parties)     (10,420 )     (17,422 )     (29,796 )     (49,053 )
Foreign currency transaction (loss) gain     (5,153 )     (1,288 )     (13,296 )     6,357  
Loss on extinguishment of debt     (5,219 )           (5,219 )      
Equity loss from VAA     (189 )           (1,480 )      
Earnings from unconsolidated subsidiaries and investees     114       205       345       802  
Total other (expenses) income     (12,723 )     5,955       (21,613 )     1,995  
(Loss) income before gain on land sales, non-controlling interest, and taxes     (14,589 )     11,165       (29,591 )     15,740  
Loss on sale of income producing properties                 (80 )      
Gain on land sales     5,139       12,243       9,872       13,578  
Net (loss) income from continuing operations before taxes     (9,450 )     23,408       (19,799 )     29,318  
Income tax expense           (792 )           (792 )
Net (loss) income from continuing operations     (9,450 )     22,616       (19,799 )     28,526  
Net (loss) income     (9,450 )     22,616       (19,799 )     28,526  
Net (income) loss attributable to non-controlling interest     1,879       (2,265 )     3,303       (2,981 )
Net (loss) income attributable to American Realty Investors, Inc.     (7,571 )     20,351       (16,496 )     25,545  
Preferred dividend requirement           (225 )           (675 )
Net (loss) income applicable to common shares   $ (7,571 )   $ 20,126     $ (16,496 )   $ 24,870  
                                 
(Loss) earnings per share - basic                                
Net (loss) income from continuing operations   $ (0.59 )   $ 1.46     $ (1.24 )   $ 1.84  
Net (loss) income applicable to common shares   $ (0.47 )   $ 1.30     $ (1.03 )   $ 1.60  
                                 
(Loss) earnings per share - diluted                                
Net (loss) income from continuing operations   $ (0.59 )   $ 1.36     $ (1.24 )   $ 1.72  
Net (loss) income applicable to common shares   $ (0.47 )   $ 1.21     $ (1.03 )   $ 1.50  
Weighted average common shares used in computing earnings per share     15,997,076       15,514,360       15,997,076       15,514,360  
Weighted average common shares used in computing diluted earnings per share     15,997,076       16,598,942       15,997,076       16,598,942  
                                 
Amounts attributable to American Realty Investors, Inc.                                
Net (loss) income from continuing operations   $ (9,450 )   $ 22,616     $ (19,799 )   $ 28,526  
Net (loss) income applicable to American Realty Investors, Inc.   $ (7,571 )   $ 20,351     $ (16,496 )   $ 25,545  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4  

 

 

AMERICAN REALTY INVESTORS, INC. 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY 

For the Nine Months Ended September 30, 2019 and 2018 

(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, 2018   $ 321,127     $ 106,086     $ 5       16,412,861     $ 164     $ (6,395 )   $ 84,885     $ 179,666     $ 62,802  
Net loss     (19,799 )     (16,496 )                                   (16,496 )     (3,303 )
Distribution to equity partner     (2,867 )                                   (2,867 )            
Balance, September 30, 2019   $ 298,461     $ 89,590     $ 5       16,412,861     $ 164     $ (6,395 )   $ 82,018     $ 163,170     $ 59,499  

 

    Total     Comprehensive     Preferred     Common Stock     Treasury     Paid-in     Retained     Non-controlling  
    Equity     Income (Loss)     Stock     Shares     Amount     Stock     Capital     Earnings     Interest  
                                                       
Balance, December 31, 2017   $ 165,883     $ (67,613 )   $ 2,205       15,930,145     $ 159     $ (6,395 )   $ 110,138     $ 5,967     $ 53,809  
Net income     28,526       25,545                                     25,545       2,981  
Conversion of Series A preferred stock into common stock     (395 )           (400 )     482,716       5                          
Series A preferred stock dividend ($1.00 per share)     (675 )                                   (450 )            
Balance, September 30, 2018   $ 193,339     $ (42,068 )   $ 1,805       16,412,861     $ 164     $ (6,395 )   $ 109,688     $ 31,512     $ 56,790  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5  

 

 

AMERICAN REALTY INVESTORS, INC. 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 

(unaudited)

 

    Nine Months Ended  
    September 30,  
    2019     2018  
    (dollars in thousands)  
             
Net (loss) income   $ (19,799 )   $ 28,526  
Total comprehensive (loss) income     (19,799 )     28,526  
Comprehensive loss (income) attributable to non-controlling interest     3,303       (2,981 )
Comprehensive (loss) income attributable to American Realty Investors, Inc.   $ (16,496 )   $ 25,545  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6  

 

 

AMERICAN REALTY INVESTORS, INC. 

CONSOLIDATED STATEMENTS OF CASH FLOWS 

(unaudited)

 

    Nine Months Ended  
    September 30,  
    2019     2018  
    (dollars in thousands)  
Cash Flow From Operating Activities:                
Net (loss) income   $ (19,799 )   $ 28,526  
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:                
Foreign currency transaction loss (gain)     13,296       (6,357 )
Loss on debt extinguishment     5,219        
Gain on sale of land     (9,872 )     (13,578 )
Loss on sale of income-producing properties     80        
Depreciation and amortization     9,964       19,768  
Amortization of deferred borrowing costs     502       1,296  
Amortization of bond issuance costs     2,352       2,346  
Loss from joint venture     1,480        
(Earnings) from unconsolidated subsidiaries and investees     (345 )     (802 )
(Increase) decrease in assets:                
Accrued interest receivable     282       1,177  
Other assets     9,064       521  
Prepaid expense     4,435       1,407  
Rent receivables     404       (621 )
Related party receivables     (35,257 )     (28,341 )
Increase (decrease) in liabilities:                
Accrued interest payable     (1,454 )     (3,324 )
Other liabilities     10,848       (13,233 )
Net cash (used in) operating activities     (8,801 )     (11,215 )
                 
Cash Flow From Investing Activities:                
Proceeds from notes receivables     255       6,541  
Origination of notes receivables     (7,262 )     (14,557 )
Distribution from equity investee     1,928        
Acquisition of land held for development     (3,422 )      
Acquisition of income producing properties     1,296        
Proceeds from sale of income producing properties           2,706  
Proceeds from sale of land     21,734       10,439  
Improvement of income producing properties     (4,644 )     (3,688 )
Construction and development of new properties     (26,667 )     (73,357 )
Net cash (used in) investing activities     (16,782 )     (71,916 )
                 
Cash Flow From Financing Activities:                
Proceeds from bonds     78,125       59,213  
Bond payments     (21,742 )      
Bond issuance costs     (4,241 )     (5,257 )
Proceeds from notes payable     18,105       68,943  
Recurring payment of principal on notes payable     (5,812 )     (14,443 )
Payments on maturing notes payable           (16,750 )
Payment on commercial note payable     (41,531 )      
Debt extinguishment costs     (3,799 )      
Distributions to equity partner     (197 )      
Preferred stock dividends - Series A           (675 )
Net cash provided by financing activities     18,908       91,031  
                 
Net increase in cash and cash equivalents     (6,675 )     7,900  
Cash and cash equivalents, beginning of period     106,615       88,538  
Cash and cash equivalents, end of period   $ 99,940     $ 96,438  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 33,521     $ 45,655  
                 
Schedule of noncash investing and financing activities:                
Land received in exchanged for note receivable   $ 1,800     $  
Notes receivable received from sale of income-producing properties   $     $ 1,735  
Seller financing note - acquisition of income-producing properties   $     $ 1,895  
Notes payable issued on acquisition of income-producing properties   $     $ 31,175  
Notes payable issued on acquisition of land   $ 1,155     $  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7  

 

 

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”). Over 80% of ARL’s stock is owned by related party entities.

 

ARL and a subsidiary own approximately 78% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, whose common stock is traded on the NYSE under the symbol (“TCI”). TCI, a subsidiary of ARL, owns approximately 81.25% of the common stock of Income Opportunity Realty Investors, Inc. (“IOR”). Effective July 17, 2009, IOR’s financial results were consolidated with those of ARL and TCI and their subsidiaries. IOR’s common stock is traded on the NYSE American under the symbol (“IOR”).

 

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

 

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 IOR.

 

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.

 

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

 

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

 

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

 

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

 

Properties

 

At September 30, 2019, our income-producing properties consisted of:

 

Seven commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7 million square feet;
Nine residential apartment communities owned directly by us comprising in 1,512 units, excluding apartments being developed;
Approximately 2,310 acres of developed and undeveloped land; and
Fifty-one residential apartment communities totaling 9,643 units owned by our 50% owned investee VAA.

 

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. 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 three and nine months ended September 30, 2019, 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, 2018 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, 2018. Certain 2018 Consolidated Financial Statement amounts have been reclassified to conform to the 2019 presentation.

 

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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 investments in Gruppa Florentina, LLC and VAA are 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.

 

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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.

 

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Newly Issued Accounting Standards

 

In February 2016, FASB issued ASU 2016-02 (“ASU 2016-02”), Leases. This guidance establishes a new model for accounting for leases and provides for enhanced disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. The adoption of ASU 2016-02 did not have a material impact on the Company’s financial position and results of operations.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement that eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2018-13 may have on its consolidated financial statements.

 

NOTE 2. INVESTMENT IN VAA

 

On November 19, 2018, TCI executed an agreement with Macquarie Group (“Macquarie”) to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily housing in focused secondary and tertiary markets.

 

The Company accounts for its investment in VAA under the equity method of accounting. Under the equity method of accounting, our net equity in the investment is reflected within the Consolidated Balance Sheets in the caption ‘Investment in VAA’, and our share of the net income or loss from the joint venture is included within the Consolidated Statements of Operations in the caption ‘Equity earnings from VAA’. 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 and other agreed upon adjustments.

 

The following is a summary of the financial position and results of operations of VAA (dollars in thousands):

 

Balance Sheet   September 30, 2019          
               
Net real estate assets   $ 1,240,076          
Other assets     53,808          
Debt, net     (816,581 )        
Other liabilities     (274,604 )        
Total equity     (202,699 )        

 

Results of Operations   Three Months Ended
September 30, 2019
    Nine Months Ended
September 30, 2019
 
Total revenue   $ 29,657     $ 85,985  
Total property, operating, and maintenance expenses     (13,863 )     (42,345 )
Interest expense     (15,425 )     (45,294 )
Depreciation and Amortization     (16,036 )     (46,792 )
Total other expense     (917 )     (1,919 )
Net loss   $ (16,584 )   $ (50,365 )

 

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Below is a reconciliation of our allocation of income or loss from VAA.

 

    Three Months Ended September 30, 2019     Nine Months Ended September 30, 2019  
VAA net loss   $ (16,584 )   $ (50,365 )
Adjustments to reconcile to income (loss) from VAA                
Interest expense on mezzanine loan     6,314       18,804  
In-place lease intangibles - amortization expense     9,272       26,037  
Depreciation basis differences     621       2,565  
Net loss   $ (377 )   $ (2,959 )
Percentage ownership in VAA     50 %     50 %
Loss from VAA   $ (189 )   $ (1,480 )

 

NOTE 3. REAL ESTATE ACTIVITY

 

The following table summarizes ARL’s real estate investments as of September 30, 2019 and December 31, 2018 (dollars in thousands):

 

    September 30, 2019     December 31, 2018  
             
Apartments   $ 135,172     $ 126,274  
Apartments under construction     32,285       21,916  
Commercial properties     228,805       224,162  
Land held for development     68,190       83,641  
Real estate subject to sales contract     1,626       3,149  
Total real estate, at cost, less impairment     466,078       459,142  
Less accumulated deprecation     (86,088 )     (78,099 )
Total real estate, net of depreciation   $ 379,990     $ 381,043  

 

The following is a description of the Company’s significant real estate and financing transactions for the three months ended September 30, 2019:

 

Sold 7.37 acres of land located in Farmers Branch, Texas for an aggregate sales price of $5.4 million and recognized a gain on the sale of approximately $3.9 million.

 

Sold 8.78 acres of land located in Forney, Texas for a total sales price of $1.6 million and recognized a gain on the sale of approximately $1.2 million.

 

Purchased 32.58 acres of land in Athens, Alabama for a total purchase price of $1.8 million, out of which $0.6 million was paid in cash and the remaining balance of $1.2 million was issued as a note payable. The note payable matures in eighteen months and bears an annual interest rate of 5.91%.

 

Sold water district receivables related to infrastructure development work, located in Kaufman County, Texas for $5.0 million. No gain or loss was recognized from the sale of these receivables.

 

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

 

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The Company continues to invest in the development of apartment projects. During the nine months ended September 30, 2019, ARL has invested $26.4 million related to the construction or predevelopment of various apartment complexes and capitalized $0.3 million of interest costs.

 

NOTE 4. SUPPLEMENTAL CASH FLOW INFORMATION

 

For the nine months ended September 30, 2019 and 2018, the Company paid interest expense of $33.5 million and $45.7 million, respectively.

 

Cash and cash equivalents, and restricted cash for the nine months ended September 30, 2019 and 2018 was $99.9 million and $96.4 million, respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total presented in the consolidated statement of cash flows.

 

    September 30,  
    2019     2018  
             
Cash and cash equivalents   $ 63,075     $ 23,768  
Restricted cash (cash held in escrow)     24,052       57,117  
Restricted cash (certificate of deposits)     5,733       9,155  
Restricted cash (held with Trustee)     7,080       6,398  
Total cash, cash equivalents and restricted cash   $ 99,940     $ 96,438  

 

Amounts included in restricted cash represent funds set aside to meet contractual obligations with certain financial institutions for the payment of reserve replacement deposits and tax and insurance escrow. In addition, restricted cash includes funds to the Bond’s Trustee for payment of principal and interests.

 

NOTE 5. NOTES AND INTEREST RECEIVABLE

 

A portion of our assets is 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.

 

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Below is a summary of our notes receivable as of September 30, 2019 (dollars in thousands):

 

  Maturity   Interest          
Borrower   Date   Rate     Amount   Security
Performing loans:                    
H198, LLC (Las Vegas Land)   01/20   12.00 %     5,907   Secured
H198, LLC (Legacy at Pleasant Grove Land)   10/19   12.00 %     496   Secured
Oulan-Chikh Family Trust   03/21   8.00 %     174   Secured
H198, LLC (McKinney Ranch Land)   09/20   6.00 %     4,554   Secured
RAI PFBL 2018 Purch Fee Note Weatherford   12/21   12.00 %     525   Secured
Forest Pines   11/20   5.00 %     2,675   Secured
Spyglass Apartments of Ennis, LP   11/19   5.00 %     5,287   Secured
Bellwether Ridge   05/20   5.00 %     3,706   Secured
Parc at Windmill Farms   05/20   5.00 %     6,513   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 %     3,639   Secured
Unified Housing Foundation, Inc. (Kensington Park) (1)   12/32   12.00 %     3,933   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 %     6,369   Secured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)   12/32   12.00 %     2,732   Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)   12/32   12.00 %     1,953   Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)   12/32   12.00 %     2,000   Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)   12/32   12.00 %     4,000   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. (Timbers of Terrell) (1)   12/32   12.00 %     1,323   Secured
Unified Housing Foundation, Inc. (Tivoli) (1)   12/32   12.00 %     6,140   Secured
Unified Housing Foundation, Inc. (Trails at White Rock) (1)   12/32   12.00 %     3,815   Secured
Unified Housing Foundation, Inc. (1)   12/21   12.00 %     10,401   Unsecured
Unified Housing Foundation, Inc. (1)   06/20   12.00 %     11,074   Unsecured
Unified Housing Foundation, Inc. (1)   03/22   12.00 %     4,782   Unsecured
Unified Housing Foundation, Inc. (Lakeshore Villas) (1)   07/21   12.00 %     838   Secured
Unified Housing Foundation, Inc. (Limestone Ranch) (1)   07/21   12.00 %     773   Secured
Unified Housing Foundation, Inc. (Marquis at Vista Ridge) (1)   07/21   12.00 %     839   Secured
Unified Housing Foundation, Inc. (Timbers at the Park) (1)   07/21   12.00 %     432   Secured
Unified Housing Foundation, Inc. (Trails at White Rock) (1)   07/21   12.00 %     913   Secured
Unified Housing Foundation, Inc. (Bella Vista) (1)   08/21   12.00 %     212   Secured
Unified Housing Foundation, Inc. (1)   10/21   12.00 %     6,831   Unsecured
Unified Housing Foundation, Inc. (1)   12/32   12.00 %     1,349   Unsecured
Realty Advisors Management, Inc. (1)   12/24   2.28 %     20,387   Unsecured
One Realco Corporation   01/20   3.00 %     7,000   Unsecured
Other related party notes (1) (2)   Various   Various       4,019   Various secured interests
Other non-related party notes   Various   Various       17,308   Various secured interests
Accrued interest               11,048    
Total Performing             $ 172,468    
Allowance for estimated losses               (14,269 )  
Total             $ 158,199    

 

(1) Related party notes. 

(2) An allowance was taken for estimated losses at full value of note.

 

We invest in 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, 2019, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $120.3 million. We recognized interest income of $8.1 million related to these notes receivables.

 

The Company has distributed the interest of ‘Class A Limited Partners of Edina Park Plaza Associates’, Limited Partnership, of which a subsidiary of ARI was the general partner as a result of non-payment of certain promissory notes in the amount of $2.7 million upon maturity (Refer to Note 14 ‘Edina Park Class A Plaza Limited Partners’).

 

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.

 

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NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES

 

The summary data presented below includes our investments accounted for under the equity method, except for our investment in VAA which is discussed in detail in Note 2 ‘Investment in VAA’.

 

The Company owns a 20% interest in Gruppa Florentina, LLC which 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):

 

    September 30,  
SUMMARY OF FINANCIAL POSITION:   2019     2018  
Real estate, net of accumulated depreciation   $ 13,132     $ 13,846  
Notes receivable     11,111       10,967  
Other assets     32,614       32,097  
Notes payable     (9,386 )     (10,523 )
Other liabilities     (6,853 )     (7,881 )
Shareholders’ equity     (40,618 )     (38,506 )
                 
    September 30,  
SUMMARY OF OPERATIONS:     2019       2018  
Revenue   $ 40,001     $ 40,362  
Depreciation     (1,092 )     (1,092 )
Operating expenses     (36,716 )     (37,206 )
Interest expense     (468 )     (507 )
Income from continuing operations     1,725       1,557  
Net income   $ 1,725     $ 1,557  
                 
Company’s 20% proportionate share of earnings   $ 345     $ 311  

 

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NOTE 7. NOTES AND INTEREST PAYABLE

 

Below is a summary of our notes and interest payable as of September 30, 2019 (dollars in thousands):

 

    September 30, 2019     December 31, 2018  
Apartments   $ 105,437     $ 94,759  
Apartments under Construction     17,682       14,402  
Commercial     93,658       136,327  
Land     19,622       27,520  
Corporate and other notes     20,827       22,527  
Total notes payable   $ 257,226     $ 295,535  
Less: unamortized deferred borrowing costs     (7,503 )     (9,428 )
Total outstanding notes payable, net   $ 249,723     $ 286,107  
Accrued Interest     1,002       861  
Total notes payable, net and accrued interest   $ 250,725     $ 286,968  

 

On July 28, 2019, simultaneously with the issuance of the Series C bonds, the Company paid off the mortgage debt of $41.5 million for one of its commercial properties. As a result of the retirement of this debt, the Company recorded a loss on extinguishment of approximately $5.2 million, which consisted of debt borrowing costs write-off of $1.4 million and a prepayment penalty of approximately $3.9 million.

 

In conjunction with the development of various apartment projects and land developments, we drew down $13.8 million in construction loans during the nine months ended September 30, 2019.

 

NOTE 8. BONDS AND BONDS INTEREST PAYABLE

 

Following is the outstanding balance of SPC’s Bonds and interest payable as of September 30, 2019 and December 31, 2018 (dollars in thousands):

 

    September 30, 2019     December 31, 2018  
Bonds (Series A)   $ 91,962     $ 106,686  
Bonds (Series B)     39,546       36,740  
Bonds (Series B expansion)     20,764       19,290  
Bonds (Series C)     79,115        
Total outstanding bonds   $ 231,387     $ 162,716  
Less: deferred bond issuance costs     (10,531 )     (8,179 )
Total outstanding bonds, net     220,856       154,537  
Accrued Interest     2,577       4,037  
Total oustanding bonds, net and accrued interest   $ 223,433     $ 158,574  

 

The aggregate maturity of the bonds are as follows:

 

Year   September 30, 2019     December 31, 2018  
             
2019   $     $ 22,049  
2020     22,786       22,049  
2021     34,748       33,629  
2022     34,748       33,629  
2023     113,073       30,070  
Thereafter     26,032       21,290  
    $ 231,387     $ 162,716  

 

17  

 

 

On July 28, 2019, SPC issued Series C bonds in the amount of NIS 275 million (or approximately $78.1 million). The bonds are reported in NIS, and registered on the TASE, and bear an annual interest of 4.65%. Interest will be paid on January 31 and July 31 of each of the years 2020 through 2023, and the principal payment due in 2023. The Company incurred bond issuance costs of approximately $4.2 million.

 

During the nine months ended September 30, 2019, the Company made payments of $21.8 million and $11.6 million on bond principal and interests, respectively.

 

The Company recognized a loss on foreign currency exchange rate of $13.3 million during the nine month ended September 30, 2019.

 

On September 23, 2019, Southern entered into a foreign exchange risk hedging transaction agreement with Bank Leumi with the aim of hedging the risk that the NIS exchange rate against the dollar will fall below 3, thereby reducing the exposure of the bonds (Series A, B and C) to exchange rate volatility.  The term of the agreement is six months and the face value of the transaction is NIS 664 million ($ 221 million).  The hedge transaction costs as well as the fair value as of September 30, 2019 are immaterial.

 

NOTE 9. DEFERRED INCOME

 

In previous years, the Company has sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method is not met, and as such the Company has deferred some or all of the gain recognition and accounted for the sale by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of September 30, 2019, we had deferred gain of $28.8 million.

 

NOTE 10. RELATED PARTY TRANSACTIONS

 

During the ordinary course of business, we have related party transactions that include, but are not limited to, rental 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 and paid are shown on the face of the Consolidated Financial Statements.

 

The following table reflects the reconciliation of the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of September 30, 2019 (dollars in thousands):

 

    Pillar  
Related party receivable, December 31, 2018   $ 70,377  
Cash transfers     22,407  
Advisory fees     (4,849 )
Net income fee     (273 )
Cost reimbursements     (3,463 )
Interest income     4,038  
Notes receivable purchased     (28,857 )
Expenses (paid) received by Advisor     12,062  
Financing (mortgage payments)     (223 )
Sales/purchases Commission     (72 )
Related party receivable, September 30, 2019   $ 71,147  

 

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NOTE 11. 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, 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 months ended September 30, 2019 and 2018, including segment assets and expenditures (dollars in thousands):

 

    Commercial                          
For the Three Months Ended September 30, 2019   Properties     Apartments     Land     Other     Total  
Rental and other property revenues   $ 8,023     $ 3,859     $ 60     $ 1     $ 11,943  
Property operating expenses     (3,503 )     (2,162 )     (560 )     342       (5,883 )
Depreciation     (2,553 )     (863 )                 (3,416 )
Mortgage and loan interest     (1,700 )     (1,050 )     (612 )     (7,058 )     (10,420 )
Loss on debt extinguishment     (5,219 )                       (5,219 )
Interest income                       6,856       6,856  
Gain on land sales                 5,139             5,139  
Segment operating (loss) income   $ (4,952 )   $ (216 )   $ 4,027     $ 141     $ (1,000 )
                                         
Capital expenditures   $ 599     $ 9,233     $ 590     $     $ 10,422  
                                         
Property Sales                                        
Sales price   $     $     $ 6,970     $     $ 6,970  
Cost of sale                 (1,831 )           (1,831 )
Gain on sale   $     $     $ 5,139     $     $ 5,139  
                                         
                                         
    Commercial                          
For the Three Months Ended September 30, 2018   Properties     Apartments     Land     Other     Total  
Rental and other property revenues   $ 8,227     $ 25,274     $ (95 )   $ 3     $ 33,409  
Property operating expenses     (4,236 )     (11,345 )     (158 )     (206 )     (15,945 )
Depreciation     (2,523 )     (4,364 )           14       (6,873 )
Mortgage and loan interest     (1,921 )     (5,721 )     (306 )     (9,474 )     (17,422 )
Interest income                       5,710       5,710  
Gain on land sales                 12,243             12,243  
Segment operating (loss) income   $ (453 )   $ 3,844     $ 11,684     $ (3,953 )   $ 11,122  
                                         
Capital expenditures   $ 962     $ 114     $ (107 )   $     $ 969  
                                         
Property Sales                                        
Sales price   $     $     $ 35,519     $     $ 35,519  
Cost of sale                 (23,276 )           (23,276 )
Gain on sale   $     $     $ 12,243     $     $ 12,243  

 

19  

 

 

The following table presents the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations for the three months ended September 30, 2019 and 2018 (dollars in thousands):

 

    For the Three Months Ended  
    September 30,  
    2019     2018  
Segment operating income (loss)   $ (1,000 )   $ 11,122  
Other non-segment items of income (expense)                
General and administrative     (2,669 )     (2,062 )
Net income fee to related party     (83 )     (383 )
Advisory fee to related party     (1,758 )     (2,936 )
Other income     1,288       18,750  
Foreign currency translation (loss) gain     (5,153 )     (1,288 )
Loss from joint venture     (189 )      
Earnings from unconsolidated investees     114       205  
Income tax expense           (792 )
Net (loss) income from continuing operations   $ (9,450 )   $ 22,616  

 

Presented below is our reportable segments’ operating income for the nine months ended September 30, 2019 and 2018, including segment assets and expenditures (dollars in thousands):

 

    Commercial                          
For the Nine Months Ended September 30, 2019   Properties     Apartments     Land     Other     Total  
Rental and other property revenues   $ 24,270     $ 11,377     $ 60     $ 5     $ 35,712  
Property operating expenses     (11,849 )     (6,238 )     (605 )     (511 )     (19,203 )
Depreciation     (7,660 )     (2,304 )                 (9,964 )
Mortgage and loan interest     (5,614 )     (2,987 )     (982 )     (20,213 )     (29,796 )
Loss on debt extinguishment     (5,219 )                       (5,219 )
Interest income                       19,514       19,514  
Loss on the sale of income producing property           (80 )                 (80 )
Gain on land sales                 9,872             9,872  
Segment operating (loss) income   $ (6,072 )   $ (232 )   $ 8,345     $ (1,205 )   $ 836  
                                         
Capital expenditures   $ 4,644     $ 26,667     $ 3,422     $     $ 34,733  
Real estate assets   $ 158,854     $ 151,320     $ 69,816     $       379,990  
                                         
Property Sales                                        
Sales price   $     $ 3,096     $ 23,287     $     $ 26,383  
Cost of sale           (3,176 )     (13,415 )           (16,591 )
(Loss) gain on sale   $     $ (80 )   $ 9,872     $     $ 9,792  
                                         
                                         
    Commercial                          
For the Nine Months Ended September 30, 2018   Properties     Apartments     Land     Other     Total  
Rental and other property revenues   $ 23,187     $ 73,001     $ (95 )   $ 6     $ 96,099  
Property operating expenses     (12,222 )     (33,127 )     (291 )     (279 )     (45,919 )
Depreciation     (7,138 )     (12,709 )           79       (19,768 )
Mortgage and loan interest     (5,662 )     (16,520 )     (437 )     (26,434 )     (49,053 )
Interest income                       15,701       15,701  
Gain on land sales                 13,578             13,578  
Segment operating (loss) income   $ (1,835 )   $ 10,645     $ 12,755     $ (10,927 )   $ 10,638  
                                         
Capital expenditures   $ 3,688     $ (2,398 )   $ (724 )   $     $ 566  
Real estate assets   $ 134,142     $ 823,619     $ 91,586     $ 643     $ 1,049,990  
                                         
Property Sales                                        
Sales price   $ 2,313     $ 8,512     $ 38,503     $     $ 49,328  
Cost of sale     (2,313 )     (8,512 )     (24,925 )           (35,750 )
Gain on sale   $     $     $ 13,578     $     $ 13,578  

 

20  

 

 

The following table presents the reconciliation of the segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):

 

    For the Nine Months Ended  
    September 30,  
    2019     2018  
Segment operating income (loss)   $ 836     $ 10,638  
Other non-segment items of income (expense)                
General and administrative     (9,401 )     (7,357 )
Net income fee to related party     (273 )     (489 )
Advisory fee to related party     (4,849 )     (8,821 )
Other income     8,319       28,188  
Foreign currency translation (loss) gain     (13,296 )     6,357  
Loss from joint venture     (1,480 )      
Earnings from unconsolidated investees     345       802  
Income tax expense           (792 )
Net (loss) income from continuing operations   $ (19,799 )   $ 28,526  

 

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:

 

    As of September 30,