AMERICAN REALTY INVESTORS, INC. The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this Quarterly Report on Form 10-Q (the "Quarterly Report") and in the Company's Form 10-K for the year endedDecember 31, 2019 (the "Annual 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 ontenants' 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 venturearrangements 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;
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? 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.
We continue to closely monitor the impact of the COVID-19 pandemic on all
aspects of our business and our property portfolio. While we did not incur
significant disruptions during the three months ended June 30, 2020 from the
COVID-19 pandemic, we are unable to predict the impact that the COVID-19
pandemic will have on our financial condition, results of operations and cash
flows due to numerous uncertainties. These uncertainties include the scope,
severity and duration of the pandemic, the actions taken to contain the pandemic
or mitigate its impact and the direct and indirect economic effects of the
pandemic and containment measures, among others. The pandemic is having a
significant impact on the U.S. economy and on the local markets in which our
properties are located. Nearly every industry has been impacted directly or
indirectly, and the commercial real estate market has come under pressure due to
numerous factors, including preventative measures taken by local, state and
federal authorities to alleviate the public health crisis such as mandatory
business closures, quarantines, and restrictions on travel and
"shelter-in-place" or "stay-at-home" orders.
The following provides an overview of the impact of COVID-19 on our financial condition, results of operations and cash flows.
? We have collected approximately 97% of its second quarter rents, comprised
of approximately 95% from multi-family tenants and 98% from office tenants.
? We have not granted any abatements or granted any significant deferments of
contractual rents.
? Occupancy at its non-lease up properties remains stable at 87% at
2020 in comparison to 89% at
? We continue to obtain positive leasing spreads for new leases and renewals
at properties.
? Our ground up development work continues unabated and thus far we have not
experienced any work stoppages.
In addition, we believe that our financing activity will not be significantly
impacted, given that most of our assets are HUD-backed loans with long maturity
periods and it continues to able to refinance its maturities as they become due
and obtain new financings for leased up properties.
The future impact of COVID-19 on our business and financial activities will depend on future developments, which at this stage are unpredictable considering the fluctuations of COVID-19 outbreaks and the resulting changes in the markets.
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 matters 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 theSEC . 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. 26
We acquire land primarily in urban in-fill locations or high-growth suburban markets. We are an active buyer and seller of real estate.
During the six months endedJune 30, 2020 , we sold 44.9 acres of land to third parties inFarmers Branch, Texas andForney, Texas for an aggregate sales price of$12.2 million and recognized a gain on the sale of$9.5 million . Furthermore, we acquired (i) 100% of the membership interest inEQK Portage, LLC , which owns approximately 49.2 acres of land inKent, OH . We purchased the land for development at a total purchase price of$5.4 million , consisting of$2.0 million in cash and a 3.4 million note payable. The note has an interest rate of 10% and a maturity date ofNovember 13, 2024 , (ii) 100% of the membership interest in RNC Portfolio, which owns approximately 0.7 acres of commercial land in inLewisville, TX. The Company purchased the land for development at a purchase price of approximately$0.1 million , which was paid in cash, (iii) approximately 1.3 acres of land in inMcKinney, TX. The Company purchased the land for development at a purchase price of approximately$0.5 million , which was paid in cash.
In addition, we purchased notes receivables from related parties for an
aggregate purchase price of
As ofJune 30, 2020 , we owned 1,657 units in ten residential apartment communities, and seven commercial properties comprising of approximately 1.7 million rentable square feet. In addition, we own approximately 1,891 acres of land held for development. The Company currently owns income-producing properties and land in eight states. We finance our acquisitions primarily through operating cash flow, proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders. We finance our development projects principally with 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 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. 27 Critical Accounting Policies We present our Consolidated Financial Statements in accordance with generally accepted accounting principles inthe 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 withU.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 withEmerging Issues Task Force ("EITF") Issue 04-5, Investor's Accounting for an Investment in a Limited Partnership when the Investor is the SoleGeneral 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 inVAA and Gruppa Florentina, LLC are 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.
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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
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. The Company owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartments to tenants. As ofJune 30, 2020 , our apartment leases generally have initial terms of 12 months or less and the rental revenue is recognized on an accrual basis when due from tenants in accordance with ASC 842, Leases. These leases are generally renewable at the end of the lease term subject to potential increases in rental rates. Collection of the rental payments is determined to be probable at lease commencement, so the payments are generally due and collected on a monthly basis and recognized monthly as earned, which is not materially different than on a straight-line basis, as lease terms are normally for periods of one year or less. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of lease revenue on a monthly basis consistent with rental payment revenue recognition. Lease revenue also includes all pass-through revenue from leases and common area maintenance reimbursements. These services represent non-lease components in a contract as the Company transfers a service to the lessee other than the right to use the underlying asset. The Company has elected the practical expedient under the leasing standard to not separate lease and non-lease components as the timing and pattern of revenue recognition for the non-lease component and related lease component are the same and the combined single lease component would be classified as an operating lease. 29
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.
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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 following discussion and analysis is based on our Consolidated Statements of Operations for the three months endedJune 30, 2020 and 2019, as included in Part I, Item 1. "Financial Statements" of this report. AtJune 30, 2020 and 2019, we owned or had interests in a portfolio of ten and nine income-producing properties, respectively.
Comparison of the three months ended
For the three months endedJune 30, 2020 , we reported net loss applicable to common shares of 2.3 million or$0.14 per diluted earnings per share, as compared to a net loss applicable to common shares of$2.8 million or$0.17 per diluted earnings per share for the same period ended 2019. Revenues
Rental and other property revenues were$11.9 million for the three months endedJune 30, 2020 , compared to$11.8 million for the same period in 2019. For the quarter endedJune 30, 2020 , the Company generated revenues of$7.9 million and$4.0 million from its commercial and residential segments, respectively. Expenses Property operating expenses decreased by$1.5 million to$5.8 million for the three months endedJune 30, 2020 as compared to$7.3 million for the same period in 2019. The decrease in property operating expenses was primarily attributable to reduction in property replacements cost.
Depreciation and amortization during the three months ended
General and administrative expense was$1.7 million for the three months endedJune 30, 2020 , compared to$2.4 million for the same period in 2019. The decrease of$0.7 million in general and administrative expenses was primarily due to decrease in professional and legal services, and other expenses.
We had no franchise taxes and other expenses for the three months ended
Other income (expense)
Interest income was
Other income decreased to$2.8 million for the three months endedJune 30, 2020 , from$3.4 million for the same period in 2019. The decrease of$0.6 million in other income was primarily due to tax increment incentives related to infrastructure development work. For the same period a year ago, the Company received cash proceeds of$3.4 million from the collection of tax increment incentives related to infrastructure development work. 31
Mortgage and loan interest expense was
Foreign currency transaction was a loss of$5.6 million for the three months endedJune 30, 2020 as compared to a loss of$2.3 million for the same period in 2019. The loss was the result of the strengthening of the Israel Shekels against the US Dollar due to economic uncertainties most likely as a result of the global pandemic outbreak. Loss from unconsolidated investments was a net$0.7 million for the three months endedJune 30, 2020 as compared to a net loss of nominal amount for the three months endedJune 30, 2019 . The loss from unconsolidated investments during the first quarter just ended was driven primarily from our share in the losses reported by the VAA Joint Venture of$0.7 million . Gain on land sales was$5.3 for the three months endedJune 30, 2020 , compared to$2.1 million for the same period in 2019. In the current period we sold approximately 25.9 acres of land for a sales price of$6.6 million which resulted in a gain of$5.3 million . For the same period in 2019, we sold 41.6 acres of land for an aggregate sales price of$7.6 million and recorded a gain of$2.5 million .
Comparison of the six months ended
For the six months endedJune 30, 2020 , we reported a net income applicable to common shares of$0.6 million or$0.04 per diluted share, compared to a net loss applicable to common shares of$8.9 million or$0.56 per diluted share for
the same period in 2019. Revenues Rental and other property revenues were$23.9 million for the six months endedJune 30, 2020 , compared to$23.8 million for the same period in 2019. For the six months endedJune 30, 2020 , the Company generated revenues of$15.8 million and$8.1 million from its commercial and residential segments, respectively. Expenses
Property operating expenses decreased by$1.2 million to$12.1 million for the six months endedJune 30, 2020 as compared to$13.3 million for the same period in 2019. The decrease in property operating expenses was primarily attributable to reduction in property replacements cost.
Depreciation and amortization increased by
General and administrative expense was$4.5 million for the six months endedJune 30, 2020 , compared to$5.0 million for the same period in 2019. The decrease of$0.5 million in general and administrative expenses was primarily due to decrease in other expenses, partially offset by increase in in professional and legal services. Franchise taxes and other expenses was$1.5 million for the six months endedJune 30, 2020 , compared to$0.6 million for the same period in 2019. The increase of$0.9 million in franchise taxes and other expenses was primarily due to increases in franchise taxes of$1.0 million . Other income (expense)
Interest income was
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Other income was $4.0 million for the six months ended June 30, 2020 , compared
to $7.0 million for the same period in 2019 a decrease of $3.0 million . During
the six months just ended, we recognized miscellaneous income of $2.6 million
from the collection of tax increment incentives related to infrastructure
development work and $1.4 million from other miscellaneous activities. For the
same period a year ago, we recognized a gain of $3.6 million as a result of
deferred income associated with the sale of land held by IOR, and received cash
proceeds of $3.1million from the collection of tax increment incentives related
to infrastructure development work.
Mortgage and loan interest expense was
Foreign currency transaction was a gain of$2.2 million for the three months endedMarch 31, 2020 as compared to a loss of$8.1 million for the same period in 2019. The unrealized gain was the result of the strengthening of theU.S. Dollar against the Israel Shekels due to perceived liquidity issues inIsrael most likely as a result of the global pandemic outbreak, primarily during the first quarter of 2020.
Loss from unconsolidated investments was a net of$1.0 million for the six months endedJune 30, 2020 as compared to a loss of$1.1 million for the six months endedJune 30, 2019 . The loss from unconsolidated investments during the six months endedJune 30, 2020 , was driven primarily from our share in the losses reported by the VAA Joint Venture of$1.1 million (Refer to Note 2). Gain on land sales was$9.5 for the three months endedJune 30, 2020 , compared to$4.7 million for the same period in 2019. In the current period we sold approximately 44.9 acres of land for a sales price of$12.2 million which resulted in a gain of$9.5 million . For the same period a year ago, we sold 63.9 acres of land for an aggregate sales price of$16.3 million and recorded a
gain of$4.7 million .
Liquidity and Capital Resources
Our principal liquidity needs are:
? fund normal recurring expenses;
? meet debt service and principal repayment obligations including balloon
payments on maturing debt;
? fund capital expenditures, including tenant improvements and leasing costs;
? fund development costs not covered under construction loans; and ? fund possible property acquisitions.
Our principal sources of cash have been and will continue to be:
? property operations;
? proceeds from land and income-producing property sales;
? collection of mortgage notes receivable;
? collection of receivables from related party companies;
? refinancing of existing debt; and
? additional borrowing, including mortgage notes, mezzanine financing and
lines of credit.
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We draw on multiple financing sources to fund our long-term capital needs. We
generally fund our development projects with construction loans. Management
anticipates that our available cash from property operations may not be
sufficient to meet all of our cash requirements. Management intends to
selectively sell land and income-producing assets, refinance or extend real
estate debt and seek additional borrowing secured by real estate to meet its
liquidity requirements. Although the past cannot predict the future,
historically, management has been successful at extending a portion of our
current maturity obligations and selling assets as necessary to meet current
obligations.
Cash Flow Summary
The following summary discussion of our cash flows is based on the statements of
cash flows as presented in Part I Item 1. "Financial Statements" and is not
meant to be an all-inclusive discussion of the changes in our cash flow (dollars
in thousands):
For the six months ended June 30,
2020 2019 Incr /(Decr)Net cash (used in) operating activities$ (12,223 ) $ (15,490 ) $ 3,267 Net cash provided by (used in) investing activities $ 8,728 $ (7,910 )$ 16,638 Net cash (used in) financing activities $ (7,241 )
$ (968 )$ (6,273 ) 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.
Our primary cash outlays for investing activities are for construction and development, acquisition of land and income-producing properties, and capital improvements to existing properties. During the six months endedJune 30, 2020 , we advanced$1.7 million toward various notes receivable, purchased land for development for$2.7 million , and invested approximately$8.0 million for the development of new properties and improvement of income producing properties. For the six months endedJune 30, 2019 , we advanced$0.9 million toward various notes receivables, purchased land for development for$2.8 million , and invested approximately$21.5 million for the development of new properties and improvement of income producing properties. Our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties. During the three months endedJune 30, 2020 , we received aggregate sales proceeds of$12.2 million from the sale of 44.9 acres of land and recorded a gain of$9.5 million . In addition, collected$5.0 million on note receivables and received$3.8 million on distributions from one of our equity investees. For the six months endedJune 30, 2019 , we received aggregate sales proceeds of$15.8 million from the sale of 63.94 acres of land and recorded a gain of$4.7 million , and received$1.3 million and land valued at$1.8 million from the sale of a multifamily residential property. 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. During the three months endedJune 30, 2020 , the decrease in cash flow from financing activities is primarily due to a payment on bond principal of$11.6 million , and payments on our outstanding notes of$20.2 million , partially offset by proceeds from borrowings of approximately$24.7 million . During the six months endedJune 30, 2019 , the decrease in cash flow from financing activities is primarily due to a payment on bond principal of$10.4 million , and payments on our outstanding notes of$3.4 million , offset by proceeds from notes of approximately$12.9 million . 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. 34 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 a member of theMay Realty Holdings, Inc. , ("MRHI") consolidated group for federal income tax reporting. There is a tax sharing and compensating agreement between ARL,Income Opportunities Realty Investors, Inc. ("IOR"), and Transcontinental Realty Investors, Inc. ("TCI").
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.
For the quarter endedJune 30, 2020 , ARL had income before income taxes of$1.4 million driven mostly by the unrealized gain in foreign currency of$2.2 million which for federal income tax purposes is not taxable and therefore produces a loss before income taxes, and as such, the Company did not recognize a tax expense.
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