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 our Form 10-K for the year endedDecember 31, 2020 (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 on tenants' financial condition, and competition from other developers, owners and operators of real estate); •risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments; •demand for apartments and commercial properties in our markets and the effect on occupancy and rental rates; •Our ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties; •risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales; •failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully •risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities); •risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets; •costs of compliance with the Americans with Disabilities Act and other similar laws and regulations; •potential liability for uninsured losses and environmental contamination; •risks associated with our dependence on key personnel whose continued service is not guaranteed; and •the other risk factors identified in this Form 10-Q, including those described under the caption "Risk Factors." The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements, include among others, the factors listed and described at Part I, Item 1A. "Risk Factors" Annual Report on Form 10-K, which investors should review. 19 -------------------------------------------------------------------------------- Table of Contents 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 six months endedJune 30, 2021 from the COVID-19 pandemic, our commercial properties have experienced a decline in occupancy. We believe this decline to be temporary and do not expect a significant decrease in rental revenue. 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 continues to have an impact on theU.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. Management's 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 throughout theSouthern United States . Our portfolio of income-producing properties includes residential apartment communities ("multifamily properties"), office buildings and retail properties ("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. Our operations are managed byPillar Income Asset Management, Inc. ("Pillar") in accordance with an Advisory Agreement. Pillar's duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges our debt and equity financing with third party lenders and investors. We have no employees. Employees of Pillar render services to us in accordance with the terms of the Advisory Agreement. Pillar is considered to be a related party due to its common ownership withRealty Advisors, Inc. ("RAI"), who is our controlling shareholder. The following is a summary of our recent acquisition, disposition, financing and development activities: Acquisitions and Dispositions •OnMarch 5, 2020 , we acquired a 49.2 acres land parcel inKent, Ohio for$5.4 million that was funded by a$2.0 million cash payment and a$3.4 million note payable that bears interest at 10% and matures onNovember 13, 2024 . •OnMay 1, 2020 , we sold Villager, a 33 unit multifamily property in FortWalton, Florida for$2.4 million , resulting in a gain on sale of$1.0 million . •OnJuly 16, 2020 , we soldFarnham Park , a 144 unit multifamily property inPort Arthur, Texas for$13.3 million , resulting in a gain on sale of$2.7 million . •OnSeptember 14, 2020 , we soldBridge View Plaza , a retail property inLa Crosse, Wisconsin for$5.3 million , resulting in a gain on sale of$4.6 million . •OnMarch 30, 2021 , we sold a 50% ownership interest in Overlook atAllensville Phase II, a 144 unit multifamily property inSevierville, Tennessee to Macquarie for$2.6 million resulting in gain on sale of$1.4 million . Concurrent with the sale, we each contributed our 50% ownership interests in Overlook atAllensville Phase II into VAA. •During the six months endedJune 30, 2021 , we sold a total of 51.2 acres of land from our holdings inWindmill Farms for$15.3 million , in aggregate, resulting in gains on sale of$6.3 million . In addition, we sold 11.1 acres of land from our holdings inMercer Crossing for$6.9 million , resulting in a gain on sale of$4.9 million . •During the three and six months endedJune 30, 2021 , recorded a loss of$29.6 million on the remeasurements of certain assets ("Earn Out Obligation") that were sold in connection with the our investment in VAA (See Note 16 - Commitments and Contingencies of our consolidated financial statements). 20 -------------------------------------------------------------------------------- Table of Contents Financing Activities •OnNovember 30, 2020 , issued$19.7 million in additional Series A bonds (See Note 11 of our consolidated financial statements) for$18.8 million in net proceeds. We used the proceeds to fund our bond payments that were due onJanuary 30, 2021 . •OnDecember 3, 2020 , we extended our$14.7 million loan fromHSW Partners toJune 17, 2021 . •OnMarch 2, 2021 , we extended our$1.2 million loan on Parc atAthens toAugust 28, 2022 . •OnMarch 4, 2021 , we extended the maturity of our$8.8 million loan onWindmill Farms untilFebruary 28, 2023 at a reduced interest rate of 5%. Development Activities During the year endedDecember 31, 2020 , we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of$17.2 million and$14.2 million , respectively. Our current developments projects atJune 30, 2021 , are as follow: (dollars in thousands) Costs to Date Total Projected Property Location No. of Units (1) Costs (1) Parc at Athens Athens, AL 232$ 2,422 $ 34,800 Heritage McKinney McKinney, TX 170 3,173 24,650 402$ 5,595 $ 59,450 (1) Costs include land and construction hard costs, construction soft costs and loan borrowing costs. Critical Accounting Policies The preparation of our consolidated financial statements in conformity withUnited States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Some of these estimates and assumptions include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, the allocation of purchase price between tangible and intangible assets, capitalization of costs and fair value measurements. Our significant accounting policies are described in more detail in Note 2-Summary of Significant Accounting Policies in our notes to the consolidated financial statements. However, the following policies are deemed to be critical. 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. 21 -------------------------------------------------------------------------------- Table of Contents The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows: Level 1 - Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets. Level 2 - Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 - Unobservable inputs that are significant to the fair value measurement. A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Related Parties We apply ASC Topic 805, "Business Combinations", to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing our own separate interests, or affiliates of the entity. Results of Operations Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to theLease-Up Properties and theDisposition Properties (each as defined below). For purposes of the discussion below, we define "Same Properties " as those properties that are substantially leased-up and in operation for the entirety of both periods of the comparison.Non-Same Properties for comparison purposes include those properties that have been recently constructed or leased-up ("Lease-up Properties ") and properties that have been disposed of ("Disposition Properties "). A developed property is considered leased-up, when it achieves occupancy of 80% or more. We move a property in and out ofSame Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison. Accordingly, theSame Properties consist of all properties, excluding theLease-up Properties and theDisposition Properties for the periods of comparison. For the comparison of the three and six months endedJune 30, 2021 to the three and six months endedJune 30, 2020 , theLease-up Properties areForest Grove , Parc at Denham Springs Phase II and Sugar Mill Phase III; and theDisposition Properties areBridge View Plaza ,Farnham Park , Villager and Overlook at Allensville Phase II. 22 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our results of operations for the three and six months endedJune 30, 2021 and 2020: Three Months Ended June 30, Six Months Ended June 30, 2021 2020 Variance 2021 2020 Variance
Multifamily Segment
Revenue$ 3,529 $ 3,702 $ (173) $ 7,365 $ 7,258 $ 107 Operating expenses (2,111) (2,108) (3) (4,234) (4,053) (181) 1,418 1,594 (176) 3,131 3,205 (74) Commercial Segment Revenue 6,665 7,863 (1,198) 13,190 15,749 (2,559) Operating expenses (2,947) (3,702) 755 (6,656) (8,066) 1,410 3,718 4,161 (443) 6,534 7,683 (1,149) Segment profit 5,136 5,755 (619) 9,665 10,888 (1,223) Other non-segment items of income (expense) Depreciation and amortization (3,211) (3,418) 207 (6,538) (6,812) 274 General, administrative and advisory (11,605) (4,022) (7,583) (17,276) (10,687) (6,589) Interest, net (2,065) (3,787) 1,722 (4,159) (7,635) 3,476 (Loss) gain on foreign currency transactions (4,793) (5,599) 806 2,824 2,244 580 (Loss) gain sale or write down of assets (24,445) 5,339 (29,784) (7,047) 9,477 (16,524) Income (loss) from joint ventures 4,572 (719) 5,291 7,908 (979) 8,887 Other income 2,750 3,127 (377) 4,177 4,568 (391) Net (loss) income$ (33,661) $ (3,324) $ (30,337) $ (10,446) $ 1,064 $ (11,510) Comparison of the three months endedJune 30, 2021 to the three months endedJune 30, 2020 : Our$30.3 million increase in net loss during the three months endedJune 30, 2021 is primarily attributed to the following: •The$29.8 million change in (loss) gain on sale or write down of assets is primarily due to the$29.6 million charge from the remeasurement of the Earn Out Obligation (See "Acquisitions and Dispositions" in Management's Overview). •The$7.6 million increase in general, administrative and advisory expenses is primarily due to a an increase in advisory fees and legal fees.. •The$5.3 million increase in income from joint ventures is due to the increase in occupancy of the various lease-up properties at VAA. Comparison of the six months endedJune 30, 2021 to the six months endedJune 30, 2020 : Our$11.5 million decrease in net income during the six months endedJune 30, 2021 is primarily attributed to the following: •The$16.5 million change in (loss) gain on sale or write down of assets is due to the$29.6 million charge from the remeasurements of Earn Out Obligation (See "Acquisitions and Dispositions" in Management's Overview) offset in part by the$11.4 million gain on sale of multifamily properties in 2021 and a$1.6 million increase in gain on sales of land. The gain on sale of multifamily properties is due to the$1.4 million gain sale of Overlook at Allensville Phase II (See "Acquisitions and Dispositions" in Management's Overview) and a$10.0 million gain on sale of properties that had previously been deferred (See Note 7 - Real Estate Activity of our consolidated financial statements). •The$9.0 million increase in income from joint ventures is due to the increase in occupancy of various lease-up properties at VAA. •The$7.6 million increase in general, administrative and advisory expenses is primarily due to an increase in advisory fees and legal fees. 23 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our principal sources of cash have been, and will continue to be, property operations; proceeds from land and income-producing property sales; collection of mortgage notes receivable; collections of receivables from related companies; refinancing of existing mortgage notes payable; and additional borrowings, including mortgage notes and bonds payable, and lines of credit. Our principal liquidity needs are to 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. We anticipate that our cash and cash equivalents as ofJune 30, 2021 , along with cash that will be generated in the remainder of 2021 from notes and interest receivables, will be sufficient to meet all of our cash requirements. We intend to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet our liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of our current maturity obligations. The following summary discussion of our cash flows is based on the consolidated statements of cash flows in our consolidated financial statements, and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands): Six Months
Ended
2021 2020 Incr /(Decr) Net cash used in operating activities $ (88)$ (12,223) $ 12,135 Net cash provided by investing activities$ 29,529 $ 8,728 $ 20,801 Net cash used in financing activities$ (48,453)
The decrease in cash used in operating activities is primarily due to the$18.6 million decrease in related party receivables, offset in part by a decrease in accrued interest. The increase in cash provided by investing activities is primarily due to a$12.2 million increase in proceeds from sale of assets, a$4.3 million increase in collection of notes receivable, and a$3.6 million increase in distributions from VAA. The increase in cash proceeds on sale of assets is due to an increase in the sale of land atWindmill Farms andMercer Crossing in 2021. The increase in cash used in financing activities is primarily due to$24.6 million decrease in proceeds from mortgages, notes and bonds payable and a$16.6 million increase in payments of mortgages, notes and bonds payable. The increase in payments of mortgages, notes and bonds payable is due to the$10.0 million prepayment of the Series C bonds inJune 2021 . Funds From Operations ("FFO") We use FFO in addition to net income to report our operating and financial results and considers FFO and FFO-diluted as supplemental measures for the real estate industry and a supplement to GAAP measures.The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of properties, plus real estate related depreciation and amortization, impairment write-downs of real estate and write-downs of investments in an affiliate where the write-downs have been driven by a decrease in the value of real estate held by the affiliate and after adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. We also present FFO excluding the impact of the effects of foreign currency transactions. 24 -------------------------------------------------------------------------------- Table of Contents FFO and FFO on a diluted basis are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization, as we believe real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. We believe that such a presentation also provides investors with a meaningful measure of our operating results in comparison to the operating results of other real estate companies. In addition, we believe that FFO excluding gain (loss) from foreign currency transactions provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results. We believe that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs. We also caution that FFO, as presented, may not be comparable to similarly titled measures reported by other real estate companies. We compensate for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of net income to FFO and FFO-diluted. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements. The following table reconciles our net (loss) income attributable to the Company to FFO and FFO-basic and diluted, excluding gain from foreign currency transactions for the three and six months endedJune 30, 2021 and 2020 (dollars and shares in thousands): Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020
Net (loss) income attributable to the Company
3,211 3,418 6,538 6,812 Loss (gain) on sale or write down of assets 24,445 (5,339) 7,047 (9,477) Gain on sale of land 5,154 5,339 11,111 9,477 Depreciation and amortization on unconsolidated joint ventures at pro rata share 3,439 3,430 7,016 6,913 FFO-Basic and Diluted 8,921 4,542 22,452 14,365 Loss (gain) on foreign currency transactions 4,793 5,599 (2,824) (2,244) FFO-adjusted$ 13,714 $
10,141
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