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OFFON

AMERICAN REALTY INVESTORS, INC.

(ARL)
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AMERICAN REALTY INVESTORS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/11/2021 | 11:35am EDT
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 ended December 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.
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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 ended June 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 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.
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 the Southern 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 by Pillar 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 with Realty 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
•On March 5, 2020, we acquired a 49.2 acres land parcel in Kent, 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 on November 13, 2024.
•On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort
Walton, Florida for $2.4 million, resulting in a gain on sale of $1.0 million.
•On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port
Arthur, Texas for $13.3 million, resulting in a gain on sale of $2.7 million.
•On September 14, 2020, we sold Bridge View Plaza, a retail property in La
Crosse, Wisconsin for $5.3 million, resulting in a gain on sale of $4.6 million.
•On March 30, 2021, we sold a 50% ownership interest in Overlook at Allensville
Phase II, a 144 unit multifamily property in Sevierville, 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 at Allensville
Phase II into VAA.
•During the six months ended June 30, 2021, we sold a total of 51.2 acres of
land from our holdings in Windmill 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 in Mercer Crossing for $6.9 million, resulting in a gain
on sale of $4.9 million.
•During the three and six months ended June 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).

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Financing Activities
•On November 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 on
January 30, 2021.
•On December 3, 2020, we extended our $14.7 million loan from HSW Partners to
June 17, 2021.
•On March 2, 2021, we extended our $1.2 million loan on Parc at Athens to
August 28, 2022.
•On March 4, 2021, we extended the maturity of our $8.8 million loan on Windmill
Farms until February 28, 2023 at a reduced interest rate of 5%.
Development Activities
During the year ended December 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 at June 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 with
United 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.

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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 the Lease-Up Properties and the Disposition 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 of Same Properties based
on whether the property is substantially leased-up and in operation for the
entirety of both periods of the comparison. Accordingly, the Same Properties
consist of all properties, excluding the Lease-up Properties and the Disposition
Properties for the periods of comparison.
For the comparison of the three and six months ended June 30, 2021 to the three
and six months ended June 30, 2020, the Lease-up Properties are Forest Grove,
Parc at Denham Springs Phase II and Sugar Mill Phase III; and the Disposition
Properties are Bridge View Plaza, Farnham Park, Villager and Overlook at
Allensville Phase II.

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The following table summarizes our results of operations for the three and six
months ended June 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 ended June 30, 2021 to the three months ended
June 30, 2020:
Our $30.3 million increase in net loss during the three months ended June 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 ended June 30, 2021 to the six months ended
June 30, 2020:
Our $11.5 million decrease in net income during the six months ended June 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.
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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 of June 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 June 30,

                                                             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)      

$ (7,241) $ (41,212)



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 at Windmill Farms and Mercer 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 in June 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.

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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 ended June 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 $ (27,328) $ (2,306) $ (9,260) $ 640 Depreciation and amortization

                              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 $ 19,628 $ 12,121

© Edgar Online, source Glimpses

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