The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
As used herein, the terms “ARL”,
“the Company”, “we”, “our” or “us” refer to American Realty Investors, Inc., a
Nevada corporation, which was formed in 1999. The Company is headquartered in Dallas, Texas and its common stock trades on the
New York Stock Exchange (“NYSE”) under the symbol (“ARL”). Over 80% of ARL’s stock is owned by related
party entities.
ARL and a subsidiary own approximately
78% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation,
whose common stock is traded on the NYSE under the symbol (“TCI”). TCI, a subsidiary of ARL, owns approximately 81.25%
of the common stock of Income Opportunity Realty Investors, Inc. (“IOR”). Effective July 17, 2009, IOR’s financial
results were consolidated with those of ARL and TCI and their subsidiaries. IOR’s common stock is traded on the NYSE American
under the symbol (“IOR”).
ARL’s Board of Directors is responsible
for directing the overall affairs of ARL and for setting the strategic policies that guide the Company. As of April 30, 2011, the
Board of Directors delegated the day-to-day management of the Company to Pillar Income Asset Management, Inc. (“Pillar”),
a Nevada corporation, under a written Advisory Agreement that is reviewed annually by ARL’s Board of Directors. The directors
of ARL are also directors of TCI and IOR. The Chairman of the Board of Directors of ARL also serves as the Chairman of the Board
of Directors of TCI and IOR. The officers of ARL also serve as officers of TCI, IOR and Pillar.
ARL invests in real estate through direct
ownership, leases and partnerships and also invests in mortgage loans on real estate. Pillar Income Asset Management, Inc. (“Pillar”)
is the Company’s external Advisor and Cash Manager. Although the Board of Directors is directly responsible for managing
the affairs of ARL, and for setting the policies which guide it, the day-to-day operations of ARL are performed by Pillar, as the
contractual Advisor, under the supervision of the Board. Pillar’s duties include, but are not limited to: locating, evaluating
and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company
with third party lenders and investors. Additionally, Pillar serves as a consultant to the Board with regard to their decisions
in connection with ARL’s business plan and investment policy. Pillar also serves as an Advisor and Cash Manager to TCI and
IOR.
Regis Realty Prime, LLC (“Regis”)
manages our commercial properties and provides brokerage services. ARL engages third-party companies to lease and manage its apartment
properties.
Southern Properties Capital Ltd. a British
Virgin Island corporation (“Southern” or “SPC”), is a wholly owned subsidiary of TCI that was incorporated
on August 16, 2016 for the purpose of raising funds by issuing debentures that cannot be converted into shares on the Tel-Aviv
Stock Exchange(“TASE”). Southern operates in the United States and is primarily involved in investing in, developing,
constructing and operating income-producing properties of multi-family residential real estate assets. Southern is included in
the consolidated financial statements of TCI.
On January 1, 2012, the Company’s
subsidiary, TCI, entered into a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation
that provides management services for the development of residential apartment projects in the future. This development agreement
was terminated December 31, 2013. The Company has also invested in surplus cash notes receivables from UHF and has sold several
residential apartment properties to UHF in prior years. Due to this ongoing relationship and the significant investment in the
performance of the collateral secured under the notes receivable, UHF has been determined to be a related party.
On November 19, 2018, TCI executed an agreement
between the Macquarie Group (“Macquarie”) and SPC and TCI to create a joint venture, Victory Abode Apartments, LLC
(“VAA”) to address existing and future demand for quality multifamily residential housing through acquisition and development
of sustainable Class A multifamily housing in focused secondary and tertiary markets. In connection with the formation of the joint
venture, SPC and TCI contributed a portfolio of 49 income producing apartment complexes, and 3 development projects in various
stages of construction and received cash consideration of $236.8 million. At the time of the transfer of the properties, the joint
venture assumed all liabilities of those properties, including mortgage debt to the Department of Housing and Urban Development
(“HUD”).
VAA is equally owned and controlled by
Abode JVP, LLC, a wholly-owned subsidiary of SPC and Summerset Intermediate Holdings 2 LLC (“Summerset”), a wholly-owned
indirect subsidiary of Macquarie. Pursuant to the Agreement, Abode JVP, LLC and Summerset each own voting and profit participation
rights of 50% and 49%, respectively (“Class A Members”). The remaining 2% of the profit participation interest
is held by Daniel J. Moos ARL’s President and Chief Executive Officer (“Class B Member”) who also serves as the
Manager of the joint venture.
Properties
At March 31, 2019, our income-producing
properties consisted of:
|
●
|
Seven
commercial properties consisting of five office buildings and two retail properties comprising in aggregate of approximately 1.7
million square feet;
|
|
●
|
Nine
residential apartment communities owned directly by us comprising 1,489 units, excluding apartments being developed;
|
|
●
|
Approximately
2,324 acres of developed and undeveloped land; and
|
|
●
|
Fifty-one
residential apartment communities totaling 9,786 units owned by our 50% owned investee VAA.
|
We join with various third-party development
companies to construct residential apartment communities. We are in the predevelopment process on several residential apartment
communities that have not yet begun construction. The third-party developer typically holds a general partner as well as a majority
limited partner interest in a limited partnership formed for the purpose of building a single property, while we generally take
a minority limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity
contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all necessary
equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor
and for the overall management, successful completion and delivery of the project. We generally bear all the economic risks and
rewards of ownership in these partnerships and therefore include these partnerships in our Consolidated Financial Statements. The
third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches
stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer
fees.
Basis of Presentation
The accompanying unaudited Consolidated
Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted in accordance with
such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from
being misleading. In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for
a fair presentation have been included. The results of operations for the three months ended March 31, 2019, are not necessarily
indicative of the results that may be expected for other interim periods or for the full fiscal year.
The year-end Consolidated Balance Sheet
at December 31, 2018 was derived from the audited Consolidated Financial Statements at that date, but does not include all of the
information and disclosures required by U.S. GAAP for complete financial statements. For further information, refer to the Consolidated
Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31,
2018. Certain 2018 Consolidated Financial Statement amounts have been reclassified to conform to the 2019 presentation.
Principles of Consolidation
The accompanying Consolidated Financial
Statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in
which we have a controlling interest. Arrangements that are not controlled through voting or similar rights are accounted for as
a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810, “Consolidation”,
whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or
managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting
for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain
Rights (“EITF 04-5”). VIEs are generally entities that lack sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to
absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests.
The primary beneficiary is generally the entity that provides financial support and bears a majority of the financial risks, authorizes
certain capital transactions, or makes operating decisions that materially affect the entity’s financial results. All significant
intercompany balances and transactions have been eliminated in consolidation.
In determining whether we are the primary
beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics
of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’
ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business
activities of us and the other investors. Significant judgments related to these determinations include estimates about the current
future fair values and performance of real estate held by these VIEs and general market conditions.
For entities in which we have less than
a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted
for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in
consolidated net income. Our investments in Gruppa Florentina, LLC and VAA are accounted for under the equity method.
Real Estate, Depreciation and Impairment
Real estate assets are stated at the lower
of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over
their estimated useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings
and improvements: 10-40 years; furniture, fixtures and equipment: 5-10 years). The Company continually evaluates the recoverability
of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360 (“ASC 360”), “Property,
Plant and Equipment”. Factors considered by management in evaluating impairment of its existing real estate assets held for
investment include significant declines in property operating profits, annually recurring property operating losses and other significant
adverse changes in general market conditions that are considered permanent in nature. Under ASC 360, a real estate asset held for
investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash
flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period
are in excess of the asset’s net book value at the balance sheet date. If any real estate asset held for investment is considered
impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.
Real Estate Held For Sale
We periodically classify real estate assets
as “held for sale.” An asset is classified as held for sale after the approval of our Board of Directors, after an
active program to sell the asset has commenced and if the sale is probable. One of the deciding factors in determining whether
a sale is probable is whether the firm purchase commitment is obtained and whether the sale is probable within the year. Upon the
classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book
value or its estimated fair value, less costs to sell the asset. Subsequent to the classification of assets as held for sale, no
further depreciation expense is recorded. Real estate assets held for sale are stated separately on the accompanying Consolidated
Balance Sheets. Upon a decision that the sale is no longer probable, the asset is classified as an operating asset and depreciation
expense is reinstated.
Cost Capitalization
Costs related to planning, developing,
leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets. We capitalize
interest to qualifying assets under development based on average accumulated expenditures outstanding during the period. In capitalizing
interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average
interest rate of non-project specific debt. We capitalize interest, real estate taxes and certain operating expenses until building
construction is substantially complete and the building is ready for its intended use, but no later than one year from the cessation
of major construction activity.
We capitalize leasing costs which include
commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that
may be applicable. We allocate these costs to individual tenant leases and amortize them over the related lease term.
Fair Value Measurement
We apply the guidance in ASC Topic 820,
“Fair Value Measurements and Disclosures”, to the valuation of real estate assets. These provisions define fair value
as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants
at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require
disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted
prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the
reporting entity’s own data.
The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as
follows:
Level 1 –
|
Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
|
|
|
Level 2 –
|
Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
|
Level 3 –
|
Unobservable inputs that are significant to the fair value measurement.
|
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Deferred Costs
Costs relating to the financing of properties
are deferred and amortized over the life of the related financing agreement. Amortization is reflected as interest expense in the
Consolidated Statements of Operations, with remaining terms ranging from 6 months to 40 years. Unamortized financing costs are
written off when the financing agreement is extinguished before the maturity date.
Related Parties
We apply ASC Topic 805, “Business
Combinations”, to evaluate business relationships. Related parties are persons or entities who have one or more of the following
characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit
of persons including principal owners of the entities and members of their immediate families, management personnel of the entity
and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly
influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing
its own separate interests, or affiliates of the entity.
Newly Issued Accounting Standards
In February 2016, FASB issued ASU 2016-02
(“ASU 2016-02”), Leases. This guidance establishes a new model for accounting for leases and provides for enhanced
disclosures. ASU 2016-02 is effective for reporting periods beginning after December 15, 2018. The adoption of ASU 2016-02 did
not have a material impact on the Company’s financial position and results of operations.
In August 2018, the FASB issued ASU 2018-13,
Fair
Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
that
eliminates, adds and modifies certain disclosure requirements for fair value measurements. The effective date of the standard is
for fiscal periods, and interim periods within those years, beginning after December 15, 2019. The amendments on changes in unrealized
gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements,
and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied
retrospectively. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2018-13 may
have on its consolidated financial statements.
NOTE 2. INVESTMENT IN VAA
On November 19, 2018, TCI executed an agreement with Macquarie
Group (“Macquarie”) to create a joint venture, Victory Abode Apartments, LLC (“VAA”) to address existing
and future demand for quality multifamily residential housing through acquisition and development of sustainable Class A multifamily
housing in focused secondary and tertiary markets.
The Company accounts for its investment in VAA under the equity
method of accounting. Under the equity method of accounting, our net equity in the investment is reflected within the Consolidated
Balance Sheets in the caption ‘Investment in VAA’, and our share of the net income or loss from the joint venture is
included within the Consolidated Statements of Operations in the caption ‘Equity earnings from VAA’. The joint venture
agreements may designate different percentage allocations among investors for profits and losses; however, our recognition of joint
venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement
of certain investment return thresholds and other agreed upon adjustments.
The following is a summary of the financial
position and results of operations of VAA (dollars in thousands):
|
|
March 31, 2019
|
Balance Sheet
|
|
|
|
|
Net real estate assets
|
|
$
|
1,257,557
|
|
Other assets
|
|
|
67,020
|
|
Debt, net
|
|
|
(796,065
|
)
|
Other liabilities
|
|
|
(275,448
|
)
|
Total equity
|
|
|
(253,064
|
)
|
|
|
For the Three Months Ended March 31, 2019
|
Results of Operations
|
|
|
|
|
Total revenue
|
|
$
|
27,401
|
|
Total property, operating, and maintenance expenses
|
|
|
(14,169
|
)
|
Interest expense
|
|
|
(15,070
|
)
|
Depreciation and Amortization
|
|
|
(15,233
|
)
|
Total other expense
|
|
|
(675
|
)
|
Net loss
|
|
$
|
(17,746
|
)
|
Below
is a reconciliation of our allocation of income or loss from VAA.
|
|
For
the Three Months Ended March 31, 2019
|
VAA net
loss
|
|
$
|
(17,746
|
)
|
Adjustments
to reconcile to income (loss) from VAA
|
|
|
|
|
Interest
expense on mezzanine loan
|
|
|
6,089
|
|
In-place
lease intangibles - amortization expense
|
|
|
8,336
|
|
Depreciation
basis differences
|
|
|
1,211
|
|
Net
loss
|
|
$
|
(2,110
|
)
|
Percentage ownership
in VAA
|
|
|
50
|
%
|
Loss from VAA
|
|
$
|
(1,055
|
)
|
NOTE 3. REAL ESTATE ACTIVITY
Below is a summary of the real estate
owned as of March 31, 2019 (dollars in thousands):
|
|
|
|
|
|
March 31,
|
|
|
|
2019
|
|
Apartments
|
|
$
|
111,537
|
|
Apartments under construction
|
|
|
35,608
|
|
Commercial properties
|
|
|
227,861
|
|
Land held for development
|
|
|
74,001
|
|
Real estate subject to sales contract
|
|
|
3,488
|
|
Real estate subject to sales contract
|
|
|
14,737
|
|
Total real estate, at cost, less impairment
|
|
$
|
467,232
|
|
Less accumulated deprecation
|
|
|
(80,755
|
)
|
Total real estate, net of depreciation
|
|
$
|
386,477
|
|
The following is a description of our significant
real estate and financing transactions for the three months ended March 31, 2019:
We sold 76 land parcels (or
11.96 acres of land) from our Mercer Crossing land holdings in Farmers Branch, Texas and 10.33 acres of land in Dallas, Texas
to third parties for an aggregate sales price of $8.7 million and recognized a gain on the sale of approximately $2.2
million.
We purchased from a third party 8.94 acres
of land located in Collin County, Texas for a total purchase price of $2.5 million. In addition, purchased an option to buy 37.8
acres of land (6.3 acres located in Collin County, Texas and 31.5 acres located in Clark County, Nevada) for $2.0 million from
a third party land developer.
We entered into a purchase and sale agreement
with a third party for the sale of Vista Ridge Apartments, located in Lee County, Mississippi. This asset is classified as ‘held
for sale’ for the period ended March 31, 2019.
We continue to invest in the development
of apartment projects. During the three months ended March 31, 2019, we have invested $7.6 million related to the construction
or predevelopment of various apartment complexes and capitalized $0.2 million of interest costs.
NOTE
4. SUPPLEMENTAL CASH FLOW INFORMATION
For
the three months ended March 31, 2019 and 2018, the Company paid interest expense of $10.9 million and $13.4 million, respectively.
Cash
and cash equivalents, and restricted cash for the three months ended March 31, 2019 and 2018 was $81.1 million and $96.3 million,
respectively. The following is a reconciliation of the Company’s cash and cash equivalents, and restricted cash to the total
presented in the consolidated statement of cash flows.
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
28,163
|
|
|
$
|
40,899
|
|
Restricted cash (cash held in escrow)
|
|
|
34,690
|
|
|
|
38,784
|
|
Restricted cash (certificate of deposits)
|
|
|
11,876
|
|
|
|
10,652
|
|
Restricted cash (held with Trustee)
|
|
|
6,398
|
|
|
|
5,947
|
|
|
|
$
|
81,127
|
|
|
$
|
96,282
|
|
Amounts
included in restricted cash represent funds set aside to meet contractual obligations with certain financial institutions for the
payment of reserve replacement deposits and tax and insurance escrow. In addition, restricted cash includes funds to the Bond’s
Trustee for payment of principal and interests.
NOTE 5. NOTES AND INTEREST RECEIVABLE
A portion of our assets are invested in
mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase
money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and
guarantees, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in
our portfolio. A majority of the notes receivable provide for principal to be paid at maturity.
Below is a summary of our notes receivable as of March 31, 2019
(dollars in thousands):
Borrower
|
|
Maturity
Date
|
|
|
Interest
Rate
|
|
|
Amount
|
|
|
Security
|
|
Performing loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H198, LLC (Las Vegas Land)
|
|
01/20
|
|
|
12.00
|
%
|
|
|
5,907
|
|
|
|
Secured
|
|
H198, LLC (Legacy at Pleasant Grove Land)
|
|
10/19
|
|
|
12.00
|
%
|
|
|
496
|
|
|
|
Secured
|
|
Oulan-Chikh Family Trust
|
|
03/21
|
|
|
8.00
|
%
|
|
|
174
|
|
|
|
Secured
|
|
H198, LLC (McKinney Ranch Land)
|
|
09/20
|
|
|
6.00
|
%
|
|
|
4,554
|
|
|
|
Secured
|
|
Forest Pines
|
|
09/19
|
|
|
5.00
|
%
|
|
|
2,230
|
|
|
|
Secured
|
|
Spyglass Apartments of Ennis, LP
|
|
11/19
|
|
|
5.00
|
%
|
|
|
5,141
|
|
|
|
Secured
|
|
Bellwether Ridge
|
|
05/20
|
|
|
5.00
|
%
|
|
|
3,540
|
|
|
|
Secured
|
|
Parc at Windmill Farms
|
|
05/20
|
|
|
5.00
|
%
|
|
|
6,202
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Echo Station)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,481
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Inwood on the Park)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
3,639
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Kensington Park)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
3,933
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Lakeshore Villas)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,000
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Lakeshore Villas)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
6,369
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Lakeshore Villas)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,732
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,953
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,000
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
4,000
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Reserve at White Rock Phase I)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,485
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Reserve at White Rock Phase II)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
2,555
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Timbers of Terrell)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,323
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Tivoli)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
6,140
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc. (Trails at White Rock)
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
3,815
|
|
|
|
Secured
|
|
Unified Housing Foundation, Inc.
(1)
|
|
12/19
|
|
|
12.00
|
%
|
|
|
10,401
|
|
|
|
Unsecured
|
|
Unified Housing Foundation, Inc.
(1)
|
|
06/20
|
|
|
12.00
|
%
|
|
|
11,075
|
|
|
|
Unsecured
|
|
Unified Housing Foundation, Inc.
(1)
|
|
12/32
|
|
|
12.00
|
%
|
|
|
1,349
|
|
|
|
Unsecured
|
|
Realty Advisors Management, Inc.
(1)
|
|
12/24
|
|
|
2.28
|
%
|
|
|
20,387
|
|
|
|
Unsecured
|
|
One Realco Corporation
|
|
01/20
|
|
|
3.00
|
%
|
|
|
7,000
|
|
|
|
Unsecured
|
|
Other related party notes
(1) (2)
|
|
Various
|
|
|
Various
|
|
|
|
2,363
|
|
|
|
Various secured interests
|
|
Other non-related party notes
|
|
Various
|
|
|
Various
|
|
|
|
1,377
|
|
|
|
Various secured interests
|
|
Other non-related party notes
|
|
Various
|
|
|
Various
|
|
|
|
2,671
|
|
|
|
Various unsecured interests
|
|
Accrued interest
|
|
|
|
|
|
|
|
|
9,439
|
|
|
|
|
|
Total Performing
|
|
|
|
|
|
|
|
$
|
138,731
|
|
|
|
|
|
Allowance for estimated losses
|
|
|
|
|
|
|
|
|
(14,269
|
)
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
124,462
|
|
|
|
|
|
|
(2)
|
An allowance was taken for estimated losses at full value
of note.
|
We invest in mortgage loans, secured by
mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on
such loans ordinarily includes the real estate on which the loan is made, other collateral and guarantees.
At March 31, 2019, we had mortgage loans
and accrued interest receivable from related parties, net of allowances, totaling $114.3 million. We recognized interest income
of $2.5 million related to these notes receivables.
The Company has various notes receivable
from Unified Housing Foundation, Inc. (“UHF”) and Foundation for Better Housing, Inc. (“FBH”). UHF and
FBH are determined to be related parties due to our reliance upon the performance of the collateral secured under the notes receivable.
Payments are due from surplus cash flow of operations of the properties. A sale or refinance of any of the properties underlying
these notes will be used to repay outstanding interest and principal for the remaining notes for the specific borrower. These notes
are cross-collateralized for the specific borrower, but to the extent cash is received from a specific UHF or FBH property, it
is applied first against any outstanding interest for the related-property note. The allowance on the UHF notes was a purchase
allowance that was netted against the notes when acquired.
NOTE 6. INVESTMENT IN UNCONSOLIDATED INVESTEES
The summary data presented below includes
our investments accounted for under the equity method, except for our investment in VAA which is discussed in detail in Note 2
‘Investment in VAA’.
The Company owns a 20% interest in Gruppa
Florentina, LLC which is the sole shareholder of Milano Restaurants International Corporation, (“Milano”) which operates
33 pizza parlors under the trade name “Me-N-Ed’s Pizza Parlors” and four pizza parlors operating under the trade
name “Blast 825 Pizza”, located primarily in Central and Northern California. Milano has a 100% ownership interest
in Siena Corp, which operates two grills under the trade names “Me-N-Ed’s Victory Grill” and “Me-N-Ed’s
Coney Island Grill”. Milano has a 100% ownership interest in Piazza del Pane, Inc., which operates two restaurants located
in Central California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s
Pizzerias.
The following is a summary of the financial
position and results of operations as of March 31, 2019 and March 31, 2018 from our investees (dollars in thousands):
|
|
March 31,
|
|
|
March 31,
|
|
SUMMARY OF FINANCIAL POSITION:
|
|
2019
|
|
|
2018
|
|
Real estate, net of accumulated depreciation
|
|
$
|
13,530
|
|
|
$
|
13,810
|
|
Notes receivable
|
|
|
11,508
|
|
|
|
11,238
|
|
Other assets
|
|
|
31,381
|
|
|
|
32,566
|
|
Notes payable
|
|
|
(9,853
|
)
|
|
|
(11,287
|
)
|
Other liabilities
|
|
|
(6,584
|
)
|
|
|
(7,320
|
)
|
Shareholders’ equity/partners capital
|
|
|
(39,982
|
)
|
|
|
(39,007
|
)
|
|
|
For the three months ended March 31,
|
|
SUMMARY OF OPERATIONS:
|
|
2019
|
|
|
2018
|
|
Revenue
|
|
$
|
13,626
|
|
|
$
|
13,144
|
|
Depreciation
|
|
|
(364
|
)
|
|
|
(364
|
)
|
Operating expenses
|
|
|
(12,815
|
)
|
|
|
(11,991
|
)
|
Interest expense
|
|
|
(156
|
)
|
|
|
(161
|
)
|
Income from continuing operations
|
|
|
291
|
|
|
|
628
|
|
Net income
|
|
$
|
291
|
|
|
$
|
628
|
|
|
|
|
|
|
|
|
|
|
Company’s 20% proportionate share of earnings
|
|
$
|
58
|
|
|
$
|
126
|
|
NOTE 7. NOTES AND INTEREST PAYABLE
Below is a summary of our notes and interest payable as of March
31, 2019 (dollars in thousands):
|
|
Notes
Payable
|
|
|
Accrued
Interest
|
|
|
Total
|
|
Apartments
|
|
$
|
94,368
|
|
|
$
|
269
|
|
|
$
|
94,637
|
|
Apartments under Construction
|
|
|
21,919
|
|
|
|
—
|
|
|
|
21,919
|
|
Commercial
|
|
|
136,126
|
|
|
|
670
|
|
|
|
136,796
|
|
Land
|
|
|
26,930
|
|
|
|
180
|
|
|
|
27,110
|
|
Corporate and other notes
|
|
|
22,027
|
|
|
|
73
|
|
|
|
22,100
|
|
Total
|
|
$
|
301,370
|
|
|
$
|
1,192
|
|
|
$
|
302,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized deferred borrowing costs
|
|
|
(9,089
|
)
|
|
|
—
|
|
|
|
(9,089
|
)
|
|
|
$
|
292,281
|
|
|
$
|
1,192
|
|
|
$
|
293,473
|
|
There are various land mortgages, secured
by the property, that are in the process of a modification or extension to the original note due to expiration of the loan. We
are in constant contact with these lenders, working together in order to modify the terms of these loans and we anticipate a timely
resolution that is similar to the existing agreement or subsequent modification.
In conjunction with the development of various apartment projects
and other developments, we drew down $7.5 million in construction loans during the three months ended March 31, 2019.
NOTE 8. BONDS AND BONDS INTEREST PAYABLE
Following is the outstanding balance of SPC’s Bonds and interest
payable as of March 31, 2019 and December 31, 2018 (dollars in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Bonds (Series A)
|
|
$
|
99,376
|
|
|
$
|
106,686
|
|
Bonds (Series B)
|
|
|
37,913
|
|
|
|
36,740
|
|
Bonds (Series B expansion)
|
|
|
19,906
|
|
|
|
19,290
|
|
Total outstanding bonds
|
|
|
157,195
|
|
|
|
162,716
|
|
Less: deferred bond issuance costs
|
|
|
(7,587
|
)
|
|
|
(8,179
|
)
|
Total outstanding bonds, net
|
|
|
149,608
|
|
|
|
154,537
|
|
Accrued Interest
|
|
|
1,857
|
|
|
|
4,037
|
|
Total oustanding bonds, net and accrued interest
|
|
$
|
151,465
|
|
|
$
|
158,574
|
|
The aggregate maturity of the bonds are as follows:
Year
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
2019
|
|
$
|
11,024
|
|
|
$
|
22,049
|
|
2020
|
|
|
22,049
|
|
|
|
22,049
|
|
2021
|
|
|
33,629
|
|
|
|
33,629
|
|
2022
|
|
|
33,629
|
|
|
|
33,629
|
|
2023
|
|
|
30,070
|
|
|
|
30,070
|
|
Thereafter
|
|
|
26,794
|
|
|
|
21,290
|
|
|
|
$
|
157,195
|
|
|
$
|
162,716
|
|
On January 31, 2019, the Company paid $10.4
million and $5.8 million on bond principal and interests, respectively, and recognized a loss on foreign currency exchange rate
of $5.8 million.
NOTE 9. DEFERRED INCOME
In previous years, the Company has sold
properties to related parties where we have had continuing involvement in the form of management or financial assistance associated
with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full
accrual method is not met, and as such the Company has deferred some or all of the gain recognition and accounted for the sale
by applying the finance, deposit, installment or cost recovery methods, as appropriate, until the sales criteria is met. The gain
on these transactions have been deferred until the properties are sold to a non-related third party. As of March 31, 2019, we had
deferred gain of $30.4 million.
For the quarter ended March 31, 2019, the
Company recognized, from the proportionate share of the remaining deferred income, $3.6 million as gain on sale, as a result of
the sale of land to third parties.
NOTE 10. RELATED PARTY TRANSACTIONS
During the ordinary course of business,
we have related party transactions that include, but are not limited to, rental income, interest income, interest expense, general
and administrative costs, commissions, management fees, and property expenses. In addition, we have assets and liabilities that
include related party amounts. The related party amounts included in assets and liabilities, and the related party revenues and
expenses received and paid are shown on the face of the Consolidated Financial Statements.
The following table reflects the reconciliation
of the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of March 31, 2019
(dollars in thousands):
|
|
Pillar
|
|
Related party receivable, December 31, 2018
|
|
$
|
70,377
|
|
Cash transfers
|
|
|
10,682
|
|
Advisory fees
|
|
|
(1,853
|
)
|
Net income fee
|
|
|
(100
|
)
|
Cost reimbursements
|
|
|
(1,551
|
)
|
Interest income
|
|
|
1,414
|
|
Expenses (paid) received by Advisor
|
|
|
(289
|
)
|
Financing (mortgage payments)
|
|
|
(74
|
)
|
Income tax expense
|
|
|
(258
|
)
|
Related party receivable, March 31, 2019
|
|
$
|
78,348
|
|
NOTE 11. OPERATING SEGMENTS
Our segments are based on our method of
internal reporting which classifies our operations by property type. Our property types are grouped into commercial properties,
apartments, land and other operating segments. Significant differences among the accounting policies of the operating segments
as compared to the Consolidated Financial Statements principally involve the calculation and allocation of administrative and other
expenses. Management evaluates the performance of each of the operating segments and allocates resources to them based on their
net operating income and cash flow.
Items of income that are not reflected
in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships and
gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and
incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on
sale of real estate.
The segment labeled as “Other”
consists of revenue and operating expenses related to the notes receivable and corporate debt.
Presented below is our reportable segments’
operating income for the three months ended March 31, 2019 and 2018, including segment assets and expenditures (dollars in thousands):
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2019
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
8,227
|
|
|
$
|
3,700
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
11,929
|
|
Property operating expenses
|
|
|
(3,936
|
)
|
|
|
(2,058
|
)
|
|
|
43
|
|
|
|
(46
|
)
|
|
|
(5,997
|
)
|
Depreciation
|
|
|
(2,375
|
)
|
|
|
(734
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,109
|
)
|
Mortgage and loan interest
|
|
|
(1,967
|
)
|
|
|
(934
|
)
|
|
|
(329
|
)
|
|
|
(6,738
|
)
|
|
|
(9,968
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,153
|
|
|
|
6,153
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
2,216
|
|
|
|
—
|
|
|
|
2,216
|
|
Segment operating (loss) income
|
|
$
|
(51
|
)
|
|
$
|
(26
|
)
|
|
$
|
1,930
|
|
|
$
|
(629
|
)
|
|
$
|
1,224
|
|
Capital expenditures
|
|
|
3,690
|
|
|
|
—
|
|
|
|
5,167
|
|
|
|
—
|
|
|
|
8,857
|
|
Real estate assets
|
|
|
154,791
|
|
|
|
150,841
|
|
|
|
80,845
|
|
|
|
|
|
|
|
386,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
|
$
|
—
|
|
|
$
|
8,715
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,499
|
)
|
|
|
—
|
|
|
|
(6,499
|
)
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
|
$
|
—
|
|
|
$
|
2,216
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2018
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
7,555
|
|
|
$
|
23,525
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
31,083
|
|
Property operating expenses
|
|
|
(3,749
|
)
|
|
|
(10,582
|
)
|
|
|
—
|
|
|
|
(93
|
)
|
|
|
(14,424
|
)
|
Depreciation
|
|
|
(2,292
|
)
|
|
|
(4,149
|
)
|
|
|
—
|
|
|
|
50
|
|
|
|
(6,391
|
)
|
Mortgage and loan interest
|
|
|
(1,849
|
)
|
|
|
(5,456
|
)
|
|
|
(195
|
)
|
|
|
(8,224
|
)
|
|
|
(15,724
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,109
|
|
|
|
5,109
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
1,335
|
|
|
|
—
|
|
|
|
1,335
|
|
Segment operating (loss) income
|
|
$
|
(335
|
)
|
|
$
|
3,338
|
|
|
$
|
1,141
|
|
|
$
|
(3,156
|
)
|
|
$
|
988
|
|
Capital expenditures
|
|
|
633
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
633
|
|
Real estate assets
|
|
|
135,799
|
|
|
|
726,244
|
|
|
|
116,436
|
|
|
|
651
|
|
|
|
979,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
8,512
|
|
|
$
|
7,239
|
|
|
$
|
—
|
|
|
$
|
15,751
|
|
Cost of sale
|
|
|
—
|
|
|
|
(8,512
|
)
|
|
|
(5,904
|
)
|
|
|
—
|
|
|
|
(14,416
|
)
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
|
$
|
—
|
|
|
$
|
1,335
|
|
The table below reflects the reconciliation of segment information
to the corresponding amounts in the Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (dollars
in thousands):
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Segment operating income
|
|
$
|
1,224
|
|
|
$
|
988
|
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(2,605
|
)
|
|
|
(2,341
|
)
|
Net income fee to related party
|
|
|
(100
|
)
|
|
|
(53
|
)
|
Advisory fee to related party
|
|
|
(1,853
|
)
|
|
|
(2,956
|
)
|
Other income
|
|
|
(2,151
|
)
|
|
|
3,657
|
|
Loss from joint venture
|
|
|
(1,055
|
)
|
|
|
—
|
|
Earnings from unconsolidated investees
|
|
|
58
|
|
|
|
320
|
|
Net loss from continuing operations
|
|
$
|
(6,482
|
)
|
|
$
|
(385
|
)
|
The table below reflects a reconciliation
of the segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):
|
|
As of March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Segment assets
|
|
$
|
386,477
|
|
|
$
|
979,130
|
|
Investments in unconsolidated investees
|
|
|
75,634
|
|
|
|
6,716
|
|
Notes and interest receivable
|
|
|
124,462
|
|
|
|
128,756
|
|
Other assets
|
|
|
228,240
|
|
|
|
197,721
|
|
Total assets
|
|
$
|
814,813
|
|
|
$
|
1,312,323
|
|
NOTE 12. COMMITMENTS, CONTINGENCIES, AND LIQUIDITY
Liquidity.
Management believes
that ARL will generate excess cash flow from property operations in 2019; such excess, however, will not be sufficient to discharge
all of ARL’s obligations as they became due. Management intends to sell land and income-producing real estate, refinance
real estate and obtain additional borrowings primarily secured by real estate to meet its liquidity requirements.
Partnership Buyouts
. ARL is the
limited partner in various partnerships related to the construction of residential properties. As permitted in the respective partnership
agreements, ARL intends to purchase the interests of the general and any other limited partners in these partnerships subsequent
to the completion of these projects. The amounts paid to buy out the non-affiliated partners are limited to development fees earned
by the non-affiliated partners and are outlined in the respective partnership agreements.
Litigation.
The ownership of
property and provision of services to the public as tenants entails an inherent risk of liability. Although the Company and its
subsidiaries are involved in various items of litigation incidental to and in the ordinary course of its business, in the opinion
of management, the outcome of such litigation will not have a material adverse impact upon the Company’s financial condition,
results of operation or liquidity, unless otherwise noted below.
Guarantees.
The Company is
the primary guarantor on a $39.1 million mezzanine loan between UHF and a lender. In addition, ARI and an officer of the Company
are limited recourse guarantors of the loan. As of March 31, 2019 UHF was in compliance with the covenants to the loan agreement.
ART and ART Midwest, Inc.
While the Company and all entities in which
the Company has a direct or indirect equity interest are not parties to or obligated in any way for the outcome, a formerly owned
entity (American Realty Trust, Inc.) and its former subsidiary (ART Midwest, Inc.) have been engaged since 1999 in litigation with
Mr. David Clapper and entities related to Mr. Clapper (collectively, the “Clapper Parties”). The matter originally
involved a transaction in 1998 in which ART Midwest, Inc. was to acquire eight residential apartment complexes from the Clapper
Parties. Through the years, a number of rulings, both for and against American Realty Trust, Inc. “ART” and ART Midwest,
Inc., were issued. In October 2011, a ruling was issued under which the Clapper Parties received a judgment for approximately $74
million, including $26 million in actual damages and $48 million interest. The ruling was against ART and ART Midwest, Inc., but
no other entity. During February 2014, the Court of Appeals affirmed a portion of the judgment in favor of the Clapper Parties,
but also ruled that a double counting of a significant portion of the damages had occurred and remanded the case back to the trial
court to recalculate the damage award, as well as pre- and post-judgment interest thereon. Subsequently, the trial court recalculated
the damage award, reducing it to approximately $59 million, inclusive of actual damages and then current interest. ART was also
a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.
The Clapper Parties subsequently filed
a new lawsuit against ARI, its subsidiary EQK Holdings, Inc. “EQK”, and ART. The Clapper Parties seek damages from
ARL for payment by ART to ARL of ART’s stock in EQK in exchange for a release of the Antecedent Debt owed by ART to ARI.
In February 2018 the court determined that this legal matter should not have been filed in federal court and therefore granted
motions to dismiss on jurisdictional grounds. In June 2018, the court overruled its own grant of motions to dismiss and reinstated
the case. We continue to vigorously defend the case and management believes it has defenses to the claims.
In 2005, ART filed suit against a major
national law firm over the initial transaction. That action was initially abated while the principal case with the Clapper Parties
was pending, but the abatement was recently lifted. The trial court subsequently dismissed the case on procedural grounds, but
ART has filed a notice of appeal. The appeal was heard in February 2018 and we are awaiting a ruling by the appeals court. In January
2012, the Company sold all of the issued and outstanding stock of ART to an unrelated party for a promissory note in the amount
of $10 million. At December 31, 2012, the Company fully reserved and valued such note at zero.
Dynex Capital, Inc.
On July 20, 2015, the 68
th
Judicial
District Court in Dallas County, Texas issued its Final Judgment in Cause No. DC-03-00675, styled Basic Capital Management, Inc.,
American Realty Trust, Inc., Transcontinental Realty Investors, Inc., Continental Poydras Corp., Continental Common, Inc. and Continental
Baronne, Inc. v. Dynex Commercial, Inc. The case, which was litigated for more than a decade, had its origin with Dynex Commercial
making loans to Continental Poydras Corp., Continental Common, Inc. and Continental Baronne, Inc. (subsidiaries of Continental
Mortgage & Equity Trust (“CMET”), an entity which merged into TCI in 1999 after the original suit was filed). Under
the original loan commitment, $160 million in loans were to be made to the entities. The loans were conditioned on the execution
of a commitment between Dynex Commercial and Basic Capital Management, Inc. (“Basic”).
An original trial in 2004, which also included
Dynex Capital, Inc. as a defendant, resulted in a jury awarding damages in favor of Basic for “lost opportunity,” as
well as damages in favor of ART and in favor of TCI and its subsidiaries for “increased costs” and “lost opportunity.”
The original Trial Court judge ignored the jury’s findings, however, and entered a “Judgment Notwithstanding the Verdict”
(“JNOV”) in favor of the Dynex entities (the judge held the Plaintiffs were not entitled to any damages from the Dynex
entities). After numerous appeals by all parties, Dynex Capital, Inc. was ultimately dismissed from the case and the remaining
claims against Dynex Commercial were remanded to the Trial Court for a new judgment consistent with the jury’s findings.
The Court entered the new Final Judgment against Dynex Commercial, Inc. on July 20, 2015.
The Final Judgment entered against Dynex
Commercial, Inc. on July 20, 2015 awarded Basic was $0.256 million in damages, plus pre-judgment interest of $0.192 million for
a total amount of $0.448 million. The Judgment awarded ART was $14.2 million in damages, plus pre-judgment interest of $10.6 million
for a total amount of $24.8 million. The Judgment awarded TCI was $11.1 million, plus pre-judgment interest of $8.4 million for
a total amount of $19.5 million. The Judgment also awarded Basic, ART, and TCI post-judgment interest at the rate of 5% per annum
from April 25, 2014 until the date their respective damages were paid. Lastly, the Judgement awarded Basic, ART, and TCI was $1.6
million collectively in attorneys’ fees from Dynex Commercial, Inc.
TCI is working with counsel to identify
assets and collect on the Final Judgment against Dynex Commercial, Inc., as well as pursue additional claims, if any, against Dynex
Capital, Inc.
Berger Litigation
On February 4, 2019, an individual claiming
to be a stockholder holding 7,900 shares of Common Stock of Income Opportunity Realty Investors, Inc. (“IOR”) filed
a Complaint in the United States District Court for the Northern District of Texas, Dallas Division, individually and allegedly
derivatively on behalf of IOR, against Transcontinental Realty Investors, Inc. (“TCI”), American Realty Investors,
Inc. (“ARL”), (TCI is a shareholder of IOR, ARL is a shareholder of TCI) Pillar Income Asset Management, Inc. (“Pillar”),
( collectively the “Companies”), certain officers and directors of the Companies (“Additional Parties”)
and two other individuals. The Complaint filed alleges that the sale and/or exchange of certain tangible and intangible property
between the Companies and IOR during the last ten years of business operations constitutes a breach of fiduciary duty by the one
or more of Companies, the Additional Defendants and/or the directors of IOR. The case alleges other related claims. The Plaintiff
seeks certification as a representative of IOR and all of its shareholders, unspecified damages, a return to IOR of various funds
and an award of costs, expenses, disbursements (including Plaintiff’s attorneys’ fees) and prejudgment and post-judgment
interest. The named Defendants intend to vigorously defend the action, deny all of the allegations of the Complaint, and believe
the allegations to be wholly without any merit.
NOTE 13. EARNINGS PER SHARE
Earnings Per Share (“EPS”) have
been computed pursuant to the provisions of ASC Topic 260, “Earnings Per Share”. The computation of basic EPS is calculated
by dividing net income available to common shareholders from continuing operations, adjusted for preferred dividends, by the weighted-average
number of common shares outstanding during the period. Shares issued during the period shall be weighted for the portion of the
period that they were outstanding.
As of March 31, 2019, we have 1,800,614 shares
issued and 614 shares outstanding of Series A 10.0% cumulative convertible preferred stock. These shares may be converted into
common stock at 90% of the average daily closing price of the common stock for the prior 20 trading days. These are considered
in the computation of diluted earnings per share if the effect of applying the if-converted method is dilutive. Of the issued
1,800,614 shares of Series A 10.0% cumulative convertible preferred stock, 1,800,000 shares are held by ARL and its subsidiaries.
Dividends are not paid on the shares owned by ARL.
NOTE 14. SUBSEQUENT EVENTS
The date to which events occurring after
March 31, 2019, the date of the most recent balance sheet, have been evaluated for possible adjustment to the Consolidated Financial
Statements or disclosure is May 15, 2019, which is the date on which the Consolidated Financial Statements were available to be
issued.