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 81.1% 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 New York Stock Exchange (“NYSE MKT”) 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.
Properties
We, together with TCI and its subsidiaries, own or had interests in a total property portfolio of 59 income-producing properties as of September 30, 2017. The properties consisted of:
|
●
|
Eight commercial properties consisting of five office buildings and three retail centers comprising in aggregate approximately 2.0 million rentable square feet;
|
|
●
|
A golf course comprising approximately 96 acres;
|
|
●
|
50 apartment communities totaling 8,226 units, excluding apartments being developed; and
|
|
●
|
3,652 acres of developed and undeveloped land.
|
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. At September 30, 2017, we had seven apartment projects in development. 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 nine months ended September 30, 2017, 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, 2016 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, 2016. Certain 2016 Consolidated Financial Statement amounts have been reclassified to conform to the 2017 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 investment in Gruppa Florentina, LLC is 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 upon 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 related 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 Pronouncements
In May 2014, Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers,” was issued. This new guidance established a new single comprehensive revenue recognition model and provides for enhanced disclosures. Under the new policy, the nature, timing and amount of revenue recognized for certain transactions could differ from those recognized under existing accounting guidance. This new standard does not affect revenue recognized under lease contracts. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its financial position and results of operations, if any.
In February 2016, Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases was issued. 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 Company is currently evaluating the impact the adoption of this guidance, if any, on its financial position and results of operations.
NOTE 2. REAL ESTATE ACTIVITY
Below is a summary of the real estate owned as of September 30, 2017 (dollars in thousands):
Apartments
|
|
$
|
695,746
|
|
Apartments under construction
|
|
|
77,537
|
|
Commercial properties
|
|
|
221,493
|
|
Land held for development
|
|
|
79,331
|
|
Real estate subject to sales contract
|
|
|
48,898
|
|
Total real estate
|
|
$
|
1,123,005
|
|
Less accumulated depreciation
|
|
|
(183,762
|
)
|
Total real estate, net of depreciation
|
|
$
|
939,243
|
|
The highlights of our significant real estate transactions for the nine months ended September 30, 2017 are discussed below.
Purchases
During the nine months ended September 30, 2017, TCI acquired three land parcels for development for a total purchase price of $11.4 million, adding 29.7 acres to the development portfolio.
Sales
During the nine months ended September 30, 2017, TCI sold a combined 14.16 acres of land located in Texas to independent third parties for a total sales price of $2.4 million. We recorded an aggregate gain of $0.5 million from the land sales.
In addition, during the nine months ended September 30, 2017, we recognized deferred gains of $12.7 million and $0.5 million related to prior years’ sales of two income-producing properties and some land parcels, respectively.
As of September 30, 2017, the Company has approximately 91 acres of land, at various locations that were sold to related parties in multiple transactions. These transactions are treated as “subject to sales contract” on the Consolidated Balance Sheets. Due to the related party nature of the transactions, TCI has deferred the recording of the sales in accordance with ASC 360-20.
We continue to invest in the development of multifamily properties. During the nine months ended September 30, 2017, we have disbursed $41.4 million related to the construction or predevelopment of various apartment complexes and capitalized $1.6 million of interest costs.
NOTE 3. 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 September 30, 2017 (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 (McKinney Ranch Land)
|
|
09/18
|
|
6.00
|
%
|
|
|
4,402
|
|
|
Secured
|
Spyglass Apartments of Ennis
|
|
11/19
|
|
5.00
|
%
|
|
|
3,862
|
|
|
Secured
|
Leman Development, Ltd
(2)
|
|
N/A
|
|
0.00
|
%
|
|
|
1,500
|
|
|
Unsecured
|
One Realco Corporation
(1,2)
|
|
01/17
|
|
3.00
|
%
|
|
|
7,000
|
|
|
Unsecured
|
Oulan-Chikh Family Trust
|
|
03/21
|
|
8.00
|
%
|
|
|
174
|
|
|
Secured
|
Realty Advisors Management, Inc.
(1)
|
|
12/19
|
|
2.28
|
%
|
|
|
20,387
|
|
|
Unsecured
|
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
|
%
|
|
|
9,100
|
|
|
Secured
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
12/32
|
|
12.00
|
%
|
|
|
6,000
|
|
|
Secured
|
Unified Housing Foundation, Inc. (Limestone Ranch)
(1)
|
|
12/32
|
|
12.00
|
%
|
|
|
1,953
|
|
|
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
|
%
|
|
|
7,966
|
|
|
Secured
|
Unified Housing Foundation, Inc. (Trails at White Rock)
(1)
|
|
12/32
|
|
12.00
|
%
|
|
|
3,815
|
|
|
Secured
|
Unified Housing Foundation, Inc.
(1)
|
|
12/18
|
|
12.00
|
%
|
|
|
3,994
|
|
|
Unsecured
|
Unified Housing Foundation, Inc.
(1)
|
|
12/18
|
|
12.00
|
%
|
|
|
6,407
|
|
|
Unsecured
|
Unified Housing Foundation, Inc.
(1)
|
|
06/20
|
|
12.00
|
%
|
|
|
5,760
|
|
|
Unsecured
|
Other related party notes
(1)
|
|
Various
|
|
Various
|
|
|
|
1,814
|
|
|
Various secured interests
|
Other non-related party notes
|
|
Various
|
|
Various
|
|
|
|
796
|
|
|
Various unsecured interests
|
Other non-related party notes
|
|
Various
|
|
Various
|
|
|
|
3,901
|
|
|
Various secured interests
|
Accrued interest
|
|
|
|
|
|
|
|
7,438
|
|
|
|
Total Performing
|
|
|
|
|
|
|
$
|
119,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for estimated losses
|
|
|
|
|
|
|
|
(17,037
|
)
|
|
|
Total
|
|
|
|
|
|
|
$
|
102,555
|
|
|
|
(1)
Related party notes
(2)
An allowance was taken for estimated losses at full value of note.
We invest in mortgage loans, secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on such loans ordinarily includes the real estate on which the loan is made, other collateral and guarantees.
At September 30, 2017, we had mortgage loans and accrued interest receivable from related parties, net of allowances, totaling $90.6 million. During the nine months ended September 30, 2017, we recognized interest income of $7 million from related party notes receivable.
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 4. INVESTMENT IN UNCONSOLIDATED INVESTEES
Investments in unconsolidated investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses under the equity method of accounting.
Investments in unconsolidated investees consist of the following:
|
|
Percentage ownership as of
|
|
|
|
September 30, 2017
|
|
|
September 30, 2016
|
|
Gruppa Florentina, LLC
|
|
|
20.00
|
%
|
|
|
20.00
|
%
|
Gruppa Florentina, LLC is the sole shareholder of Milano Restaurants International Corporation, (“Milano”) which operates 33 pizza parlors under the trade name “Me-N-Ed’s Pizza Parlors” and four pizza parlors operating under the trade name “Blast 825 Pizza,” located primarily in Central and Northern California. Milano has a 100% ownership interest in Siena Corp, which operates two grills under the trade names “Me-N-Ed’s Victory Grill” and “Me-N-Ed’s Coney Island Grill.” Milano has a 100% ownership interest in Piazza del Pane, Inc., which operates two restaurants located in Central California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s Pizzerias.
The following is a summary of the financial position and results of operations from our investees (dollars in thousands):
As of September 30,
|
|
2017
|
|
|
2016
|
|
Real estate, net of accumulated depreciation
|
|
$
|
13,471
|
|
|
$
|
13,582
|
|
Notes receivable
|
|
|
10,065
|
|
|
|
9,359
|
|
Other assets
|
|
|
29,745
|
|
|
|
30,332
|
|
Notes payable
|
|
|
(9,226
|
)
|
|
|
(10,231
|
)
|
Other liabilities
|
|
|
(7,509
|
)
|
|
|
(7,372
|
)
|
Shareholders’ equity
|
|
|
(36,546
|
)
|
|
|
(35,670
|
)
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
2017
|
|
|
2016
|
|
Revenue
|
|
$
|
36,451
|
|
|
$
|
40,598
|
|
Depreciation
|
|
|
(792
|
)
|
|
|
(863
|
)
|
Operating expenses
|
|
|
(34,641
|
)
|
|
|
(37,215
|
)
|
Interest expense
|
|
|
(475
|
)
|
|
|
(602
|
)
|
Net income
|
|
$
|
543
|
|
|
$
|
1,918
|
|
|
|
|
|
|
|
|
|
|
Company’s proportionate share of earnings
|
|
$
|
109
|
|
|
$
|
384
|
|
NOTE 5. NOTES PAYABLE
Below is a summary of our notes and interest payable as of September 30, 2017 (dollars in thousands):
|
|
Notes Payable
|
|
|
Accrued
Interest
|
|
|
Total Debt
|
|
Apartments
|
|
$
|
537,396
|
|
|
$
|
1,476
|
|
|
$
|
538,872
|
|
Apartments under Construction
|
|
|
43,507
|
|
|
|
—
|
|
|
|
43,507
|
|
Commercial
|
|
|
127,182
|
|
|
|
602
|
|
|
|
127,784
|
|
Land
|
|
|
27,812
|
|
|
|
230
|
|
|
|
28,042
|
|
Real estate subject to sales contract
|
|
|
3,450
|
|
|
|
489
|
|
|
|
3,939
|
|
Mezzanine financing
|
|
|
100,673
|
|
|
|
—
|
|
|
|
100,673
|
|
Other
|
|
|
12,656
|
|
|
|
—
|
|
|
|
12,656
|
|
Total
|
|
$
|
852,676
|
|
|
$
|
2,797
|
|
|
$
|
855,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized deferred borrowing costs
|
|
|
(18,396
|
)
|
|
|
—
|
|
|
|
(18,396
|
)
|
Total
|
|
$
|
834,280
|
|
|
$
|
2,797
|
|
|
$
|
837,077
|
|
The segment labeled as “Other” consists of unsecured or stock-secured notes payable.
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. During the nine months ended September 30, 2017, we refinanced three loans with a total principal balance of $80.1 million. The transactions provided for lower monthly payments over the term of the loans due to lower interest rates and the extension of maturity dates of the loans.
In conjunction with the development of various apartment projects and other developments, we drew down $25.7 million in construction loans during the nine months ended September 30, 2017.
The properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.
NOTE 6. SERIES A BONDS PAYABLE
On February 13, 2017, Southern Properties Capital LTD, a British Virgin Islands corporation (“Southern”), filed a final prospectus with the Tel Aviv Stock Exchange LTD (the “TASE”) for an offering and sale of nonconvertible Series A Bonds (the “Debentures”), to be issued by Southern, which is an indirect subsidiary of TCI. Southern, in turn, wholly owns interest in other entities, which, in turn, are the principal owners of various residential and commercial properties located in the south and southwestern portions of the United States. The Debentures are unsecured obligations of Southern. On February 14, 2017, Southern commenced the institutional tender of the Debentures and accepted application for 276 million Israeli, new Shekels (approximately $73,651,065 USD, based on the exchange rate of 3.7474 Shekels to the U.S. Dollar effective February 14, 2017) in both institutional and public tenders, at an annual interest rate averaging approximately 7.38%. The Series A Bonds payable have a stated interest rate of 7.3% and an effective yield of 9.25%.
On May 16, 2017, Southern issued nonconvertible Series A Bonds for 100.2 million Israeli, new Shekels (approximately $27,769,615 USD, based on the exchange rate of 3.607 Shekels to the U.S. Dollar) at an annual interest rate of 7.3%.
On July 12, 2017, Southern sold nonconvertible Series A Bonds for 23.8 million Israeli, new Shekels (approximately $6,668,998 USD, based on the exchange rate of 3.574 Shekels to the U.S. Dollar) in both institutional and public tenders, at an annual interest rate averaging approximately 7.3%.
Foreign Currency Gain or Loss
Principal and interest will be paid in Israeli Shekels as the bonds mature. Interest payments are due semiannually beginning in July 2017 through July 2023 with ten semiannual principal payments due beginning July 2019 through July 2023. Until such actual principal payments are made, there will not be any significant need to convert US dollars to Israeli shekels.
The Company records
unrealized gains or losses each quarter based upon the relative exchange values of the US dollar and the Israeli shekel; however, no gain or loss will be realized until a conversion from US dollars to Israeli shekels actually occurs in the future. The recorded unrealized gain or loss is reflected as a separate line item to highlight the fact that it is a non-cash transaction until such time as actual payment of principal and interest on the bonds is made.
The Company recorded a foreign currency transaction gain of $1.9 million and a foreign currency transaction loss of $1.8 million for the three and nine months ended September 30, 2017, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
The following table reflects the reconciliation of the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of September 30, 2017 (dollars in thousands):
|
|
Pillar
|
|
Related party receivable, December 31, 2016
|
|
$
|
24,672
|
|
Cash transfers
|
|
|
49,321
|
|
Advisory fees
|
|
|
(8,310
|
)
|
Net income fee
|
|
|
(189
|
)
|
Cost reimbursements
|
|
|
(2,234
|
)
|
Interest income
|
|
|
718
|
|
Notes receivable purchased
|
|
|
(447
|
)
|
Fees and commissions
|
|
|
(1,658
|
)
|
Expenses paid by Advisor
|
|
|
(4,479
|
)
|
Financing (mortgage payments)
|
|
|
(17,238
|
)
|
Sales/purchases transactions
|
|
|
(9,129
|
)
|
Tax sharing
|
|
|
—
|
|
Purchase of obligations
|
|
|
—
|
|
Related party receivable, September 30, 2017
|
|
$
|
31,02
7
|
|
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 are shown on the face of the Consolidated Financial Statements.
NOTE 8. 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 other income and equity in partnerships. Expenses that are not reflected in the segments are provision for losses, advisory and net income fees, general and administrative and non-controlling interests.
The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.
Presented below is our reportable segments’ operating income for the three months ended September 30, 2017 and 2016, including capital expenditures and segment assets (dollars in thousands):
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2017
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
8,461
|
|
|
$
|
23,231
|
|
|
$
|
111
|
|
|
$
|
4
|
|
|
$
|
31,807
|
|
Property operating expenses
|
|
|
(4,485
|
)
|
|
|
(10,659
|
)
|
|
|
(127
|
)
|
|
|
(132
|
)
|
|
|
(15,403
|
)
|
Depreciation
|
|
|
(2,345
|
)
|
|
|
(4,028
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,373
|
)
|
Mortgage and loan interest
|
|
|
(1,902
|
)
|
|
|
(5,168
|
)
|
|
|
(420
|
)
|
|
|
(8,227
|
)
|
|
|
(15,717
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,232
|
|
|
|
4,232
|
|
Gain on sale of income producing properties
|
|
|
—
|
|
|
|
12,760
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,760
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
1,062
|
|
|
|
—
|
|
|
|
1,062
|
|
Segment operating income (loss)
|
|
$
|
(271
|
)
|
|
$
|
16,136
|
|
|
$
|
626
|
|
|
$
|
(4,123
|
)
|
|
$
|
12,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
691
|
|
|
$
|
—
|
|
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
1,289
|
|
Real estate assets
|
|
$
|
147,377
|
|
|
$
|
663,636
|
|
|
$
|
128,230
|
|
|
$
|
—
|
|
|
$
|
939,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
850
|
|
|
$
|
—
|
|
|
$
|
850
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(320
|
)
|
|
|
—
|
|
|
|
(320
|
)
|
Recognized prior deferred gain
|
|
|
—
|
|
|
|
12,760
|
|
|
|
532
|
|
|
|
—
|
|
|
|
13,292
|
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
12,760
|
|
|
$
|
1,062
|
|
|
$
|
—
|
|
|
$
|
13,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2016
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
7,658
|
|
|
$
|
22,408
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
30,067
|
|
Property operating expenses
|
|
|
(4,727
|
)
|
|
|
(10,693
|
)
|
|
|
(243
|
)
|
|
|
(8
|
)
|
|
|
(15,671
|
)
|
Depreciation
|
|
|
(2,236
|
)
|
|
|
(3,807
|
)
|
|
|
—
|
|
|
|
18
|
|
|
|
(6,025
|
)
|
Mortgage and loan interest
|
|
|
(1,700
|
)
|
|
|
(6,424
|
)
|
|
|
(550
|
)
|
|
|
(6,688
|
)
|
|
|
(15,362
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,712
|
|
|
|
5,712
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
555
|
|
|
|
—
|
|
|
|
555
|
|
Segment operating income (loss)
|
|
$
|
(1,005
|
)
|
|
$
|
1,484
|
|
|
$
|
(238
|
)
|
|
$
|
(965
|
)
|
|
$
|
(724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,045
|
|
|
$
|
—
|
|
|
$
|
375
|
|
|
$
|
—
|
|
|
$
|
2,420
|
|
Real estate assets
|
|
$
|
151,900
|
|
|
$
|
613,431
|
|
|
$
|
144,378
|
|
|
$
|
—
|
|
|
$
|
909,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
805
|
|
|
$
|
—
|
|
|
$
|
805
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(250
|
)
|
|
|
—
|
|
|
|
(250
|
)
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
555
|
|
|
$
|
—
|
|
|
$
|
555
|
|
The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations for the three months ended September 30, 2017 and 2016 (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Segment operating income (loss)
|
|
$
|
12,368
|
|
|
$
|
(724
|
)
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(1,766
|
)
|
|
|
(1,760
|
)
|
Net income fee to related party
|
|
|
(53
|
)
|
|
|
(67
|
)
|
Advisory fee to related party
|
|
|
(2,802
|
)
|
|
|
(2,749
|
)
|
Other income
|
|
|
2,096
|
|
|
|
252
|
|
Earnings from unconsolidated investees
|
|
|
41
|
|
|
|
146
|
|
Income tax expense
|
|
|
—
|
|
|
|
(46
|
)
|
Net income (loss) from continuing operations
|
|
$
|
9,884
|
|
|
$
|
(4,948
|
)
|
Presented below is our reportable segments’ operating income for the nine months ended September 30, 2017 and 2016, including capital expenditures and segment assets (dollars in thousands):
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2017
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
26,172
|
|
|
$
|
68,922
|
|
|
$
|
111
|
|
|
$
|
11
|
|
|
$
|
95,216
|
|
Property operating expenses
|
|
|
(14,324
|
)
|
|
|
(31,616
|
)
|
|
|
(575
|
)
|
|
|
(583
|
)
|
|
|
(47,098
|
)
|
Depreciation
|
|
|
(7,045
|
)
|
|
|
(12,105
|
)
|
|
|
—
|
|
|
|
37
|
|
|
|
(19,113
|
)
|
Mortgage and loan interest
|
|
|
(5,629
|
)
|
|
|
(16,955
|
)
|
|
|
(1,503
|
)
|
|
|
(25,772
|
)
|
|
|
(49,859
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,083
|
|
|
|
14,083
|
|
Gain on sale of producing properties
|
|
|
—
|
|
|
|
12,760
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,760
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
1,032
|
|
|
|
—
|
|
|
|
1,032
|
|
Segment operating income (loss)
|
|
$
|
(826
|
)
|
|
$
|
21,006
|
|
|
$
|
(935
|
)
|
|
$
|
(12,224
|
)
|
|
$
|
7,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,623
|
|
|
$
|
543
|
|
|
$
|
641
|
|
|
$
|
—
|
|
|
$
|
3,807
|
|
Real estate assets
|
|
$
|
147,377
|
|
|
$
|
663,636
|
|
|
$
|
128,230
|
|
|
$
|
—
|
|
|
$
|
939,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,446
|
|
|
$
|
—
|
|
|
$
|
2,446
|
|
Cost of sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,946
|
)
|
|
|
—
|
|
|
|
(1,946
|
)
|
Recognized prior deferred gain
|
|
|
—
|
|
|
|
12,760
|
|
|
|
532
|
|
|
|
—
|
|
|
|
13,292
|
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
12,760
|
|
|
$
|
1,032
|
|
|
$
|
—
|
|
|
$
|
13,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2016
|
|
Properties
|
|
|
Apartments
|
|
|
Land
|
|
|
Other
|
|
|
Total
|
|
Rental and other property revenues
|
|
$
|
24,496
|
|
|
$
|
65,578
|
|
|
$
|
30
|
|
|
$
|
2
|
|
|
$
|
90,106
|
|
Property operating expenses
|
|
|
(14,658
|
)
|
|
|
(30,255
|
)
|
|
|
(1,159
|
)
|
|
|
(6
|
)
|
|
|
(46,078
|
)
|
Depreciation
|
|
|
(6,820
|
)
|
|
|
(10,958
|
)
|
|
|
—
|
|
|
|
55
|
|
|
|
(17,723
|
)
|
Mortgage and loan interest
|
|
|
(5,371
|
)
|
|
|
(18,689
|
)
|
|
|
(1,703
|
)
|
|
|
(17,788
|
)
|
|
|
(43,551
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,791
|
|
|
|
15,791
|
|
Gain on sale of producing properties
|
|
|
6
|
|
|
|
4,919
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,925
|
|
Gain on land sales
|
|
|
—
|
|
|
|
—
|
|
|
|
3,925
|
|
|
|
—
|
|
|
|
3,925
|
|
Segment operating income (loss)
|
|
$
|
(2,347
|
)
|
|
$
|
10,595
|
|
|
$
|
1,093
|
|
|
$
|
(1,946
|
)
|
|
$
|
7,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
4,125
|
|
|
$
|
(146
|
)
|
|
$
|
1,873
|
|
|
$
|
—
|
|
|
$
|
5,852
|
|
Real estate assets
|
|
$
|
151,900
|
|
|
$
|
613,431
|
|
|
$
|
144,378
|
|
|
$
|
—
|
|
|
$
|
909,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales price
|
|
$
|
—
|
|
|
$
|
11,129
|
|
|
$
|
11,987
|
|
|
$
|
—
|
|
|
$
|
23,116
|
|
Cost of sale
|
|
|
—
|
|
|
|
(10,394
|
)
|
|
|
(6,863
|
)
|
|
|
—
|
|
|
|
(17,257
|
)
|
Recognized prior deferred gain
|
|
|
—
|
|
|
|
—
|
|
|
|
2,737
|
|
|
|
—
|
|
|
|
2,737
|
|
Gain on sale
|
|
$
|
—
|
|
|
$
|
735
|
|
|
$
|
7,861
|
|
|
$
|
—
|
|
|
$
|
8,596
|
|
The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Statements of Operations for the nine months ended September 30, 2017 and 2016 (dollars in thousands):
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Segment operating income
|
|
$
|
7,021
|
|
|
$
|
7,395
|
|
Other non-segment items of income (expense)
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
(5,797
|
)
|
|
|
(6,197
|
)
|
Net income fee to related party
|
|
|
(189
|
)
|
|
|
(193
|
)
|
Advisory fee to related party
|
|
|
(8,310
|
)
|
|
|
(8,174
|
)
|
Other income
|
|
|
(324
|
)
|
|
|
1,452
|
|
Earnings from unconsolidated investees
|
|
|
249
|
|
|
|
430
|
|
Income tax expense
|
|
|
—
|
|
|
|
(45
|
)
|
Net loss from continuing operations
|
|
$
|
(7,350
|
)
|
|
$
|
(5,332
|
)
|
The table below reflects the reconciliation of segment information to the corresponding amounts in the Consolidated Balance Sheets (dollars in thousands):
|
|
As of September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Segment assets
|
|
$
|
939,243
|
|
|
$
|
909,709
|
|
Investments in unconsolidated investees
|
|
|
6,335
|
|
|
|
5,152
|
|
Notes and interest receivable
|
|
|
102,555
|
|
|
|
115,415
|
|
Other assets
|
|
|
184,431
|
|
|
|
144,472
|
|
Total assets
|
|
$
|
1,232,564
|
|
|
$
|
1,174,748
|
|
NOTE 9. COMMITMENTS, CONTINGENCIES, AND LIQUIDITY
Liquidity.
Management believes that ARL will generate excess cash flow from property operations in 2017; 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 June 30, 2017, UHF was in compliance with the covenants to the loan agreement.
In connection with its sale of LK–Four Hickory, LLC on December 17, 2007, both Limkwang Nevada, Inc., the majority owner of LK-Four Hickory, LLC, and ARL unconditionally guaranteed the punctual payment when due, whether at stated maturity, by acceleration or hereafter, including all fees and expenses incurred by the bank on collection of a $28.0 million note payable for LK-Four Hickory, LLC which has a current outstanding balance at September 30, 2017 of $19.7 million.
The Company’s investment in LK-Four Hickory, LLC at January 17, 2012 was sold and the Company has additional reserves for estimated potential amounts it could be liable for if various related parties are not able to meet their obligations to LK-Four Hickory, LLC. The Company will continue to evaluate these potential estimates and also the likelihood of having to fund any of these and adjust their reserves accordingly.
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. ART was also a significant owner of a partnership interest in the partnership that was awarded the initial damages in this matter.
The only defendants in the litigation involving the Clapper Parties are ART and ART Midwest, Inc., which, together, had total assets and net worth, as of December 31, 2012, of approximately $10 million. 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.
The Plaintiff has filed a lawsuit against ARL which initially alleged multiple causes of actions and claims against the Company. However, after a Memorandum Opinion and Order issued by the court, all of the claims in the lawsuit against the Company were dismissed, except for a claim that the Company was the unlawful transferee of assets previously owned by American Realty Trust and EQK Holdings, Inc. Subsequently the plaintiff added a claim of alter ego.
Management believes that the Company has no liability for any ultimate judgment in the proceeding involving the Clapper Parties; however, Management of the Company has serious reservations about the current collectability of the $10 million note and, accordingly, has reserved the full amount of the note.
Port Olpenitz
ARL, through a foreign subsidiary, was involved in developing a maritime harbor town on the 420 acre site of the former naval base of Olpenitz in Kappeln, Germany. Disputes with the local partner related to his mismanagement of the project resulted in his being replaced as the managing partner which was followed by a filing for bankruptcy protection in Germany to completely remove him from the project. An insolvency manager was placed in control of the project in order to protect the creditors and as of December 31, 2013, had sold the vast majority of assets (almost all land) of the project. The Company no longer has any financial responsibility for the obligations of the creditors related to the project and has claims filed for loans relating to our investment in the project. Due to the questionable collectability of these loans from the proceeds of the project, the Company has written off the unreserved balance of $5.3 million in the project. As of December 13, 2013, ARL had filed two lawsuits in Germany to recover funds invested in the project. The lawsuits are against: 1) the former German partner and his company, and 2) against the law firm in Hamburg originally hired to protect ARL’s investment in the project. At this time it is unknown how much can be recovered or how successful the litigation will be.
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 $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 $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 $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 are paid. Lastly, the Judgement awarded Basic, ART, and TCI $1.6 million collectively in attorneys’ fees from Dynex Commercial, Inc.
In April 2017, the plaintiffs filed a lawsuit against Dynex Capital, Inc. and Dynex Commercial, Inc. for $50 million alleging, among other things, fraudulent transfer and alter ego.
NOTE 10. EARNINGS PER SHARE
Earnings Per Share (“EPS”) has 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 September 30, 2017, we have 2,000,614 shares of Series A 10.0% cumulative convertible preferred stock, which are outstanding. 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 outstanding 2,000,614 shares of Series A 10.0% cumulative convertible preferred stock, 900,000 shares are owned by ARL. Dividends are not paid on the shares owned by ARL subsidiaries.
Prior to July 17, 2014, RAI owned 2,451,435 shares of the outstanding Series A 10.0% convertible preferred stock and had accrued dividends unpaid of $15.1 million. On July 17, 2014, RAI converted 890,797 shares, including $6.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common stock. This conversion resulted in the issuance of 2,502,230 new shares of ARL common stock. On April 9, 2015, RAI converted 460,638 shares, including $2.3 million in accumulated dividends unpaid for these shares, into the requisite number of shares of common stock. This conversion resulted in the issuance of 1,486,741 new shares of ARL common stock. As of September 30, 2017 RAI owns 1,100,000 shares of the outstanding Series A 10.0% convertible preferred stock and has accrued dividends unpaid of $10.7 million.
As of September 30, 2017, the Company has no preferred stock or stock options that are required to be included in the calculation of EPS.
NOTE 11. SUBSEQUENT EVENTS
The date to which events occurring after September 30, 2017, the date of the most recent balance sheet, have been evaluated for possible adjustment to the Consolidated Financial Statements or disclosure is November 14, 2017, which is the date on which the Consolidated Financial Statements were available to be issued.
The Company has determined that there are no subsequent events to be reported.