AMERICAN REALTY INVESTORS INC 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Optional and not included. 25 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Financial Statements Report of Independent Registered Public Accounting Firm 27 Consolidated Balance Sheets at December 31, 2020 and 2019 30 Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 31 Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019 and 2018 32 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 33 Notes to Consolidated Financial Statements 34 Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation 53 Schedule IV—Mortgage Loan Receivables on Real Estate 55 26 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of and Stockholders of American Realty Investors, Inc. Dallas, Texas Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of American Realty Investors, Inc. and Subsidiaries as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American Realty Investors, Inc. as of December 31, 2020 and 2019 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Impairment of investment in real estate Description of the Matter The Company’s net investment in real estate totaled $377.3 million as of December 31, 2020. As discussed in Note 2 to the consolidated financial statements, the Company periodically assesses whether there has been any impairment in the carrying value of its properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. Impairment is recognized on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows for a real estate asset are less than its carrying amount, at which time the real estate asset is written down to its estimated fair value. 27 Auditing the Company's impairment assessment for real estate assets was complex because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. Our evaluation of management’s identification of indicators of impairment included our related assessment of such indicators, either individually or in combination, in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the real estate asset. How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s controls over the Company’s real estate asset impairment assessment process. Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment existed for the Company’s real estate assets. Our procedures included obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, including searching for significant tenant write-offs or upcoming lease expirations with little prospects for replacement tenants. We also searched for any significant declines in operating results of a real estate asset due that could be a triggering event or an indicator of potential impairment. Collectability of Notes Receivable Description of the Matter At December 31, 2020, the Company had notes receivable in the amount of $130.6 million. The Company performs an assessment as to whether or not substantially all of the amounts due under these notes receivable is deemed probable of collection. Subsequently, for notes where the Company concludes that it is not probable that it will collect substantially all payments due under the note, the Company creates an allowance for any amounts not probable of collection. Auditing the Company's collectability assessment is complex due to the judgment involved in the Company’s determination of the collectability of these notes. The determination involves consideration of the terms of the note, whether or not the note is currently performing, and any security for the note. How We Addressed the Matter in Our Audit We obtained an understanding of the Company's controls over notes receivable and their collectability assessment. Our testing included among other things, confirming selected notes receivable, determining if the notes were performing according to their terms and testing the Company’s evaluation of the underlying security interest if necessary. Revenue Recognition (straight-line) for commercial tenants Description of the Matter During 2020, the Company recognized office rental revenues and tenant recoveries of $37.2 million and recorded tenant receivables of $.1 million and deferred rent receivables of $3.2 million at December 31, 2020. As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from commercial properties on a straight-line basis over the terms of the related leases. Auditing the Company's straight-line calculations is complex due to the free rent periods, lease amendments and escalation clauses contained in many of the leases. How We Addressed the Matter in Our Audit We obtained an understanding of the Company's controls over office rental revenues and tenant recoveries, including controls over management’s calculation of the straight-line calculation and deferred rent receivable. To test the straight-line rent revenue and deferred rent receivable, we performed audit procedures that included, among others, evaluating the data and assumptions used in determining the calculation and agreeing amounts in the calculation to copies of lease agreements. In addition, we tested the complet 28 Emphasis of Liquidity As described in the Note 17, management intends to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet the Company’s liquidity requirements. Supplemental Information The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole. FARMER, FUQUA & HUFF, PC Richardson, Texas March 24, 2021 We have served as the Company’s auditor since 2004. 29 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except par value amounts) December 31, 2020 2019 Assets Real estate $ 377,383 $ 387,790 Notes receivable (including $ 69,518 and $ 83,757 at December 31, 2020 and 2019, respectively, from related parties) 130,626 143,087 Cash and cash equivalents 36,814 51,228 Restricted cash 50,206 32,083 Investment in unconsolidated joint ventures 60,425 67,655 Receivable from related parties 129,335 85,996 Other assets 80,975 62,802 Total assets $ 865,764 $ 830,641 Liabilities and Equity Liabilities: Mortgages and other notes payable $ 242,711 $ 249,854 Bonds payable 237,888 223,265 Accounts payable and other liabilities (including $ 12,488 and $ 11,817 at December 31, 2020 and 2019, respectively, to related parties) 27,299 29,014 Interest payable 7,639 7,230 Deferred revenue 19,821 24,762 Total liabilities 535,358 534,125 Equity: Shareholders' equity Preferred stock, Series A, $ 2.00 par value, 15,000,000 shares authorized, 1,800,614 shares issued and outstanding 1,801 3,601 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 16,209,228 shares issued and 16,152,043 outstanding 162 164 Treasury stock at cost, ( 57,185 ) shares ( 2 ) ( 6,395 ) Additional paid-in capital 62,092 78,421 Retained earnings 172,738 163,708 Total shareholders’ equity 236,791 239,499 Noncontrolling interest 93,615 57,017 Total equity 330,406 296,516 Total liabilities and equity $ 865,764 $ 830,641 The accompanying notes are an integral part of these consolidated financial statements. 30 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) For the Years Ended December 31, 2020 2019 2018 Revenues: Rental revenues (including $ 1,083 , $ 841 and $ 144 for 2020, 2019 and 2018, respectively, from related parties) $ 51,909 $ 46,231 $ 113,944 Other income 7,117 12,757 36,005 Total revenue 59,026 58,988 149,949 Expenses: Property operating expenses (including $ 990 , $ 991 and $ 254 for 2020, 2019 and 2018, respectively, from related parties) 24,360 25,694 59,587 Depreciation and amortization 14,755 13,379 22,670 General and administrative (including $ 3,869 , $ 4,429 and $ 1,267 for 2020, 2019 and 2018, respectively, from related parties) 10,614 11,089 12,708 Advisory fee to related party 9,409 9,216 12,106 Total operating expenses 59,138 59,378 107,071 Net operating (loss) income ( 112 ) ( 390 ) 42,878 Interest income (including $ 19,515 , $ 23,670 and $ 5,406 for 2020, 2019 and 2018, respectively, from related parties) 23,098 25,955 21,645 Interest expense (including $ 6,632 , $ 9,282 and $ 2,240 for 2020, 2019 and 2018, respectively, from related parties) ( 35,004 ) ( 39,860 ) ( 66,063 ) (Loss) gain on foreign currency transactions ( 13,378 ) ( 15,108 ) 12,399 Loss on extinguishment of debt — ( 5,219 ) — Equity in (loss) income from unconsolidated joint ventures ( 379 ) ( 2,313 ) 1,513 Gain on sale or write-down of assets 36,895 15,192 171,530 Income tax provision 147 — ( 1,210 ) Net income (loss) 11,267 ( 21,743 ) 182,692 Net (income ) loss attributable to noncontrolling interest ( 2,237 ) 5,785 ( 8,993 ) Net (loss) income attributable to the Company 9,030 ( 15,958 ) 173,699 Preferred dividend — ( 1 ) ( 901 ) Net income (loss) applicable to common shares $ 9,030 $ ( 15,959 ) $ 172,798 Earnings per share - basic Basic $ 0.56 $ ( 1.00 ) $ 10.81 Diluted $ 0.56 $ ( 1.00 ) $ 10.35 Weighted average common shares used in computing earnings per share Basic 16,045,796 15,997,076 15,982,528 Diluted 16,045,796 15,997,076 16,697,966 The accompanying notes are an integral part of these consolidated financial statements. 31 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF EQUITY For the Three Years Ended December 31, 2020 (dollars in thousands, except share amounts) Preferred Stock Common Stock Treasury Stock Paid-in Capital Retained Earnings Total Stockholders' Equity Noncontrolling Interest Total Equity Balance, January 1, 2018 $ 4,001 $ 159 $ ( 6,395 ) $ 107,342 $ 5,967 $ 111,074 $ 53,809 $ 164,883 Net income — — — 173,699 173,699 8,993 182,692 Conversion of Series A preferred stock into common stock ( 400 ) 5 — 395 — — — — Series D preferred dividend — — — ( 8,347 ) — ( 8,347 ) — ( 8,347 ) Redemption of Series D preferred stock — — — ( 10,000 ) — ( 10,000 ) — ( 10,000 ) Acquisition of Series A preferred stock by consolidated subsidiary — — — ( 7,200 ) — ( 7,200 ) — ( 7,200 ) Series A preferred stock cash dividend ($ 1.00 per share) — — — ( 901 ) — ( 901 ) — ( 901 ) Balance, December 31, 2018 3,601 164 ( 6,395 ) 81,289 179,666 258,325 62,802 321,127 Net loss — — — — ( 15,958 ) ( 15,958 ) ( 5,785 ) ( 21,743 ) Series A preferred stock cash dividend ($ 1.00 per share) — — — ( 1 ) — ( 1 ) — ( 1 ) Distribution to equity partner — — — ( 2,867 ) — ( 2,867 ) — ( 2,867 ) Balance, December 31, 2019 3,601 164 ( 6,395 ) 78,421 163,708 239,499 57,017 296,516 Net income — — — — 9,030 9,030 2,237 11,267 Issuance of common shares — — — 3,747 — 3,747 — 3,747 Issuance of Series A preferred shares — — — 18,876 — 18,876 — 18,876 Cancellation of treasury shares ( 1,800 ) ( 2 ) 6,393 ( 4,591 ) — — — — Adjustment of noncontrolling interest — — — ( 34,361 ) — ( 34,361 ) 34,361 — Balance, December 31, 2020 $ 1,801 $ 162 $ ( 2 ) $ 62,092 $ 172,738 $ 236,791 $ 93,615 $ 330,406 The accompanying notes are an integral part of these consolidated financial statements. 32 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the Years Ended December 31, 2020 2019 2018 Cash Flow From Operating Activities: Net income (loss) $ 11,267 $ ( 21,743 ) $ 182,692 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale or write down of assets ( 36,895 ) ( 15,192 ) ( 171,530 ) Loss (gain) on foreign currency transactions 13,378 15,108 ( 12,399 ) Loss on debt extinguishment — 5,219 — Depreciation and amortization 18,579 15,588 30,658 Provision for doubtful accounts 984 — — Equity in earnings from unconsolidated joint ventures 379 2,313 ( 1,513 ) Distribution of income from unconsolidated joint ventures 1,782 — — Changes in assets and liabilities, net of dispositions: Other assets ( 3,450 ) 10,814 ( 104,163 ) Related party receivables ( 327 ) ( 46,191 ) ( 11,894 ) Accrued interest payable ( 531 ) 2,338 ( 2,316 ) Accounts payable and other liabilities ( 1,668 ) ( 8,895 ) ( 81,867 ) Net cash provided by (used in) operating activities 3,498 ( 40,641 ) ( 172,332 ) Cash Flow From Investing Activities: Collection of notes receivable 8,251 19,755 6,541 Originations and advances on notes receivable ( 33,015 ) ( 21,434 ) ( 16,801 ) Acquisition of real estate — ( 3,422 ) ( 10,558 ) Development and renovation of real estate ( 17,505 ) ( 33,730 ) ( 85,055 ) Deferred leasing costs ( 2,603 ) — Proceeds from sale of assets 40,982 28,622 253,498 Distribution from unconsolidated joint ventures 8,086 6,504 — Net cash provided by (used in) by investing activities 4,196 ( 3,705 ) 147,625 Cash Flow From Financing Activities: Proceeds from mortgages, other notes and bonds payable 30,727 103,800 182,558 Payments on mortgages, other notes and bonds payable ( 33,415 ) ( 74,718 ) ( 124,616 ) Debt extinguishment costs — ( 3,799 ) — Deferred financing costs ( 1,297 ) ( 4,241 ) ( 5,257 ) Repurchase of preferred stock — — ( 9,001 ) Preferred stock dividends — — ( 900 ) Net cash (used in) provided by financing activities ( 3,985 ) 21,042 42,784 Net increase (decrease) in cash and cash equivalents 3,709 ( 23,304 ) 18,077 Cash and cash equivalents, beginning of period 83,311 106,615 88,538 Cash and cash equivalents, end of period $ 87,020 $ 83,311 $ 106,615 The accompanying notes are an integral part of these consolidated financial statements. 33 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Organization As used herein, the terms “the Company”, “We”, “Our”, or “Us” refer to American Realty Investors, Inc., a Nevada corporation which was formed in 1999. Our common stock is listed and trades on the New York Stock Exchange (“NYSE”) under the symbol “ARL”. Over 80 % of our stock is owned by related party entities. Our primary business is the acquisition, development and ownership of income-producing multifamily apartment communities and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate revenues from gains on sales of income-producing properties and land. We own approximately 78.4 % of Transcontinental Realty Investors, Inc. ("TCI") and substantially all of our operations are conducted through TCI, whose common stock is traded on the NYSE under the symbol “TCI”. Accordingly, we include TCI’s financial results in our consolidated financial statements. Substantially all of TCI's assets are held by its wholly-owned subsidiary, Southern Properties Capital Ltd (“SPC”), which was formed for the purpose of raising funds by issuing non-convertible bonds that are listed and traded on the Tel-Aviv Stock Exchange ("TASE"). At December 31, 2020, our portfolio of income-producing properties consisted of: ● Six commercial properties consisting of five office buildings and 1 retail property comprising in aggregate of approximately 1,600,000 square feet; ● Ten multifamily apartment communities owned directly by us comprising in 1,639 units, excluding apartments being developed; ● Approximately 1,980 acres of developed and undeveloped land; and ● Fifty-one multifamily apartment communities totaling 10,137 units owned by our 50 % owned investment in VAA. Our day to day operations are managed by Pillar Income Asset Management, Inc. (“Pillar”). Their 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 with third party lenders and investors. All of the Companies employees are Pillar employees. Our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. Our multifamily properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 12 – Related Party Transactions). 2. Summary of Significant Accounting Policies Basis of presentation These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America. We consolidate entities in which we are considered to be the primary beneficiary of a variable interest entity (“VIE”) or have a majority of the voting interest of the entity. We have determined that we are a primary beneficiary of the VIE when we have (i) the power to direct the activities of a VIE that most significantly impacts its economic performance, and (ii) the obligations to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, we consider qualitative and quantitative factors, including ownership interest, management representation, ability to control decision and other contractual rights. We account for entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary under the equity 34 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) method of accounting. Accordingly, we include our share of the net earnings or losses of these entities in our results of operations. Certain prior year amounts have been reclassified to conform to the current year presentation on the consolidated balance sheets, consolidated statements of operations and the consolidated statements of cash flows. 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 remaining useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements— 10 to 40 years; furniture, fixtures and equipment— 5 to 10 years). We assess whether an indicator of impairment in the value of our real estate exists by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include projected rental revenue, operating costs and capital expenditures as well as estimated holding periods and capitalization rates. If an impairment indicator exists, the determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. We generally hold and operate our income producing real estate long-term, which decreases the likelihood of their carrying values not being recoverable. Real estate classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell. Real estate held for sale We classify properties as held for sale when certain criteria are met in accordance with GAAP. At that time, we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property. Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell. We did not have any real estate assets classified as held for sale at December 31, 2020 or 2019. Cost capitalization The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. We also capitalize development costs including costs directly related to planning, developing, initial leasing and constructing a property as well as interest, property taxes, insurance, and other direct project costs incurred during the period of development. Capitalized costs also include direct and certain indirect costs clearly associated with the project. Indirect costs include real estate taxes, insurance and certain shared administrative costs. In assessing the amounts of direct and indirect costs to be capitalized, allocations are made to projects based on estimates of the actual amount of time spent on each activity. Indirect costs not clearly associated with specific projects are expensed as period costs. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction. Deferred leasing costs We capitalize leasing costs on our commercial properties, 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. 35 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Fair value measurement Fair value represents 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. In determining fair value we apply the following hierarchy: Level 1 —Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets. Level 2 —Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 —Unobservable inputs that are significant to the fair value measurement. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Related parties 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. Recognition of revenue Rental revenue includes fixed minimum rents, reimbursement of operating costs and other leasing income. Rental revenue for residential property, which is generally leased for twelve months or less, is recorded when due from residents, whereas rental revenue for commercial properties, which is generally leased for more than twelve months, is recognized on a straight-line basis over the terms of the related leases. Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier. An allowance for doubtful accounts is recorded for all past due rents and operating expense reimbursements considered to be uncollectible. Cash and Cash Equivalents and Restricted Cash We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value. Restricted cash includes cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable. Concentration of credit risk We maintain our cash balances at commercial banks and through investment companies, the deposits that are insured by the Federal Deposit Insurance Corporation (FDIC). At December 2020 and 2019, the Company maintained balances in excess of the insured amount. 36 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Income taxes We are a “C” corporation” for U.S. federal income tax purposes. However, we are included in the May Realty Holdings, Inc. (the "MRHI"). consolidated group for tax purposes. We have a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group. Comprehensive income (loss) Net income (loss) and comprehensive income (loss) are the same for the year ended December 31, 2020, 2019 and 2018. Use of estimates In the preparation of consolidated financial statements in conformity with GAAP, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates. Recent accounting pronouncements. In October 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This standard is intended to improve the accounting when considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The adoption of the standard on January 1, 2020, did not have a material impact on our financial position and results of operations. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The standard provides guidance, optional expedients and exceptions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The standard was effective upon issuance and can be applied through December 31, 2022. We have mortgage notes payable with interest rates that reference LIBOR, and therefore, we will adopt this standard when LIBOR is discontinued. On April 10, 2020, the FASB issued a Staff Q&A (“Q&A”) related to the application of the lease guidance in ASC 842 for the accounting impact of lease concessions related to the COVID-19 pandemic. The Q&A, allows an entity to make an election to account for lease concessions related to the effects of the COVID-19 as though enforceable rights and obligations for those concessions existed. As a result of this election, an entity will not have to analyze each lease to determine whether enforceable rights and obligations for concessions exist in the lease and can elect to apply or not apply the lease modification guidance in ASC 842, as long as the concessions do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. Our adoption of the guidance of the Q&A did not have a significant impact on our consolidated financial statements during the year ended December 2020. 37 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 3. Earnings Per Share Earnings per share (“EPS”) has been computed by dividing net income available to common shares, adjusted for preferred dividends, by the weighted-average number of common shares outstanding during the period. The following table provides our basic and diluted EPS calculation: For the Year Ended December 31, 2020 2019 2018 Net income (loss) $ 11,267 $ ( 21,743 ) $ 182,692 Net (income ) loss attributable to noncontrolling interest ( 2,237 ) 5,785 ( 8,993 ) Net (loss) income attributable to the Company 9,030 ( 15,958 ) 173,699 Preferred dividend — ( 1 ) ( 901 ) Net income (loss) applicable to common shares $ 9,030 $ ( 15,959 ) $ 172,798 Denominator for basic EPS - weighted average common shares outstanding Weighted-average common shares outstanding-basic 16,046 15,997 15,983 Effect of conversion of preferred shares — — 715 Weighted-average common shares outstanding-diluted 16,046 15,997 16,698 EPS - attributable to common shares- basic $ 0.56 $ ( 1.00 ) $ 10.81 EPS - attributable to common shares- diluted $ 0.56 $ ( 1.00 ) $ 10.35 38 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 4. Supplemental Cash Flows Information The following presents the schedule of interest paid and other supplemental cash flow information: For the Years Ended December 31, 2020 2019 2018 Cash paid for interest $ 31,453 $ 38,904 $ 57,981 Cash - Beginning of period Cash and cash equivalents $ 51,228 $ 36,428 $ 42,920 Restricted cash 32,083 70,187 45,618 $ 83,311 $ 106,615 $ 88,538 Cash - End of Period Cash and cash equivalents $ 36,814 $ 51,228 $ 36,428 Restricted cash 50,206 32,083 70,187 $ 87,020 $ 83,311 $ 106,615 Proceeds from mortgages, notes and bonds payable Mortgages and notes payable $ 10,942 $ 25,675 $ 123,345 Bonds payable 19,785 78,125 59,213 $ 30,727 $ 103,800 $ 182,558 Payment of mortgages, notes and bonds payable Mortgages and notes payable $ 13,823 $ 52,976 $ 124,616 Bonds payable 19,592 21,742 — $ 33,415 $ 74,718 $ 124,616 The following is a schedule of noncash investing and financing activities: For the Years Ended December 31, 2020 2019 2018 Property acquired in exchange for note payable $ 3,350 $ 1,155 $ 1,895 Note receivable issued in exchange for property 1,761 — — Property acquired in exchange for note receivable — 1,800 1,735 Debt assumed in sale of properties 8,238 — 31,175 5. Operating Segments Our segments are based on the internal reporting that we review for operational decision-making purposes. We operate in two reportable segments: (i) the acquisition, development, ownership and management of multifamily properties and (ii) the acquisition, ownership and management of commercial real estate properties. The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, advisory fees, interest income and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level. 39 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The following table presents our profit by reportable segment: For the Years Ended December 31, 2020 2019 2018 Multifamily Segment Revenue $ 14,686 $ 13,517 $ 80,821 Operating expenses ( 8,482 ) ( 9,304 ) ( 42,778 ) Profit from segment 6,204 4,213 38,043 Commercial Segment Revenue 37,223 32,714 33,123 Operating expenses ( 15,878 ) ( 16,390 ) ( 16,809 ) Profit from segment 21,345 16,324 16,314 Total profit from segments $ 27,549 $ 20,537 $ 54,357 The following table reconciles our profit by reportable segment to net income (loss): For the Years Ended December 31, 2020 2019 2018 Segment operating income $ 27,549 $ 20,537 $ 54,357 Other non-segment items of income (expense) Depreciation and amortization ( 14,755 ) ( 13,379 ) ( 22,670 ) General and administrative ( 10,614 ) ( 11,089 ) ( 12,708 ) Advisory Fee ( 9,409 ) ( 9,216 ) ( 12,106 ) Other income 7,117 12,757 36,005 Interest Income 23,098 25,955 21,645 Interest Expense ( 35,004 ) ( 39,860 ) ( 66,063 ) (Loss) gain on foreign currency transactions ( 13,378 ) ( 15,108 ) 12,399 Los on extinguishment of debt — ( 5,219 ) — Equity in (loss) income from unconsolidated joint ventures ( 379 ) ( 2,313 ) 1,513 Gain on sale or write-down of assets 36,895 15,192 171,530 Income tax provision 147 — ( 1,210 ) Net income (loss) $ 11,267 $ ( 21,743 ) $ 182,692 The table below reconciles the segment information to the corresponding amounts in the consolidated balance sheets: December 31, 2020 2019 Segment assets $ 342,965 $ 348,404 Real estate 65,149 70,006 Investments in unconsolidated joint ventures 60,425 67,655 Notes receivable 130,626 143,087 Receivable from related parties 129,335 85,996 Other assets and receivables 137,264 115,493 Total assets $ 865,764 $ 830,641 40 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 6. Lease Revenue We lease our multifamily properties and commercial properties under agreements that are classified as operating leases. Our multifamily leases generally include minimum rents and charges for ancillary services. Our commercial property leases generally included minimum rents and recoveries for property taxes and common area maintenance. Minimum rental revenues are recognized on a straight-line basis over the terms of the related leases. The following table summarizes the components of rental revenue for the years ended December 2020, 2019 and 2018: For the Year Ended December 31, 2020 2019 2018 Fixed component $ 49,974 $ 43,749 $ 112,203 Variable component 1,935 2,482 1,741 Total rental revenue $ 51,909 $ 46,231 $ 113,944 The following table summarizes the future rental payments to us from under non-cancelable leases. The table exclude multifamily leases, which typically have a term of one-year or less: Year Amount 2021 $ 23,419 2022 21,363 2023 16,003 2024 10,889 2025 6,938 Thereafter 25,566 Total $ 104,178 7. Real Estate Activity At December 31, 2020 and 2019, our real estate investment is comprised of the following: December 31, 2020 2019 Land $ 50,759 $ 49,887 Building and improvements 297,644 286,280 Tenant improvements 30,935 49,431 Construction in progress 77,891 84,399 Total cost 457,229 469,997 Less accumulated deprecation ( 82,418 ) ( 90,173 ) Total real estate, net 374,811 379,824 Property held for sale 2,572 7,966 Total real estate $ 377,383 $ 387,790 Our property held for sale consists of land parcels at Mercer Crossing that are currently under contract for sale. 41 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) We continues to invest in the development of multifamily properties. During the year ended December 31, 2020, we invested $ 17,505 related to the construction and development projects. Gain on sale or write-down of assets, net consists of the following: For the Year Ended December 31, 2020 2019 2018 Land(1) $ 25,171 $ 14,889 $ 17,404 Multifamily(2) 3,702 ( 80 ) 154,126 Commercial(3) 4,610 — — Other(4) 3,412 383 — $ 36,895 $ 15,192 $ 171,530 (1) Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings. (2) On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, Florida for $ 2,426 , resulting in a gain on sale of $ 960 . The sales price was funded by the issuance of a $ 1,761 note receivable and the assumption of the $ 665 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable). On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $ 13,300 , resulting in a gain on the sale of of $ 2,742 . The sales price was funded by cash payment of $ 4,215 and the assumption of the $ 9,085 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable). (3) On September 14, 2020, we sold Bridge View Plaza, a 122,205 square foot retail center in La Crosse, Wisconsin for $ 5,250 , resulting in a gain on sale of $ 4,610 . The proceeds from the sale were used to pay off the $ 3,375 mortgage note payable on the property (See Note 10 – Mortgages and Other Notes Payable) and for general corporate purposes. (4) Includes the write-off of development costs. 42 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 8. Notes Receivable The following table summarizes our notes receivables at December 31, 2020 and 2019: Carrying Value Interest Rate Maturity Date Borrower / Project 2020 2019 ABC Land and Development, Inc. $ 4,408 $ 4,408 9.50 % 6/30/2021 ABC Paradise, LLC 1,210 1,210 9.50 % 6/30/2021 Autumn Breeze(1) 1,867 1,302 5.00 % 7/1/2022 Bellwether Ridge(1) 3,858 3,765 5.00 % 11/1/2021 Centura Towers — 19,845 2.28 % 12/28/2022 Forest Pines(1) 2,869 2,868 5.00 % 11/1/2022 JEM Holdings, Inc. — 300 6.00 % 7/1/2016 Lake Wales 3,000 3,000 9.50 % 6/30/2021 Legacy Pleasant Grove 496 496 12.00 % 10/23/2022 McKinney Ranch 4,554 4,554 6.00 % 9/15/2022 One Realco Land Holding, Inc. 1,728 1,728 9.50 % 6/30/2021 Oulad-Chikh Family Trust — 174 8.00 % 3/1/2021 Parc at Ingleside(1) 2,523 1,531 5.00 % 12/1/2021 Parc at Windmill Farms(1) 7,803 7,602 5.00 % 11/1/2022 Phillips Foundation for Better Living, Inc.(2) — 314 12.00 % 3/31/2022 Phillips Foundation for Better Living, Inc.(2) 61 — 12.00 % 3/31/2023 Plum Tree(1) 857 413 5.00 % 4/26/2026 Riverview on the Park Land, LLC 1,045 1,045 9.50 % 6/30/2021 RNC Portfolio, Inc. 8,853 8,802 5.00 % 9/1/2024 Spartan Land 5,907 5,907 12.00 % 1/16/2023 Spyglass of Ennis(1) 5,360 5,288 5.00 % 11/1/2022 Steeple Crest(1) 6,498 6,665 5.00 % 8/1/2021 Unified Housing Foundation, Inc. (2)(3) 2,880 3,793 12.00 % 7/31/2021 Unified Housing Foundation, Inc. (2)(3) 212 212 12.00 % 8/30/2021 Unified Housing Foundation, Inc. (2)(3) 6,831 6,831 12.00 % 10/31/2021 Unified Housing Foundation, Inc. (2)(3) 10,896 10,926 12.00 % 12/31/2021 Unified Housing Foundation, Inc. (2)(3) 10,096 10,096 12.00 % 3/31/2022 Unified Housing Foundation, Inc. (2)(3) 6,990 — 12.00 % 3/31/2023 Unified Housing Foundation, Inc. (2)(3) 3,615 — 12.00 % 5/31/2023 Unified Housing Foundation, Inc. (2)(3) 26,209 30,012 12.00 % 12/31/2032 $ 130,626 $ 143,087 (1) The note is convertible, at our option, into a 100 % ownership interest in the underlying development property, and are collateralized by the underlying development property. (2) The borrower is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. (3) Principal and interest payments on the notes from Unified Housing Foundation, Inc. (“UHF”) are funded from surplus cash flow from operations, sale or refinancing of the underlying properties and are cross collateralized to the extent that any surplus cash available from any of the properties underlying the notes. 43 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 9. Investment in Unconsolidated Joint Ventures On November 19, 2018, we formed the VAA joint venture with the Macquarie Group (“Macquarie”). In connection with the formation of VAA, we sold a 50 % ownership interest in certain multifamily properties to Macquarie for a $ 236,800 cash payment, resulting in a gain on sale of assets of $ 154,100 . We then immediately transferred our respective ownership interests in the multifamily projects ("VAA Portfolio") to VAA in exchange for a 50 % voting interest / 49 % profit participation interest ("Class A interest") in VAA a nd note payable (“Mezzanine Loan”) in accordance with the terms of a contribution agreement (the “Contribution”). Upon completion of the Contribution, VAA owned and controlled 52 multifamily properties. VAA assumed all liabilities of those properties, including mortgage debt insured by the Department of Housing and Urban Development (“HUD”). Concurrent with the Contributi on, VAA issued Class B interests with a 2 % profits participation interest and no voting rights to Daniel J. Moos, our former President and Chief Executive Officer (“Class B Member”). The Class B Member serves as the Manager of VAA. Interest on the Mezzanine loan is limited to cash generated from the properties and matures concurrently with the termination of VAA. Accordingly, we account for our interest in the Mezzanine Loan as additional equity interest and includes any interest payments accrued as income from unconsolidated joint ventures. We also own a 20 % ownership interest in a 20 % interest in Gruppa Florentina, LLC ("Milano"), which operates several pizza parlors in Central and Northern California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s Pizzerias. The following is a summary of our investment in unconsolidated joint ventures: As of December 31, 2020 2019 Assets (1) Real estate 1,230,197 1,255,998 Other assets 113,537 107,006 Total assets $ 1,343,734 $ 1,363,004 Liabilities and Partners Capital (1) Mortgage notes payable 843,522 843,053 Mezzanine notes payable 239,878 240,422 Other liabilities 45,619 37,118 Our share of partners' capital 93,334 108,035 Outside partner's capital 121,381 134,376 Total liabilities and partners' capital $ 1,343,734 $ 1,363,004 Investment in unconsolidated joint ventures Our share of partners' capital $ 93,334 $ 108,035 Our share of Mezzanine note payablestr 119,939 120,211 Basis adjustment (2) ( 152,848 ) ( 160,591 ) Total investment in unconsolidated joint ventures $ 60,425 $ 67,655 (1) These amounts include the assets of $ 1,280,827 and $ 1,305,179 of VAA at December 31, 2020 and 2019, respectively, and liabilities of $ 1,107,861 and $ 1,104,070 of VAA at December 31, 2020 and 2019, respectively. (2) We amortize the difference between the cost of our investments in unconsolidated joint ventures and the book value of our underlying equity into income on a straight-line basis consistent with the lives of the underlying assets. 44 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The following is a summary of our income (loss) from investments in unconsolidated joint ventures: For the Years Ended December 31, 2020 2019 2018 Revenue (1) Rental revenue $ 117,336 $ 109,746 $ 11,568 Other revenue 57,515 59,069 53,603 Total revenue 174,851 168,815 65,171 Expenses (1) Operating expenses 110,108 109,588 57,922 Depreciation and amortization 31,921 45,453 8,506 Interest 57,455 61,867 6,432 Total expenses 199,484 216,908 72,860 Net loss $ ( 24,633 ) $ ( 48,093 ) $ ( 7,689 ) Our share of net (loss) income in unconsolidated joint ventures $ ( 379 ) $ ( 2,313 ) $ 1,513 (1) These amounts include revenue of $ 123,115 , $ 115,377 and $ 12,877 of VAA during the years ended December 31, 2020, 2019 and 2018, respectively, and expenses of $ 149,817 , $ 165,773 and $ 22,609 of VAA during the years ended December 31, 2020, 2019 and 2018, respectively. 45 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 10. Mortgages and Other Notes Payable Below is a summary of our notes and interest payable as of December 31, 2020 and 2019: Carrying Value Interest Rate Maturity Date Property/ Entity 2020 2019 600 Las Colinas 35,589 36,302 5.30 % 11/1/2023 770 South Post Oak 11,871 12,077 4.40 % 6/1/2025 Bridge View Plaza(1) — 3,824 7.75 % 11/1/2020 Chelsea 8,194 8,749 3.40 % 12/1/2050 EQK Portage - Land(2) 3,350 — 10.00 % 11/13/2024 HSW Partners(3) 17,790 17,359 9.50 % 6/17/2021 Farnham Park(4) — 9,144 3.39 % 12/1/2050 Forest Grove(5) 7,333 1,390 3.75 % 5/5/2024 Landing Bayou 14,643 15,467 3.50 % 9/1/2053 Athens(6) 1,155 1,155 5.90 % 8/28/2022 Legacy at Pleasant Grove 13,653 13,944 3.60 % 4/1/2048 McKinney 36 Land 820 944 8.00 % 6/30/2022 New Concept Energy 3,542 4,000 6.00 % 9/30/2021 Overlook at Allenville Phase II 15,621 15,798 3.80 % 5/1/2059 Parc at Denham Springs Phase II 16,128 14,785 4.10 % 2/1/2060 Stanford Center(7) 39,093 39,255 6.00 % 2/26/2022 Sugar Mill Phase III 9,298 5,908 4.50 % 2/1/2060 Toulon 13,975 14,219 3.20 % 12/1/2051 Villager(8) — 556 2.50 % 3/1/2043 Villas at Bon Secour 10,280 11,026 4.00 % 1/1/2022 Vista Ridge 9,979 10,122 4.00 % 8/1/2053 Windmill Farms(9) 10,397 13,830 6.00 % 2/28/2023 242,711 249,854 (1) On September 14, 2020, we paid off the loan in connection with the sale of the underlining property (See Note 7 – Real Estate Activity). (2) On March 5, 2020, we acquired 49.2 acres of land in Kent, Ohio in exchange for the note payable. (3) On, December 3, 2020 , we extended the maturity on the loan to June 17, 2021 . (4) On July 16, 2020, the loan was assumed by a third party in connection with the sale of the underlying property (See Note 7 – Real Estate Activity). (5) The loan bears interest at prime rate plus 0.5 %. (6) On March 2, 2021, the loan was extended to August 28, 2022. (7) On May 1, 2020, the loan was extended to February 26, 2022. (8) On May 1, 2020, the loan was assumed by a third party in connection to sale of the underlying property (See Note 7 – Real Estate Activity). (9) On March 4, 2021, the loan was extended to February 28, 2023 at an interest of 5 %. Interest payable at December 31, 2020 and 2019, was $ 773 and $ 844 , respectively. We capitalized interest of $ 858 and $ 585 during the years ended December 31, 2020 and 2019, respectively. 46 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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 working with our existing lenders and new lenders to modify, extend the loans before they become due or refinancing the loans with terms that are similar to the existing agreement. As of December 31, 2020, we were in compliance with all our loan covenants. Future principal payments due on our notes payable at December 31, 2020 are as follows: Year Amount 2021 $ 14,079 2022 14,403 2023 37,690 2024 2,575 2025 12,927 Thereafter 166,222 247,896 Deferred finance cost ( 5,185 ) $ 242,711 11. Bonds Payable We have issued three series of nonconvertible bonds ("Bonds') through SPC, which are traded on the TASE. The Bonds are denominated in New Israeli Shekels ("NIS") and provide for semiannual principal and interest payments through maturity. On February 2, 2020, the S&P Global Ratings of our Series A and Series C bonds increased to 'ilA-' from 'ilBBB+'. In addition, the rating on our Series C bonds increased to 'ilA' from 'ilA-' rating due to the expectation of continued improvement in coverage ratios and the expansion of our portfolio. In connection with the Bonds, we incurred a (loss) gain on foreign currency transactions of $( 13,378 ), $( 15,108 ), and $ 12,399 , for the years ended December 31, 2020, 2019 and 2018, respectively. From September 23, 2019 to December 31, 2019, we had hedging agreement that effectively prevented the exchange rate for the NIS to the U.S. Dollar from falling below three. The outstanding balance of our Bonds at December 31, 2020 and 2019 is as follows: December 31, Bond Issuance 2020 2019 Interest Rate Maturity Series A Bonds(1)(2) 95,133 92,653 7.30 % 7/31/23 Series B Bonds(3) 65,318 60,764 6.80 % 7/31/25 Series C Bonds(2) 85,537 79,572 4.65 % 1/31/23 245,988 232,989 Less unamortized deferred issuance costs ( 8,100 ) ( 9,724 ) 237,888 223,265 (1) On November 30, 2020, we issued $ 19,693 in additional bonds for $ 18,822 in net proceeds. (2) The bonds are collateralized by the assets of SPC. (3) The bonds are collateralized by a trust deed in Browning Place, a 625,297 square foot office building in Farmers Branch, Texas. 47 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The aggregate maturities of our Bonds are as follows: Year Amount 2021 $ 44,775 2022 44,775 2023 130,310 2024 13,064 2025 13,064 $ 245,988 As of December 31, 2020, we were in compliance with our bond covenants. 12. Related Party Transactions We engage in certain business transactions with related parties, including but not limited to asset acquisition and dispositions of real estate. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest. Pillar and Regis are wholly owned by an affiliates of the MRHI, which owns appro ximately 91 % of the Company. Pillar is compensated for advisory services in accordance with an agreement. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. In addition, Regis is entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Rental income includes $ 1,083 , $ 841 and $ 144 for the years ended December 31, 2020, 2019 and 2018, respectively, for office space leased to Pillar and Regis. Property operating expense includes $ 990 , $ 991 and $ 254 for the years ended December 31, 2020, 2019 and 2018, respectively, for management fees on commercial properties payable to Regis. General and administrative expense includes $ 3,869 , $ 4,429 and $ 1,267 for the years ended December 31, 2020, 2019 and 2018, respectively, for employee compensation and other reimbursable costs payable to Pillar. Advisor fees paid to Pillar were $ 9,409 , $ 9,216 and $ 12,106 for the years ended December 31, 2020, 2019 and 2018, respectively. Notes receivable are includes amounts held by UHF and Pillar (See Note 8 – Notes Receivable). UHF is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. Interest income on these notes was $ 19,515 , $ 23,670 and $ 5,406 for the years ended December 31, 2020, 2019 and 2018, respectively. Interest expense on notes payable to Pillar was $ 6,632 , $ 9,282 and $ 2,240 for the years ended December 31, 2020, 2019 and 2018, respectively. Related party receivables represents amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above. 48 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 13. Noncontrolling Interests The noncontrolling interest represents the third party ownership interest in TCI and Income Opportunity Realty Investors, Inc. ("IOR"). We owned 78.4 % of TCI and 81.1 % in in IOR during the years ended December 31, 2020. 14. Stockholders Equity Dividends: Our decision to declare dividends on common stock are determined on an annual basis following the end of each year. In accordance with that policy, no dividends on our common stock were declared for 2020, 2019, or 2018. Future distributions to common stockholders will be determined in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by our board of directors. Preferred Stock: We are authorized to issue up to 15,000,000 shares of Series A 10.0 % Cumulative Convertible Preferred Stock with a par value of $ 2.00 per share with a liquidation preference of $ 10.00 per share plus accrued and unpaid dividends. Dividends are payable quarterly at the annual rate of $ 1.00 per share, or $ .25 per share when declared. The Series A Preferred Stock may be converted into common stock at 90.0 % of the average daily closing price of our common stock for the prior 20 trading days. 15. 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 gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31, 2020, we had deferred gain of $ 19,821 . 16. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. 49 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The (benefit) expense for income taxes consists of: Years Ended December 31, 2020 2019 2018 Current: Federal $ — $ — $ 42,231 State ( 147 ) — 1,210 Deferred and Other: Federal — — ( 42,231 ) State — — — Total tax (benefit) expense $ ( 147 ) $ — $ 1,210 The reconciliation between our effective tax rate on income from operations and the statutory rate is as follows: Years Ended December 31, 2020 2019 2018 Income tax (benefit) expense at federal statutory rate $ 2,335 $ ( 4,566 ) $ 31,739 State and local income taxes net of federal tax (benefit) expense ( 147 ) — 1,210 Permanent tax differences ( 1,846 ) ( 2,499 ) ( 224 ) Temporary tax differences Installment note on land sale — — ( 2,875 ) Allowance for losses on note receivables ( 77 ) ( 246 ) ( 712 ) Deferred gains ( 878 ) ( 1,920 ) ( 7,041 ) Basis differences on fixed assets 1,307 — 22,110 Other basis/timing differences 2,296 3,172 ( 766 ) Generation (use) on net operating loss carryforwards ( 3,137 ) 6,059 ( 42,231 ) Reported tax (benefit) expense $ ( 147 ) $ — $ 1,210 Effective tax rate 4.7 % — % 0.7 % We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2020, our tax years for 2019, 2018, and 2017 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2020, we are no longer subject to U.S federal, state, local, or foreign examinations by tax authorities for the years before 2016. The 2020 and 2019 effective tax rate is driven primarily by the passing of the Tax Cuts and Jobs Act by congress on December 22, 2017. This act reduced the statutory tax rate for corporations to 21% starting in 2019. As a result, our tax assets were remeasured to reflect the new tax rate for future years with the impact on the 2018 provision for income taxes. 50 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Components of the Net Deferred Tax Asset or Liability Years Ended December 31, 2020 2019 Deferred tax assets: Allowance for losses on notes $ 2,674 $ 2,751 Basis difference in fixed assets 1,426 — Deferred gain 5,168 5,199 Foreign currency translations 3,818 1,522 Net operating loss carryforward 15,234 18,371 Total deferred tax assets 28,320 27,843 Less: valuation allowance ( 28,320 ) ( 21,180 ) Total net deferred tax assets $ — $ 6,663 Deferred tax liabilities: Deferred gain $ — $ — Basis differences for fixed assets — 6,663 Total deferred tax liability $ — $ 6,663 Current net deferred tax asset — 6,663 Long-Term net deferred tax liability — ( 6,663 ) Net deferred tax asset (liability) $ — $ — We have state net operating losses in many of the various states in which we operate. We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. At December 31, 2020, we had a net deferred tax asset due to tax deductions available to us in future years. However, as we could not determine that it was more likely than not that we would realize the benefit of the deferred tax asset, we established a 100 % valuation allowance. 17. Commitments and Contingencies We believes that we will generate excess cash from property operations in the next twelve months; such excess, however, might not be sufficient to discharge all of our obligations as they become due. We intend to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet our liquidity requirements. We were the primary guarantor, on a $ 24,300 mezzanine loan between UHF and a lender. The guarantee was remove on January 29, 2021, concurrent with the repayment of the loan by UHF. We are the defendant in ongoing litigation with Mr. David Clapper and related entities (collectively, "Clapper”) regarding a multifamily property transaction that occurred in 1988. In March 2016, the court ruled in favor of Clapper and awarded them approximately $ 59,000 . We appealed the ruling and the trial has been set to begin in May 2021. We were the plaintiff in a lawsuit against Dynex Commercial, Inc. (“Dynex”) for failure to fulfill certain loan commitments. In January 2015, the court awarded us with a judgment of $ 24,800 . We are pursuing all legal means to collect this award. However, due to the uncertainty of the collectability of the award, the receivable has been fully reserved. In February 2019, we were charged in a lawsuit brought by Paul Berger (“Berger”) that alleges that we a completed improper sales and/or transfers of property with IOR. Berger requests that we pay off various related party loans to IOR and that IOR then distribute the funds to its shareholders. We intend to vigorously defend against the allegations. 51 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) In connection with the formation of VAA, ten of the properties that we contributed to the joint venture are subject to an earn-out provision that provides for a remeasurement of the value of those properties after a two-year period following the completion of construction. As of December 31, 2020, we have recorded a liability of $ 10,000 , which we believe is the amount that will be required to settle our obligation. We have been unable to reach agreement with our joint venture partner on the remeasured value. As a result, the parties have filed for arbitration in accordance with the joint venture agreement. 18. Quarterly Results of Operations The following is a tabulation of our quarterly results of operations for the years 2020, 2019 and 2018. Quarterly results presented may differ from those previously reported in our Form 10-Q due to the reclassification of the operations 2020 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 13,130 $ 14,741 $ 11,937 $ 19,218 Net operating (loss) income ( 3,238 ) 1,491 ( 2,303 ) 3,938 Net income (loss) attributable to the Company 2,946 ( 2,306 ) 7,987 403 Net income (loss) attributable to the Company per share - basic and diluted $ 0.18 $ ( 0.14 ) $ 0.50 $ 0.02 2019 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 15,596 $ 15,204 $ 13,231 $ 14,957 Net operating income (loss) 1,932 ( 1,013 ) ( 578 ) ( 731 ) Net (loss) income attributable to the Company ( 6,147 ) ( 2,778 ) ( 7,571 ) 538 Net (loss) income attributable to the Company per share - basic and diluted $ ( 0.38 ) $ ( 0.17 ) $ ( 0.47 ) $ 0.03 19. Subsequent Events The date to which events occurring after December 31, 2020, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 24, 2021, which is the date of which the financial statements were available to be issued. There are no subsequent events that would require an adjustment to the financial statements. 52 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2020 Initial Cost Cost Capitalized Subsequent to Acquisition Gross Amount Carried at End of Year Property/Location Encumbrances Land Buildings Land Building & Improvements Total Accumulated Depreciation Date of Construction Date Acquired Multifamily Chelsea $ 8,194 $ 1,225 $ 11,230 $ 6 $ 1,231 $ 11,230 $ 12,461 $ 596 1999 2018 Forest Grove 7,333 1,440 10,234 26 1,440 10,260 11,700 150 2020 2020 Landing Bayou 14,643 2,011 18,255 14 2,011 18,269 20,280 948 2005 2018 Legacy at Pleasant Grove 13,653 2,005 18,109 — 2,005 18,109 20,114 2,761 2006 2014 Overlook at Allenville Phase II 15,621 2,410 17,033 12 2,410 17,045 19,455 749 2012 2015 Parc at Denham Springs Phase II 16,128 1,505 16,975 — 1,505 16,975 18,480 449 2010 2009 Sugar Mill Phase III 9,298 576 9,755 7 576 9,762 10,338 138 2015 2015 Toulon 13,975 1,621 20,107 372 1,993 20,107 22,100 4,775 2011 2009 Villas at Bon Secour 10,280 2,715 15,385 — 2,715 15,385 18,100 929 2007 2018 Vista Ridge 9,979 1,339 13,398 — 1,339 13,398 14,737 2,241 2009 2015 119,104 16,847 150,481 437 17,225 150,540 167,765 13,736 Development Forest Pines — 3,600 — 301 3,600 301 3,901 — 2020 Heritage McKinney — 3,037 — 231 3,037 231 3,268 — 2017 — 6,637 — 532 6,637 532 7,169 — Commercial 600 Las Colinas 35,589 5,751 55,460 9,609 5,751 65,069 70,820 27,702 1984 2005 770 South Post Oak 11,871 1,763 16,312 615 1,763 16,927 18,690 2,465 1970 2015 Browning Place 85,537 5,096 49,441 14,428 5,096 63,869 68,965 24,624 1984 2005 Stanford Center 39,093 20,278 25,876 6,223 20,278 32,099 52,377 13,817 2007 2008 Other — 646 74 — 646 74 720 74 172,090 33,534 147,163 30,875 33,534 178,038 211,572 68,682 Land Mercer Crossing — 5,406 — — 5,406 — 5,406 — 2008 Windmill Farms 10,397 43,973 — 4,329 48,302 — 48,302 — 2011 Other 5,325 16,571 — 3,016 19,587 — 19,587 — 15,722 65,950 — 7,345 73,295 — 73,295 — $ 306,916 $ 122,968 $ 297,644 $ 39,189 $ 130,691 $ 329,110 $ 459,801 $ 82,418 53 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION As of December 31, 2019 2020 2019 2018 Reconciliation of Real Estate Balance at January 1, $ 477,963 $ 463,732 $ 1,165,662 Additions 21,223 92,964 175,996 Deductions ( 39,385 ) ( 78,733 ) ( 877,926 ) Balance at December 31, $ 459,801 $ 477,963 $ 463,732 Reconciliation of Accumulated Depreciation Balance at January 1, 90,173 79,228 177,546 Additions 12,188 13,379 22,761 Deductions ( 19,943 ) ( 2,434 ) ( 121,079 ) Balance at December 31, $ 82,418 $ 90,173 $ 79,228 54 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS December 2020 Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount Carrying Value Convertible loans Autumn Breeze 5.00 % 7/1/2022 No payments until maturity or conversion $ — $ 1,867 $ 1,867 Bellwether Ridge 5.00 % 11/1/2021 No payments until maturity or conversion — 3,858 3,858 Forest Pines 5.00 % 11/1/2022 No payments until maturity or conversion — 2,869 2,869 Parc at Ingleside 5.00 % 12/1/2021 No payments until maturity or conversion — 2,523 2,523 Parc at Windmill Farms 5.00 % 11/1/2022 No payments until maturity or conversion — 7,803 7,803 Plum Tree 5.00 % 4/26/2026 No payments until maturity or conversion — 857 857 Spyglass of Ennis 5.00 % 11/1/2022 No payments until maturity or conversion — 5,360 5,360 Steeple Crest 5.00 % 8/1/2021 No payments until maturity or conversion — 6,498 6,498 — 31,635 31,635 Land loans ABC Land and Development, Inc. 9.50 % 6/30/2021 No payments until maturity — 4,408 4,408 ABC Paradise, LLC 9.50 % 6/30/2021 No payments until maturity — 1,210 1,210 Lake Wales 9.50 % 6/30/2021 No payments until maturity — 3,000 3,000 Legacy Pleasant Grove 12.00 % 10/23/2022 No payments until maturity — 496 496 McKinney Ranch 6.00 % 9/15/2022 No payments until maturity — 4,554 4,554 One Realco Land Holding, Inc. 9.50 % 6/30/2021 No payments until maturity — 1,728 1,728 Riverview on the Park Land, LLC 9.50 % 6/30/2021 No payments until maturity — 1,045 1,045 RNC Portfolio, Inc. 5.00 % 9/1/2024 No payments until maturity — 8,853 8,853 Spartan Land 12.00 % 1/16/2023 No payments until maturity — 5,907 5,907 — 31,201 31,201 Subsidized housing Phillips Foundation for Better Living, Inc. 12.00 % 3/31/2023 Payments from excess property cash flows — 61 61 Unified Housing Foundation, Inc. 12.00 % 7/31/2021 Payments from excess property cash flows — 2,880 2,880 Unified Housing Foundation, Inc. 12.00 % 8/30/2021 Payments from excess property cash flows — 212 212 Unified Housing Foundation, Inc. 12.00 % 10/31/2021 Payments from excess property cash flows — 6,831 6,831 Unified Housing Foundation, Inc. 12.00 % 12/31/2021 Payments from excess property cash flows — 10,896 10,896 Unified Housing Foundation, Inc. 12.00 % 3/31/2022 Payments from excess property cash flows — 10,096 10,096 55 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount Carrying Value Unified Housing Foundation, Inc. 12.00 % 3/31/2023 Payments from excess property cash flows — 6,990 6,990 Unified Housing Foundation, Inc. 12.00 % 5/31/2023 Payments from excess property cash flows — 3,615 3,615 Unified Housing Foundation, Inc. 12.00 % 12/31/2032 Payments from excess property cash flows — 26,209 26,209 — 67,790 67,790 $ — $ 130,626 $ 130,626 56 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS As of December 31, 2020 2019 2018 Balance at January 1, $ 143,087 $ 114,893 $ 102,143 Additions 15,312 60,154 21,291 Deductions ( 27,773 ) ( 31,960 ) ( 8,541 ) Balance at December 31, $ 130,626 $ 143,087 $ 114,893 57 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.