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Item 7. Management’s Discussion and Analysis

2022-03-29 compared with 2021-03-26 · 64 added, 50 removed, 125 unchanged (48% of the section changed)

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We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development throughout the Southern United States.

Our portfolio of income-producing properties includes residential apartment communities, office buildings and other commercial properties.

Our portfolio of income-producing properties includes multifamily residential properties, office buildings and other commercial properties.

Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project.

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Pillar also arranges our debt and equity financing with third party lenders and investors.

We have no employees.

Employees of Pillar render services to us in accordance with the terms of the Advisory Agreement.

Pillar is considered to be a related party due to its common ownership with American Realty Investors, Inc.

(“ARL”), who is our controlling shareholder.

We rely upon the employees of Pillar render services to us in accordance with the terms of the Advisory Agreement.

Pillar is considered to be a related party due to its common ownership with RAI.

The following is a summary of our recent acquisition, disposition, financing and development activities:

Acquisitions and Dispositions

• On November 19, 2018, we formed the Victory Abode Apartments, LLC ("VAA") joint venture with the Macquarie Group (“Macquarie”).

In connection with the formation of VAA, we sold a 50% ownership interest in certain multifamily apartment projects to Macquarie for a $236.8 million cash payment, resulting in a gain on sale of assets of $154.1 million.

We then immediately transferred our respective ownership interests in the multifamily apartments ("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 apartments.

VAA assumed all liabilities of those properties, including mortgage debt insured by the Department of Housing and Urban Development (“HUD”).

• On May 31, 2019, we sold Westwood, a 120 unit multifamily property in Mary Ester, Florida for $3.1 million, resulting in a loss on the sale of $0.1 million.

• On May 31, 2019, we sold Westwood, a 120 unit multifamily property in Mary Ester, Florida for $3.1 million, resulting in a loss on sale of $0.1 million.

• During the year ended December 31, 2019, we sold 105.1 acres of land for an aggregate sales price of $30.0 million and purchased 41.9 acres for an aggregate purchase price of approximately $4.6 million.

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In addition, we sold 26.79 acres of land from our holdings in Mercer Crossing during the year ended December 31, 2020 for $16.3 million , resulting in a gain on sale of $5.7 million .

• On March 30, 2021, we sold a 50% ownership interest in Overlook at Allensville Phase II, a 144 unit multifamily property in Sevierville, Tennessee, to Macquarie for $2.6 million resulting in a gain on sale of $1.4 million.

Concurrent with the sale, we each contributed our 50% ownership interests in Overlook at Allensville Phase II into VAA.

• On August 26, 2021, we sold 600 Las Colinas, a 512,173 square foot office building in Irving, Texas for $74.8 million, resulting in a gain on sale of $27.3 million.

We used the proceeds to pay down the mortgage note payable on the property (See "Financing Activities") and for general corporate purposes.

• During the year ended December 31, 2021, we sold a total of 134.7 acres of land from our holdings in Windmill Farms for $20.2 million , in aggregate, resulting in gains on sale of $10.3 million .

In addition, we sold 14.1 acres of land from our holdings in Mercer Crossing during the year ended December 31, 2021 for $9.0 million , resulting in a gain on sale of $6.4 million .

Financing Activities

• On February 15, 2018, we issued $39.2 million in Series B bonds (See Note 11 in our consolidated financial statements) that bear interest at 6.80% and mature on July 31, 2025.

The proceeds were used to fund development activity, pay down debt and other general corporate purposes..

• On July 19, 2018, we issued an additional $19.8 million of Series B bonds (See Note 11 in our consolidated financial statements) in a private placement.

We used the proceeds from the issuance to fund our development activities.

• On July 28, 2019, we paid off the $41.5 million mortgage note payable on Browning Place , which resulted in a loss on early extinguishment of debt of $5.2 million .

Concurrent with the repayment of the mortgage note payable, we issued $78.1 million of Series C bonds (See Note 12 in our consolidated financial statements), which are collateralized by Browning Place, bear interest at 4.65% and mature on January 31, 2023.

• On November 30, 2020, issued $19.7 million in additional Series A bonds (See Note 11 in our consolidated financial statements) for $18.8 million in net proceeds.

• On November 30, 2020, we issued $19.7 million in additional Series A bonds (See Note 12 in our consolidated financial statements) for $18.8 million in net proceeds.

We used the proceeds to fund in part our bond payments that were due on January 30, 2021.

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• On March 2, 2021 , we extended our $1.2 million loan on Athens to August 28, 2022 .

• On March 4, 2021 , we received a commitment from our lender to extend the maturity of our $10.4 million loan on Windmill Farms until February 28, 2023 at a reduced interest rate of 5%.

• On March 4, 2021 , we extended the maturity of our $8.4 million loan on Windmill Farms until February 28, 2023 at a reduced interest rate of 5%.

• On August 25, 2021, we replaced the existing loan on Villas at Bon Secour with a new $20.0 million loan that bears interest at 3.08% and matures on September 1, 2031.

• On August 26, 2021, we paid off the $35.9 million loan on 600 Las Colinas in connection with the sale of the underlying property (See "Acquisitions and Dispositions" ).

• On March 3, 2022, the loan on Stanford Center was extended to February 26, 2023.

Development Activities

In 2020 , we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of $17.2 million and $14.2 million, respectively.

During 2021, we spent $15.7 million on our ongoing development of Windmill Farms .

Our expenditure includes $2.8 million on the development of land lots for sale to single family home developers and $13.0 million on reimbursable infrastructure investments.

We have investment in nine notes receivable that were issued to fund the development of multifamily properties (See Item 2 - Properties).

As of December 31, 2021, one of the projects was in construction, two were in lease-up and six were stabilized.

In 2021, we advanced $8.6 million on these development notes.

Each of these notes are convertible, at our option, into a 100% ownership interest in the underlying property.

During 2021, we advanced $2.3 million on the development of Tower Bay Lofts , which is owned by a third party.

We have an agreement that allows us to purchase this project, at our option, for the price of investment.

Other Developments:

During the year ended December 31, 2020 , we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of $17.2 million and $14.2 million, respectively.

Our current developments projects at December 31, 2020, are as follow:

(dollars in thousands)

Property Location No.

of Units Costs to Date (1) Total Projected Costs (1)

Athens Athens, AL 232 270 34,800

Heritage McKinney McKinney, TX 170 231 24,650

Total 402 $ 501 $ 59,450

(1) Costs include construction hard costs, construction soft costs and loan borrowing costs.

During 2021, we recorded a loss of $29.6 million on the remeasurements of certain assets ("Earn Out Obligation") that were sold in connection with our investment in VAA ..

On November 17, 2021 , we entered into a Major Decision with Macquarie to engage a broker and initiate a sale of all the properties held by VAA, which are listed in Item 2.

Properties as Joint Venture properties.

In connection with the sale, VAA will distribute seven of its existing properties to us (referred to herein as the "Holdback Properties") and we in turn, will contribute one of our properties ("Contributed Property") into the portfolio offered for sale to third-parties.

The sales price for the Holdback Properties and Contributed Property will be the estimated value of these properties as stated in the agreement, multiplied by the ratio of the actual sales price of the portion of the VAA Portfolio sold to a third party to the estimated value of the those properties that were provided in the agreement.

Each of the properties in the VAA Portfolio is appraised on an annual basis as part of our filing requirement with the TASE.

As of December 31, 2021, the fair value of the VAA Portfolio, based on these appraisals was approximately $1.4 billion.

The appraised value reflect an aggregate of individual property appraised value and does not reflect a premium that is sometimes offered in a portfolio sale.

These values reflects a compression of cap rates for multifamily properties during the last year.

However, there can be no assurances that these values will be realized.

The Major Decision agreement will expire on August 1, 2022, if the VAA Portfolio has not been sold.

Our ownership interest in VAA is held by SPC, and is therefore subject to the bond covenants of the three series of bonds that have been issued by SPC.

These provisions include restrictions on the distribution of cash from SPC (See Note 12 - Bonds Payable in our consolidated financial statements).

Critical Accounting Policies

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Some of these estimates and assumptions include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, the allocation of purchase price between tangible and intangible assets, capitalization of costs and fair value measurements.

Our significant accounting policies are described in more detail in Note 2—Summary of Significant Accounting Policies in our notes to the consolidated financial statements.

Our significant

accounting policies are described in more detail in Note 2—Summary of Significant Accounting Policies in our notes to the consolidated financial statements.

However, the following policies are deemed to be critical.

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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.

These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date that is other than in a forced or liquidation sale, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy.

The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.

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For the comparison of the year ended December 31, 2021 to the year ended December 31, 2020 , the Lease-up Properties are Forest Grove, Parc at Denham Springs Phase II and Sugar Mill Phase III;

and the Disposition Properties are Bridge View Plaza, Farnham Park and Villager.

The following table shows the total number of income-producing properties, and other key financial measures as of December 31, 2020 and 2019:

and the Disposition Properties are 600 Las Colinas , Overlook at Allensville Phase II, Bridge View Plaza, Farnham Park and Villager.

The following table provides a summary of the results of operations of 2021 and 2020:

For the Years Ended December 31,

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Comparison of the year ended December 31, 2021 to the year ended December 31, 2020:

Our $33.0 million increase in net income during the year ended December 31, 2020 is primarily attributed to the following:

• The $1.5 million increase in operating profits in our multifamily segment is primarily due a $2.1 million increase at our Lease-Up Properties offset in part by a decrease at our Disposition Properties.

The increase in profit at our Lease-Up Properties is due to an increase in occupancy at Overlook at Allenville Phase II, Parc at Denham Springs Phase II and Forest Grove in 2020.

• The $5.0 million increase in operating profits in our commercial segment is primarily due to a $6.0 million lease termination payment at Browning Place offset in part by a decrease in rental revenue at our Same Properties due to a decline in occupancy.

Our $4.8 million decrease in net income in 2021 is primarily attributed to the following:

• The $10.7 million decrease in operating profits in our commercial segment is attributed a decrease of $8.1 million from the Same Properties and $1.9 million from the Disposition Properties .

The decrease at the Same Properties is primarily due to a $5.9 million lease termination payment at Browning Place in 2020 and a decline in occupancy.

The lease termination payment relates to a former tenant that has been replaced by a new tenant at increased rents.

• The $5.2 million loss on extinguishment of debt in 2019 is due to the early extinguishment of our mortgage note payable on Browning Place (See "Financing Activities" in Management's Overview).

• The $21.7 million increase in gain on sale of assets is due to an increase of $10.3 million sales of land;

the sale of Bridge View Plaza, Farnham Park and Villager in 2020 (See "Acquisitions and Dispositions" in Management's Overview);

and the recognition of $3.0 million in gain in 2020 from sales that had been previously deferred.

• The $9.9 million increase in general, administrative and advisory expenses is primarily due to a an increase in advisory fees related to the sale of 600 Las Colinas , the refinance of Villas at Bon Secour ( See "Acquisitions and Dispositions" and "Financing Activities " in Management's Overview), and legal costs associated with the Clapper litigation and the VAA Earn Out arbitration.

• The decrease in interest expense, net is primarily due to the repayment of the loan on 600 Las Colinas (See "Acquisitions and Dispositions" and "Financing Activities" in Management's Overview) and the repayment of other notes payable in 2021.

• The decrease in loss on foreign currency transactions is due to the decrease in the amount of bonds payable outstanding during 2020 in comparison to 2021 , offset in part by the continued decrease in the value of the dollar in comparison to the New Israel Shekel in 2021 .

• The $1.5 million loss on extinguishment of debt in 2021 is due to the early extinguishment of our mortgage note payable on 600 Las Colinas and Villas at Bon Secour (See "Financing Activities" in Management's Overview).

• The $12.2 million decrease on gain on sale or remeasurement of assets is primarily due to the $29.6 million charge from the remeasurement of the Earn Out Obligation (See "Acquisitions and Dispositions" in Management's Overview) and a $6.7 million decrease in gain on sale of land in 2021 , offset in part by a $28.0 million increase gain on sale of various commercial and multifamily properties in 2021 (See "Acquisitions and Dispositions" in Management's Overview).

• The $15.0 million increase of income (loss) from joint ventures is due to the increased in occupancy of the various lease-up properties at VAA.

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and fund possible property acquisitions.

We anticipates that our cash and cash equivalents as of December 31, 2020, along with cash that will be generated in 2021 from notes and interest receivables, will be sufficient to meet all of our cash requirements.

We anticipates that our cash, cash equivalents and short-term investments as of December 31, 2021, along with cash that will be generated in 2022 from notes and interest receivables, will be sufficient to meet all of our cash requirements.

We intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet our liquidity requirements.

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2021 2020 Incr /(Decr)

Net cash provided by (used in) operating activities $ 3,498 $ (40,641) $ 44,139

Net cash provided by (used in) investing activities $ 4,196 $ (3,705) $ 7,901

Net cash (used in) provided by financing activities $ (3,985) $ 21,042 $ (25,027)

The increase in cash from operating activities is primarily due to the $45.9 million decrease in receivable from related parties in 2019.

The increase in cash provided by investing activities is primarily due to a $16.2 million decrease in development and renovation of real estate and a $12.4 million increase in proceeds from sale of assets offset in part by a $11.6 million decrease in originations and advances on notes receivable and a $9.4 million decrease in collection of notes receivable.

The increase in cash used in financing activities is primarily due to a $73.1 million decrease in proceeds from mortgages, notes and bonds payable offset in part by a $42.0 million decrease in payments of mortgages, notes and bonds payable.

The decrease in proceeds and payment on mortgage, notes and bonds payable is due to the refinancing of Browning Place in 2019 (See " Financing Activities " in Management's Overview ).

Net cash (used in) provided by operating activities $ (11,523) $ 3,498 $ (15,021)

Net cash provided by investing activities $ 100,822 $ 4,196 $ 96,626

Net cash used in financing activities $ (103,585) $ (3,985) $ (99,600)

The decrease in cash from operating activities is primarily due to the $18.6 million decrease in receivable from related parties in 2019.

The increase in cash provided by investing activities is primarily due to a $64.6 million increase in proceeds from sale of assets, a $28.0 million decrease in originations and advances on notes receivable, a $9.9 million increase in collection of notes

receivable and a $9.4 million decrease in development and renovation of real estate.

The increase in proceeds from sale of assets is primarily due to the sale of 600 Las Colinas in 2021 (See " Acquisitions and Dispositions " in Management's Overview ).

The increase in cash used in financing activities is primarily due to a $85.5 million increase in payments of mortgages, notes and bonds payable and $10.7 million decrease in proceeds from mortgages, notes and bonds payable.

The increase in payments of mortgages, notes and bonds payable is due to the pay off of the loan on 600 Las Colinas in 2021, the refinancing of Villas at Bon Secour in 2021 (See " Financing Activities" in Management's Overview ), and a $34.1 million increase in payments on the bonds payable.

Funds From Operations ("FFO")

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We believe that such a presentation also provides investors with a meaningful measure of our operating results in comparison to the operating results of other real estate companies.

In addition, we believe that FFO excluding gain (loss) from foreign currency transactions

provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results.

In addition, we believe that FFO excluding gain (loss) from foreign currency transactions provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results.

We believe that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs.

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We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.

The following reconciles our net income attributable to FFO and FFO-basic and diluted, excluding (loss) gain from foreign currency transactions for the years ended December 31, 2020, 2019 and 2018 (dollars and shares in thousands):

The following reconciles our net income attributable to FFO and FFO-basic and diluted, excluding loss from foreign currency transactions and loss on extinguishment of debt for the years ended December 31, 2021, 2020 and 2019 (dollars and shares in thousands):

For the Year Ended

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Loss on extinguishment of debt 1,451 — 5,219

Loss (gain) on foreign currency transaction 13,378 15,108 (12,399)

Loss on foreign currency transactions 6,175 13,378 15,108

FFO-adjusted $ 26,445 $ 36,734 $ 38,268

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis