What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-03-29 compared with 2021-03-26 · 178 added, 209 removed, 734 unchanged (35% of the section changed)

4 unchanged sentences

Financial Statements

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID 782 )

Consolidated Balance Sheets at December 31, 2021 and 2020

57 unchanged sentences

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.

During 2021, the Company recognized office rental revenues and tenant recoveries of $23.3 million and deferred rent receivables of $2.0 million at December 31, 2021.

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.

3 unchanged sentences

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

In addition, we tested the completeness and accuracy of the data that was used in management’s straight-line rent and deferred rent receivable calculation.

Emphasis of Liquidity

14 unchanged sentences

Real estate $ 296,363 $ 377,383

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 50,748 36,814

Restricted cash 21,986 50,206

Short-term investments 16,001 —

Notes receivable (including $ 75,872 and $ 69,518 at December 31, 2021 and 2020, respectively, from related parties)

136,607 130,626

Investment in unconsolidated joint ventures 61,621 60,425

Receivable from related parties 100,599 129,335

Other assets 80,975 62,802

Other assets (including $ 4,535 and 4,480 at December 31, 2021 and 2020, respectively, from related parties)

86,644 80,975

Total assets $ 770,569 $ 865,764

12 unchanged sentences

Treasury stock at cost, — shares

( 2 ) ( 6,395 )

Additional paid-in capital 62,090 62,092

21 unchanged sentences

Total operating expenses 62,657 59,138 59,378

Net operating (loss) income ( 112 ) ( 390 ) 42,878

Net operating loss ( 20,618 ) ( 112 ) ( 390 )

Interest income (including $ 19,799 , $ 19,515 and $ 23,670 for 2021, 2020 and 2019, respectively, from related parties)

2 unchanged sentences

( 29,080 ) ( 35,004 ) ( 39,860 )

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

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

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

Equity in (loss) income from unconsolidated joint ventures ( 379 ) ( 2,313 ) 1,513

Equity in income (loss) from unconsolidated joint ventures 14,634 ( 379 ) ( 2,313 )

Gain on sale or write-down of assets 24,647 36,895 15,192

2 unchanged sentences

Net (income ) loss attributable to noncontrolling interest ( 3,098 ) ( 2,237 ) 5,785

Net (loss) income attributable to the Company 9,030 ( 15,958 ) 173,699

Net income (loss) attributable to the Company 3,347 9,030 ( 15,958 )

Preferred dividend — — ( 1 )

9 unchanged sentences

CONSOLIDATED STATEMENT OF EQUITY

For the Three Years Ended December 31, 2020

(Dollars in thousands, except share amounts)

6 unchanged sentences

Net income — — — ( 15,958 ) ( 15,958 ) ( 5,785 ) ( 21,743 )

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)

— — — (1) — (1) — (1)

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

Net loss — — — — 9,030 9,030 2,237 11,267

Issuance of common shares — — — 3,747 — 3,747 — 3,747

3 unchanged sentences

Balance, December 31, 2020 1,801 162 ( 2 ) 62,092 172,738 236,791 93,615 330,406

Net income — — — — 3,347 3,347 3,098 6,445

Cancellation of treasury shares — — 2 ( 2 ) — — — —

Balance, December 31, 2021 $ 1,801 $ 162 $ — $ 62,090 $ 176,085 $ 240,138 $ 96,713 $ 336,851

The accompanying notes are an integral part of these consolidated financial statements.

6 unchanged sentences

Net income (loss) $ 6,445 $ 11,267 $ ( 21,743 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Gain on sale or write down of assets ( 24,647 ) ( 36,895 ) ( 15,192 )

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

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

Loss on debt extinguishment 1,451 — 5,219

Depreciation and amortization 15,029 18,579 15,588

Provision for doubtful accounts 984 — —

(Recovery) provision for doubtful accounts ( 1,326 ) 984 —

Equity in earnings from unconsolidated joint ventures ( 14,634 ) 379 2,313

5 unchanged sentences

Accounts payable and other liabilities ( 2,564 ) ( 1,668 ) ( 8,895 )

Net cash provided by (used in) operating activities 3,498 ( 40,641 ) ( 172,332 )

Net cash (used in) provided by operating activities ( 11,523 ) 3,498 ( 40,641 )

Cash Flow From Investing Activities:

1 unchanged sentence

Originations and advances on notes receivable ( 4,968 ) ( 33,015 ) ( 21,434 )

Purchase of short-term investments ( 16,000 ) — —

Acquisition of real estate — — ( 3,422 )

2 unchanged sentences

Proceeds from sale of assets 105,547 40,982 28,622

Contribution to unconsolidated joint venture ( 411 ) — —

Distribution from unconsolidated joint ventures 7,430 8,086 6,504

8 unchanged sentences

Net cash (used in) provided by financing activities ( 103,585 ) ( 3,985 ) 21,042

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

Net (decrease) increase in cash and cash equivalents ( 14,286 ) 3,709 ( 23,304 )

Cash and cash equivalents, beginning of year 87,020 83,311 106,615

Cash and cash equivalents, end of year $ 72,734 $ 87,020 $ 83,311

The accompanying notes are an integral part of these consolidated financial statements.

3 unchanged sentences

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”.

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ARL”.

Over 80 % of our stock is owned by related party entities.

5 unchanged sentences

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”.

("TCI") and substantially all of our operations are conducted through TCI, whose common stock is listed 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;

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, 2021, our property portfolio consisted of:

● Five commercial properties, consisting of four office buildings and 1 retail property, comprising in aggregate of approximately 1,063,515 square feet;

● Nine multifamily apartment communities owned directly by us, comprising in 1,492 units, excluding apartments being developed;

● Approximately 1,875 acres of developed and undeveloped land;

● Fifty-one multifamily apartment communities totaling 10,137 units owned by our 50 % owned investment in VAA.

● Fifty-two multifamily apartment communities, totaling 10,281 units, owned by our joint venture.

Our day to day operations are managed by Pillar Income Asset Management, Inc.

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”).

All of our employees are Pillar employees.Four of our commercial properties are managed by Regis Realty Prime, LLC (“Regis”).

Regis provides leasing, construction management and brokerage services.

7 unchanged sentences

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

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 method of accounting.

Accordingly, we include our share of the net earnings or losses of these entities in our results of operations.

AMERICAN REALTY INVESTORS, INC.

1 unchanged sentence

(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

30 unchanged sentences

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.

Fair value represents 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.

In determining fair value we apply the following hierarchy:

56 unchanged sentences

Net (income ) loss attributable to noncontrolling interest ( 3,098 ) ( 2,237 ) 5,785

Net (loss) income attributable to the Company 9,030 ( 15,958 ) 173,699

Net income (loss) attributable to the Company 3,347 9,030 ( 15,958 )

Preferred dividend — — ( 1 )

Net income (loss) applicable to common shares $ 3,347 $ 9,030 $ ( 15,959 )

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

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Weighted-average common shares outstanding-basic and diluted 16,152 16,046 15,997

EPS - attributable to common shares basic and diluted $ 0.21 $ 0.56 $ ( 1.00 )

Supplemental Cash Flows Information

3 unchanged sentences

Cash paid for interest $ 28,891 $ 31,453 $ 38,904

Cash - Beginning of period

Cash - beginning of year

Cash and cash equivalents $ 36,814 $ 51,228 $ 36,428

1 unchanged sentence

$ 87,020 $ 83,311 $ 106,615

Cash - End of Period

Cash - end of year

Cash and cash equivalents $ 50,748 $ 36,814 $ 51,228

9 unchanged sentences

$ 118,900 $ 33,415 $ 74,718

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The following is a schedule of noncash investing and financing activities:

1 unchanged sentence

2021 2020 2019

Assets contributed to joint venture $ 18,608 $ — $ —

Liabilities assumed by joint venture $ 15,606 $ — $ —

Notes receivable received in exchange for related party receivable $ 9,259 $ — $ —

Distribution from joint venture applied to Earn Out Obligation $ 5,441 $ — $ —

Property acquired in exchange for note payable $ — $ 3,350 $ 1,155

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 $ —

Property acquired in exchange for note receivable $ — $ — $ 1,800

Operating Segments

1 unchanged sentence

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.

(i) the acquisition, development, ownership and management of multifamily properties ("Residential Segment") and (ii) the acquisition, ownership and management of commercial real estate properties ("Commercial Segment").

The services for our segments include property rentals 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.

1 unchanged sentence

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.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The following table presents our profit by reportable segment:

1 unchanged sentence

2021 2020 2019

Multifamily Segment

Residential Segment

Revenue $ 14,495 $ 14,686 $ 13,517

7 unchanged sentences

The following table reconciles our profit by reportable segment to net income (loss):

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

For the Years Ended December 31,

8 unchanged sentences

Interest Expense ( 29,080 ) ( 35,004 ) ( 39,860 )

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

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

Los on extinguishment of debt ( 1,451 ) — ( 5,219 )

Equity in (loss) income from unconsolidated joint ventures ( 379 ) ( 2,313 ) 1,513

Equity in income (loss) from unconsolidated joint ventures 14,634 ( 379 ) ( 2,313 )

Gain on sale or write-down of assets 24,647 36,895 15,192

9 unchanged sentences

Total assets $ 770,569 $ 865,764

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Lease Revenue

9 unchanged sentences

Total rental revenue $ 37,808 $ 51,909 $ 46,231

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:

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The following table summarizes the future rental payments to us from under non-cancelable leases, which excludes multifamily leases, which typically have a term of one-year or less:

2022 $ 13,368

11 unchanged sentences

Total real estate $ 296,363 $ 377,383

Our property held for sale consists of land parcels at Mercer Crossing that are currently under contract for sale.

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.

Our property held for sale consists of land parcels at Mercer Crossing that are currently under contract for sale and our construction in progress consists of development of Windmill Farms.

Gain on sale or write-down of assets, net consists of the following:

2 unchanged sentences

Land(1) $ 16,645 $ 25,171 $ 14,889

Multifamily(2) 3,702 ( 80 ) 154,126

Commercial(3) 4,610 — —

Residential properties(2) 10,405 3,702 ( 80 )

Commercial properties(3) 27,196 4,610 —

Other(4) ( 29,599 ) 3,412 383

$ 24,647 $ 36,895 $ 15,192

(1) Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings.

(1) Includes the gain sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings.

(2) Includes the gain from the sale of a 50 % ownership interest in Overlook at Allensville Phase II (See Note 9 – Investment in Unconsolidated Joint Ventures) and the gains on the sale of various multifamily properties that had previously been deferred (See Note 16 – Deferred Income).

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(3) On August 26, 2021, we sold 600 Las Colinas, a 512,173 square foot office building in Irving, Texas for $ 74,750 , resulting in gain on sale of $ 27,270 .

We used the proceeds to pay down the mortgage note payable on the property (See Note 10 - Mortgages and Other Notes Payable) and for general corporate purposes.

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 $ 898 .

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.

The sales price was funded by the issuance of a $ 1,761 note receivable and the assumption of a $ 665 mortgage note payable on the property.

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 sale of $ 2,684 .

The sales price was funded by cash payment of $ 4,215 and the assumption of the $ 9,085 mortgage note payable on the property.

(4) Includes a $ 29,600 loss on the remeasurement of the Earn Out Obligation in connection with our investment in VAA (See Note 9 - Investment in Unconsolidated Joint Ventures).

Short-term Investments

The Company has an investment in variable denominated floating rate notes with a a financial institution.

The notes are have no stated maturity and are subject to immediate repayment at the Company’s option.

At December 31, 2021, the interest rate on the notes was 1.15 %.

AMERICAN REALTY INVESTORS, INC.

11 unchanged sentences

Bellwether Ridge(1) 3,967 3,858 5.00 % 11/1/2026

Centura Towers — 19,845 2.28 % 12/28/2022

Forest Pines(1) 6,472 2,869 5.00 % 11/1/2022

JEM Holdings, Inc.

— 300 6.00 % 7/1/2016

Lake Wales 3,000 3,000 9.50 % 6/30/2026

3 unchanged sentences

1,728 1,728 9.50 % 6/30/2026

Oulad-Chikh Family Trust — 174 8.00 % 3/1/2021

Parc at Ingleside(1) 3,700 2,523 5.00 % 11/1/2026

Parc at Opelika(1) 2,305 — 10.00 % 1/13/2023

Parc at Windmill Farms(1) 7,830 7,803 5.00 % 11/1/2022

8 unchanged sentences

Steeple Crest(1) 6,498 6,498 5.00 % 8/1/2026

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

Unified Housing Foundation(2)(3) 2,881 2,880 12.00 % 6/30/2023

Unified Housing Foundation(2)(3) 212 212 12.00 % 6/30/2023

Unified Housing Foundation(2)(3) 6,831 6,831 12.00 % 6/30/2023

Unified Housing Foundation(2)(3) 10,401 10,896 12.00 % 6/30/2023

Unified Housing Foundation(2)(3) 10,096 10,096 12.00 % 3/31/2022

Unified Housing Foundation(2)(3) 6,990 6,990 12.00 % 3/31/2023

Unified Housing Foundation(2)(3) 3,615 3,615 12.00 % 5/31/2023

Unified Housing Foundation(2)(3) 24,053 26,209 12.00 % 12/31/2032

Unified Housing Foundation(2)(3) 6,521 — 12.00 % 3/31/2024

Unified Housing Foundation(2)(3) 1,549 — 12.00 % 4/30/2024

Unified Housing Foundation(2)(3) 183 — 12.00 % 6/30/2024

$ 136,607 $ 130,626

7 unchanged sentences

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”).

On November 16, 2018 , we formed Victory Abode Apartments, LLC ("VAA"), a joint venture with the Macquarie Group (“Macquarie”).

VAA was formed as a result of a sale of the 50 % ownership interest in 51 multifamily properties owned by us in exchange for a 50 % voting interest / 49 % profit participation interest ("Class A interest") in VAA a nd a note payable (“Mezzanine Loan”).

Concurrent with the Contributi on, VAA issued Class B interests with a 2 % profits participation interest and no voting rights to Daniel J.

2 unchanged sentences

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.

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.In connection with the formation of VAA, ten out of the initial properties were subject to an earn-out provision ("Earn Out") that provides for a remeasurement of value after a two-year period following the completion of construction.

Upon the formation of VAA, we recorded a liability ("Earn Out Obligation") for the $ 10,000 advance on the Earn Out that we received from Macquarie.

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 $ 2,551 resulting in gain on sale of $ 1,417 .

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

On July 13, 2021, we received the arbitration result of a dispute regarding the measurement of the Earn Out Obligation.

Our position and claims were declined, and the position of Macquarie was fully accepted.

As a result, we are required to pay approximately $ 39,600 to Macquarie to satisfy the Earn Out Obligation, and therefore, recorded a charge of $ 29,600 during the year ended December 31, 2021 (See Note 7 – Real Estate Activity).

In accordance with the joint venture operating agreement, the Earn Out Obligation will be paid from our share of future distributions from VAA, which generally occur each six months .

In July 2021, our $ 5,441 distribution from VAA was paid directly to Macquarie as a reduction of the Earn Out Obligation.

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 the VAA.

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 remaining forty-five properties as referred to herein as the VAA Portfolio.

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 VAA Portfolio over the estimated value of the portfolio as stated in the agreement.

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

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.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The following is a summary of our investment in unconsolidated joint ventures:

12 unchanged sentences

Our share of partners' capital $ 80,602 $ 93,334

Our share of Mezzanine note payablestr 119,939 120,211

Our share of Mezzanine note payable and accrued interest 125,306 123,752

Basis adjustment (2) ( 144,287 ) ( 156,661 )

2 unchanged sentences

(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.

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:

21 unchanged sentences

770 South Post Oak 11,635 11,871 4.40 % 6/1/2025

Bridge View Plaza(1) — 3,824 7.75 % 11/1/2020

Athens(2) 1,155 1,155 4.00 % 8/28/2022

Chelsea 8,037 8,194 3.40 % 12/1/2050

1 unchanged sentence

HSW Partners(3) — 17,790 9.50 % 6/17/2021

Farnham Park(4) — 9,144 3.39 % 12/1/2050

Forest Grove(4) 7,263 7,333 3.75 % 5/5/2024

Landing Bayou 14,407 14,643 3.50 % 9/1/2053

Athens(6) 1,155 1,155 5.90 % 8/28/2022

Legacy at Pleasant Grove 13,352 13,653 3.60 % 4/1/2048

1 unchanged sentence

New Concept Energy 3,542 3,542 6.00 % 9/30/2022

Overlook at Allenville Phase II 15,621 15,798 3.80 % 5/1/2059

Overlook at Allensville Phase II(5) — 15,621 3.80 % 5/1/2059

Parc at Denham Springs Phase II 15,962 16,128 4.10 % 2/1/2060

RCM HC Enterprises(3) 5,086 — 9.50 % 12/17/2026

Stanford Center(6) 38,979 39,093 6.00 % 2/26/2022

1 unchanged sentence

Toulon(7) 13,697 13,975 3.20 % 12/1/2051

Villager(8) — 556 2.50 % 3/1/2043

Villas at Bon Secour(8) 19,492 10,280 3.08 % 9/1/2031

2 unchanged sentences

$ 183,392 $ 242,711

(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 %.

(1) On August 26, 2021, we paid off the loan in connection with the sale of the underlying property (See Note 7 - Real Estate Activity).

(2) 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 %.

(3) On June 4, 2021, the lender assumed the remaining $ 1,986 balance of our loan from HSW Partners and extended the maturity to December 17, 2026.

(4) The loan bears interest at prime rate plus 0.5 %.

(5) On March 30, 2021 , the loan was assumed by VAA in connection with our contribution of the underlying property to the joint venture (See Note 9 – Investment in Unconsolidated Joint Ventures).

(6) On March 4, 2021, the loan was extended to February 28, 2023 at an interest rate of 5 %.

(7) On January 14, 2022, we paid off the loan in connection with the sale of the underlying property (See Note 20 - Subsequent Events).

(8) On August 25, 2021, we replaced the existing loan on the property with a new $ 20,015 loan that bears interest at 3.08 % and matures on September 1, 2031.

(9) On March 4, 2021, the loan was extended to February 28, 2023 at an interest rate of 5 %.

Interest payable at December 31, 2021 and 2020 , was $ 1,147 and $ 1,123 , respectively.

We capitalized interest of $ 3,733 and $ 2,305 during the years ended December 31, 2021 and 2020 , respectively.

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.

AMERICAN REALTY INVESTORS, INC.

1 unchanged sentence

(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, 2021 are as follows:

5 unchanged sentences

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.

In connection with the Bonds, we incurred a loss on foreign currency transactions of $ 6,175 , $ 13,378 , and $ 15,108 , for the years ended December 31, 2021 , 2020 and 2019, respectively.

We have a hedging agreement that effectively prevents the exchange rate for the NIS to the U.S.

Dollar from falling below 2.7 .

The outstanding balance of our Bonds at December 31, 2021 and 2020 is as follows:

Bond Issuance 2020 2019 Interest Rate Maturity

December 31, Interest Rate

Bond Issuance 2021 2020 Maturity

Series A Bonds(1)(2) 65,563 95,133 7.30 % 7/31/23

4 unchanged sentences

189,452 237,888

(1) On November 30, 2020, we issued $ 19,693 in additional bonds for $ 18,822 in net proceeds.

(1) The bonds are collateralized by the assets of SPC.

(2) The bonds are collateralized by a trust deed in Browning Place, a 625,297 square foot office building in Farmers Branch, Texas.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The aggregate maturities of our Bonds are as follows:

2022 $ 46,286

The Bonds include a number of covenants, including restrictions on the amount of cash that can distributed from SPC.

As of December 31, 2021, we were in compliance with our bond covenants.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Related Party Transactions

2 unchanged sentences

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 and Regis are wholly owned by an affiliates of the MRHI, which owns appro ximately 90.8 % of our common shares.

Pillar is compensated for advisory services in accordance with an agreement.

4 unchanged sentences

General and administrative expense includes $ 4,399 , $ 3,869 and $ 4,429 for the years ended December 31, 2021, 2020 and 2019, 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.

Advisory fees paid to Pillar were $ 13,985 , $ 9,409 and $ 9,216 for the years ended December 31, 2021, 2020 and 2019, respectively.

Notes receivable are includes amounts held by UHF and Pillar (See Note 9 – Notes Receivable).

3 unchanged sentences

Related party receivables represents amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Noncontrolling Interests

The noncontrolling interest represents the third party ownership interest in TCI and Income Opportunity Realty Investors, Inc.

We owned 78.4 % of TCI and 81.1 % in in IOR during the years ended December 31, 2020.

We owned 78.4 % of TCI, which in turn owned 81.1 % in in IOR, during the years ended December 31, 2021, 2020 and 2019.

Stockholders Equity

Our decision to declare dividends on common stock are determined on an annual basis following the end of each year.

Our decision to declare dividends on common stock is 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 2021, 2020 , or 2019 .

2 unchanged sentences

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.

Dividends are

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

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.

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.

In previous years, we 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 was not met, and as such we deferred the gain recognition and accounted for the transaction by applying the finance, deposit, installment or cost recovery methods, as appropriate.

The gains on these transactions have been deferred until the properties are sold to a non-related third party.

7 unchanged sentences

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.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The (benefit) expense for income taxes consists of:

6 unchanged sentences

Total tax (benefit) expense $ ( 1,067 ) $ ( 147 ) $ —

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

The reconciliation between our effective tax rate on income from operations and the statutory rate is as follows:

3 unchanged sentences

State and local income taxes net of federal tax (benefit) expense 341 ( 147 ) —

AMT refund ( 1,434 ) — —

Permanent tax differences ( 1,837 ) ( 1,846 ) ( 2,499 )

11 unchanged sentences

With few exceptions, as of December 31, 2021, 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.

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,

December 31, 2021

Deferred tax assets:

7 unchanged sentences

Total net deferred tax assets $ — $ —

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.

2 unchanged sentences

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.

AMERICAN REALTY INVESTORS, INC.

NOTES TO FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

Commitments and Contingencies

We believes that we will generate excess cash from property operations in the next twelve months;

We believe 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.

1 unchanged sentence

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.

The guarantee was removed on January 29, 2021, concurrent with the repayment of the loan by UHF.

We are are also a guarantor on the mortgage notes payable on two properties in that are owned by VAA (See Note 10 - Investment in Unconsolidated Joint Ventures) and four that are owned directly by us (See Note 11 - Mortgages and Other Notes Payable).

We were a defendant in litigation with David Clapper and related entities (collectively, "Clapper”) regarding a multifamily property transaction that occurred in 1988.

The litigation led to a substantial judgment against our affiliate and Clapper subsequently sued numerous other entities including us in Federal Court to collect that judgment.

The case was tried to a jury in May 2021.

The jury found the defendants owed Clapper nothing and the Court issued a take nothing judgment.

Clapper subsequently filed and appeal to the US Fifth Circuit Court of Appeals.

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.

1 unchanged sentence

We intend to vigorously defend against the allegations.

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.

The trial for this matter is scheduled for November 2022.

Quarterly Results of Operations

6 unchanged sentences

Net income (loss) attributable to the Company 18,068 ( 27,328 ) 19,411 ( 6,804 )

Net income (loss) attributable to the Company per share - basic and diluted $ 0.18 $ ( 0.14 ) $ 0.50 $ 0.02

EPS - basic and diluted $ 1.12 $ ( 1.69 ) $ 1.20 $ ( 0.42 )

2020 Quarter Ended

3 unchanged sentences

Net (loss) income attributable to the Company 2,946 ( 2,306 ) 7,987 403

Net (loss) income attributable to the Company per share - basic and diluted $ ( 0.38 ) $ ( 0.17 ) $ ( 0.47 ) $ 0.03

EPS - basic and diluted $ 0.18 $ ( 0.14 ) $ 0.50 $ 0.02

Subsequent Events

On January 14, 2022, we sold Toulon, a 240 unit multifamily property property in Gautier, Mississippi for $ 26,750 .

The proceeds were used to pay off the mortgage note payable on the property and for general corporate purposes.

The date to which events occurring after December 31, 2021, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 28, 2021, which is the date of which the financial statements were available to be issued.

16 unchanged sentences

Legacy at Pleasant Grove 13,352 2,005 18,109 57 2,033 18,138 20,171 3,237 2006 2018

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 15,962 1,505 16,975 — 1,505 16,975 18,480 873 2010 2009

4 unchanged sentences

111,256 14,437 133,448 ( 5,402 ) 14,843 127,640 142,483 16,407

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 —

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 11,635 1,763 16,312 672 1,763 16,984 18,747 3,037 1970 2015

36 unchanged sentences

Parc at Ingleside 5.00 % 11/1/2026 No payments until maturity or conversion 25,201 3,700 3,700

Parc at Opelika 10.00 % 1/13/2023 No payments until maturity or conversion 23,661 2,305 2,305

Parc at Windmill Farms 5.00 % 11/1/2022 No payments until maturity or conversion 35,524 7,830 7,830

12 unchanged sentences

Riverview on the Park Land, LLC 9.50 % 6/30/2026 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

3 unchanged sentences

12.00 % 3/31/2024 Payments from excess property cash flows — 813 813

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

Unified Housing Foundation 12.00 % 6/30/2023 Payments from excess property cash flows — 2,881 2,881

Unified Housing Foundation 12.00 % 6/30/2023 Payments from excess property cash flows — 212 212

Unified Housing Foundation 12.00 % 6/30/2023 Payments from excess property cash flows — 6,831 6,831

Unified Housing Foundation 12.00 % 6/30/2023 Payments from excess property cash flows — 10,401 10,401

Unified Housing Foundation 12.00 % 3/31/2022 Payments from excess property cash flows — 10,096 10,096

AMERICAN REALTY INVESTORS, INC.

3 unchanged sentences

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

Unified Housing Foundation 12.00 % 3/31/2023 Payments from excess property cash flows — 6,990 6,990

Unified Housing Foundation 12.00 % 5/31/2023 Payments from excess property cash flows — 3,615 3,615

Unified Housing Foundation 12.00 % 12/31/2032 Payments from excess property cash flows 96,929 24,053 24,053

Unified Housing Foundation 12.00 % 3/31/2024 Payments from excess property cash flows — 6,521 6,521

Unified Housing Foundation 12.00 % 4/30/2024 Payments from excess property cash flows — 1,549 1,549

Unified Housing Foundation 12.00 % 6/30/2024 Payments from excess property cash flows — 183 183

96,929 74,145 74,145

12 unchanged sentences

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 7A. Quantitative and Qualitative Disclosures About Market Risk