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 (PCAOB ID 782 ) 27 Consolidated Balance Sheets at December 31, 2021 and 2020 30 Consolidated Statements of Operations for the Years Ended December 31, 2021, 2020 and 2019 31 Consolidated Statements of Equity for the Years Ended December 31, 2021, 2020 and 2019 32 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019 33 Notes to Consolidated Financial Statements 34 Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation 52 Schedule IV—Mortgage Loan Receivables on Real Estate 54 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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 $296.4 million as of December 31, 2021. 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, 2021, the Company had notes receivable in the amount of $136.6 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 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. 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 completeness and accuracy of the data that was used in management’s straight-line rent and deferred rent receivable calculation. 28 Emphasis of Liquidity As described in the Note 18, 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 28, 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, 2021 2020 Assets Real estate $ 296,363 $ 377,383 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 (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 Liabilities and Equity Liabilities: Mortgages and other notes payable $ 183,392 $ 242,711 Bonds payable 189,452 237,888 Accounts payable and other liabilities (including $ 616 and $ 930 at December 31, 2021 and 2020, respectively, to related parties) 44,518 27,299 Interest payable 6,565 7,639 Deferred revenue 9,791 19,821 Total liabilities 433,718 535,358 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 1,801 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 16,152,043 shares issued and 16,152,043 outstanding 162 162 Treasury stock at cost, — shares — ( 2 ) Additional paid-in capital 62,090 62,092 Retained earnings 176,085 172,738 Total shareholders’ equity 240,138 236,791 Noncontrolling interest 96,713 93,615 Total equity 336,851 330,406 Total liabilities and equity $ 770,569 $ 865,764 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, 2021 2020 2019 Revenues: Rental revenues (including $ 944 , $ 1,083 and $ 841 for 2021, 2020 and 2019, respectively, from related parties) $ 37,808 $ 51,909 $ 46,231 Other income 4,231 7,117 12,757 Total revenue 42,039 59,026 58,988 Expenses: Property operating expenses (including $ 889 , $ 990 and $ 991 for 2021, 2020 and 2019, respectively, from related parties) 20,860 24,360 25,694 Depreciation and amortization 11,870 14,755 13,379 General and administrative (including $ 4,399 , $ 3,869 and $ 4,429 for 2021, 2020 and 2019, respectively, from related parties) 15,942 10,614 11,089 Advisory fee to related party 13,985 9,409 9,216 Total operating expenses 62,657 59,138 59,378 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) 23,421 23,098 25,955 Interest expense (including $ 5,661 , $ 6,632 and $ 9,282 for 2021, 12/31/2020 and 2019, respectively, from related parties) ( 29,080 ) ( 35,004 ) ( 39,860 ) Loss on foreign currency transactions ( 6,175 ) ( 13,378 ) ( 15,108 ) Loss on extinguishment of debt ( 1,451 ) — ( 5,219 ) 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 Income tax provision 1,067 147 — Net income (loss) 6,445 11,267 ( 21,743 ) Net (income ) loss attributable to noncontrolling interest ( 3,098 ) ( 2,237 ) 5,785 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 ) Earnings per share - basic Basic $ 0.21 $ 0.56 $ ( 1.00 ) Diluted $ 0.21 $ 0.56 $ ( 1.00 ) Weighted average common shares used in computing earnings per share Basic 16,152,043 16,045,796 15,997,076 Diluted 16,152,043 16,045,796 15,997,076 The accompanying notes are an integral part of these consolidated financial statements. 31 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF EQUITY (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, 2019 $ 3,601 $ 164 $ ( 6,395 ) $ 81,289 $ 179,666 $ 258,325 $ 62,802 $ 321,127 Net income — — — ( 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 loss — — — — 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 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. 32 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the Years Ended December 31, 2021 2020 2019 Cash Flow From Operating Activities: Net income (loss) $ 6,445 $ 11,267 $ ( 21,743 ) 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 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 (Recovery) provision for doubtful accounts ( 1,326 ) 984 — Equity in earnings from unconsolidated joint ventures ( 14,634 ) 379 2,313 Distribution of income from unconsolidated joint ventures 3,157 1,782 — Changes in assets and liabilities, net of dispositions: Other assets ( 14,205 ) ( 3,450 ) 10,814 Related party receivables 18,246 ( 327 ) ( 46,191 ) Accrued interest payable ( 4,650 ) ( 531 ) 2,338 Accounts payable and other liabilities ( 2,564 ) ( 1,668 ) ( 8,895 ) Net cash (used in) provided by operating activities ( 11,523 ) 3,498 ( 40,641 ) Cash Flow From Investing Activities: Collection of notes receivable 18,171 8,251 19,755 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 ) Development and renovation of real estate ( 8,070 ) ( 17,505 ) ( 33,730 ) Deferred leasing costs ( 877 ) ( 2,603 ) 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 Net cash provided by (used in) by investing activities 100,822 4,196 ( 3,705 ) Cash Flow From Financing Activities: Proceeds from mortgages, other notes and bonds payable 20,015 30,727 103,800 Payments on mortgages, other notes and bonds payable ( 118,900 ) ( 33,415 ) ( 74,718 ) Debt extinguishment costs ( 4,086 ) — ( 3,799 ) Deferred financing costs ( 614 ) ( 1,297 ) ( 4,241 ) Repurchase of preferred stock — — — Preferred stock dividends — — — Net cash (used in) provided by financing activities ( 103,585 ) ( 3,985 ) 21,042 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. 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 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 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, 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; and ● 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. (“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 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. Our multifamily properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 13 – 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 method of accounting. Accordingly, we include our share of the net earnings or losses of these entities in our results of operations. 34 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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, 2021 or 2020. 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 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: 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 31, 2021 and 2020, 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, 2021, 2020 and 2019. 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 31, 2021. 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, 2021 2020 2019 Net income (loss) $ 6,445 $ 11,267 $ ( 21,743 ) Net (income ) loss attributable to noncontrolling interest ( 3,098 ) ( 2,237 ) 5,785 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 ) 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 ) 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, 2021 2020 2019 Cash paid for interest $ 28,891 $ 31,453 $ 38,904 Cash - beginning of year Cash and cash equivalents $ 36,814 $ 51,228 $ 36,428 Restricted cash 50,206 32,083 70,187 $ 87,020 $ 83,311 $ 106,615 Cash - end of year Cash and cash equivalents $ 50,748 $ 36,814 $ 51,228 Restricted cash 21,986 50,206 32,083 $ 72,734 $ 87,020 $ 83,311 Proceeds from mortgages, notes and bonds payable Mortgages and notes payable $ 20,015 $ 10,942 $ 25,675 Bonds payable — 19,785 78,125 $ 20,015 $ 30,727 $ 103,800 Payment of mortgages, notes and bonds payable Mortgages and notes payable $ 65,242 $ 13,823 $ 52,976 Bonds payable 53,658 19,592 21,742 $ 118,900 $ 33,415 $ 74,718 38 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: For the Years Ended December 31, 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 $ — Debt assumed in sale of properties $ — $ 8,238 $ — Property acquired in exchange for note receivable $ — $ — $ 1,800 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 ("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. 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. The following table presents our profit by reportable segment: For the Years Ended December 31, 2021 2020 2019 Residential Segment Revenue $ 14,495 $ 14,686 $ 13,517 Operating expenses ( 8,167 ) ( 8,482 ) ( 9,305 ) Profit from segment 6,328 6,204 4,212 Commercial Segment Revenue 23,313 37,223 32,714 Operating expenses ( 12,693 ) ( 15,878 ) ( 16,389 ) Profit from segment 10,620 21,345 16,325 Total profit from segments $ 16,948 $ 27,549 $ 20,537 The following table reconciles our profit by reportable segment to net income (loss): 39 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) For the Years Ended December 31, 2021 2020 2019 Segment operating income $ 16,948 $ 27,549 $ 20,537 Other non-segment items of income (expense) Depreciation and amortization ( 11,870 ) ( 14,755 ) ( 13,379 ) General and administrative ( 15,942 ) ( 10,614 ) ( 11,089 ) Advisory Fee ( 13,985 ) ( 9,409 ) ( 9,216 ) Other income 4,231 7,117 12,757 Interest Income 23,421 23,098 25,955 Interest Expense ( 29,080 ) ( 35,004 ) ( 39,860 ) Loss on foreign currency transactions ( 6,175 ) ( 13,378 ) ( 15,108 ) Los on extinguishment of debt ( 1,451 ) — ( 5,219 ) 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 Income tax provision 1,067 147 — Net income (loss) $ 6,445 $ 11,267 $ ( 21,743 ) The table below reconciles the segment information to the corresponding amounts in the consolidated balance sheets: December 31, 2021 2020 Segment assets $ 263,937 $ 342,965 Real estate 63,945 65,149 Investments in unconsolidated joint ventures 61,621 60,425 Notes receivable 136,607 130,626 Receivable from related parties 100,599 129,335 Other assets and receivables 143,860 137,264 Total assets $ 770,569 $ 865,764 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 31, 2021, 2020 and 2019: For the Year Ended December 31, 2021 2020 2019 Fixed component $ 35,555 $ 49,974 $ 43,749 Variable component 2,253 1,935 2,482 Total rental revenue $ 37,808 $ 51,909 $ 46,231 40 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: Year Amount 2022 $ 13,368 2023 9,128 2024 5,613 2025 5,200 2026 4,912 Thereafter 20,008 Total $ 58,229 7. Real Estate Activity At December 31, 2021 and 2020, our real estate investment is comprised of the following: December 31, 2021 2020 Land $ 67,348 $ 78,755 Building and improvements 219,327 297,644 Tenant improvements 21,364 30,935 Construction in progress 51,091 49,895 Total cost 359,130 457,229 Less accumulated deprecation ( 62,933 ) ( 82,418 ) Total real estate, net 296,197 374,811 Property held for sale 166 2,572 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 and our construction in progress consists of development of Windmill Farms. Gain on sale or write-down of assets, net consists of the following: For the Year Ended December 31, 2021 2020 2019 Land(1) $ 16,645 $ 25,171 $ 14,889 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 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). 41 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 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). 8. 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 %. 42 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 9. Notes Receivable The following table summarizes our notes receivables at December 31, 2021 and 2020: Carrying Value Interest Rate Maturity Date Borrower / Project 2021 2020 ABC Land and Development, Inc. $ 4,408 $ 4,408 9.50 % 6/30/2026 ABC Paradise, LLC 1,210 1,210 9.50 % 6/30/2026 Autumn Breeze(1) 2,486 1,867 5.00 % 7/1/2022 Bellwether Ridge(1) 3,967 3,858 5.00 % 11/1/2026 Forest Pines(1) 6,472 2,869 5.00 % 11/1/2022 Lake Wales 3,000 3,000 9.50 % 6/30/2026 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 % 6/30/2026 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 Phillips Foundation for Better Living, Inc.(2) — 61 12.00 % 3/31/2023 Phillips Foundation for Better Living, Inc.(2) 813 — 12.00 % 3/31/2024 Plum Tree(1) 1,537 857 5.00 % 4/26/2026 Riverview on the Park Land, LLC 1,045 1,045 9.50 % 6/30/2026 RNC Portfolio, Inc. — 8,853 5.00 % 9/1/2024 Spartan Land 5,907 5,907 12.00 % 1/16/2023 Spyglass of Ennis(1) 5,319 5,360 5.00 % 11/1/2022 Steeple Crest(1) 6,498 6,498 5.00 % 8/1/2026 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 (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) 10. Investment in Unconsolidated Joint Ventures 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. 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.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. 44 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: As of December 31, 2021 2020 Assets (1) Real estate 1,220,391 1,230,197 Other assets 127,464 113,537 Total assets $ 1,347,855 $ 1,343,734 Liabilities and Partners Capital (1) Mortgage notes payable 867,430 843,522 Mezzanine notes payable 242,942 239,878 Other liabilities 49,877 45,619 Our share of partners' capital 80,602 93,334 Outside partner's capital 107,004 121,381 Total liabilities and partners' capital $ 1,347,855 $ 1,343,734 Investment in unconsolidated joint ventures Our share of partners' capital $ 80,602 $ 93,334 Our share of Mezzanine note payable and accrued interest 125,306 123,752 Basis adjustment (2) ( 144,287 ) ( 156,661 ) Total investment in unconsolidated joint ventures $ 61,621 $ 60,425 (1) These amounts include the assets of $ 1,280,867 and $ 1,279,197 of VAA at December 31, 2021 and 2020, respectively, and liabilities of $ 1,137,273 and $ 1,106,231 of VAA at December 31, 2021 and 2020, 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. The following is a summary of our income (loss) from investments in unconsolidated joint ventures: For the Years Ended December 31, 2021 2020 2019 3/31/2024 Revenue (1) Rental revenue $ 131,455 $ 117,336 $ 109,746 Other revenue 67,516 45,725 59,069 Total revenue 198,971 163,061 168,815 Expenses (1) Operating expenses 125,513 99,305 109,588 Depreciation and amortization 32,566 31,515 45,453 Interest 55,790 57,342 61,867 Total expenses 213,869 188,162 216,908 Net loss $ ( 14,898 ) $ ( 25,101 ) $ ( 48,093 ) Our share of net (loss) income in unconsolidated joint ventures $ 14,634 $ ( 379 ) $ ( 2,313 ) (1) These amounts include revenue of $ 139,161 , $ 123,576 and $ 115,377 of VAA during the years ended December 31, 2021 , 2020 and 2019 , respectively, and expenses of $ 155,847 , $ 150,278 and $ 165,773 of VAA during the years ended December 31, 2021 , 2020 and 2019 , respectively. 45 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 11. Mortgages and Other Notes Payable Below is a summary of our notes and interest payable as of December 31, 2021 and 2020 : Carrying Value Interest Rate Maturity Date Property/ Entity 2021 2020 600 Las Colinas(1) $ — $ 35,589 5.30 % 11/1/2023 770 South Post Oak 11,635 11,871 4.40 % 6/1/2025 Athens(2) 1,155 1,155 4.00 % 8/28/2022 Chelsea 8,037 8,194 3.40 % 12/1/2050 EQK Portage - Land 3,350 3,350 10.00 % 11/13/2024 HSW Partners(3) — 17,790 9.50 % 6/17/2021 Forest Grove(4) 7,263 7,333 3.75 % 5/5/2024 Landing Bayou 14,407 14,643 3.50 % 9/1/2053 Legacy at Pleasant Grove 13,352 13,653 3.60 % 4/1/2048 McKinney 36 Land — 820 8.00 % 6/30/2022 New Concept Energy 3,542 3,542 6.00 % 9/30/2022 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 Sugar Mill Phase III 9,216 9,298 4.50 % 2/1/2060 Toulon(7) 13,697 13,975 3.20 % 12/1/2051 Villas at Bon Secour(8) 19,492 10,280 3.08 % 9/1/2031 Vista Ridge 9,830 9,979 4.00 % 8/1/2053 Windmill Farms(9) 8,389 10,397 5.00 % 2/28/2023 $ 183,392 $ 242,711 (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. (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. 46 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Future principal payments due on our notes payable at December 31, 2021 are as follows: Year Amount 2022 $ 50,763 2023 4,355 2024 9,444 2025 13,021 2026 2,172 Thereafter 107,307 187,062 Deferred finance cost ( 3,670 ) $ 183,392 12. 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. 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: December 31, Interest Rate Bond Issuance 2021 2020 Maturity Series A Bonds(1)(2) 65,563 95,133 7.30 % 7/31/23 Series B Bonds(3) 54,019 65,318 6.80 % 7/31/25 Series C Bonds(2) 75,298 85,537 4.65 % 1/31/23 194,880 245,988 Less unamortized deferred issuance costs ( 5,428 ) ( 8,100 ) 189,452 237,888 (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. The aggregate maturities of our Bonds are as follows: Year Amount 2022 $ 46,286 2023 121,584 2024 13,505 2025 13,505 $ 194,880 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. 47 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 13. 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 90.8 % of our common shares. 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 $ 944 , $ 1,083 and $ 841 for the years ended December 31, 2021, 2020 and 2019, respectively, for office space leased to Pillar and Regis. Property operating expense includes $ 889 , $ 990 and $ 991 for the years ended December 31, 2021, 2020 and 2019, respectively, for management fees on commercial properties payable to Regis. 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. 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). 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 $ 19,799 , $ 19,515 and $ 23,670 for the years ended December 31, 2021, 2020 and 2019, respectively. Interest expense on notes payable to Pillar was $ 5,661 , $ 6,632 and $ 9,282 for the years ended December 31, 2021, 2020 and 2019, respectively. Related party receivables represents amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above. 14. 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, which in turn owned 81.1 % in in IOR, during the years ended December 31, 2021, 2020 and 2019. 15. Stockholders Equity Dividends: 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 . 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 48 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. 16. Deferred Income 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. As of December 31, 2021, we had deferred gain of $ 9,791 . 17. 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. The (benefit) expense for income taxes consists of: Years Ended December 31, 2021 2020 2019 Current: Federal $ ( 1,408 ) $ — $ — State 341 ( 147 ) — Deferred and Other: Federal — — — State — — — Total tax (benefit) expense $ ( 1,067 ) $ ( 147 ) $ — 49 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: Years Ended December 31, 2021 2020 2019 Income tax (benefit) expense at federal statutory rate $ 285 $ 2,335 $ ( 4,566 ) 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 ) Temporary tax differences Installment note on land sale — — — Allowance for losses on note receivables ( 485 ) ( 77 ) ( 246 ) Deferred gains ( 4,893 ) ( 878 ) ( 1,920 ) Basis differences on fixed assets ( 721 ) 1,307 — Other basis/timing differences ( 2,729 ) 2,296 3,172 Generation (use) on net operating loss carryforwards 10,406 ( 3,137 ) 6,059 Reported tax (benefit) expense $ ( 1,067 ) $ ( 147 ) $ — 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, 2021, our tax years for 2021 , 2020 , and 2019 are subject to examination by the tax authorities. 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. Components of the Net Deferred Tax Asset or Liability December 31, 2021 2021 2020 Deferred tax assets: Allowance for losses on notes $ 2,189 $ 2,674 Basis difference in fixed assets 705 1,426 Deferred gain 275 5,168 Foreign currency translations 1,088 3,818 Net operating loss carryforward 25,993 15,234 Total deferred tax assets 30,250 28,320 Less: valuation allowance ( 30,250 ) ( 28,320 ) Total net deferred tax assets $ — $ — 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, 2021, 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. 50 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 18. Commitments and Contingencies 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. 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 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. 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. The trial for this matter is scheduled for November 2022. 19. Quarterly Results of Operations The following is a tabulation of our quarterly results of operations for the years 2021, 2020 and 2019. Quarterly results presented may differ from those previously reported in our Form 10-Q due to the reclassification of the operations 2021 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 11,828 $ 11,103 $ 10,494 $ 8,614 Net operating (loss) income ( 3,002 ) ( 8,771 ) ( 5,168 ) ( 3,677 ) Net income (loss) attributable to the Company 18,068 ( 27,328 ) 19,411 ( 6,804 ) EPS - basic and diluted $ 1.12 $ ( 1.69 ) $ 1.20 $ ( 0.42 ) 2020 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 13,130 $ 14,741 $ 11,937 $ 19,218 Net operating income (loss) ( 3,238 ) 1,491 ( 2,303 ) 3,938 Net (loss) income attributable to the Company 2,946 ( 2,306 ) 7,987 403 EPS - basic and diluted $ 0.18 $ ( 0.14 ) $ 0.50 $ 0.02 20. 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. There are no subsequent events that would require an adjustment to the financial statements. 51 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2021 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 $ 8,037 $ 1,225 $ 11,230 $ 17 $ 1,231 $ 11,241 $ 12,472 $ 893 1999 2018 Forest Grove 7,263 1,440 10,234 32 1,440 10,266 11,706 410 2020 2020 Landing Bayou 14,407 2,011 18,255 ( 5,962 ) 2,011 12,293 14,304 1,425 2005 2018 Legacy at Pleasant Grove 13,352 2,005 18,109 57 2,033 18,138 20,171 3,237 2006 2018 Parc at Denham Springs Phase II 15,962 1,505 16,975 — 1,505 16,975 18,480 873 2010 2009 Sugar Mill Phase III 9,216 576 9,755 ( 15 ) 576 9,740 10,316 382 2015 2015 Toulon 13,697 1,621 20,107 411 1,993 20,146 22,139 5,279 2011 2014 Villas at Bon Secour 19,492 2,715 15,385 52 2,715 15,437 18,152 1,318 2007 2018 Vista Ridge 9,830 1,339 13,398 6 1,339 13,404 14,743 2,590 2009 2018 111,256 14,437 133,448 ( 5,402 ) 14,843 127,640 142,483 16,407 Commercial 770 South Post Oak 11,635 1,763 16,312 672 1,763 16,984 18,747 3,037 1970 2015 Browning Place 75,298 5,096 49,441 14,453 5,096 63,894 68,990 28,140 1984 2005 Stanford Center 38,979 20,278 25,876 6,224 20,278 32,100 52,378 15,275 2007 2008 Other — 646 74 — 646 74 720 74 125,912 27,783 91,703 21,349 27,783 113,052 140,835 46,526 Land Mercer Crossing — 2,999 — — 2,999 — 2,999 — 2018 Windmill Farms 8,389 43,608 — 2,159 45,767 — 45,767 — 2006 Other 6,491 19,608 — 7,604 27,212 — 27,212 — 14,880 66,215 — 9,763 75,978 — 75,978 — $ 252,048 $ 108,435 $ 225,151 $ 25,710 $ 118,604 $ 240,692 $ 359,296 $ 62,933 52 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, 2021 2021 2020 2019 Reconciliation of Real Estate Balance at January 1, $ 459,801 $ 477,963 $ 463,732 Additions 5,814 21,223 92,964 Deductions ( 106,319 ) ( 39,385 ) ( 78,733 ) Balance at December 31, $ 359,296 $ 459,801 $ 477,963 Reconciliation of Accumulated Depreciation Balance at January 1, 82,418 90,173 79,228 Additions 10,820 12,188 13,379 Deductions ( 30,305 ) ( 19,943 ) ( 2,434 ) Balance at December 31, $ 62,933 $ 82,418 $ 90,173 53 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS December 31, 2021 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 $ 24,756 $ 2,486 $ 2,486 Bellwether Ridge 5.00 % 11/1/2026 No payments until maturity or conversion 18,070 3,967 3,967 Forest Pines 5.00 % 11/1/2022 No payments until maturity or conversion 26,407 6,472 6,472 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 Plum Tree 5.00 % 4/26/2026 No payments until maturity or conversion 17,105 1,537 1,537 Spyglass of Ennis 5.00 % 11/1/2022 No payments until maturity or conversion 22,793 5,319 5,319 Steeple Crest 5.00 % 8/1/2026 No payments until maturity or conversion 11,529 6,498 6,498 205,046 40,114 40,114 Land loans ABC Land and Development, Inc. 9.50 % 6/30/2026 No payments until maturity — 4,408 4,408 ABC Paradise, LLC 9.50 % 6/30/2026 No payments until maturity — 1,210 1,210 Lake Wales 9.50 % 6/30/2026 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 % 6/30/2026 No payments until maturity — 1,728 1,728 Riverview on the Park Land, LLC 9.50 % 6/30/2026 No payments until maturity — 1,045 1,045 Spartan Land 12.00 % 1/16/2023 No payments until maturity — 5,907 5,907 — 22,348 22,348 Subsidized housing Phillips Foundation for Better Living, Inc. 12.00 % 3/31/2024 Payments from excess property cash flows — 813 813 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 54 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 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 $ 301,975 $ 136,607 $ 136,607 55 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS As of December 31, 2021 2020 2019 Balance at January 1, $ 130,626 $ 143,087 $ 114,893 Additions 19,149 15,312 60,154 Deductions ( 13,168 ) ( 27,773 ) ( 31,960 ) Balance at December 31, $ 136,607 $ 130,626 $ 143,087 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.