What changed in this filing

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Item 1. Business

2023-03-23 compared with 2022-03-29 · 50 added, 58 removed, 88 unchanged (55% of the section changed)

American Realty Investors, Inc.

(the “Company”) is a fully integrated externally managed real estate company.

We operate high quality multifamily and properties throughout the southern United States.

We also invest in mortgage notes receivable and in land that is either held for appreciation and or development.

(the “Company”), a Nevada Corporation, is a fully integrated externally managed real estate company.

We operate high quality multifamily and commercial properties throughout the southern United States.

We also invest in mortgage notes receivable and in land that is either held for appreciation or development.

As used herein, the terms “ARL”, “the Company”, “We”, “Our”, or “Us” refer to the Company.

Corporate Structure

We own approximately 78.4% of Transcontinental Realty Investors, Inc.

We own approximately 78.4% of the common stock of Transcontinental Realty Investors, Inc.

("TCI") and substantially all of our operations are conducted through TCI, whose common stock is traded on the New York Stock Exchange ("NYSE") under the symbol “TCI”.

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(“SPC”), which was formed to allow us to raise funds by issuing non-convertible bonds that are listed and traded on the Tel-Aviv Stock Exchange ("TASE").

In addition, TCI owns approximately 81.1% of the common stock of Income Opportunity Realty Investors, Inc.

("IOR") a Nevada corporation, which is publicly listed and traded on the NYSE under the symbol IOR.

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

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We account for our investment in VAA under the equity method.

O n November 17, 2021 , we entered into a Major Decision with Macquarie to sell all the properties held by VAA (See "Recent Activity - Other Developments").

Controlling Shareholder

In 2022, VAA sold 45 of its properties to a third party and distributed the remaining seven properties to us in a liquidating distribution (See "Recent Activity - Other Developments").

Controlling Stockholder

Realty Advisors, Inc.

(“RAI”) and its affiliates own approximately 90.8% of our common stock.

(“RAI”), a Nevada corporation, and its affiliates own approximately 90.8% of our common stock.

As described in Part III, Item 13.

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Our officers and directors owe fiduciary duties to both TCI and us under applicable law.

In determining whether a particular investment opportunity will be allocated to TCI our to us, management considers the respective investment objectives of each company and the appropriateness of a particular investment in light of each company’s existing real estate and mortgage notes receivable portfolio.

To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity may be allocated to the entity which has had funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all three or two of the entities.

In determining whether a particular investment opportunity will be allocated to TCI or to us, management considers the respective investment objectives of each company, the ability to purchase and/or finance the asset and the appropriateness of a particular investment in light of each company’s existing real estate and mortgage notes receivable portfolio.

Our business is managed by Pillar Income Asset Management, Inc.

(“Pillar”) in accordance with an Advisory Agreement that is reviewed annually by our Board of Directors.

Pillar is a wholly-owned affiliate of RAI.

Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities.

(“Pillar”) in accordance with an Advisory Agreement and a Cash Management Agreement that are reviewed annually by our Board of Directors.

Pillar is wholly-owned by RAI.

Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate-related investment opportunities.

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

They also serve as the contractual Advisor and Cash Manager to TCI.

In addition, Pillar serves as the contractual Advisor and Cash Manager to TCI and IOR.

As the contractual advisor, Pillar is compensated by us under an Advisory Agreement that is more fully described in Part III, Item 10.

“Directors, Executive Officers and Corporate Governance

– The Advisor”.

“Directors, Executive Officers and Corporate Governance – The Advisor”.

We have no employees.

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At December 31, 2022, our property portfolio consisted of:

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

• Nine multifamily properties owned directly by us comprising in 1,492 units, excluding apartments being developed;

• Commercial pr operties , consisting of four office buildings with an aggregate of approximately 1,056,793 square feet;

• Fourteen multifamily properties, comprising in 2,328 units;

• Approximately 1,858 acres of developed and undeveloped land.

• Fifty-two multifamily properties totaling 10,281 units owned by VAA.

Recent Activity

The following is a description of our significant real estate and financing transactions during the year ended December 31, 2021:

Acquisitions and Dispositions

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

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

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

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

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

• On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $26.8 million, resulting in gain on sale of $9.4 million.

We used the proceeds to pay off the $14.7 million mortgage note payable on the property and for general corporate purposes.

• On May 17, 2022 , we sold Fruitland Park, a 6,722 square foot commercial building in Fruitland Park, Florida for $0.8 million , resulting in gain on sale of $0.7 million .

We used the proceeds for general corporate purposes.

• On September 16, 2022, we sold Sugar Mill Phase III, a 72 unit multifamily property in Baton Rouge , Louisiana for $11.8 million in connection with the sale of the VAA Sale Portfolio (See "Other Developments"), resulting in gain on sale of $1.9 million.

We used the proceeds to pay off the $9.6 million mortgage note payable on the property and for general corporate purposes.

• On November 1, 2022, we acquired seven multifamily properties from VAA (See "Other Developments") with a fair value of $219.5 million .

• In 2022, we sold a total of 26.9 acres of land from our holdings in Windmill Farms for $5.1 million, resulting in gains on sale of $4.2 million.

In addition, we sold 0.9 acres of land from our holdings in Mercer Crossing for $0.7 million, resulting in a gain on sale of $0.2 million.

• On January 14, 2022, we sold Toulon, a 240 unit multifamily property property in Gautier, Mississippi, for $26.8 million.

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

Financing Activities

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

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

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

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

• On January 14, 2022, the $14.7 million loan on Toulon was paid off in connection with the sale of the underlying property (See "Acquisitions and Dispositions").

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

• On September 1, 2022 , we extended the $1.2 million loan on Athens to August 28, 2023.

• On September 16, 2022 , we paid off the $9.6 million loan on Sugar Mill Phase III in connection with the sale of the underlying property (See "Acquisitions and Dispositions").

• On October 21, 2022, we paid off the $38.5 million loan on Stanford Center from the cash generated from sale of the VAA Sale Portfolio (See "Other Developments").

• On November 1, 2022, we assumed the $70.3 million mortgage notes payable on the VAA Holdback Portfolio in connection with the distribution of the underlying properties from VAA (See "Other Developments").

• On January 31, 2023 , we paid off the $66.5 million Series C bonds.

Development Activities

During 2022, we spent $6.0 million on our ongoing development of Windmill Farms .

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

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

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

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

Our expenditures included $1.2 million on the development of land lots for sale to single family home builders and $4.8 million on reimbursable infrastructure investments.

We have investment in nine notes receivable that were issued to fund the development of multifamily properties.

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

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

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

As of December 31, 2022, one of the projects was in construction, one was in lease-up and seven were stabilized.

In 2022, we advanced $2.1 million on these development notes.

Other Developments:

During the year ended December 31, 2021, we recorded a loss of $29.6 million on the remeasurements of certain assets ("Earn Out Obligation") that were sold in connection with our investment in VAA.

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

Properties as Joint Venture properties.

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

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

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

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

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

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

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

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

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

On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale Portfolio”) held by VAA and one property held by our SPC subsidiary.

On September 15, 2022, we entered into a Distribution and Holdback Property Agreement (“Distribution Agreement”) with Macquarie, which provided the timing and ordering of the distribution of the net proceeds from the sale of the VAA Sale Portfolio, the repayment of the Mezzanine Loans, and the distribution of the remaining seven properties of VAA (“VAA Holdback Portfolio”).

On September 16, 2022, VAA completed the sale of the VAA Sale Portfolio for $1.8 billion, resulting in gain on sale of $738.4 million to the joint venture.

As a result, we received an initial distribution of $182.8 million from VAA, which included the payment of the remaining balance of our Earn Out Obligation to Macquarie.

In connection with this transaction, we sold Sugar Mill Phase III (See "Acquisitions and Dispositions").

On November 1, 2022, we received an additional distribution from VAA, which included the full operational control of the VAA Holdback Portfolio and a cash payment of $204.0 million.

We are in the process of negotiating the assumption of the mortgage notes payable on the VAA Holdback Portfolio.

Our ownership interest in VAA is held by SPC, and is therefore our share of the proceeds from the sale of the VAA Sale Portfolio is subject to the debt covenants of the bonds issued by SPC.

These provisions include restrictions on the distribution of cash from SPC.

(See Note 12 - Bonds Payable in our consolidated financial statements).

Business Plan and Investment Policy

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Our income producing real estate is managed by external management companies.

Our multifamily properties and one of our commercial properties are managed by various third-party companies and four of our commercial properties are managed by Regis Realty Prime, LLC (“Regis"), collectively the "management companies".

The management companies conduct all of the administrative functions associated with our property operations (including billing, collections, and response to resident inquiries).

Our multifamily properties and one of our commercial properties are managed third-party companies and three of our commercial properties are managed by Regis Realty Prime, LLC (“Regis"), collectively the "management companies".

The management companies conduct all of the administrative functions associated with our property operations (including billing, collections, and response to tenant inquiries).

Regis receives property management fees, construction management fees and leasing commissions in accordance with the terms of its property-level management agreement and is also entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement.

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These investments have included notes receivables from Unified Housing Foundation, Inc.

("UHF") Due to our ongoing relationship

and our significant investment in the performance of the collateral secured under the notes receivable, we consider UHF to be a related party.

Due to our ongoing relationship and significant investment in the performance of the collateral secured under the notes receivable, we consider UHF to be a related party.

We finance our acquisitions through operating cash flow, proceeds from the sale of land and income-producing properties, and debt, which is financing primarily in the form of property-specific, first-lien mortgage loans from commercial banks and institutional lenders.

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We may also from time to time enter into partnerships or joint ventures with various investors to acquire land or income-producing properties, or to sell interests in some of our properties.

We have increased our portfolio of multifamily properties through ground up development.

Since we don’t have a fully developed in-house development, we have traditionally partnered with third-party developers (“Developers”) to construct multifamily properties on our behalf.

We have increased our portfolio of multifamily properties by partnering with third-party developers (“Developers”) to construct multifamily properties on our behalf.

We work with the Developer on the location, design, construction budget and initial lease plan for a potential development project (“Development Project”).

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The services for our commercial segment include primarily rental of office space and other tenant services, including parking and storage space rental.

The services for our multifamily segment include primarily rental of apartments and other tenant

services, including parking and storage space rental.

The services for our multifamily segment include primarily rental of apartments and other tenant services, including parking and storage space rental.

See Note 5 to our consolidated financial statements in Item 8 of this Report for more information regarding our segments.

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Available Information

We maintain an internet site at www.transconrealty-invest.com.

We maintain an internet site at www.americanrealtyinvest.com.

We make available through our website free of charge Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed pursuant to Section 16, and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission.

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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 1. Business