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Item 7. Management’s Discussion and Analysis

2023-03-23 compared with 2022-03-29 · 73 added, 77 removed, 112 unchanged (57% of the section changed)

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

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

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

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

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

(“Pillar”) in accordance with an Advisory Agreement.

Our operations are managed by Pillar in accordance with an Advisory Agreement.

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

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

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

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

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

Acquisitions and Dispositions

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

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

• O n March 5, 2020, we acquired a 49.2 acres land parcel in Kent, Ohio for $5.4 million that was funded by a $2.0 million cash payment and a $3.4 million note payable that bears interest at 10% and matures on November 13, 2024.

• On May 1, 2020, we sold Villager, a 33 unit multifamily property in Fort Walton, Florida for $2.4 million, resulting in a gain on sale of $1.0 million.

• On July 16, 2020, we sold Farnham Park, a 144 unit multifamily property in Port Arthur, Texas for $13.3 million, resulting in a gain on sale of $2.7 million.

• On September 14, 2020, we sold Bridge View Plaza, a retail property in La Crosse, Wisconsin for $5.3 million, resulting in a gain on sale of $4.6 million.

• During the year ended December 31, 2020 , we sold a total of 58.8 acres of land from our holdings in Windmill Farms for $12.9 million , in aggregate, resulting in gains on sale of $11.1 million .

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

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

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

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

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

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

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

In addition, we sold 14.1 acres of land from our holdings in Mercer Crossing for $9.0 million , resulting in a gain on sale of $6.4 million .

• On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $26.8 million, resulting in a 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 a 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 a sale of properties by VAA (See "Other Developments"), resulting in a 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 .

• During the year ended December 31, 2022 , we sold a total of 26.9 acres of land from our holdings in Windmill Farms for $5.1 million in aggregate, resulting in gains on sale of $4.2 million.

In addition, we sold 14.09 acres of land from our holdings in Mercer Crossing for $9.0 million, resulting in a gain on sale of $6.4 million.

Financing Activities

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

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

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

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

• On December 3, 2020 , we extended our $14.7 million loan from HSW Partners to June 17, 2021 .

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

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

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

• 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 , we extended the loan on Stanford Center to February 26, 2023 .

• On September 1, 2022 , we extended our $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 .

• 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 our $66.5 million Series C bonds.

Development Activities

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

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

Our expenditure includes $1.2 million on the development of land lots for sale to single family home developers 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 (See Item 2 - Properties).

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

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

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 purchase this project, at our option, for the price of 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, 2020 , we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of $17.2 million and $14.2 million, respectively.

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

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

Properties as Joint Venture properties.

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

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

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

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

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

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

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

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

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

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

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

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 provides 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.

In connection with sale, 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.

On November 1, 2022, in connection with the sale of the VAA Sale Portfolio, we received an additional distribution from VAA, which included a cash payment of $204.0 million and the full operational control of the VAA Holdback Portfolio, which resulted a $73.2 million gain on the remeasurement of assets.

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.

Critical Accounting Policies

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

Our significant

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

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

However, the following policies are deemed to be critical.

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Results of Operations

Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to the Lease-Up Properties and the Disposition Properties (each as defined below).

For purposes of the discussion below, we define "Same Properties" as those properties that are substantially leased-up and in operation for the entirety of both periods of the comparison.

Non-Same Properties for comparison purposes include those properties that have been recently constructed or leased-up (“Lease-up Properties”) and properties that have been disposed of ("Disposition Properties").

A developed property is considered leased-up, when it achieves occupancy of 80% or more.We move a property in and out of Same Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison.

Accordingly, the Same Properties consist of all properties, excluding the Lease-up Properties and the Disposition Properties for the periods of comparison.

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

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

Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to the Redevelopment Property, Acquisition Properties and the Disposition Properties (each as defined below).

For purposes of the discussion below, we define "Same Properties" as all of our properties with the exception of those properties that have been recently constructed or leased-up (“Redevelopment Property”), properties that have recently been acquired ("Acquisition Properties") and properties that have been disposed ("Disposition Properties").

A developed property is considered leased-up, when it achieves occupancy of 80% or more.

We move a property in and out of Same Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison.

For the comparison of the year ended December 31, 2022 to the year ended December 31, 2021 , the Redevelopment Property is Landing Bayou.

The Acquisition Properties are Blue Lake Villas, Blue Lake Villas Phase II, Northside on Travis, Parc at Denham Springs, Residences at Holland Lake, Villas of Park West I and Villas of Park West II.

The Disposition Properties are 600 Las Colinas, Fruitland Park, Overlook at Allensville Phase II, Sugar Mill Phase III and Toulon.

The following table provides a summary of the results of operations of 2022 and 2021:

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Interest, net 9,030 (5,659) 14,689

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

(Loss) gain on foreign currency transactions (6,175) (13,378) 7,203

Gain sale or write down of assets 24,647 36,895 (12,248)

Income (loss) from joint ventures 14,634 (379) 15,013

Other income 5,298 7,264 (1,966)

Net income (loss) $ 6,445 $ 11,267 $ (4,822)

Loss on early extinguishment of debt (2,805) (1,451) (1,354)

Gain (loss) on foreign currency transactions 20,067 (6,175) 26,242

Gain sale, remeasurement or write down of assets 87,132 24,647 62,485

Income from joint ventures 469,268 14,634 454,634

Other (expense) income (94,644) 5,298 (99,942)

Net income $ 475,317 $ 6,445 $ 468,872

Comparison of the year ended December 31, 2022 to the year ended December 31, 2021:

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

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

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

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

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

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

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

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

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

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

Our $468.9 million increase in net income in 2022 is primarily attributed to the following:

• The $2.0 million increase in profit the multifamily is due to increases of $2.5 million from the Acquisition Properties and $0.4 million from the Same Properties offset in part a decrease of $0.6 million from the Disposition Properties and $0.3 million from the Redevelopment Property .

• The $3.2 million decrease in profit from the commercial properties is due to a decreases of $2.6 million from the Disposition Properties and $0.6 million from the Same Properties .

• The decrease in general, administrative and advisory expenses is primarily due to the decrease in legal costs from the arbitration settlement in 2021 (See " Other Developments" in Management's Overview) and a decrease in other administrative and advisory expenses .

• The change in interest, net is due a $7.2 million increase in interest income and $4.8 million decrease in interest expense.

The increase in interest income is due to an increase in interest from our convertible loans, an increase in interest rates and an increase in short term investments in 2022.

The increase in short-term investments is due the $388.0 million in cash distributions received from VAA in 2022 (See " Other Developments" in Management's Overview ).

The decrease in interest expense is primarily due to pay downs of our bonds payable and repayment of mortgage notes payable on properties sold in 2021 and 2022 (See " Acquisitions and Dispositions " in Management's Overview).

• The increase in gain on foreign currency transactions is due to a favorable change in the U.S.

Dollar and the New Israeli Shekel conversion rate.

• Gain on sale, remeasurement or write down of assets increased $65.8 million from $23.4 million in 2021 to $89.2 million in 2022.

The increase is due to the $73.2 million gain on remeasurement of the VAA Holdback Portfolio in 2022 and other transactions described in "Other Developments" and " Acquisitions and Dispositions " in Management's Overview.

• The increase in income from joint ventures is primarily due our share of the gain on the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in Management's Overview).

• The change in other (expense) income is primarily due to the $104.2 million increase in tax expense as a result of the sale of the VAA Sale Portfolio in 2022.

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

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Year Ended December 31,

2021 2020 Incr /(Decr)

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

2022 2021 Variance

Net cash used in operating activities $ (45,386) $ (11,523) $ (33,863)

Net cash provided by investing activities $ 307,357 $ 100,822 $ 206,535

Net cash used in financing activities $ (112,377) $ (103,585) $ (8,792)

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

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

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

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

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

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

The increase in cash used in operating activities is primarily due to payments of taxes related to our share of the gain on the sale of VAA Sale Portfolio in 2022.

The increase in cash provided by investing activities is primarily due the $376.9 million increase in distribution from joint venture and the $175.3 million redemption of short term investments in 2022 offset in part by the $261.6 million purchase of short term investments in 2022, the $61.0 million decrease in proceeds from the sale of real estate and the $15.1 million decrease in collection of notes receivable.

The increase in distribution from joint venture is due to the sale of the VAA Sale Portfolio in 2022 (See "Other Developments" in Management's Overview).

The increase in cash used in financing activities is primarily due to the $20.0 million proceeds from mortgages, notes and bonds payable in 2021 offset in part by a $7.9 million decrease in payments of mortgages, notes and bonds payable.

Funds From Operations ("FFO")

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2022 2021 2020

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

Net income attributable to the Company $ 373,349 $ 3,347 $ 9,030

Depreciation and amortization on consolidated assets 9,686 11,870 14,755

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

Gain on sale, remeasurement or write down of assets (87,132) (24,647) (36,895)

Gain on sale of land 4,752 16,645 25,171

Gain on sale of assets from unconsolidated joint venture at our pro rata share less noncontrolling interest (265,804) — —

Depreciation and amortization on unconsolidated joint ventures at pro rata share 8,424 11,604 11,295

FFO-Basic and Diluted 43,275 18,819 23,356

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

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

Loss on early extinguishment of debt 2,805 1,451 —

Loss on early extinguishment of debt from unconsolidated joint venture at our pro rata share 15,254 — —

(Gain) loss on foreign currency transactions (20,067) 6,175 13,378

FFO-adjusted $ 41,267 $ 26,445 $ 36,734

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

What changed 10-K

Item 7. Management’s Discussion and Analysis