AMERICAN REALTY INVESTORS INC 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Optional and not included. 24 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 ) 26 Consolidated Balance Sheets at December 31, 2022 and 2021 29 Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 30 Consolidated Statements of Equity for the Years Ended December 31, 2022, 2021 and 2020 31 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 32 Notes to Consolidated Financial Statements 33 Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation 51 Schedule IV—Mortgage Loan Receivables on Real Estate 53 25 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 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 $493.8 million as of December 31, 2022. 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. 26 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, 2022, the Company had notes receivable in the amount of $139.6 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 2022, the Company recognized office rental revenues and tenant recoveries of $16.3 million and deferred rent receivables of $2.4 million at December 31, 2022. 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. 27 Emphasis of Liquidity As described in the Note 19, 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 23, 2023 We have served as the Company’s auditor since 2004. 28 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except par value amounts) December 31, 2022 2021 Assets: Real estate $ 493,821 $ 296,363 Cash and cash equivalents 113,445 50,748 Restricted cash 108,883 21,986 Short-term investments 119,787 16,001 Notes receivable (including $ 76,935 and $ 75,872 at December 31, 2022 and 2021, respectively, from related parties) 139,609 136,607 Investment in unconsolidated joint ventures 28,226 61,621 Receivable from related parties 108,184 100,599 Other assets (including $ 4,663 and $ 4,535 at December 31, 2022 and 2021, respectively, from related parties) 85,524 86,644 Total assets $ 1,197,479 $ 770,569 Liabilities and Equity Liabilities: Mortgages and other notes payable $ 188,004 $ 183,392 Bonds payable 129,218 189,452 Accounts payable and other liabilities (including $ 599 and $ 616 at December 31, 2022 and 2021, respectively, to related parties) 53,100 44,518 Interest payable 5,198 6,565 Deferred revenue 9,791 9,791 Total liabilities 385,311 433,718 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 Additional paid-in capital 62,090 62,090 Retained earnings 549,434 176,085 Total shareholders’ equity 613,487 240,138 Noncontrolling interest 198,681 96,713 Total equity 812,168 336,851 Total liabilities and equity $ 1,197,479 $ 770,569 The accompanying notes are an integral part of these consolidated financial statements. 29 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) For the Years Ended December 31, 2022 2021 2020 Revenues: Rental revenues (including $ 931 , $ 944 and $ 1,083 for 2022, 2021 and 2020, respectively, from related parties) $ 34,080 $ 37,808 $ 51,909 Other income 3,464 4,231 7,117 Total revenue 37,544 42,039 59,026 Expenses: Property operating expenses (including $ 433 , $ 889 and $ 990 for 2022, 2021 and 2020, respectively, from related parties) 18,339 20,860 24,360 Depreciation and amortization 9,686 11,870 14,755 General and administrative (including $ 4,191 , $ 4,399 and $ 3,869 for 2022, 2021 and 2020, respectively, from related parties) 10,033 15,942 10,614 Advisory fee to related party 8,753 13,985 9,409 Total operating expenses 46,811 62,657 59,138 Net operating loss ( 9,267 ) ( 20,618 ) ( 112 ) Interest income (including $ 24,267 , $ 19,799 and $ 19,515 for 2022, 2021 and 2020, respectively, from related parties) 35,226 23,421 23,098 Interest expense (including $ 8,667 , $ 5,661 and $ 6,632 for 2022, 2021 and 2020, respectively, from related parties) ( 26,196 ) ( 29,080 ) ( 35,004 ) Gain (loss) on foreign currency transactions 20,067 ( 6,175 ) ( 13,378 ) Loss on early extinguishment of debt ( 2,805 ) ( 1,451 ) — Equity in income (loss) from unconsolidated joint ventures 469,268 14,634 ( 379 ) Gain on sale, remeasurement or write down of assets 87,132 24,647 36,895 Income tax provision ( 98,108 ) 1,067 147 Net income 475,317 6,445 11,267 Net income attributable to noncontrolling interest ( 101,968 ) ( 3,098 ) ( 2,237 ) Net income applicable to the Company $ 373,349 $ 3,347 $ 9,030 Earnings per share Basic and diluted $ 23.11 $ 0.21 $ 0.56 Weighted average common shares used in computing earnings per share Basic and diluted 16,152,043 16,152,043 16,045,796 The accompanying notes are an integral part of these consolidated financial statements. 30 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, 2020 $ 3,601 $ 164 $ ( 6,395 ) $ 78,421 $ 163,708 $ 239,499 $ 57,017 $ 296,516 Net income — — — 9,030 9,030 2,237 11,267 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 Net income — — — — 373,349 373,349 101,968 475,317 Balance, December 31, 2022 $ 1,801 $ 162 $ — $ 62,090 $ 549,434 $ 613,487 $ 198,681 $ 812,168 The accompanying notes are an integral part of these consolidated financial statements. 31 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the Years Ended December 31, 2022 2021 2020 Cash Flow From Operating Activities: Net income $ 475,317 $ 6,445 $ 11,267 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale, remeasurement or write down of assets ( 87,132 ) ( 24,647 ) ( 36,895 ) (Gain ) loss on foreign currency transactions ( 20,067 ) 6,175 13,378 Loss on early debt extinguishment 2,805 1,451 — Depreciation and amortization 13,111 15,029 18,579 (Recovery) provision for doubtful accounts ( 3,284 ) ( 1,326 ) 984 Equity in (income) loss from unconsolidated joint ventures ( 469,268 ) ( 14,634 ) 379 Distribution of income from unconsolidated joint ventures 5,200 3,157 1,782 Changes in assets and liabilities, net of acquisitions and dispositions: Other assets 7,782 ( 14,205 ) ( 3,450 ) Related party receivables ( 7,585 ) 18,246 ( 327 ) Accrued interest payable ( 1,318 ) ( 4,650 ) ( 531 ) Accounts payable and other liabilities 39,053 ( 2,564 ) ( 1,668 ) Net cash (used in) provided by operating activities ( 45,386 ) ( 11,523 ) 3,498 Cash Flow From Investing Activities: Collection of notes receivable 3,027 18,171 8,251 Originations and advances on notes receivable ( 2,305 ) ( 4,968 ) ( 33,015 ) Purchase of short-term investments ( 277,641 ) ( 16,000 ) — Redemption of short-terms investments 175,250 — — Development and renovation of real estate ( 18,686 ) ( 8,070 ) ( 17,505 ) Deferred leasing costs ( 1,163 ) ( 877 ) ( 2,603 ) Proceeds from sale of assets 44,591 105,547 40,982 Contribution to unconsolidated joint venture — ( 411 ) — Distributions from unconsolidated joint ventures 384,284 7,430 8,086 Net cash provided by investing activities 307,357 100,822 4,196 Cash Flow From Financing Activities: Proceeds from mortgages, other notes and bonds payable — 20,015 30,727 Payments on mortgages, other notes and bonds payable ( 111,022 ) ( 118,900 ) ( 33,415 ) Debt extinguishment costs ( 1,355 ) ( 4,086 ) — Deferred financing costs — ( 614 ) ( 1,297 ) Net cash used in financing activities ( 112,377 ) ( 103,585 ) ( 3,985 ) Net increase (decrease) in cash and cash equivalents 149,594 ( 14,286 ) 3,709 Cash and cash equivalents, beginning of year 72,734 87,020 83,311 Cash and cash equivalents, end of year $ 222,328 $ 72,734 $ 87,020 The accompanying notes are an integral part of these consolidated financial statements. 32 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 90 % of our stock is owned by related party entities. Our primary business is the acquisition, development and ownership of income-producing residential 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 income from the sales of income-producing properties and land. 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 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, 2022, our property portfolio consisted of: ● Four office buildings ("commercial properties") comprising in aggregate of approximately 1,056,793 square feet; ● Fourteen multifamily properties comprising in 2,328 units; and ● Approxima tely 1,858 acres of developed and undeveloped land. 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-related investment opportunities and arranging debt and equity financing with third party lenders and investors. All of our employees are Pillar employees. Three of our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. All of our multifamily properties and one of our commercial properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 14 – 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. 33 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. 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. We allocate these costs to individual tenant leases and amortize them over the related lease term. 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. 34 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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, 2022 and 2021, the Company maintained balances in excess of the insured amount. Income taxes We are a “C” corporation” for U.S. federal income tax purposes. However, we are included in the May Realty Holdings, Inc. ("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 and comprehensive income are the same for the year ended December 31, 2022, 2021 and 2020. 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. 35 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Recent accounting pronouncements. 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. We do not have any mortgage notes payable with interest rates that reference LIBOR, and therefore, the adoption of this standard did not have an impact on our consolidated financial statements. 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, 2022 2021 2020 Net income $ 475,317 $ 6,445 $ 11,267 Net income attributable to noncontrolling interest ( 101,968 ) ( 3,098 ) ( 2,237 ) Net income applicable to the Company $ 373,349 $ 3,347 $ 9,030 Weighted-average common shares outstanding - basic and diluted 16,152 16,152 16,046 EPS - attributable to common shares - basic and diluted $ 23.11 $ 0.21 $ 0.56 36 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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, 2022 2021 2020 Cash paid for interest $ 22,211 $ 28,891 $ 31,453 Cash paid for income taxes $ 55,288 $ 910 $ 2,530 Cash, cash equivalents and restricted cash - beginning 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 Cash, cash equivalents and restricted cash - end of year Cash and cash equivalents $ 113,445 $ 50,748 $ 36,814 Restricted cash 108,883 21,986 50,206 $ 222,328 $ 72,734 $ 87,020 Proceeds from mortgages, other notes and bonds payable Mortgages and other notes payable $ — $ 20,015 $ 10,942 Bonds payable — — 19,785 $ — $ 20,015 $ 30,727 Payment on mortgages, other notes and bonds payable Mortgages and other notes payable $ 67,263 $ 65,242 $ 13,823 Bonds payable 43,759 53,658 19,592 $ 111,022 $ 118,900 $ 33,415 The following is a schedule of noncash investing and financing activities: For the Years Ended December 31, 2022 2021 2020 Assets distributed from joint venture $ 133,372 $ — $ — Liabilities assumed by joint venture $ 72,143 $ — $ — Distribution from joint venture applied to Earn Out Obligation $ 34,159 $ 5,441 $ — 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 $ — Property acquired in exchange for note payable $ — $ — $ 3,350 Note receivable issued in exchange for property $ — $ — $ 1,761 Debt assumed in sale of properties $ — $ — $ 8,238 37 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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, 2022 2021 2020 Residential Segment Revenue $ 17,828 $ 14,495 $ 14,686 Operating expenses ( 9,524 ) ( 8,167 ) ( 8,482 ) Profit from segment 8,304 6,328 6,204 Commercial Segment Revenue 16,252 23,313 37,223 Operating expenses ( 8,815 ) ( 12,693 ) ( 15,878 ) Profit from segment 7,437 10,620 21,345 Total profit from segments $ 15,741 $ 16,948 $ 27,549 The following table reconciles our profit by reportable segment to net income (loss): For the Years Ended December 31, 2022 2021 2020 Profit from reportable segments $ 15,741 $ 16,948 $ 27,549 Other non-segment items of income (expense) Depreciation and amortization ( 9,686 ) ( 11,870 ) ( 14,755 ) General and administrative ( 10,033 ) ( 15,942 ) ( 10,614 ) Advisory fee to related party ( 8,753 ) ( 13,985 ) ( 9,409 ) Other income 3,464 4,231 7,117 Interest income 35,226 23,421 23,098 Interest expense ( 26,196 ) ( 29,080 ) ( 35,004 ) Gain (loss) on foreign currency transactions 20,067 ( 6,175 ) ( 13,378 ) Loss on early extinguishment of debt ( 2,805 ) ( 1,451 ) — Equity in income (loss) from unconsolidated joint ventures 469,268 14,634 ( 379 ) Gain on sale, remeasurement or write down of assets 87,132 24,647 36,895 Income tax provision ( 98,108 ) 1,067 147 Net income $ 475,317 $ 6,445 $ 11,267 The table below reconciles the segment information to the corresponding amounts in the consolidated balance sheets: 38 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) December 31, 2022 2021 Segment assets $ 461,303 $ 263,937 Real estate 67,747 63,945 Investments in unconsolidated joint ventures 28,226 61,621 Notes receivable 139,609 136,607 Receivable from related parties 108,184 100,599 Cash, short-term investments and other non-segment assets 392,410 143,860 Total assets $ 1,197,479 $ 770,569 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, 2022, 2021 and 2020: For the Year Ended December 31, 2022 2021 2020 Fixed component $ 32,163 $ 35,555 $ 49,974 Variable component 1,917 2,253 1,935 Total rental revenue $ 34,080 $ 37,808 $ 51,909 The following table summarizes the future rental payments to us from under non-cancelable leases, which excludes multifamily properties, which typically have lease terms of one-year or less: Year Amount 2023 $ 11,620 2024 9,015 2025 8,638 2026 8,286 2027 8,012 Thereafter 21,713 Total $ 67,284 39 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 7. Real Estate Activity At December 31, 2022 and 2021, our real estate investment is comprised of the following: December 31, 2022 2021 Land $ 108,933 $ 67,514 Building and improvements 359,904 219,327 Tenant improvements 25,611 21,364 Construction in progress 65,427 51,091 Total cost 559,875 359,296 Less accumulated deprecation ( 66,054 ) ( 62,933 ) Total real estate $ 493,821 $ 296,363 Construction in progress consists of development of Windmill Farms and the renovation cost associated with Landing Bayou. We incurred depreciation expense of $ 8,962 , $ 10,820 and $ 14,755 for the years ending December 31, 2022, 2021 and 2020, respectively. Gain on sale or write-down of assets, net consists of the following: For the Year Ended December 31, 2022 2021 2020 Land(1) $ 4,752 $ 16,645 $ 25,171 Residential properties(2) 83,758 10,405 3,702 Commercial properties(3) 686 27,197 4,610 Other(4) ( 2,064 ) ( 29,600 ) 3,412 $ 87,132 $ 24,647 $ 36,895 (1) Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings. (2) On November 1, 2022, we acquired control of the VAA Holdback Portfolio VAA (See Note 11 – Acquisitions), which resulted in a $ 73,187 gain on remeasurement of assets. On September 16, 2022, in connection with the sale of properties by VAA (See Note 10 - Investment in Unconsolidated Joint Ventures), we sold Sugar Mill Phase III, a 72 unit multifamily property in Baton Rouge , Louisiana for $ 11,800 , resulting in a gain on sale of $ 1,871 . We used the proceeds to pay off the $ 9,551 mortgage note payable on the property and for general corporate purposes. On March 30, 2021 we sold a 50 % ownership interest in Overlook at Allensville Phase II to Macquarie in 2021 ( See Note 10 – Investment in Unconsolidated Joint Ventures). In 2021, we also recognized the gain on the sale of various multifamily properties that had previously been deferred (See Note 17 – Deferred Income). On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $ 26,750 , resulting in a gain on sale of $ 9,364 . We used the proceeds to pay off the $ 14,740 mortgage note payable on the property 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. (3) On May 17, 2022 , we sold Fruitland Park, a 6,722 square foot commercial building in Fruitland Park, Florida for $ 750 , resulting in a gain on sale of $ 667 . We used the proceeds for general corporate purposes. 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 pay off the $ 35,946 mortgage note payable on the property and for general corporate purposes. (4) In 2021, we incurred a $ 29,600 loss on the remeasurement of the Earn Out Obligation in connection with our investment in VAA (See Note 10 - Investment in Unconsolidated Joint Ventures). 40 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 8. Short-term Investments We have investment in variable denominated floating rate notes and commercial paper with maturities of less than 180 days. At December 31, 2022, the average interest rate on the notes was 4.67 % . 9. Notes Receivable The following table summarizes our notes receivables at December 31, 2022 and 2021: Carrying Value Interest Rate Maturity Date Borrower / Project 2022 2021 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) 2,326 2,486 5.00 % 7/1/2025 Bellwether Ridge(1) 3,798 3,967 5.00 % 11/1/2026 Forest Pines(1)(4) 6,472 6,472 5.00 % 11/1/2022 Lake Wales 3,000 3,000 9.50 % 6/30/2026 Legacy Pleasant Grove 496 496 12.00 % 10/23/2024 McKinney Ranch 3,926 4,554 6.00 % 9/15/2024 One Realco Land Holding, Inc. 1,728 1,728 9.50 % 6/30/2026 Parc at Ingleside(1) 3,759 3,700 5.00 % 11/1/2026 Parc at Opelika Phase II(1)(4) 3,190 2,305 10.00 % 1/13/2023 Parc at Windmill Farms(1)(4) 7,886 7,830 5.00 % 11/1/2022 Phillips Foundation for Better Living, Inc.(2) 182 813 12.00 % 3/31/2024 Plum Tree(1) 1,767 1,537 5.00 % 4/26/2026 Riverview on the Park Land, LLC 1,045 1,045 9.50 % 6/30/2026 Spartan Land 5,907 5,907 12.00 % 1/16/2025 Spyglass of Ennis(1)(4) 5,258 5,319 5.00 % 11/1/2022 Steeple Crest(1) 6,498 6,498 5.00 % 8/1/2026 Unified Housing Foundation(2)(3) 2,881 2,881 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 10,401 12.00 % 6/30/2023 Unified Housing Foundation(2)(3) 10,096 10,096 12.00 % 3/31/2024 Unified Housing Foundation(2)(3) 6,990 6,990 12.00 % 3/31/2025 Unified Housing Foundation(2)(3) 3,615 3,615 12.00 % 5/31/2023 Unified Housing Foundation(2)(3) 27,477 24,053 12.00 % 12/31/2032 Unified Housing Foundation(2)(3) 6,521 6,521 12.00 % 3/31/2024 Unified Housing Foundation(2)(3) 1,549 1,549 12.00 % 4/30/2024 Unified Housing Foundation(2)(3) 180 183 12.00 % 6/30/2024 $ 139,609 $ 136,607 (1) The note is convertible, at our option, into a 100 % ownership interest in the underlying development property, and is 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. (4) We are working with the borrower to extend the maturity and/or exercise or conversion option. 41 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 the 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 the manager (“Class B Member”). 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") of $ 10,000 for the 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 were required to pay approximately $ 39,600 to Macquarie to satisfy the Earn Out Obligation, and therefore, recorded a charge of $ 29,600 in 2021 (See Note 7 – Real Estate Activity). In accordance with the joint venture operating agreement, the Earn Out Obligation was paid from our share of subsequent distributions from VAA. On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale Portfolio”) owned by VAA and one property owned by our SPC subsidiary. On September 15, 2022, VAA, SPC, Macquarie and Pillar entered a Distribution and Holdback Property Agreement (“Distribution Agreement”), 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 $ 1,810,700 , resulting in gain on sale of $ 738,444 to the joint venture. In connection with sale, we received an initial distribution of $ 182,848 from VAA, which included the payment of the remaining balance of the Earn Out Obligation. On November 1, 2022, we received an additional distribution from VAA, which included the full operational control of the VAA Holdback Portfolio (See Note 11 - Acquisitions) and a cash payment of $ 204,036 . We are in the process of negotiating the assumption of the mortgage notes payable on the VAA Holdback Portfolio with the lenders. We plan to use our share of the proceeds from the sale of the VAA Sale Portfolio to investment in additional income-producing real estate, pay down our debt and for general corporate purposes. Our ownership interest in VAA is held by SPC, and is therefore subject to the debt covenants of bonds issued by SPC. These provisions include restrictions on the distribution of cash from SPC (See Note 13 - Bonds Payable). We also own a 20 % ownership 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. 42 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, 2022 2021 Assets (1) Assets from discontinued operations $ — $ 1,135,769 Real estate 13,140 142,629 Other assets 102,302 69,457 Total assets $ 115,442 $ 1,347,855 Liabilities and Partners Capital (1) Liabilities from discontinued operations $ 8,824 $ 807,382 Mortgage notes payable 16,267 83,955 Mezzanine notes payable — 242,942 Other liabilities 13,412 25,970 Our share of partners' capital 27,973 80,602 Outside partner's capital 48,966 107,004 Total liabilities and partners' capital $ 115,442 $ 1,347,855 Investment in unconsolidated joint ventures Our share of partners' capital $ 27,973 $ 80,602 Our share of Mezzanine note payable and accrued interest — 125,306 Basis adjustment (2) 253 ( 144,287 ) Total investment in unconsolidated joint ventures $ 28,226 $ 61,621 (1) These amounts include the assets of $ 52,404 and $ 1,280,867 of VAA at December 31, 2022 and 2021, respectively, and liabilities of $ 1,988 and $ 1,137,273 of VAA at December 31, 2022 and 2021, 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, 2022 2021 2020 3/31/2024 Revenue (1) Rental revenue $ 11,362 $ 14,632 $ 13,402 Other revenue 41,093 60,514 40,568 Total revenue 52,455 75,146 53,970 Expenses (1) Operating expenses 55,831 66,503 45,870 Depreciation and amortization 3,499 4,857 4,403 Interest 15,839 23,744 24,231 Total expenses 75,169 95,104 74,504 Loss from continuing operations ( 22,714 ) ( 19,958 ) ( 20,534 ) Income (loss) from discontinued operations (2) 708,341 7,416 ( 4,567 ) Net income (loss) $ 685,627 $ ( 12,542 ) $ ( 25,101 ) Our share of net income (loss) in unconsolidated joint ventures $ 469,268 $ 14,634 $ ( 379 ) 43 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (1) These amounts include reve nue of $ 11,963 , $ 15,336 and $ 14,024 of VAA during the years ended December 31, 2022, 2021 and 2020, respectively, and expenses of $ 36,076 , $ 39,438 and $ 36,159 of VAA during the years ended December 31, 2022, 2021 and 2020, respectively. (2) The amount for the year ended December 31, 2022, includes $ 738,444 gain on sale of asset and $ 31,281 loss on early extinguishment of debt that were incurred in connection with the sale of the VAA Sale Portfolio. 11. Acquisitions On November 1, 2022, we acquired the remaining 50 % ownership interest in the VAA Holdback Portfolio that we did not previously own through a distribution from VAA (See Note 10 – Investment in Unconsolidated Joint Ventures). Prior to the acquisition, we had accounted for the VAA Holdback Portfolio under the equity method of accounting as part of our investment in VAA. As a result of this transaction,we obtained 100 % ownership of the VAA Holdback Portfolio. The acquisition was completed in order to obtain 100 % ownership and control over this well positioned portfolio of multifamily residential properties in southern United States. The VAA Holdback Portfolio consisted of the following properties: Property Location Units Blue Lake Villas Waxahachie, TX 186 Blue Lake Villas Phase II Waxahachie, TX 70 Northside on Travis Sherman, TX 200 Parc at Denham Springs Denham Spring, LA 224 Residences at Holland Lake Weatherford, TX 208 Villas of Park West I Pueblo, CO 148 Villas of Park West II Pueblo, CO 112 1,148 The following is a summary of the preliminary allocation of the fair value of the VAA Holdback Portfolio: Real estate $ 219,500 Other assets 4,843 Total assets acquired 224,343 Mortgage notes payable 70,330 Accounts payable and other liabilities 1,624 Accrued interest 190 Total liabilities assumed 72,144 Fair value of acquired net assets ( 100 % ownership) $ 152,199 We have determined that the purchase price represented the fair value of the additional ownership interest in the VAA Holdback Portfolio that was acquired. Fair value of existing ownership interest (at 50 % ownership) $ 219,500 Carrying value of investment 146,313 Gain on remeasurement of assets $ 73,187 From November 1, 2022 , we have included the VAA Holdback Portfolio in our consolidated financial statements. 44 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 12. Mortgages and Other Notes Payable Below is a summary of our notes and interest payable as of December 31, 2022 and 2021 : Carrying Value Interest Rate Maturity Date Property/ Entity 2022 2021 770 South Post Oak $ 11,406 $ 11,635 4.40 % 6/1/2025 Athens 1,155 1,155 4.00 % 8/28/2023 Blue Lake Villas(1) 9,673 — 3.15 % 11/1/2055 Blue Lake Villas Phase II(1) 3,424 — 2.85 % 6/1/2052 Chelsea 7,875 8,037 3.40 % 12/1/2050 EQK Portage 3,350 3,350 10.00 % 11/13/2024 Forest Grove 7,128 7,263 3.75 % 5/5/2024 Landing Bayou 14,161 14,407 3.50 % 9/1/2053 Legacy at Pleasant Grove 13,039 13,352 3.60 % 4/1/2048 New Concept Energy 3,542 3,542 6.00 % 9/30/2023 Northside on Travis(1) 11,656 — 2.50 % 2/1/2053 Parc at Denham Springs(1) 16,737 — 3.75 % 4/1/2051 Parc at Denham Springs Phase II 15,789 15,962 4.05 % 2/1/2060 RCM HC Enterprises(5) 5,086 5,086 5.00 % 12/31/2022 Residences at Holland Lake(1) 10,622 — 3.60 % 3/1/2053 Stanford Center(2) — 38,979 6.00 % 2/26/2023 Sugar Mill Phase III(3) — 9,216 4.50 % 2/1/2060 Toulon(4) — 13,697 3.20 % 12/1/2051 Villas at Bon Secour 19,410 19,492 3.08 % 9/1/2031 Villas of Park West I(1) 9,373 — 3.04 % 3/1/2053 Villas of Park West II(1) 8,504 — 3.18 % 3/1/2053 Vista Ridge 9,674 9,830 4.00 % 8/1/2053 Windmill Farms(5) 6,400 8,389 5.00 % 2/28/2023 $ 188,004 $ 183,392 (1) On November 1, 2022, we assumed the mortgage note payable in connection with the acquisition of the underlying property (See Note 11 - Acquisitions). (2) On October 21, 2022, we paid off the loan, which resulted in a loss on early extinguishment of debt of $ 1,639 . (3) On September 16, 2022, we paid off the loan in connection with the sale of the underlying property (See Note 7 - Real Estate Activity), which resulted in a loss on early extinguishment of debt of $ 1,166 . (4) On January 14, 2022, we paid off the loan in connection with the sale of the underlying property (See Note 7 - Real Estate Activity). (5) We are currently negotiating an extension of the loan with the lender. Interest payable at December 31, 2022 and 2021, was $ 2,004 and $ 1,522 , respectively. We capitalized interest of $ 3,417 and $ 3,733 during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 , we were in compliance with all of our loan covenants except for the minimum debt service coverage ratio (“DSCR”) for the loan on 770 South Post Oak. As a result, the lender requires us to lock the surplus cash flow of the property into a designated deposit account controlled by them, until we are in compliance with the DSCR for a period of two consecutive quarters. All of the above mortgages and other notes payable are collateralized by the underlying property. In addition, we have guaranteed the loans on Athens, Forest Grove and Villas at Bon Secour. 45 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, 2022 are as follows: Year Amount 2023 $ 14,454 2024 18,899 2025 14,080 2026 3,265 2027 3,377 Thereafter 136,056 190,131 Deferred finance cost ( 2,127 ) $ 188,004 13. 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 gain (loss) on foreign currency transactions of $ 20,067 , $( 6,175 ), and $( 13,378 ), for the years ended December 31, 2022 , 2021 and 2020, respectively. The outstanding balance of our Bonds at December 31, 2022 and 2021 is as follows: December 31, Interest Rate Bond Issuance 2022 2021 Maturity Series A Bonds(1) 28,971 65,563 7.30 % 7/31/23 Series B Bonds(1) 35,806 54,019 6.80 % 7/31/25 Series C Bonds(2) 66,546 75,298 4.65 % 1/31/23 131,323 194,880 Less unamortized deferred issuance costs ( 2,105 ) ( 5,428 ) 129,218 189,452 (1) The bonds are collateralized by the assets of SPC. (2) The bonds were collateralized by a trust deed in Browning Place, a 625,297 square foot office building in Dallas, Texas. On January 31, 2023, the series of bonds were paid off. The aggregate maturities of our Bonds are as follows: Year Amount 2023 (1) $ 107,453 2024 11,935 2025 11,935 $ 131,323 (1) Includes the $ 66,546 Series C Bonds that were repaid on January 31, 2023. The Bonds include a number of covenants, including restrictions on the amount of cash that can be distributed from SPC. As of December 31, 2022, we were in compliance with all of our bond covenants. 46 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 14. 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 indirectly owns appro ximately 90.8 % of our common shares. Pillar is compensated for services in accordance with an Advisory 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 $ 931 , $ 944 and $ 1,083 for the years ended December 31, 2022, 2021 and 2020, respectively, for office space leased to Pillar and Regis. Property operating expense includes $ 433 , $ 889 and $ 990 for the years ended December 31, 2022, 2021 and 2020, respectively, for management fees on commercial properties payable to Regis. General and administrative expense includes $ 4,191 , $ 4,399 and $ 3,869 for the years ended December 31, 2022, 2021 and 2020, respectively, for employee compensation and other reimbursable costs payable to Pillar. Advisory fees paid to Pillar were $ 8,753 , $ 13,985 and $ 9,409 for the years ended December 31, 2022, 2021 and 2020, respectively. Notes receivable include 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 $ 16,880 , $ 19,799 and $ 19,515 for the years ended December 31, 2022, 2021 and 2020, respectively. Accrued interest on the these notes of $ 4,663 and $ 4,535 is included in other assets at December 31, 2022 and 2021, respectively. Interest expense on notes payable to Pillar was $ 8,667 , $ 5,661 and $ 6,632 for the years ended December 31, 2022, 2021 and 2020, respectively. Related party receivables represent amounts outstanding from Pillar for loans and advances, net of unreimbursed fees, expenses and costs as provided above. 15. 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 IOR, during the years ended December 31, 2022, 2021 and 2020. 16. 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 2022, 2021 , or 2020 . Future dividends 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. 47 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 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 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. 17. 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, 2022, we had deferred gain of $ 9,791 . 18. 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 expense (benefit) for income taxes consists of: Years Ended December 31, 2022 2021 2020 Current: Federal $ 77,374 $ ( 1,408 ) $ — State 7,710 341 ( 147 ) Deferred and Other: Federal 13,024 — — State — — — Total tax expense (benefit) $ 98,108 $ ( 1,067 ) $ ( 147 ) 48 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, 2022 2021 2020 Income tax (benefit) expense at federal statutory rate $ 118,940 $ 284 $ 2,335 State and local income taxes net of federal tax (benefit) expense 7,705 342 ( 146 ) Alternative minimum tax refund — ( 1,434 ) — Temporary tax differences Change in valuation allowance ( 28,537 ) ( 259 ) ( 2,336 ) Reported tax (benefit) expense $ 98,108 $ ( 1,067 ) $ ( 147 ) Effective tax rate 24.9 % 4.6 % 4.7 % We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2022, our tax years for 2022 , 2021 , and 2020 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2022, 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, 2022 2021 Deferred tax asset: Allowance for losses on notes $ 1,470 $ — Basis difference in fixed assets — 706 Foreign currency translations 4,279 1,088 Net operating loss carryforward — 15,146 5,749 16,940 Deferred tax liabilities: Deferred gain 18,249 2,937 Basis differences for fixed assets 530 — 18,779 2,937 ( 13,030 ) 14,003 Less: valuation allowance — ( 14,003 ) Net deferred tax (liability) asset $ ( 13,030 ) $ — We have state net operating losses in many of the various states in which we operate. 49 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 19. 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 are defendants in litigation related to a property sale ("Nixdorf") that was that was completed in 2008, which was tried to a jury in March 2023. On March 18, 2023, the jury in the case returned a “Plaintiff take nothing” verdict in our favor. If judgment is finally rendered by the Court confirming the jury verdict, Plaintiff may well appeal. 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, which has the case under review. In February 2019, Paul Berger ("Berger") filed suit against us and others that alleged that IOR completed improper sales and/or transfers of property. Berger sought to proceed derivatively and directly, requested a payoff of various related party loans to IOR and that IOR then distribute the funds to its stockholders. After discovery and motions to dismiss substantial portions of the complaint, on June 28, 2022, Berger sought to voluntarily dismiss the action for reasons stated in the motion. The parties did not enter into any settlement, and neither Berger nor their counsel received any consideration for the voluntary dismissal. On January 4, 2023, the United States District Court entered a formal order that dismissed the action with prejudice. 20. Quarterly Results of Operations The following is a tabulation of our quarterly results of operations for the years 2022 and 2021. Quarterly results presented may differ from those previously reported in our Form 10-Q due to the reclassification of the operations 2022 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 7,787 $ 8,129 $ 8,319 $ 13,309 Net operating (loss) income ( 4,495 ) ( 3,033 ) ( 3,188 ) 1,449 Net income (loss) attributable to the Company 11,314 16,312 302,289 43,434 EPS - basic and diluted $ 0.70 $ 1.01 $ 18.72 $ 2.20 2021 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 11,828 $ 11,103 $ 10,494 $ 8,614 Net operating income (loss) ( 3,002 ) ( 8,771 ) ( 5,168 ) ( 3,677 ) Net (loss) income attributable to the Company 18,068 ( 27,328 ) 19,411 ( 6,804 ) EPS - basic and diluted $ 1.12 $ ( 1.69 ) $ 1.20 $ ( 0.42 ) The increase in net income and EPS - basic and diluted during the quarter ended September 30, 2022 is attributable to our share of the gain on the sale of the VAA Sale Portfolio by our joint venture in VAA (See Note 10 – Investment in Unconsolidated Joint Ventures). 21. Subsequent Events The date to which events occurring after December 31, 2022, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 23, 2023, 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. 50 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2022 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 Blue Lake Villas $ 9,673 $ 6,920 $ 27,680 $ — $ 6,920 $ 27,680 $ 34,600 $ 115 2002 2022 Blue Lake Villas Phase II 3,424 2,400 9,600 — 2,400 9,600 12,000 40 2004 2022 Chelsea 7,875 1,225 11,230 53 1,231 11,277 12,508 1,192 1999 2018 Forest Grove 7,128 1,440 10,234 37 1,440 10,271 11,711 670 2020 2020 Landing Bayou 14,161 2,011 18,255 ( 1,502 ) 2,011 16,753 18,764 1,732 2005 2018 Legacy at Pleasant Grove 13,039 2,005 18,109 92 2,033 18,173 20,206 3,716 2006 2018 Northside on Travis 11,656 7,160 28,640 — 7,160 28,640 35,800 119 2008 2022 Parc at Denham Springs 16,737 6,060 24,240 14 6,060 24,254 30,314 101 2007 2022 Parc at Denham Springs Phase II 15,789 1,505 16,975 — 1,505 16,975 18,480 1,297 2010 2009 Residences at Holland Lake 10,622 6,300 25,200 7 6,300 25,207 31,507 105 2004 2022 Villas at Bon Secour 19,410 2,715 15,385 52 2,715 15,437 18,152 1,708 2007 2018 Villas of Park West I 9,373 8,200 32,800 — 8,200 32,800 41,000 137 2005 2022 Villas of Park West II 8,504 6,860 27,440 — 6,860 27,440 34,300 114 2010 2022 Vista Ridge 9,674 1,339 13,398 6 1,339 13,404 14,743 2,939 2009 2018 157,065 56,140 279,186 ( 1,241 ) 56,174 277,911 334,085 13,985 Commercial 770 South Post Oak 11,406 1,763 16,312 1,142 1,763 17,454 19,217 3,605 1970 2015 Browning Place 66,546 5,096 49,441 18,895 5,096 68,336 73,432 31,708 1984 2005 Stanford Center — 20,278 25,876 6,250 20,278 32,126 52,404 16,700 2007 2008 Other — 646 74 ( 40 ) 622 58 680 56 77,952 27,783 91,703 26,247 27,759 117,974 145,733 52,069 Land Mercer Crossing — 2,999 — ( 166 ) 2,833 — 2,833 — 2018 Windmill Farms 6,400 43,608 — 2,707 46,315 — 46,315 — 2006 Other 9,591 19,608 — 11,301 30,909 — 30,909 — 15,991 66,215 — 13,842 80,057 — 80,057 — $ 251,008 $ 150,138 $ 370,889 $ 38,848 $ 163,990 $ 395,885 $ 559,875 $ 66,054 51 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, 2022 2022 2021 2020 Reconciliation of Real Estate Balance at January 1, $ 359,296 $ 459,801 $ 477,963 Additions 240,018 5,814 21,223 Deductions ( 39,439 ) ( 106,319 ) ( 39,385 ) Balance at December 31, $ 559,875 $ 359,296 $ 459,801 Reconciliation of Accumulated Depreciation Balance at January 1, 62,933 82,418 90,173 Additions 8,962 10,820 12,188 Deductions ( 5,841 ) ( 30,305 ) ( 19,943 ) Balance at December 31, $ 66,054 $ 62,933 $ 82,418 52 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS December 31, 2022 Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount Carrying Value Convertible loans Autumn Breeze 5.00 % 7/1/2025 No payments until maturity or conversion $ 24,474 $ 2,326 $ 2,326 Bellwether Ridge 5.00 % 11/1/2026 No payments until maturity or conversion 17,843 3,798 3,798 Forest Pines 5.00 % 11/1/2022 No payments until maturity or conversion 26,060 6,472 6,472 Parc at Ingleside 5.00 % 11/1/2026 No payments until maturity or conversion 24,815 3,759 3,759 Parc at Opelika Phase II 10.00 % 1/13/2023 No payments until maturity or conversion 21,904 3,190 3,190 Parc at Windmill Farms 5.00 % 11/1/2022 No payments until maturity or conversion 35,112 7,886 7,886 Plum Tree 5.00 % 4/26/2026 No payments until maturity or conversion 17,525 1,767 1,767 Spyglass of Ennis 5.00 % 11/1/2022 No payments until maturity or conversion 22,509 5,258 5,258 Steeple Crest 5.00 % 8/1/2026 No payments until maturity or conversion 11,298 6,498 6,498 201,540 40,954 40,954 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 % 10/23/2024 No payments until maturity — 496 496 McKinney Ranch 6.00 % 9/15/2024 No payments until maturity — 3,926 3,926 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 % 1/16/2025 No payments until maturity — 5,907 5,907 — 21,720 21,720 Subsidized housing Phillips Foundation for Better Living, Inc. 12.00 % 3/31/2024 Payments from excess property cash flows — 182 182 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 % 3/31/2024 Payments from excess property cash flows — 10,096 10,096 53 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 % 3/31/2025 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 53,039 27,477 27,477 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 — 180 180 53,039 76,935 76,935 $ 254,579 $ 139,609 $ 139,609 54 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS As of December 31, 2022 2021 2020 Balance at January 1, $ 136,607 $ 130,626 $ 143,087 Additions 4,653 19,149 15,312 Deductions ( 1,651 ) ( 13,168 ) ( 27,773 ) Balance at December 31, $ 139,609 $ 136,607 $ 130,626 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.