ari10q063013.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2013
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 
Commission File Number 001-15663
 
 

AMERICAN REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)

   
Nevada
75-2847135
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
1603 Lyndon B. Johnson Freeway, Suite 800, Dallas, Texas 75234
(Address of principal executive offices)
(Zip Code)
 
(469) 522-4200
(Registrant’s telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    xYes     ¨No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    xYes     ¨No.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
       
Large accelerated filer ¨
Accelerated filer
¨
     
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)
Smaller reporting company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨Yes     xNo.
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
   
Common Stock, $.01 par value
11,525,389
(Class)
(Outstanding at August 5, 2013)
 
 
 
 
 
 

 
 
AMERICAN REALTY INVESTORS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
     
   
    PAGE
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets at June 30, 2013 (unaudited) and December 31, 2012
               3
     
 
Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)
               4
     
 
Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2013 (unaudited)
               5
     
 
Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2013 and 2012 (unaudited)
               6
     
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)
               7
     
 
Notes to Consolidated Financial Statements
               8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
               24
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
               34
     
Item 4.
Controls and Procedures
               34
   
PART II. OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
               35
     
Item 6.
Exhibits
               36
   
SIGNATURES
               37
 
 
 
 
2

 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
(unaudited)
 
             
   
June 30,
   
December 31,
 
   
2013
   
2012
 
   
(dollars in thousands, except
share and par value amounts)
 
Assets
           
Real estate, at cost
  $ 1,004,999     $ 1,031,632  
Real estate held for sale at cost, net of depreciation ($0 for 2013 and $4,393 for 2012)
    -       17,040  
Real estate subject to sales contracts at cost, net of depreciation ($1,773 and $15,948 in 2013 and 2012)
    27,682       42,286  
Less accumulated depreciation
    (159,574 )     (160,525 )
Total real estate
    873,107       930,433  
Notes and interest receivable
               
Performing (including $111,898 and $114,275 in 2013 and 2012 from related parties)
    118,968       120,998  
Non-performing
    4,226       4,175  
   Less allowance for estimated losses (including $15,962 and $18,962 in 2013 and 2012 from related parties)
    (19,504 )     (21,704 )
Total notes and interest receivable
    103,690       103,469  
Cash and cash equivalents
    9,333       17,141  
Investments in unconsolidated investees
    10,415       8,168  
Related party receivable
    871       -  
Other assets
    61,197       76,134  
Total assets
  $ 1,058,613     $ 1,135,345  
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Notes and interest payable
  $ 757,144     $ 769,201  
Notes related to assets held for sale
    -       18,915  
Notes related to subject to sales contracts
    21,035       55,976  
Stock-secured notes payable and margin debt
    24,818       25,765  
Related party payables
    -       10,922  
Deferred gain (including $74,303 and $71,303 in 2013 and 2012 from sales to related parties)
    76,148       73,148  
Accounts payable and other liabilities (including $10,536 and $15,746 in 2013 and 2012 to related parties)
    85,278       96,314  
      964,423       1,050,241  
                 
Shareholders’ equity:
               
Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued and outstanding
3,353,954 shares in 2013 and 2012 (liquidation preference $10 per share), including 900,000 shares in
2013 and 2012 held by subsidiaries
    4,908       4,908  
Preferred stock, Series K: $2.00 par value, authorized, issued and outstanding 135,000 and 0 shares in
2013 and 2012, respectively (liquidation preference $10 per share), held by TCI (consolidated)
    -       -  
Common stock, $.01 par value, authorized 100,000,000 shares; issued 11,941,174 shares and
outstanding 11,525,389 shares in 2013 and 2012
    115       115  
Treasury stock (Common Stock) at cost; 415,785 shares in 2013 and 2012 and 229,214 shares held by
TCI (consolidated) as of 2013 and 2012
    (6,395 )     (6,395 )
Paid-in capital
    104,367       105,700  
Retained earnings
    (44,343 )     (53,071 )
Accumulated other comprehensive loss
    (786 )     (786 )
Total American Realty Investors, Inc. shareholders' equity
    57,866       50,471  
Non-controlling interest
    36,324       34,633  
Total equity
    94,190       85,104  
Total liabilities and equity
  $ 1,058,613     $ 1,135,345  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
3

 
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
   
(dollars in thousands, except share and per share amounts)
 
Revenues:
                       
Rental and other property revenues (including $166 and $167 for the three months and $331
and $335 for the six months ended 2013 and 2012 respectively from related parties)
  $ 27,182     $ 27,284     $ 53,973     $ 53,912  
                                 
Expenses:
                               
Property operating expenses (including $194 and $244 for the three months and $424 and
$509 for the six months ended 2013 and 2012 respectively from related parties)
    12,544       13,253       25,577       26,116  
Depreciation and amortization
    5,445       4,941       10,304       9,918  
General and administrative (including $1,044 and $1,017 for the three months and $1,986
and $1,936 for the six months ended 2013 and 2012 respectively from related parties)
    2,043       919       4,257       3,777  
Provision on impairment of notes receivable and real estate assets
    800       -       800       -  
Advisory fee to related party
    2,487       2,700       5,042       5,359  
     Total operating expenses
    23,319       21,813       45,980       45,170  
     Operating income
    3,863       5,471       7,993       8,742  
                                 
Other income (expense):
                               
Interest income (including $3,420 and $4,624 for the three months and $6,493 and $7,865 for
the six months ended 2013 and 2012 respectively from related parties)
    3,512       4,723       7,053       8,063  
Other income (including $0 and $1,500 for the three months and $0 and $3,000 for the six
months ended 2013 and 2012 respectively from related parties)
    149       2,235       2,685       3,981  
Mortgage and loan interest (including $581 and $931 for the three months and $865 and
$1,853 for the six months ended 2013 and 2012 respectively from related parties)
    (11,065 )     (12,061 )     (22,169 )     (24,488 )
Deferred borrowing costs amortization
    (960 )     (1,975 )     (3,436 )     (2,887 )
Loan charges and prepayment penalties
    (3,380 )     (3,769 )     (7,362 )     (6,161 )
Loss on sale of investments
    -       -       -       (362 )
Earnings from unconsolidated investees
    (25 )     33       188       150  
        Total other expenses
    (11,769 )     (10,814 )     (23,041 )     (21,704 )
Loss before gain on land sales, non-controlling interest, and taxes
    (7,906 )     (5,343 )     (15,048 )     (12,962 )
Gain (loss) on land sales
    -       4,738       (35 )     3,716  
Loss from continuing operations before tax
    (7,906 )     (605 )     (15,083 )     (9,246 )
   Income tax benefit
    6,423       2,217       8,931       2,625  
Net income (loss) from continuing operations
    (1,483 )     1,612       (6,152 )     (6,621 )
Discontinued operations:
                               
   Income (loss) from discontinued operations
    276       1,666       216       (757 )
   Gain on sale of real estate from discontinued operations
    18,074       4,668       25,301       8,256  
   Income tax expense from discontinued operations
    (6,423 )     (2,217 )     (8,931 )     (2,625 )
Net income from discontinued operations
    11,927       4,117       16,586       4,874  
Net income (loss)
    10,444       5,729       10,434       (1,747 )
Net (income) loss attributable to non-controlling interest
    (2,090 )     (1,064 )     (1,706 )     112  
Net income (loss) attributable to American Realty Investors, Inc.
    8,354       4,665       8,728       (1,635 )
Preferred dividend requirement
    (613 )     (613 )     (1,226 )     (1,226 )
Net income (loss) applicable to common shares
  $ 7,741     $ 4,052     $ 7,502     $ (2,861 )
                                 
Earnings per share - basic
                               
   Loss from continuing operations
  $ (0.36 )   $ (0.01 )   $ (0.79 )   $ (0.67 )
   Income from discontinued operations
    1.03       0.36       1.44       0.42  
   Net income (loss) applicable to common shares
  $ 0.67     $ 0.35     $ 0.65     $ (0.25 )
                                 
Earnings per share - diluted
                               
   Loss from continuing operations
  $ (0.36 )   $ (0.01 )   $ (0.79 )   $ (0.67 )
   Income from discontinued operations
    1.03       0.36       1.44       0.42  
   Net income (loss) applicable to common shares
  $ 0.67     $ 0.35     $ 0.65     $ (0.25 )
                                 
Weighted average common share used in computing earnings per share
    11,525,389       11,525,389       11,525,389       11,525,389  
Weighted average common share used in computing diluted earnings per share
    11,525,389       11,525,389       11,525,389       11,525,389  
                                 
                                 
Amounts attributable to American Realty Investors, Inc.
                               
Income (loss) from continuing operations
  $ (3,573 )   $ 548     $ (7,858 )   $ (6,509 )
Income from discontinued operations
    11,927       4,117       16,586       4,874  
Net income (loss) applicable to American Realty Investors, Inc.
  $ 8,354     $ 4,665     $ 8,728     $ (1,635 )
                                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
4

 
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
 
For the Six Months Ended June 30, 2013
 
(unaudited)
 
(dollars in thousands)
 
                                                                   
                                                         
Accumulated
       
               
Series A
   
Series K
                                 
Other
    Non-  
   
Total
   
Comprehensive
   
Preferred
   
Preferred
   
Common Stock
   
Treasury
   
Paid-in
   
Retained
   
Comprehensive
   
controlling
 
   
Equity
   
Loss
   
Stock
   
Stock
   
Shares
   
Amount
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Interest
 
                                                                   
Balance, December 31, 2012
  $ 85,104     $ (144,151 )   $ 4,908     $ -       11,941,174     $ 115     $ (6,395 )   $ 105,700     $ (53,071 )   $ (786 )   $ 34,633  
Net income
    10,434       10,434       -       -       -       -       -       -       8,728       -       1,706  
Sale of controlling interest
    57       -       -       -       -       -       -       57       -       -       -  
Distribution of non-controlling interest
    (179 )     -       -       -       -       -       -       (164 )     -       -       (15 )
Series A preferred stock cash dividend ($1.00 per share)
    (1,226 )     -       -       -       -       -       -       (1,226 )     -       -       -  
Balance, June 30, 2013
  $ 94,190     $ (133,717 )   $ 4,908     $ -       11,941,174     $ 115     $ (6,395 )   $ 104,367     $ (44,343 )   $ (786 )   $ 36,324  
                                                                                         
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
5

 
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
(unaudited)
 
             
   
For the Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
   
(dollars in thousands)
 
             
Net income (loss)
  $ 10,434     $ (1,747 )
Other comprehensive income (loss)
    -       -  
Comprehensive income (loss)
    10,434       (1,747 )
Comprehensive (income) loss attributable to non-controlling interest
    (1,706 )     112  
Comprehensive income (loss) attributable to American Realty Investors, Inc.
  $ 8,728     $ (1,635 )
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
6

 
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
 
   
For the Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
   
(dollars in thousands)
 
Cash Flow From Operating Activities:
           
Net income (loss)
  $ 10,434     $ (1,747 )
Adjustments to reconcile net loss applicable to common
 shares to net cash used in operating activities:
 
                   (Gain) loss on sale of land
    35       (3,716 )
                   Gain on sale of income-producing properties
    (25,301 )     (8,256 )
                   Depreciation and amortization
    10,816       11,239  
                   Provision for impairment of notes receivable and real estate assets
    800       -  
                   Amortization of deferred borrowing costs
    3,441       2,902  
                   Earnings from unconsolidated investees
    (188 )     (197 )
      (Increase) decrease in assets:
               
                   Accrued interest receivable
    (677 )     (6,471 )
                   Other assets
    -       -  
                   Prepaid expense
    (982 )     (38 )
                   Escrow
    10,329       4,937  
                   Earnest money
    900       235  
                   Rent receivables
    2,991       290  
                   Related party receivable
    (871 )     -  
      Increase (decrease) in liabilities:
               
                   Accrued interest payable
    (1,472 )     (6,279 )
                   Related party payables
    (10,922 )     3,522  
   Other liabilities
    (11,934 )     (18,687 )
                              Net cash used in operating activities
    (12,601 )     (22,266 )
                 
Cash Flow From Investing Activities:
               
      Proceeds from notes receivables
    2,855       16,055  
      Origination of notes receivable
    (198 )     (9,279 )
      Acquisition of land held for development
    (7 )     (8,503 )
      Proceeds from sales of income-producing properties
    73,494       38,826  
      Proceeds from sale of land
    2,550       25,248  
      Proceeds from sale of investment in unconsolidated real estate entities
    -       -  
      Proceeds from sale of investments
    -       132  
      Investment in unconsolidated real estate entities
    (2,059 )     3,210  
      Improvement of land held for development
    (291 )     (164 )
      Improvement of income-producing properties
    (3,333 )     (862 )
      Acquisition of non-controlling interest
    (79 )     (359 )
      Sale of non-controlling interest
    -       (1,468 )
      Sale of controlling interest
    52       1,149  
      Construction and development of new properties
    (179 )     (4,292 )
                              Net cash provided by investing activities
    72,805       59,693  
                 
Cash Flow From Financing Activities:
               
      Proceeds from notes payable
    137,522       138,760  
      Recurring amortization of principal on notes payable
    (8,878 )     (15,273 )
      Payments on maturing notes payable
    (193,621 )     (158,611 )
      Stock-secured borrowings and margin debt
    (411 )     -  
      Deferred financing costs
    (1,302 )     (3,127 )
      Distributions to non-controlling interests
    (96 )     (172 )
      Preferred stock dividends - Series A
    (1,226 )     (1,226 )
                              Net cash used in financing activities
    (68,012 )     (39,649 )
                 
Net decrease in cash and cash equivalents
    (7,808 )     (2,222 )
Cash and cash equivalents, beginning of period
    17,141       20,312  
Cash and cash equivalents, end of period
  $ 9,333     $ 18,090  
                 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 23,047     $ 25,589  
                 
Schedule of noncash investing and financing activities:
               
Notes receivable received from related party
  $ -     $ 9,279  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
7

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
 
Organization
 
As used herein, the terms “ARL”, “the Company”, “we”, “our” or “us” refer to American Realty Investors, Inc., a Nevada corporation, which was formed in November 1999.  In August 2000, the Company acquired American Realty Trust, Inc. (“ART”), a Georgia corporation and National Realty, L.P. (“NRLP”), a Delaware partnership.
 
The Company is headquartered in Dallas, Texas and its common stock trades on the New York Stock Exchange (“NYSE”)  under the symbol (“ARL”). Approximately 87.4% of ARL’s stock is owned by related parties.  ARL owns approximately 83.8% of the outstanding shares of common stock of Transcontinental Realty Investors, Inc. (“TCI”), a Nevada corporation, which has its common stock listed and traded on the New York Stock Exchange (“NYSE”) under the symbol (“TCI”).  ARL is a “C” corporation for U.S. federal income tax purposes and has consolidated TCI’s accounts and operations since March 2003.  We have no employees.
 
TCI, a subsidiary of ARL, owns approximately 81.1% of the common stock of Income Opportunity Realty Investors, Inc. (“IOT”).   Effective July 17, 2009, IOT’s financial results were consolidated with those of ARL and TCI and their subsidiaries.  Shares of IOT are traded on the New York Stock Exchange Euronext (“NYSE MKT”) under the symbol (“IOT”). 

ARL invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate.  Pillar Income Asset Management, Inc. (“Pillar”) is the Company’s external Advisor and Cash Manager.  Although the Board of Directors is directly responsible for managing the affairs of ARL, and for setting the policies which guide it, the day-to-day operations of ARL are performed by Pillar, as the contractual advisor, under the supervision of the Board.  Pillar’s duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities and arranging debt and equity financing for the Company with third party lenders and investors.  Additionally, Pillar serves as a consultant to the Board with regard to their decisions in connection with ARL’s business plan and investment policy.  Pillar also serves as an Advisor and Cash Manager to TCI and IOT.

Regis Realty Prime, LLC (“Regis”) manages our commercial properties and provides brokerage services.  ARL engages third-party companies to lease and manage its apartment properties.  TCI also has a development agreement with Unified Housing Foundation, Inc. (“UHF”) a non-profit corporation that provides management services for the development of residential apartment projects in the future.
 
Properties
 
We own or had interests in a total property portfolio of 57 income-producing properties as of June 30, 2013.  The properties consisted of:
 
 
11 commercial properties consisting of seven office buildings, one industrial warehouse, and three retail centers comprising in aggregate approximately 2.6 million rentable square feet;
 
 
46 apartment communities totaling 8,353 units, excluding apartments being developed; and
 
 
4,629 acres of developed and undeveloped land.

We join with various third-party development companies to construct residential apartment communities. We are in the predevelopment process on several residential apartment communities but have not yet begun construction.  At June 30, 2013, we had no apartment projects in development.  The third-party developer typically holds a general partner as well as a majority limited partner interest in a limited partnership formed for the purpose of building a single property while we generally take a minority limited partner interest in the limited partnership. We may contribute land to the partnership as part of our equity contribution or we may contribute the necessary funds to the partnership to acquire the land. We are required to fund all required equity contributions while the third-party developer is responsible for obtaining construction financing, hiring a general contractor and for the overall management, successful completion and delivery of the project. We generally bear all the economic risks and rewards of ownership in these partnerships and therefore include these partnerships in our consolidated financial statements. The third-party developer is paid a developer fee typically equal to a percentage of the construction costs. When the project reaches stabilized occupancy, we acquire the third-party developer’s partnership interests in exchange for any remaining unpaid developer fees.

A maritime harbor town is being constructed on the 420 acre site, of which half is water area, of the former naval base of Olpenitz between the mouth of the River Schlei and the Baltic Sea in the state of Schleswig-Holstein in North Germany. The project is located less than 30 miles from the Danish border. The town will be comprised of a marina offering several thousand moorings, premium vacation homes each with their own landing stage as well as exclusive hotels, restaurants, shops and a range of leisure activities from sailing to golfing to cross country skiing.  The development project is expected to be the biggest holiday resort in northern Europe.  Due to mismanagement by the third party developer hired to run the project, the ownership entity was forced to file for insolvency and the Company is working in cooperation with the insolvency manager in order to secure the future of our investment and the development project.
 
 
 
8

 

Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being misleading.  In the opinion of management, all adjustments (consisting of normal recurring matters) considered necessary for a fair presentation have been included.  The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
 
The year-end consolidated balance sheet at December 31, 2012 was derived from the audited financial statements at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements.  For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.  Certain 2012 financial statement amounts have been reclassified to conform to the 2013 presentation, including adjustments for discontinued operations.
 
Principles of Consolidation
 
The accompanying financial statements include the accounts of the Company, its subsidiaries, generally all of which are wholly-owned, and all entities in which we have a controlling interest.  Arrangements that are not controlled through voting or similar rights are accounted for as a Variable Interest Entity (“VIE”), in accordance with the provisions and guidance of ASC Topic 810 “Consolidation”, whereby we have determined that we are a primary beneficiary of the VIE and meet certain criteria of a sole general partner or managing member as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership when the Investor is the Sole General Partner and the Limited Partners have Certain Rights (“EITF 04-5”).  VIE’s are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders as a group lack adequate decision making ability, the obligation to absorb expected losses or residual returns of the entity, or have voting rights that are not proportional to their economic interests.  The primary beneficiary generally is the entity that provides financial support and bears a majority of the financial risks, authorizes certain capital transactions, or makes operating decisions that materially affect the entity’s financial results.  All significant intercompany balances and transactions have been eliminated in consolidation.
 
In determining whether we are the primary beneficiary of a VIE, we consider qualitative and quantitative factors, including, but not limited to: the amount and characteristics of our investment; the obligation or likelihood for us or other investors to provide financial support; our and the other investors’ ability to control or significantly influence key decisions for the VIE; and the similarity with and significance to the business activities of us and the other investors.  Significant judgments related to these determinations include estimates about the current future fair values and performance of real estate held by these VIE’s and general market conditions.

For entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary, the entities are accounted for using the equity method of accounting. Accordingly, our share of the net earnings or losses of these entities is included in consolidated net income.  Our investment in Gruppa Florentina, LLC, is accounted for under the equity method. Our investment in LK-Four Hickory, LLC was accounted for under the equity method until January 17, 2012, when it was sold.
 
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 useful lives.  Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements – 10-40 years; furniture, fixtures and equipment – 5-10 years).  The Company continually evaluates the recoverability of the carrying value of its real estate assets using the methodology prescribed in ASC Topic 360, “Property, Plant and Equipment”.  Factors considered by management in evaluating impairment of its existing real estate assets held for investment include significant declines in property operating profits, annually recurring property operating losses and other significant adverse changes in general market conditions that are considered permanent in nature.  Under ASC Topic 360, a real estate asset held for investment is not considered impaired if the undiscounted, estimated future cash flows of an asset (both the annual estimated cash flow from future operations and the estimated cash flow from the theoretical sale of the asset) over its estimated holding period are in excess of the asset’s net book value at the balance sheet date.  If any real estate asset held for investment is considered impaired, a loss is provided to reduce the carrying value of the asset to its estimated fair value.
 
 
 
9

 
 
Real Estate Held For Sale
 
We periodically classify real estate assets as “held for sale”.  An asset is classified as held for sale after the approval of our board of directors, after an active program to sell the asset has commenced and if the sale is probable.  One of the deciding factors in determining whether a sale is probable is whether the firm purchase commitment is obtained and whether the sale is probable within the year.  Upon the classification of a real estate asset as held for sale, the carrying value of the asset is reduced to the lower of its net book value or its estimated fair value, less costs to sell the asset.  Subsequent to the classification of assets as held for sale, no further depreciation expense is recorded.  Real estate assets held for sale are stated separately on the accompanying Consolidated Balance Sheets.  Upon a decision that the sale is no longer probable, the asset is classified as an operating asset and depreciation expense is reinstated.  The operating results of real estate assets held for sale and sold are reported as discontinued operations in the accompanying Consolidated Statements of Operations.  Income from discontinued operations includes the revenues and expenses, including depreciation and interest expense, associated with the assets.  This classification of operating results as discontinued operations applies retroactively for all periods presented.  Additionally, gains and losses on assets designated as held for sale are classified as part of discontinued operations.
 
Cost Capitalization
 
Costs related to planning, developing, leasing and constructing a property are capitalized and classified as Real Estate in the Consolidated Balance Sheets.  We capitalize interest to qualifying assets under development based on average accumulated expenditures outstanding during the period.  In capitalizing interest to qualifying assets, we first use the interest incurred on specific project debt, if any, and next use the weighted average interest rate of non-project specific debt.  We capitalize interest, real estate taxes and certain operating expenses until building construction is substantially complete and the building is ready for its intended use, but no later than one year from the cessation of major construction activity.
 
We capitalize leasing costs which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement and any internal costs that may be applicable.  We allocate these costs to individual tenant leases and amortize them over the related lease term.
 
Fair Value Measurement
 
We apply the guidance in ASC Topic 820, “Fair Value Measurements and Disclosures,” to the valuation of real estate assets.  These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in a transaction between market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy.  The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity’s own data.
 
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
 
   
Level 1 –
Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2 –
Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 –
Unobservable inputs that are significant to the fair value measurement.
 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
Related Parties
 
We apply ASC Topic 805, “Business Combinations”, to evaluate business relationships. 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.
 
 
 
10

 
 
Newly Issued Accounting Standards
 
We have considered all other newly issued accounting guidance that is applicable to our operations and the preparation of our consolidated statements, including that which we have not yet adopted.  We do not believe that any such guidance will have a material effect on our financial position or results of operations.
 
NOTE 2. REAL ESTATE ACTIVITY
 
Below is a summary of the real estate owned as of June 30, 2013 (dollars in thousands):
 
Apartments
  $ 590,289  
Commercial properties
    220,103  
Land held for development
    194,607  
Real estate held for sale
    -  
Real estate subject to sales contract
    29,455  
Total real estate
    1,034,454  
Less accumulated depreciation
    (161,347 )
Total real estate
  $ 873,107  
 
The highlights of our significant real estate transactions for the six months ended June 30, 2013 are listed below:

On January 8, 2013, TCI sold 14.52 acres of land known as Southwood located in Tallahassee, Florida at a foreclosure auction to an independent third party for $0.5 million.  This land parcel was previously sold, on December 31, 2012, to One Realco Corporation, a related party, for a sales price of $0.6 million.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to TCI’s continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.  A sale to an independent third party, that met the requirements of ASC 360-20, took place on January 8, 2013, when the property was sold to a third party and sales proceeds were credited against the outstanding debt.  There was no gain or loss on the land parcel sale.

On January 28, 2013, TCI sold a 314–unit apartment complex known as Verandas at City View located in Fort Worth, Texas for a sales price of $25.3 million to an independent third party.  The buyer assumed the existing debt of $18.2 million secured by the property.  TCI recorded a gain of $6.2 million on the sale.

On March 14, 2013, TCI sold 13.90 acres of land known as Sheffield located in Grand Prairie, Texas to an independent third party for a sales price of $2.3 million.  The proceeds from the sale were used to pay off the multi-tract collateral debt, secured by the property.  TCI recorded a nominal loss on the sale of the property.

On April 8, 2013, TCI recorded the transfer of ownership of Eton Square, a 225,566 square foot commercial building, located in Tulsa, Oklahoma to the existing lender for satisfaction of the current mortgage note.  There was a negotiated deficiency between the value of the property and the outstanding mortgage, resulting in a promissory note for $2.0 million provided by the seller.  The promissory note is reduced by $1.0 million if timely payments are made in accordance with the note. The investment in the entity that owns this commercial building was previously sold, on May 18, 2010, to TX Highland RS Corp, a related party, for a sales price of $13.7 million.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to TCI’s continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.  A sale to an independent third party, that met the requirements of ASC 360-20, took place on April 8, 2013, when the property was transferred to the existing lender and sales proceeds were credited against the outstanding debt.  We recorded a nominal gain on the sale.

On April 12, 2013, TCI was granted full title to 0.2341 acres of land known as Minivest, located in Dallas, Texas by an order of judgment.  TCI paid real estate taxes and has been maintaining the property for the years 1993-2007.
 
 
 
11

 

On February 2, 2012, TCI and its subsidiary, 1340 Poydras, LLC, executed a guarantor settlement and consent agreement with the lender for the Amoco building, Petra CRE CDO 2007-1, Ltd (“Petra”) to transfer ownership of the Amoco building to a new entity, 1340 Owner, LLC, which is affiliated with the existing lender, Petra.  Petra and its affiliate are independent third parties.  TCI deferred the recognition of the sale in accordance with ASC 360-20 due to TCI’s continuing involvement related to the obligations under the note and guaranty agreements and the re-acquisition option.  As of May 7, 2013, TCI and Petra settled the obligations set forth under the note and guaranty and terminated the re-acquisition option.  TCI recorded the sale to the independent third party and recognized a gain of $11.9 million. In connection with the settlement of certain litigation which had been pending in the U. S. District Court, Eastern District of Louisiana, among Petra, TCI, and a subsidiary, on May 7, 2013, TCI issued a $5.0 million Promissory Note payable to the order of such lender which is secured by an unrecorded confession of judgment and a collateral pledge to such lender of 135,000 shares of Series K Convertible Preferred Stock of ARL issued on the same date to TCI. Such Promissory Note requires regular monthly payments, is pre-payable, and matures on March 5, 2015.  The issuance of the $5.0 million Promissory Note and collateral to the Lender resolved all claims of the Lender against TCI including deficiency claims under a mortgage covering certain real property located in New Orleans, Louisiana.  The note has prepayment provisions whereby if it is paid off by March 1, 2014, the balance of $3.5 million is forgiven and if paid off after March 1, 2014 but before March 1, 2015, $2.5 million will be forgiven and collateral returned to TCI and the judgment released.

On May 9, 2013, TCI sold 225 Baronne, a 422,037 square foot building, located in New Orleans, Louisiana for a sales price of $1.5 million to an independent third party.  Proceeds of sale were used to pay down a related party payable. TCI recorded a nominal gain on the sale.

On June 7, 2013, TCI sold a 206-unit apartment complex known as Laguna Vista, located in Farmers Branch, Texas, for a sale price of $24.8 million to an independent third party. TCI recorded a gain on sale of $6.1 million.

As of July 22, 2013, several subsidiaries of the TCI entered into a Twenty-Second Amendment to the Agreement for Purchase and Sale for the sale of nine residential apartment complexes.  According to the terms of the Agreement, the purchaser will assume the existing loans, secured by the property and the purchaser is in the process of obtaining approval from HUD for this transfer.  According to this Amendment, the deposits received by the Company and the title company are now only refundable if HUD does not approve the transfer of assets.  The original contract was dated December 5, 2012 and due to the restrictions on the consummation of the sale, the Company has decided that the purchase commitment is not firm and has not met the requirements to be considered “held-for-sale”.  Upon the approval from HUD, TCI will reclassify the assets as “held-for-sale”.  The properties included in this proposed transaction are Dorado Ranch, Huntington Ridge, Legends of El Paso, Mariposa Villas, Paramount Terrace, River Oaks, Savoy of Garland, Stonebridge at City Park, and Vistas at Pinnacle Park.

In December 2010, various commercial and land holdings were sold to FRE Real Estate, Inc., a related party. During the first three months of 2011, many of these transactions were rescinded as of the original transaction date and were subsequently sold to related parties under the same ownership as FRE Real Estate, Inc. As of June 30, 2013, one commercial building, Thermalloy, remains in FRE Real Estate, Inc.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to TCI’s continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.
 
The properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets.  These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution.  These properties have mortgages that are secured by the property and many have corporate guarantees.  According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation.  We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.
 
As of June 30, 2013, there remains one apartment complex, one commercial building and 212 acres of land that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets. These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution. These properties have mortgages that are secured by the property and many have corporate guarantees. According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation. We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.  The Company did not recognize or record the sale in accordance with ASC 360-20 due to our continuing involvement, which included the potential payment of cash shortfalls, future obligations under the existing mortgage and guaranty, the buyer’s inadequate initial investment and the Company’s questionable recovery of investment cost.  The Company determined that no sale had occurred for financial reporting purposes and therefore the asset remained on the books and continued to record operating expenses and depreciation as a period cost until a sale occurred that met the requirements of ASC 360-20.  The buyers received no compensation for the facilitation of the bankruptcy or debt restructuring process.
 
 
 
12

 
 
We continue to invest in the development of apartment projects. During the six months ended June 30, 2013, we have expended $0.2 million related to the construction or predevelopment of various apartment complexes.

 
NOTE 3. NOTES AND INTEREST RECEIVABLE
 
A portion of our assets are invested in mortgage notes receivable, principally secured by real estate. We may originate mortgage loans in conjunction with providing purchase money financing of property sales. Notes receivable are generally collateralized by real estate or interests in real estate and personal guarantees of the borrower and, unless noted otherwise, are so secured. Management intends to service and hold for investment the mortgage notes in our portfolio. A majority of the notes receivable provide for principal to be paid at maturity.
 
Our mortgage notes receivable consist of first, wraparound and junior mortgage loans (dollars in thousands):
 
               
Maturity
 
Interest
       
   
Borrower
       
Date
 
Rate
 
Amount
 
Security
Performing loans:
   
 
                 
 
     Miscellaneous non-related party notes
   
Various
 
Various
 
 $           4,097
 
Various security interests
 
     Miscellaneous related party notes (1)
   
Various
 
Various
 
              2,656
 
Various security interests
 
     One Realco Corporation (1)(2)
   
01/17
 
3.00%
 
              7,000
 
Unsecured
 
     Realty Advisors Management, Inc. (1)
   
12/16
 
2.19%
 
            20,387
 
Unsecured
 
     S Breeze I-V, LLC
       
09/13
 
5.00%
 
              2,933
 
6% Class A and 25% Class B Limited Partner Interests
 
     Unified Housing Foundation, Inc. (Cliffs of El Dorado) (1)
 
12/32
 
12.00%
 
              2,097
 
100% Membership Interest in Unified Housing of McKinney, LLC
 
     Unified Housing Foundation, Inc. (Echo Station) (1)
 
12/32
 
12.00%
 
              1,481
 
100% Membership Interest in Unified Housing of Temple, LLC
 
     Unified Housing Foundation, Inc. (Inwood on the Park) (1)
 
12/32
 
12.00%
 
              5,059
 
100% Membership Interest in Unified Housing Inwood, LLC
 
     Unified Housing Foundation, Inc. (Kensington Park) (1)
 
12/32
 
12.00%
 
              3,936
 
100% Membership Interest in Unified Housing Kensington, LLC
 
     Unified Housing Foundation, Inc.  (Lakeshore Villas) (1)
 
12/32
 
12.00%
 
              2,000
 
Unsecured
 
     Unified Housing Foundation, Inc.  (Lakeshore Villas) (1)
 
12/32
 
12.00%
 
              9,096
 
Membership interest in Housing for Seniors of Humble, LLC
 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)
 
12/32
 
12.00%
 
              3,057
 
100% Membership Interest in Unified Housing of Austin, LLC
 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)
 
12/32
 
12.00%
 
              4,663
 
100% Membership Interest in Unified Housing of Austin, LLC
 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)
 
12/32
 
12.00%
 
              2,250
 
100% Membership Interest in Unified Housing of Vista Ridge, LLC
 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)
 
12/32
 
12.00%
 
              6,000
 
100% Membership Interest in Unified Housing of Vista Ridge, LLC
 
     Unified Housing Foundation, Inc. (Parkside Crossing) (1)
 
12/32
 
12.00%
 
              1,936
 
100% Membership Interest in Unified Housing of Parkside Crossing, LLC
 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)
 
12/32
 
12.00%
 
              5,174
 
100% Membership Interest in Unified Housing of Sendero Ridge, LLC
 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)
 
12/32
 
12.00%
 
              4,812
 
100% Membership Interest in Unified Housing of Sendero Ridge, LLC
 
     Unified Housing Foundation, Inc. (Timbers at the Park) (1)
 
12/32
 
12.00%
 
              1,323
 
100% Membership Interest in Unified Housing of Terrell, LLC
 
     Unified Housing Foundation, Inc. (Tivoli) (1)
 
12/32
 
12.00%
 
              7,966
 
100% Membership Interest in Unified Housing of Tivoli, LLC
 
     Unified Housing Foundation, Inc. (Reserve at White Rock Phase I) (1)
12/32
 
12.00%
 
              2,485
 
100% Membership Interest in Unified Housing of Harvest Hill I, LLC
 
     Unified Housing Foundation, Inc. (Reserve at White Rock Phase II) (1)
12/32
 
12.00%
 
              2,555
 
100% Membership Interest in Unified Housing of Harvest Hill, LLC
 
     Unified Housing Foundation, Inc. (Trails at White Rock) (1)
 
12/32
 
12.00%
 
              3,815
 
100% Membership Interest in Unified Housing of Harvest Hill III, LLC
 
     Unified Housing Foundation, Inc. (1)
   
12/13
 
5.00%
 
              6,000
 
100% Membership Interest in Unified Housing of Tivoli, LLC
 
     Accrued interest
               
              6,190
   
Total Performing
                 
 $       118,968
   
                             
Non-Performing loans:
                     
 
     Leman Development, Ltd (2)
     
07/11
 
7.00%
 
              1,500
 
Unsecured
 
     Tracy Suttles (2)
       
12/11
 
0.00%
 
              1,077
 
Unsecured
 
     Miscellaneous non-related party notes
   
Various
 
Various
 
              1,279
 
Various secured interest
 
     Accrued interest
               
                 370
   
Total Non-Performing
               
 $           4,226
   
                             
 
      Allowance for estimated losses
           
          (19,504)
   
Total
                   
 $       103,690
   
                             
                             
 (1)  Related party notes
                     
 (2)  An allowance was taken for estimated losses at full value of note.
             
 
The Company has various notes receivable from Unified Housing Foundation, Inc. (“UHF”).  UHF is determined to be a related party to the company due to our significant investment in the performance of the collateral secured under the notes receivable and its consulting agreement with TCI.
 
 
 
13

 
 
Payments are due from surplus cash flow of operations; sale or refinance of any of the properties underlying these notes will be used to repay outstanding interest and principal for the remaining notes.  These notes are cross-collateralized but to the extent cash is received from a specific UHF property, it is applied against any outstanding interest for the related-property note.  The allowance on the UHF notes was a purchase allowance that was netted against the notes when acquired.
 
As of January 1, 2013, the Company agreed to extend the maturity on the surplus cash flow notes receivable from UHF for an additional term of five years in exchange for the early termination of the preferred interest rate.  The original notes gave a five-year period of preferred interest rate at 5.25%, before returning to the original note rate of 12.0%.

NOTE 4. INVESTMENT IN UNCONSOLIDATED INVESTEES
 
Investments in unconsolidated investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost and adjusted for the Company’s proportionate share of their undistributed earnings or losses under the equity method of accounting.
 
Investments in unconsolidated investees consist of the following:
 
   
Percentage ownership as of
 
   
June 30, 2013
   
June 30, 2012
 
Gruppa Florentina, LLC
    20.00 %     20.00 %
 
Gruppa Florentina, LLC is the sole member of Milano Restaurants International Corporation, (“Milano”) which operates 35 pizza parlors under the trade name “Me-N-Ed’s Pizza Parlors” located primarily in Central and Northern California.  Milano has a 100% ownership interest in SienaCorp, which operates two grills under the trade names “Me-N-Ed’s Victory Grill” and Me-N-Ed’s Coney Island Grill”.  Milano has a 100% ownership interest in Piazza del Pane, Inc., which operates three restaurants located in Central California.  Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s Pizzerias.

The following is a summary of the financial position and results of operations from our investees:

As of June 30,
 
2013
   
2012
 
Real estate, net of accumulated depreciation
  $ 11,210     $ 11,694  
Notes receivable
    6,299       5,887  
Other assets
    31,802       31,356  
Notes payable
    (12,695 )     (13,842 )
Other liabilities
    (7,268 )     (6,514 )
Shareholders' equity/partners' capital
    (29,348 )     (28,581 )
                 
For the Six Months Ended June 30,
    2013       2012  
Revenue
  $ 18,971     $ 19,183  
Depreciation
    (491 )     (580 )
Operating expenses
    (17,251 )     (17,170 )
Interest expense
    (448 )     (498 )
Income from continuing operations
    781       935  
Income from discontinued operations
    -       -  
Net income
  $ 781     $ 935  
 
               
Company's proportionate share of earnings
  $ 156     $ 187  
 

 
14

 

NOTE 5. NOTES PAYABLE

Below is a summary of our notes and interest payable (dollars in thousands):
 
   
Notes
Payable
   
Accrued
Interest
   
Total
Debt
 
Apartments
  $ 503,311     $ 1,475     $ 504,786  
Commercial
    114,808       257       115,065  
Land held for development
    118,374       2,154       120,528  
Real estate held for sale
    604       -       604  
Real estate subject to sales contract
    18,680       2,355       21,035  
Other
    15,338       823       16,161  
                         
Total
  $ 771,115     $ 7,064     $ 778,179  

On January 24, 2013, TCI refinanced the existing mortgage on Breakwater Bay apartments, a 176-unit complex located in Beaumont, Texas, for a new mortgage of $9.8 million. We paid off the existing mortgage of $9.1 million and $0.7 million in closing costs and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on February 1, 2053.

On January 25, 2013, TCI refinanced the existing mortgage on Northside on Travis apartments, a 200-unit complex located in Sherman, Texas, for a new mortgage of $13.9 million. We paid off the existing mortgage of $13.5 million and $1.3 million in closing costs and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on February 1, 2053.

On January 28, 2013, TCI refinanced the existing mortgage on Capitol Hill apartments, a 156-unit complex located in Little Rock, Arkansas, for a new mortgage of $9.4 million. We paid off the existing mortgage of $8.8 million and $0.6 million in closing costs and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on February 1, 2053.

On February 12, 2013, the construction loan in the amount of $17.0 million that was taken out on May 13, 2010 to fund the development of Toulon apartments, a 240-unit complex located in Gautier, Mississippi, closed into permanent financing.  The note accrues interest at 5.37% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on December 1, 2051.

On February 25, 2013, TCI refinanced the existing mortgage on Mansions of Mansfield apartments, a 208-unit complex located in Mansfield, Texas, for a new mortgage of $16.3 million. We paid off the existing mortgage of $15.8 million and $1.4 million in closing costs and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2053.

On February 25, 2013, TCI refinanced the existing mortgage on Preserve at Pecan Creek apartments, a 192-unit complex located in Denton, Texas, for a new mortgage of $15.1 million. We paid off the existing mortgage of $14.6 million and $1.2 million in closing costs and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2053.

On March 25, 2013, TCI refinanced the existing mortgage on Parc at Clarksville apartments, a 168-unit complex, located in Clarksville, Tennessee, for a new mortgage of $13.4 million.  We paid off the existing mortgage of $13.0 million and $0.7 million in closing costs and escrows.  The note accrues interest at 2.50% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on April 1, 2053.

On June 7, 2013 a wholly-owned subsidiary of IOT entered into a Settlement and Release Agreement and a Loan Purchase Agreement in order to purchase the Mercer/Travelers land mortgage note due to BDF TCI Mercer III, LLC (“BDF”), the existing lender, at a discount.  Under the agreement, IOT is required to make monthly deposits of $250,000 through August 6, 2013 or, if an extension option is exercised, September 5, 2013, with a final lump sum payment of $28,663,277 due October 4, 2013. 
 
 
 
15

 
 
Under these agreements, IOT also agreed to purchase an obligation known as the Lamar land loan, due by TCI, from BDF.  The Lamar land loan is to be purchased for $1,836,723, requiring a cash payment of $336,723 due September 5, 2013 or, if the extension option is exercised, October 4, 2013, and two promissory notes of $750,000 each.  The promissory notes will accrue interest at 5.0% and are due in full on the maturity dates, which will be six and twelve months from the closing date of September 5, 2013 or, if the extension option is exercised, October 4, 2013.  During this time, IOT and TCI are still obligated to make monthly mortgage payments of $150,000 per month according to the Fourth Modification to the Forbearance Agreement.

On June 26, 2013 TCI refinanced the existing mortgage on Dorado Ranch apartments, a 224-unit complex located in Dallas, Texas, for a new mortgage of $16.6 million. We paid off the existing mortgage of $16.2 million and $1.4 million in closing cost and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based on a 40-year amortization schedule, maturing on July 1, 2053.

On June 26, 2013 TCI refinanced the existing mortgage on Legends of El Paso apartments, a 240-unit complex located in El Paso, Texas, for a new mortgage of $16 million. We paid off the existing mortgage of $15.2 million and $1.2 million in closing cost and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based on a 40-year amortization schedule, maturing on July 1, 2053.

On June 26, 2013 TCI refinanced the existing mortgage on Vistas of Pinnacle Park apartments, a 332-unit complex located in Dallas, Texas, for a new mortgage of $19 million. We paid off the existing mortgage of $18.6 million and $2 million in closing cost and escrows. The note accrues interest at 2.50% and payments of interest and principal are due monthly based on a 40-year amortization schedule, maturing on June 26, 2053.
 
In conjunction with the development of various apartment projects and other developments, we drew down $0.3 million in construction loans during the six months ended Junes 30, 2013.  This was related to the permanent closing of the construction loan for Toulon apartments.
 
There are various land mortgages, secured by the property, that are in the process of a modification or extension to the original note due to expiration of the loan.  We are in constant contact with these lenders, working together in order to modify the terms of these loans and we anticipate a timely resolution that is similar to the existing agreement or subsequent modification.
 
The properties that we have sold to a related party and have deferred the recognition of the sale are treated as “subject to sales contract” on the Consolidated Balance Sheets.  These properties were sold to a related party in order to help facilitate an appropriate debt or organizational restructure and may or may not be transferred back to the seller upon resolution.  These properties have mortgages that are secured by the property and many have corporate guarantees.  According to the loan documents, the maker is currently in default on these mortgages primarily due to lack of payment and is actively involved in discussions with every lender in order to settle or cure the default situation.  We have reviewed each asset and taken impairment to the extent we feel the value of the property was less than our current basis.
 
NOTE 6. STOCK-SECURED NOTES PAYABLE
 
The Company has margin arrangements with various financial institutions and brokerage firms, which provide for borrowings of up to 50.0% of the market value of marketable equity securities.  We also have other notes payable secured by stock.  The borrowings under such margin arrangements and notes are secured by the equity securities of IOT, TCI, and ARL’s trading portfolio securities, and bear interest rates ranging from 5.00% to 10.00% per annum.  Stock-secured notes payable and margin borrowings were $24.8 million at June 30, 2013.
 

 
16

 
 
NOTE 7. RELATED PARTY TRANSACTIONS

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to related parties as of June 30, 2013 (dollars in thousands):
 
   
Pillar
 
Related party payable, December 31, 2012
  $ (10,922 )
Cash transfers
    3,593  
Advisory fees
    (5,041 )
Net income fee
    (104 )
Fees and commissions
    (2,570 )
Cost reimbursements
    (1,797 )
Interest income
    18  
POA fees
    (51 )
Expenses paid by Advisor
    (1,036 )
Financing (mortgage payments)
    (496 )
Intercompany property transfers
    10,684  
Sales/Purchases transactions
    10,973  
Purchase of obligation
    (2,380 )
Related party receivable, June 30, 2013
  $ 871  
 
During the ordinary course of business, we have related party transactions that include, but are not limited to rent income, interest income, interest expense, general and administrative costs, commissions, management fees, and property expenses.  In addition, we have assets and liabilities that include related party amounts.  The related party amounts included in assets and liabilities, and the related party revenues and expenses received/paid are shown on the face of the financial statements.
 
NOTE 8. OPERATING SEGMENTS
 
Our segments are based on our method of internal reporting which classifies our operations by property type.  Our property types are grouped into commercial, apartments, hotels, land and other operating segments.  Significant differences among the accounting policies of the operating segments as compared to the consolidated financial statements principally involve the calculation and allocation of administrative and other expenses.  Management evaluates the performance of each of the operating segments and allocates resources to them based on their net operating income and cash flow.
 
Items of income that are not reflected in the segments are interest, other income, gain on debt extinguishment, gain on condemnation award, equity in partnerships, and gains on sale of real estate. Expenses that are not reflected in the segments are provision for losses, advisory, net income and incentive fees, general and administrative, non-controlling interests and net loss from discontinued operations before gains on sale of real estate.
 
The segment labeled as “Other” consists of revenue and operating expenses related to the notes receivable and corporate debt.
 

 
17

 
 
Presented below is our reportable segments’ operating income for the three and six months ended June 30, 2013 and 2012, including segment assets and expenditures (dollars in thousands):
 
   
Commercial
                               
For the Three Months Ended June 30, 2013
 
Properties
   
Apartments
 
Hotels
   
Land
   
Other
   
Total
 
Rental and other property revenues
  $ 6,197     $ 20,956     $ -     $ 22     $ 7     $ 27,182  
Property operating expenses
    3,116       9,040       -       356       32       12,544  
Depreciation and amortization
    1,851       3,633       -       -       (39 )     5,445  
Mortgage and loan interest
    1,798       5,973       -       1,504       1,790       11,065  
Deferred borrowing costs
    21       897       -       35       7       960  
Loan charges and prepayment penalties
    -       3,200       -       -       180       3,380  
Interest income
    -       -       -       -       3,512       3,512  
Segment operating income (loss)
  $ (589 )   $ (1,787 )   $ -     $ (1,873 )   $ 1,549     $ (2,700 )
Capital expenditures
    2,250       110       -       -       -       2,360  
Real estate assets
    149,684       513,328       -       210,095       -       873,107  
                                                 
Property Sales
                                               
Sales price
  $ 26,974     $ 24,822     $ -     $ -     $ -     $ 51,796  
Cost of sale
    14,914       18,808       -       -       -       33,722  
Gain on sale
  $ 12,060     $ 6,014     $ -     $ -     $ -     $ 18,074  
                                                 
                                                 
   
Commercial
                                         
For the Three Months Ended June 30, 2012
 
Properties
   
Apartments
 
Hotels
   
Land
   
Other
   
Total
 
Rental and other property revenues
  $ 7,441     $ 19,809     $ -     $ -     $ 34     $ 27,284  
Property operating expenses
    4,312       8,761       -       293       (113 )     13,253  
Depreciation and amortization
    1,437       3,573       -       -       (69 )     4,941  
Mortgage and loan interest
    1,536       7,027       -       1,497       2,001       12,061  
Deferred borrowing costs
    23       1,903       -       37       12       1,975  
Loan charges and prepayment penalties
    -       3,730       -       39       -       3,769  
Interest income
    -       -       -       -       4,723       4,723  
Gain on land sales
    -       -       -       4,738       -       4,738  
Segment operating income (loss)
  $ 133     $ (5,185 )   $ -     $ 2,872     $ 2,926     $ 746  
Capital expenditures
    431       37       -       -       -       468  
Real estate assets
    166,902       561,711       -       231,497       -       960,110  
                                                 
Property Sales
                                               
Sales price
  $ 6,825     $ 25,985     $ 3,369     $ 12,650     $ -     $ 48,829  
Cost of sale
    7,313       23,946       252       7,912       -       39,423  
Gain (loss) on sale
  $ (488 )   $ 2,039     $ 3,117     $ 4,738     $ -     $ 9,406  
 
 
 
18

 
 
The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:

   
For the Three Months Ended
 
   
June 30,
 
   
2013
   
2012
 
Segment operating income (loss)
  $ (2,700 )   $ 746  
Other non-segment items of income (expense)
               
General and administrative
    (2,043 )     (919 )
Advisory fees
    (2,487 )     (2,700 )
Provision on impairment of notes receivable and real estate assets
    (800 )     -  
Other income
    149       2,235  
Earnings from unconsolidated investees
    (25 )     33  
Income tax benefit
    6,423       2,217  
Income (loss) from continuing operations
  $ (1,483 )   $ 1,612  
 
The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:

   
June 30,
 
   
2013
   
2012
 
Segment assets
  $ 873,107     $ 960,110  
Investments in unconsolidated investees
    10,415       7,437  
Notes and interest receivable
    103,690       101,235  
Other assets and receivables
    71,401       89,134  
Assets held for sale
    -       2,329  
Total assets
  $ 1,058,613     $ 1,160,245  
 
 
   
Commercial
                               
For the Six Months Ended June 30, 2013
 
Properties
   
Apartments
 
Hotels
   
Land
   
Other
   
Total
 
Rental and other property revenues
  $ 12,453     $ 41,450     $ -     $ 56     $ 14     $ 53,973  
Property operating expenses
    7,101       17,741       -       726       9       25,577  
Depreciation and amortization
    3,145       7,256       -       -       (97 )     10,304  
Mortgage and loan interest
    3,280       12,157       -       3,039       3,693       22,169  
Deferred borrowing costs
    43       3,253       -       97       43       3,436  
Loan charges and prepayment penalies
    -       7,182       -       -       180       7,362  
Interest income
    -       -       -       -       7,053       7,053  
Loss on land sales
    -       -       -       (35 )     -       (35 )
Segment operating income (loss)
  $ (1,116 )   $ (6,139 )   $ -     $ (3,841 )   $ 3,239     $ (7,857 )
Capital expenditures
    3,053       246       -       281       -       3,580  
Real estate assets
    149,684       513,328       -       210,095       -       873,107  
                                                 
Property Sales
                                               
Sales price
  $ 26,974     $ 50,122     $ -     $ 2,250     $ -     $ 79,346  
Cost of sale
    14,914       36,881       -       2,285       -       54,080  
Gain (loss) on sale
  $ 12,060     $ 13,241     $ -     $ (35 )   $ -     $ 25,266  
                                                 
                                                 
   
Commercial
                                         
For the Six Months Ended June 30, 2012
 
Properties
   
Apartments
 
Hotels
   
Land
   
Other
   
Total
 
Rental and other property revenues
  $ 14,924     $ 38,913     $ -     $ -     $ 75     $ 53,912  
Property operating expenses
    8,498       16,770       -       572       276       26,116  
Depreciation and amortization
    2,873       7,183       -       -       (138 )     9,918  
Mortgage and loan interest
    3,126       14,141       -       3,179       4,042       24,488  
Deferred borrowing costs
    46       2,763       -       54       24       2,887  
Loan charges and prepayment penalties
    -       6,117       -       44       -       6,161  
Interest income
    -       -       -       -       8,063       8,063  
Gain on land sales
    -       -       -       3,716       -       3,716  
Segment operating income (loss)
  $ 381     $ (8,061 )   $ -     $ (133 )   $ 3,934     $ (3,879 )
Capital expenditures
    877       235       -       285       -       1,397  
Real estate assets
    166,902       561,711