XNYS:ARL American Realty Investors Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012
 
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, 2012)

 
 
 

 
 

 
 
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, 2012 (unaudited) and December 31, 2011
               3
     
 
Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011 (unaudited)
               4
     
 
Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2012 (unaudited)
               5
     
 
Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2012 and 2011 (unaudited)
               6
     
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)
               7
     
 
Notes to Consolidated Financial Statements
               8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
               22
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
               32
     
Item 4.
Controls and Procedures
               32
   
PART II. OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
               33
     
Item 6.
Exhibits
               34
   
SIGNATURES
               35
 
 
 
 
2

 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
(unaudited)
 
             
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(dollars in thousands, except share and
par value amounts)
 
Assets
           
Real estate, at cost
  $ 1,066,094     $ 1,120,122  
Real estate held for sale at cost, net of depreciation ($3,290 for 2012 and $1,752 for 2011)
    2,329       15,015  
Real estate subject to sales contracts at cost, net of depreciation ($15,042 and $9,790 in 2012 and 2011)
    48,515       49,982  
Less accumulated depreciation
    (154,499 )     (158,489 )
Total real estate
    962,439       1,026,630  
Notes and interest receivable
               
Performing (including $114,613 and $104,969 in 2012 and 2011 from affiliates and related parties)
    118,710       110,136  
Non-performing  (including $0 and $0 in 2012 and 2011 from affiliates and related parties)
    5,908       4,787  
   Less allowance for estimated losses (including $18,962 and $8,962 in 2012 and 2011 from affiliates and related parties)
    (23,383 )     (13,383 )
Total notes and interest receivable
    101,235       101,540  
Cash and cash equivalents
    18,090       20,312  
Investments in unconsolidated subsidiaries and investees
    7,437       10,746  
Other assets (including $21 in 2012 and $11 in 2011 from affiliates and related parties)
    71,044       76,243  
Total assets
  $ 1,160,245     $ 1,235,471  
                 
Liabilities and Shareholders’ Equity
               
Liabilities:
               
Notes and interest payable
  $ 800,162     $ 855,619  
Notes related to assets held for sale
    3,868       13,830  
Notes related to subject to sales contracts
    55,503       44,516  
Stock-secured notes payable and margin debt
    26,133       26,898  
Affiliate payables
    13,816       10,294  
Deferred gain (including $75,727 and $71,964 in 2012 and 2011 from sales to related parties)
    77,572       78,750  
Accounts payable and other liabilities (including $1,925 and $1,822 in 2012 and 2011 to affiliates and related parties)
    91,921       110,307  
      1,068,975       1,140,214  
                 
Shareholders’ equity:
               
Preferred stock, Series A: $2.00 par value, authorized 15,000,000 shares, issued and outstanding 3,353,954 shares in 2012 and 2011 (liquidation preference $10 per share), including 900,000 shares in 2012 and 2011 held by subsidiaries
    4,908       4,908  
Common stock, $.01 par value, authorized 100,000,000 shares; issued 11,941,174 shares and outstanding 11,525,389 shares in 2012 and 2011
    115       115  
Treasury stock at cost; 415,785 shares in 2012 and 2011 and 229,214 and 236,587 shares held by TCI as of 2012 and 2011.
    (6,395 )     (6,395 )
Paid-in capital
    107,092       105,388  
Retained earnings
    (49,121 )     (47,486 )
Accumulated other comprehensive income
    (786 )     (786 )
Total American Realty Investors, Inc. shareholders' equity
    55,813       55,744  
Non-controlling interest
    35,457       39,513  
Total equity
    91,270       95,257  
Total liabilities and equity
  $ 1,160,245     $ 1,235,471  
                 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
3

 
 
AMERICAN REALTY INVESTORS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
   
For the Three Months Ended
   
For the Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(dollars in thousands, except share and per share amounts)
 
Revenues:
                       
Rental and other property revenues (including $167 and $0 for the three months and
$335 and $0 for the six months ended 2012 and 2011 respectively from affiliates and
related parties)
  $ 31,016     $ 29,306     $ 60,598     $ 56,480  
                                 
Expenses:
                               
Property operating expenses (including $258 and $383 for the three months and $550
and $631 for the six months ended 2012 and 2011 respectively from affiliates and
related parties)
    15,674       15,407       31,087       30,667  
Depreciation and amortization
    5,393       4,958       10,821       10,162  
General and administrative (including $937 and $1,241 for the three months and
$1,817 and $2,429 for the six months ended 2012 and 2011 respectively from
affiliates and related parties)
    935       3,692       3,507       6,915  
Provision on impairment of notes receivable and real estate assets
    -       444       -       5,622  
Advisory fee to affiliate
    2,700       3,462       5,359       6,984  
     Total operating expenses
    24,702       27,963       50,774       60,350  
     Operating income (loss)
    6,314       1,343       9,824       (3,870 )
                                 
Other income (expense):
                               
Interest income (including $4,624 and $1,104 for the three months and $7,865 and
$1,603 for the six months ended 2012 and 2011 respectively from affiliates and
 related parties)
    4,723       1,203       8,063       1,871  
Other income (including $1,500 and $0 for the three months and $3,000 and $0
for the six months ended 2012 and 2011 respectively from affiliates and
related parties)
    2,171       551       3,800       1,765  
Mortgage and loan interest (including $931 and $1,275 for the three months and
$1,853 and $1,580 for the six months ended 2012 and 2011 respectively from
affiliates and related parties)
    (16,641 )     (15,439 )     (34,219 )     (29,897 )
Loss on sale of investments
    -       -       (362 )     -  
Earnings from unconsolidated subsidiaries and investees
    33       22       150       (73 )
        Total other expenses
    (9,714 )     (13,663 )     (22,568 )     (26,334 )
Loss before gain on land sales, non-controlling interest, and taxes
    (3,400 )     (12,320 )     (12,744 )     (30,204 )
Gain on land sales
    4,738       14,029       3,716       19,373  
Income (loss) from continuing operations before tax
    1,338       1,709       (9,028 )     (10,831 )
   Income tax benefit
    1,537       1,942       2,548       2,351  
Net income (loss) from continuing operations
    2,875       3,651       (6,480 )     (8,480 )
Discontinued operations:
                               
   Loss from discontinued operations
    (277 )     (2,130 )     (975 )     (5,099 )
   Gain on sale of real estate from discontinued operations
    4,668       7,679       8,256       11,816  
   Income tax expense from discontinued operations
    (1,537 )     (1,942 )     (2,548 )     (2,351 )
Net income from discontinued operations
    2,854       3,607       4,733       4,366  
Net income (loss)
    5,729       7,258       (1,747 )     (4,114 )
Net (income) loss attributable to non-controlling interest
    (1,064 )     7,175       112       9,345  
Net income (loss) attributable to American Realty Investors, Inc.
    4,665       14,433       (1,635 )     5,231  
Preferred dividend requirement
    (613 )     (613 )     (1,226 )     (1,230 )
Net income (loss) applicable to common shares
  $ 4,052     $ 13,820     $ (2,861 )   $ 4,001  
                                 
Earnings per share - basic
                               
   Income (loss) from continuing operations
  $ 0.10     $ 0.89     $ (0.66 )   $ (0.03 )
   Income from discontinued operations
    0.25       0.31       0.41       0.38  
   Net income (loss) applicable to common shares
  $ 0.35     $ 1.20     $ (0.25 )   $ 0.35  
                                 
Earnings per share - diluted
                               
   Income (loss) from continuing operations
  $ 0.05     $ 0.59     $ (0.66 )   $ (0.03 )
   Income from discontinued operations
    0.11       0.21       0.41       0.38  
   Net income (loss) applicable to common shares
  $ 0.16     $ 0.80     $ (0.25 )   $ 0.35  
                                 
Weighted average common share used in computing earnings per share
    11,525,389       11,525,389       11,525,389       11,509,341  
Weighted average common share used in computing diluted earnings per share
    25,679,951       17,394,553       11,525,389       11,509,341  
                                 
                                 
Amounts attributable to American Realty Investors, Inc.
                               
Income (loss) from continuing operations
  $ 1,811     $ 10,826     $ (6,368 )   $ 865  
Income from discontinued operations
    2,854       3,607       4,733       4,366  
Net income (loss)
  $ 4,665     $ 14,433     $ (1,635 )   $ 5,231  
                                 
                                 
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, 2012
 
(unaudited)
 
(dollars in thousands)
 
                                                             
                                                             
                                                   
Accumulated
       
   
Total
   
Comprehensive
   
Series A
Preferred
   
Common Stock
   
Treasury
   
Paid-in
   
Retained
   
Other
Comprehensive
   
Non-controlling
 
   
Equity
   
Loss
   
Stock
   
Shares
   
Amount
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Interest
 
                                                             
Balance, December 31, 2011
  $ 95,257     $ (137,440 )   $ 4,908       11,941,174     $ 115     $ (6,395 )   $ 105,388     $ (47,486 )   $ (786 )   $ 39,513  
Net loss
    (1,747 )     (1,747 )     -       -       -       -       -       (1,635 )     -       (112 )
Sale of controlling interest
    1,149       -       -       -       -       -       -       -       -       1,149  
Acquisition of non-controlling interest
    (523 )     -       -       -       -       -       1,660       -       -       (2,183 )
Sale of non-controlling interest
    (1,468 )     -       -       -       -       -       1,434       -       -       (2,902 )
Distribution of non-controlling interest
    (172 )     -       -       -       -       -       (164 )     -       -       (8 )
Series A preferred stock cash dividend ($1.00 per share)
    (1,226 )     -       -       -       -       -       (1,226 )     -       -       -  
Balance, June 30, 2012
  $ 91,270     $ (139,187 )   $ 4,908       11,941,174     $ 115     $ (6,395 )   $ 107,092     $ (49,121 )   $ (786 )   $ 35,457  
                                                                                 
                                                                                 
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,
 
   
2012
   
2011
 
   
(dollars in thousands)
 
             
Net loss
  $ (1,747 )   $ (4,114 )
Other comprehensive loss
               
Unrealized loss on foreign currency translation
    -       (786 )
Unrealized gain (loss) on investment securities
    -       -  
Total other comprehensive loss
    -       (786 )
Comprehensive loss
    (1,747 )     (4,900 )
Comprehensive loss attributable to non-controlling interest
    112       9,345  
Comprehensive income (loss) attributable to American Realty Investors, Inc.
  $ (1,635 )   $ 4,445  
                 
                 
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,
 
   
2012
   
2011
 
   
(dollars in thousands)
 
Cash Flow From Operating Activities:
           
Net loss
  $ (1,747 )   $ (4,114 )
Adjustments to reconcile net loss applicable to common
 shares to net cash used in operating activities:
 
                   Gain on sale of land
    (3,716 )     (19,373 )
                   Gain on sale of income-producing properties
    (8,256 )     (11,816 )
                   Depreciation and amortization
    11,239       13,873  
                   Provision for impairment of notes receivable and real estate assets
    -       6,503  
                   Amortization of deferred borrowing costs
    2,902       2,100  
                   Earnings from unconsolidated subsidiaries and investees
    (197 )     73  
      (Increase) decrease in assets:
               
                   Accrued interest receivable
    (6,471 )     (813 )
                   Other assets
    -       (148 )
                   Prepaid expense
    (38 )     2,143  
                   Escrow
    4,937       11,412  
                   Earnest money
    235       (75 )
                   Rent receivables
    290       776  
                   Affiliate receivable
    -       (4,477 )
      Increase (decrease) in liabilities:
               
                   Accrued interest payable
    (6,279 )     7,091  
                   Affiliate payables
    3,522       (12,219 )
   Other liabilities
    (19,729 )     (14,062 )
                              Net cash used in operating activities
    (23,308 )     (23,126 )
                 
Cash Flow From Investing Activities:
               
      Proceeds from notes receivables
    16,055       13,806  
      Origination of notes receivable
    (9,279 )     (693 )
      Acquisition of land held for development
    (8,503 )     -  
      Proceeds from sales of income-producing properties
    53,662       64,361  
      Proceeds from sale of land
    25,248       107,877  
      Proceeds from sale of investment in unconsolidated real estate entities
    -       (9 )
      Proceeds from sale of investments
    132       -  
      Investment in unconsolidated real estate entities
    3,210       709  
      Improvement of land held for development
    (164 )     (2,024 )
      Improvement of income-producing properties
    (862 )     (733 )
      Acquisition of non-controlling interest
    (359 )     (23 )
      Sale of non-controlling interest
    (1,468 )     102  
      Sale of controlling interest
    1,149       2,208  
      Construction and development of new properties
    (4,292 )     (30,610 )
                              Net cash provided by investing activities
    74,529       154,971  
                 
Cash Flow From Financing Activities:
               
      Proceeds from notes payable
    138,760       141,565  
      Recurring amortization of principal on notes payable
    (15,273 )     (8,933 )
      Debt assumption by buyer, part of seller proceeds
    (13,794 )     (167,557 )
      Payments on maturing notes payable
    (158,611 )     (100,231 )
      Stock-secured borrowings and margin debt
    -       3,164  
      Deferred financing costs
    (3,127 )     (469 )
      Distributions to non-controlling interests
    (172 )     (294 )
      Preferred stock dividends - Series A
    (1,226 )     (1,230 )
      Repurchase of common stock/treasury stock
    -       (62 )
      Issuance of common stock
    -       1  
      Conversion of preferred stock into common stock
    -       31  
                              Net cash used in financing activities
    (53,443 )     (134,015 )
                 
Net decrease in cash and cash equivalents
    (2,222 )     (2,170 )
Cash and cash equivalents, beginning of period
    20,312       12,649  
Cash and cash equivalents, end of period
  $ 18,090     $ 10,479  
                 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 25,589     $ 32,480  
                 
Schedule of noncash investing and financing activities:
               
Notes receivable received from affiliate
  $ 9,279     $ 5,380  
                 
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 87.9% of ARL’s stock is owned by affiliated entities.  ARL owns approximately 84.7% 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.
 
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 American Stock Exchange (“AMEX”) under the symbol (“IOT”). 

ARL invests in real estate through direct ownership, leases and partnerships and also invests in mortgage loans on real estate.  Prime Income Asset Management, LLC (“Prime”) served as the Company’s external Advisor and Cash Manager until April 30, 2011.  Prime also served as an Advisor and Cash Manager to TCI and IOT.  Effective April 30, 2011, Pillar Income Asset Management, Inc. (“Pillar”) became the Company’s external Advisor and Cash Manager under similar terms as the previous agreement with Prime.  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.  We have no employees.
 
Properties
 
We own or had interests in a total property portfolio of 63 income-producing properties as of June 30, 2012.  The properties consisted of:
 
 
15 commercial properties consisting of 10 office buildings, one industrial warehouse, and four retail centers comprising in aggregate approximately 3.9 million rentable square feet;
 
 
48 apartment communities totaling 8,873 units, excluding apartments being developed; and
 
 
4,799 acres of developed and undeveloped land.

We join with various third-party development companies to construct residential apartment communities. We completed construction on five apartment projects in 2011 and are in the predevelopment process on several residential apartment communities.  At June 30, 2012, 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 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 comprise 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. At the current time over 50 lots in Phase One, of an initial 180, have been sold and are in various stages of construction.

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 six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for other interim periods or for the full fiscal year.
 
 
 
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The year-end consolidated balance sheet at December 31, 2011 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, 2011.  Certain 2011 financial statement amounts have been reclassified to conform to the 2012 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 investments in Garden Centura, L.P. and LK-Four Hickory, LLC were accounted for under the equity method until December 28, 2011 and January 17, 2012, respectively, when they were sold to a third party.
 
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.
 
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 and after an active program to sell the asset has commenced.  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 to no longer market as an asset for sale, 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 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.
 
 
 
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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.
 
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
 
The highlights of our significant real estate transactions for the six months ended June 30, 2012 are listed below:

On January 3, 2012, we recognized the March 23, 2011 sale of 82.2 acres of land known as Denton Coonrod land located in Denton County, Texas to Cross County National Associates, LP, a related party, for a sales price of $1.8 million. The existing mortgage of $0.8 million, secured by the property, was paid in full when ownership transferred to the existing lender. We recorded a gain on sale of $0.04 million on the land parcel.

On January 17, 2012, we sold 100% of our stock in American Realty Trust, Inc. to One Realco Corporation, a related party, for a sales price of $10.0 million. We provided $10.0 million in seller-financing with a five-year note receivable. The note accrues interest at 3.00% and is payable at maturity on January 17, 2017. The note is fully reserved by the Company.  Subsequent to the sale ART filed for Chapter Eleven bankruptcy protection.

On January 30, 2012, we refinanced the existing mortgage on Parc at Maumelle apartments, a 240-unit complex located in Little Rock, Arkansas, for a new mortgage of $16.8 million. We paid off the existing mortgage of $16.1 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 3.00% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on February 1, 2052.
 
 
 
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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. Regis will continue to manage the property while under Petra’s ownership and TCI will have an option to repurchase the property during the option term which shall end two years following the commencement of the agreement. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement related to the obligations under the note and guaranty agreements and the repurchase option.

On February 7, 2012, we recognized the September 1, 2011 sale of 22.92 acres of land known as Andrew B land, Denton County, Texas to TCI Luna Ventures, LLC, a related party, for a sales price of $1.3 million. We received a credit of $2.1 million to satisfy a portion of the multi-tract collateral debt when ownership transferred to the existing lender.  We recorded a gain on sale of $1.2 million on the land parcel.

On February 23, 2012, we sold a 220-unit apartment complex known as Wildflower Villas apartments located in Temple, Texas for a sales price of $19.6 million.  The buyer assumed the existing debt of $13.7 million secured by the property. We recorded a gain on sale of $3.6 million on the apartment sale.

On February 27, 2012, we re-purchased 100% interest in Cross County National Associates, LP from ABC Land Real Estate, LLC and ABC Land & Development, Inc., both related parties, for a sales price of $9.5 million. This entity owns a 307,266 square foot retail center known as Cross County Mall located in Mattoon, Illinois. We assumed the existing mortgage of $9.2 million, secured by the property. On March 22, 2011, we sold our ownership in Cross County National Associates, LP to ABC Land Real Estate, LLC and ABC Land & Development, Inc., both related parties, for an amount equal to the re-purchase price.  We did not recognize the March 22, 2011 sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost. Upon re-purchasing the ownership interests in the current period, the seller-financing note of $0.3 million was cancelled.  There is no change in the financial statements related to the March 22, 2011 sale or the subsequent re-purchase.

On February 29, 2012, we refinanced the existing mortgage on Huntington Ridge apartments, a 198-unit complex located in DeSoto, Texas, for a new mortgage of $15.0 million. We paid off the existing mortgage of $14.6 million and paid $1.2 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On February 29, 2012, we refinanced the existing mortgage on Laguna Vista apartments, a 206-unit complex located in Dallas, Texas, for a new mortgage of $17.7 million. We paid off the existing mortgage of $17.0 million and paid $1.1 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On February 29, 2012, we refinanced the existing mortgage on Savoy of Garland apartments, a 144-unit complex located in Garland, Texas, for a new mortgage of $10.3 million. We paid off the existing mortgage of $10.2 million and paid $0.9 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.
 
On March 1, 2012, we sold 100% of our interests in LaDue, LLC to ABC Land & Development, Inc., a related party, for a sales price of $1.9 million. This entity owns 8.01 acres of land known as LaDue land located in Dallas County, Texas. We provided $1.3 million in seller-financing with a five-year note receivable. The note accrues interest at 5% and is payable at maturity on March 1, 2017. The buyer assumed the existing mortgage of $0.6 million, secured by the property. We have deferred the recognition of the sale in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.

On March 1, 2012, the construction loan in the amount of $11.1 million that was taken out on July 30, 2010 to fund the development of Sonoma Court apartments, a 124-unit complex, closed into permanent financing. The note accrues interest at 5.35% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on November 1, 2051.

On March 5, 2012, we recognized the September 1, 2011 sale of 7.39 acres of land known as DeSoto Ranch land located in DeSoto, Texas to TCI Luna Ventures, LLC, a related party, for a sales price of $1.3 million. We received a credit of $1.0 million to satisfy a portion of the multi-tract collateral debt when ownership transferred to the existing lender.  We recorded a gain on sale of $0.1 million on the land parcel.

On March 27, 2012, we sold 319.07 acres of land known as Waco Ritchie land located in Waco, Texas for a sales price of $1.9 million. The existing mortgage of $1.5 million, secured by the property, was paid in full. We recorded a loss on sale of $0.8 million on the land parcel.
 
 
 
11

 
 
On March 28, 2012, we sold 29.59 acres of land known as Elm Fork land located in Carrollton, Texas for a sales price of $1.9 million. The existing mortgage of $1.9 million, secured by the property, was paid down by $1.8 million. We recorded a loss on sale of $1.3 million on the land parcel.

On March 28, 2012, the construction loan in the amount of $24.2 million that was taken out on February 18, 2010 to fund the development of Blue Ridge apartments, a 290-unit complex, 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 October 1, 2051.

On April 1, 2012, we purchased 1,000 shares of stock of Kelly Lot Development, Inc. from Tacco Financial, Inc., a related party, for $5.6 million. This entity owns six land parcels, comprising approximately 52.59 acres of undeveloped land located in Dallas County, Texas, Kaufman County, Texas, Nashville, Tennessee and Tarrant County, Texas, known as Kelly Lots land, Travis Ranch land, Nashville land, Cooks Lane land, Seminary West land and Vineyards land. We assumed the existing mortgages of $0.5 million and $0.4 million, secured by the property. The loans accrue interest at 15.00% and are payable at maturity on May 1, 2013 and November 1, 2013, respectively.

On April 3, 2012, we recognized the September 1, 2011 sale of 5.22 acres of land known as Andrew C land located in Denton, Texas to TCI Luna Ventures, LLC, a related party, for a sales price of $0.4 million. We received a credit of $0.5 million to satisfy a portion of the multi-tract collateral debt when ownership transferred to the existing lender. We recorded a gain on sale of $0.2 million on the land parcel.

On April 5, 2012, we sold Clarke Garage, a 6,869 square foot parking garage, located in New Orleans, Louisiana for a sales price of $6.0 million. All of the sale proceeds went to pay down existing mortgages, secured by the property. We recorded a loss on sale of $0.2 million on the parking garage sale.

On April 13, 2012, we recognized the August 20, 2010 sale of our investment in American Mart Hotel Corporation to ABC Land and Development, Inc., a related party, for a sales price of $3.1 million. This entity owns the Comfort Inn Hotel, a 161-room hotel, located in Denver, Colorado. The buyer assumed the existing mortgage of $3.0 million, secured by the property. We recorded a gain on sale of $3.1 million when the building was sold to a third party.

On April 30, 2012, we refinanced the existing mortgage on Parc at Metro Center apartments, a 144-unit complex located in Nashville, Tennessee, for a new mortgage of $11.0 million. We paid off the existing mortgage of $10.5 million and paid $0.7 million in closing costs and escrow reserves. The note accrues interest at 2.95% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on May 1, 2052.

On May 16, 2012, we sold 0.42 acres of land known as 1013 Common Street located in New Orleans, Louisiana for a sales price of $650,000.  All of the sale proceeds went to pay down the existing mortgage, secured by the property.

On May 17, 2012, we sold a 220-unit apartment complex known as Portofino at Mercer Crossing apartments located in Farmers Branch, Texas for a sales price of $26.0 million. The existing mortgage of $19.9 million, secured by the property, was paid in full. We recorded a gain on sale of $2.0 million on the apartment sale.

On May 25, 2012, we refinanced the existing mortgage on Pecan Pointe apartments, a 232-unit complex located in Temple, Texas, for a new mortgage of $16.8 million. We paid off the existing mortgage of $16.4 million and paid $1.3 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on June 1, 2052.

On May 30, 2012, we refinanced the existing mortgage on Blue Lake Villas II apartments, a 70-unit complex located in Waxahachie, Texas, for a new mortgage of $4.1 million. We paid off the existing mortgage of $3.9 million and paid $0.2 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on June 1, 2052.

On June 1, 2012, we purchased 19.29 acres of Summer Breeze land located in Odessa, Texas, for $2.0 million. This land was purchased for the development of The Mission apartments.

On June 8, 2012, we sold 72.22 acres of land known as McKinney Ranch land located in McKinney, Texas for a sales price of $5.4 million. We paid $5.4 million on the existing mortgage to satisfy a portion of the multi-tract collateral debt of $7.6 million, secured by the property. We recorded a gain on sale of $1.0 million on the land parcel.
 
 
 
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On June 19, 2012, the construction loan in the amount of $16.4 million that was taken out on September 14, 2010 to fund the development of Lodge at Pecan Creek apartments, a 192-unit complex, closed into permanent financing. The note accrues interest at 5.05% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On June 22, 2012, we sold 305 Baronne, a 37,081 square foot building, located in New Orleans, Louisiana for a sales price of $825,000. We paid $0.7 million on an existing mortgage, secured by the property. We recorded a loss on sale of $0.4 million on the building sale.  

On June 28, 2012, we refinanced the existing mortgage on Lake Forest apartments, a 222-unit complex located in Houston, Texas, for a new mortgage of $12.8 million. We paid off the existing mortgage of $12.0 million and paid $1.0 million in closing costs and escrow
reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.

On June 28, 2012, we refinanced the existing mortgage on Mission Oaks apartments, a 228-unit complex located in San Antonio, Texas, for a new mortgage of $15.6 million. We paid off the existing mortgage of $14.9 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 2.95% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.

On June 28, 2012, we refinanced the existing mortgage on Paramount Terrace apartments, a 181-unit complex located in Amarillo, Texas, for a new mortgage of $3.2 million. We paid off the existing mortgage of $2.8 million and paid $0.4 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2045.

On June 28, 2012, we refinanced the existing mortgage on Sugar Mill apartments, a 160-unit complex located in Addis, Louisiana, for a new mortgage of $12.0 million. We paid off the existing mortgage of $11.8 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.

On June 29, 2012, we sold 2.59 acres of land known as Vineyards land located in Grapevine, Texas for a sales price of $2.4 million. The existing mortgage of $0.4 million, secured by the property, was paid in full. We recorded a gain on sale of $1.4 million on the land parcel.

On June 29, 2012, we sold 4.33 acres of land known as Vineyards land located in Grapevine, Texas for a sales price of $3.9 million. We recorded a gain on sale of $2.2 million on the land parcel.

In December 2010, there were various commercial and land holdings 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, 2012, there is one commercial building, Thermalloy that remains in FRE Real Estate, Inc. We have deferred the recognition of the sales in accordance with ASC 360-20 due to our continuing involvement, inadequate initial investment and questionable recovery of investment cost.
 
We continue to invest in the development of apartments and various projects.  During the six months ended June 30, 2012, we have expended $4.3 million on construction and development and capitalized $0.1 million of interest costs.
 
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 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):
 
 
 
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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
          2,321
 
Various security interests
 
 
     Unified Housing Foundation, Inc. (Cliffs of El Dorado) (1)
12/27
5.25%
          2,097
 
100% Interest in Unified Housing of McKinney, LLC
 
     Unified Housing Foundation, Inc. (Echo Station) (1)
12/27
5.25%
          1,481
 
100% Interest in Unified Housing of Temple, LLC
 
 
     Unified Housing Foundation, Inc. (Inwood on the Park) (1)
12/27
5.25%
          5,059
 
100% Interest in Unified Housing Inwood, LLC
 
 
     Unified Housing Foundation, Inc. (Kensington Park) (1)
12/27
5.25%
          3,936
 
100% Interest in Unified Housing Kensington, LLC
 
 
     Unified Housing Foundation, Inc.  (Lakeshore Villas) (1)
12/27
5.25%
          2,000
 
Unsecured
 
 
     Unified Housing Foundation, Inc.  (Lakeshore Villas) (1)
12/27
5.25%
          9,096
 
Membership interest in Housing for Seniors of Humble, LLC
 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)
07/15
5.25%
          3,057
 
100% Interest in Unified Housing of Austin, LLC
 
 
     Unified Housing Foundation, Inc. (Limestone Canyon) (1)
12/27
5.25%
          4,663
 
100% Interest in Unified Housing of Austin, LLC
 
 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)
07/15
5.25%
          2,250
 
100% Interest in Unified Housing of Vista Ridge, LLC
 
     Unified Housing Foundation, Inc. (Limestone Ranch) (1)
12/27
5.25%
          6,000
 
100% Interest in Unified Housing of Vista Ridge, LLC
 
     Unified Housing Foundation, Inc. (Parkside Crossing) (1)
12/27
5.25%
          2,272
 
100% Interest in Unified Housing of Parkside Crossing, LLC
 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)
07/15
5.25%
          5,174
 
100% Interest in Unified Housing of Sendero Ridge, LLC
 
     Unified Housing Foundation, Inc. (Sendero Ridge) (1)
12/27
5.25%
          4,812
 
100% Interest in Unified Housing of Sendero Ridge, LLC
 
     Unified Housing Foundation, Inc. (Timbers of Terrell) (1)
12/27
5.25%
          1,323
 
100% Interest in Unified Housing of Terrell, LLC
 
     Unified Housing Foundation, Inc. (Tivoli) (1)
12/27
5.25%
          7,966
 
100% Interest in Unified Housing of Tivoli, LLC
 
     Unified Housing Foundation, Inc. (Reserve at White Rock Phase I) (1)
12/27
5.25%
          2,485
 
100% Interest in Unified Housing of Harvest Hill I, LLC
 
     Unified Housing Foundation, Inc. (Reserve at White Rock Phase II) (1)
12/27
5.25%
          2,555
 
100% Interest in Unified Housing of Harvest Hill, LLC
 
     Unified Housing Foundation, Inc. (Trails at White Rock) (1)
12/27
5.25%
          3,815
 
100% Interest in Unified Housing of Harvest Hill III, LLC
 
     Unified Housing Foundation, Inc.(1)
12/12
5.00%
          6,000
 
Unsecured
 
 
     Realty Advisors Management, Inc. (1)
12/16
4.00%
        20,387
 
Unsecured
 
 
     One Realco Corporation - ART Sale (1)
01/17
3.00%
        10,000
 
Unsecured
 
 
     Accrued interest
   
         5,864
     
Total Performing
   
 $ 118,710
     
               
Non-Performing loans:
           
  Dallas Fund XVII L.P. (2)
10/09
9.00%
  1,432  
Unsecured
 
  Leman Development, Ltd. 
07/11
7.00%
  1,500  
Unsecured
 
  Tracy Suttles 
12/11
0.00%
 1,077  
Unsecured  
 
  Miscellaneous non-related party notes 
Various
Various
1,526  
Various secured interest
 
  Accrued interest        373      
Total Non-Performing
     $     5,908      
               
  Allowance for estimated losses        (23,383)      
Total
   
 $ 101,235
     
               
 
 (1) Related party notes
                   
 (2) Note matured and an allowance was taken for estimated losses at full value of note
   

 
NOTE 4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES AND INVESTEES
 
Investments in unconsolidated joint ventures and other investees in which we have a 20% to 50% interest or otherwise exercise significant influence are carried at cost, adjusted for the Company’s proportionate share of their undistributed earnings or losses, via the equity method of accounting.
 
Investments in unconsolidated joint ventures and other investees consist of the following:
 
 
 
14

 
 
   
Percentage ownership as of
 
   
June 30, 2012
   
June 30, 2011
 
             
Garden Centura, L.P. (2)
    0.00 %     5.00 %
Gruppa Florentina, LLC (1)
    20.00 %     20.00 %
LK-Four Hickory, LLC (3)
    0.00 %     28.57 %
                 
(1) Other Investees                
(2) Other Investees. Investment in Garden Centura, L.P. sold on December 28, 2011.
 
(3) Other Investees. Investment in LK-Four Hickory, LLC sold on January 17, 2012.
 
 
 
Our partnership interest in Garden Centura, L.P. in the amount of 5% was accounted for under the equity method because we exercise significant influence over the operations and financial activities.  We guaranteed the notes payable and controlled the day-to-day activities.  Accordingly, the investment was carried at cost, adjusted for the companies’ proportionate share of earnings or losses. Our investments in Garden Centura, L.P. and LK-Four Hickory, LLC were accounted for under the equity method until December 28, 2011 and January 17, 2012, respectively, when the investments were sold.

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

   
For the Six Months Ended
June 30,
 
   
2012
   
2011
 
Other Investees
           
Real estate, net of accumulated depreciation
  $ 11,694     $ 118,000  
Notes receivable
    5,887       5,435  
Other assets
    31,356       43,060  
Notes payable
    (13,842 )     (88,968 )
Other liabilities
    (6,514 )     (14,294 )
Shareholders' equity/partners' capital
    (28,581 )     (63,233 )
                 
Revenue
  $ 19,183     $ 28,133  
Depreciation
    (580 )     (3,258 )
Operating expenses
    (17,170 )     (23,174 )
Gain on land sales
    -       -  
Interest expense
    (498 )     (2,485 )
Income (loss) from continuing operations
  $ 935     $ (784 )
Income from discontinued operations
    -       -  
Net income (loss)
  $ 935     $ (784 )
 
               
Company's proportionate share of earnings (1)
  $ 187     $ 3  
 
(1)Earnings represent continued and discontinued operatons.
 
NOTE 5. NOTES PAYABLE

On January 30, 2012, we refinanced the existing mortgage on Parc at Maumelle apartments, a 240-unit complex located in Little Rock, Arkansas, for a new mortgage of $16.8 million. We paid off the existing mortgage of $16.1 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 3.00% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on February 1, 2052.
 
 
 
15

 

On February 29, 2012, we refinanced the existing mortgage on Huntington Ridge apartments, a 198-unit complex located in DeSoto, Texas, for a new mortgage of $15.0 million. We paid off the existing mortgage of $14.6 million and paid $1.2 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On February 29, 2012, we refinanced the existing mortgage on Laguna Vista apartments, a 206-unit complex located in Dallas, Texas, for a new mortgage of $17.7 million. We paid off the existing mortgage of $17.0 million and paid $1.1 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On February 29, 2012, we refinanced the existing mortgage on Savoy of Garland apartments, a 144-unit complex located in Garland, Texas, for a new mortgage of $10.3 million. We paid off the existing mortgage of $10.2 million and paid $0.9 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On March 1, 2012, the construction loan in the amount of $11.1 million that was taken out on July 30, 2010 to fund the development of Sonoma Court apartments, a 124-unit complex, closed into permanent financing. The note accrues interest at 5.35% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on November 1, 2051.

On March 28, 2012, the construction loan in the amount of $24.2 million that was taken out on February 18, 2010 to fund the development of Blue Ridge apartments, a 290-unit complex, 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 October 1, 2051.

On April 30, 2012, we refinanced the existing mortgage on Parc at Metro Center apartments, a 144-unit complex located in Nashville, Tennessee, for a new mortgage of $11.0 million. We paid off the existing mortgage of $10.5 million and paid $0.7 million in closing costs and escrow reserves. The note accrues interest at 2.95% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on May 1, 2052.

On May 25, 2012, we refinanced the existing mortgage on Pecan Pointe apartments, a 232-unit complex located in Temple, Texas, for a new mortgage of $16.8 million. We paid off the existing mortgage of $16.4 million and paid $1.3 million in closing costs and escrow reserves. The note accrues interest at 3.03% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on June 1, 2052.

On May 30, 2012, we refinanced the existing mortgage on Blue Lake Villas II apartments, a 70-unit complex located in Waxahachie, Texas, for a new mortgage of $4.1 million. We paid off the existing mortgage of $3.9 million and paid $0.2 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on June 1, 2052.

On June 19, 2012, the construction loan in the amount of $16.4 million that was taken out on September 14, 2010 to fund the development of Lodge at Pecan Creek apartments, a 192-unit complex, closed into permanent financing. The note accrues interest at 5.05% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on March 1, 2052.

On June 28, 2012, we refinanced the existing mortgage on Lake Forest apartments, a 222-unit complex located in Houston, Texas, for a new mortgage of $12.8 million. We paid off the existing mortgage of $12.0 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.

On June 28, 2012, we refinanced the existing mortgage on Mission Oaks apartments, a 228-unit complex located in San Antonio, Texas, for a new mortgage of $15.6 million. We paid off the existing mortgage of $14.9 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 2.95% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.

On June 28, 2012, we refinanced the existing mortgage on Paramount Terrace apartments, a 181-unit complex located in Amarillo, Texas, for a new mortgage of $3.2 million. We paid off the existing mortgage of $2.8 million and paid $0.4 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2045.
 
 
 
16

 

On June 28, 2012, we refinanced the existing mortgage on Sugar Mill apartments, a 160-unit complex located in Addis, Louisiana, for a new mortgage of $12.0 million. We paid off the existing mortgage of $11.8 million and paid $1.0 million in closing costs and escrow reserves. The note accrues interest at 2.85% and payments of interest and principal are due monthly based upon a 40-year amortization schedule, maturing on July 1, 2052.
 
In conjunction with the development of various apartment projects and other developments, we drew down $1.3 million in construction loans during the six months ended June 30, 2012.
 
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 4.00% to 10.00% per annum.  Stock-secured notes payable and margin borrowings were $26.1 million at June 30, 2012.

 
NOTE 7. RELATED PARTY TRANSACTIONS

The following table reconciles the beginning and ending balances of accounts receivable from and (accounts payable) to affiliates as of June 30, 2012 (dollars in thousands):
 
     
Pillar
 
Balance, December 31, 2011   $ (10,294 )
 
Cash transfers
    336  
 
Advisory fees
    (5,359 )
 
Commissions to Pillar/Regis
    (2,323 )
 
Cost reimbursements
    (1,772 )
 
Interest income from advisor
    383  
 
POA fees
    (112 )
 
Net income fee
    (119 )
 
Expenses paid by Advisor
    (1,276 )
 
Financing (mortgage payments)
    1,243  
 
Note receivable with affiliate
    6,817  
 
Sales/Purchases transactions
    (825 )
 
Intercompany property transfers
    (515 )
Balance, June 30, 2012   $ (13,816 )

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 affiliated amounts included in assets and liabilities, and the affiliated 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.
 
 
 
17

 
 
Presented below is our reportable segments’ operating income for the three and six months ended June 30, 2012 and 2011, including segment assets and expenditures (dollars in thousands):
 
For the Three Months Ended June 30, 2012
 
Properties
   
Apartments
   
Hotels
   
Land
   
Other
   
Total
 
Operating revenue
  $ 9,755     $ 21,227     $ -     $ -     $ 34     $ 31,016  
Operating expenses
    5,238       10,256       -       279       (99 )     15,674  
Depreciation and amortization
    1,612       3,850       -       -       (69 )     5,393  
Mortgage and loan interest
    801       12,254       -       1,573       2,013       16,641  
Interest income
    -       -       -       -       4,723       4,723  
Gain on land sales
    -       -       -       4,738       -       4,738  
Segment operating income (loss)
  $ 2,104     $ (5,133 )   $ -     $ 2,886     $ 2,912     $ 2,769  
Capital expenditures
    431       37       -       -       -       468  
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 sales
    7,313       23,946       252       7,912       -       39,423  
Gain (loss) on sales
  $ (488 )   $ 2,039     $ 3,117     $ 4,738     $ -     $ 9,406  
                                                 
                                                 
   
Commercial
                                         
For the Three Months Ended June 30, 2011
 
Properties
   
Apartments
   
Hotels
   
Land
   
Other
   
Total
 
Operating revenue
  $ 11,103     $ 18,025     $ -     $ 200     $ (22 )   $ 29,306  
Operating expenses
    5,260       9,359       -       551       237       15,407  
Depreciation and amortization
    1,713       3,330       -       -       (85 )     4,958  
Mortgage and loan interest
    2,260       7,979       -       2,786       2,414       15,439  
Interest income
    -       -       -       -       1,203       1,203  
Gain on land sales
    -       -       -       14,029               14,029  
Segment operating income (loss)
  $ 1,870     $ (2,643 )   $ -     $ 10,892     $ (1,385 )   $ 8,734  
Capital expenditures
    5       82       -       8,924       16       9,027  
Assets
    177,298       555,522       -       337,317       -       1,070,137  
                                                 
Property Sales
                                               
Sales price
  $ 67,397     $ -     $ 2,525     $ 60,377     $ -     $ 130,299  
Cost of sales
    75,274       -       (1,114 )     49,338       -       123,498  
Recognized prior deferred gain
    -       963       -       2,990       10,954       14,907  
Gain (loss) on sales
  $ (7,877 )   $ 963     $ 3,639     $ 14,029     $ 10,954     $ 21,708  
 
The table below reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations:
 
   
For Three Months Ended June 30,
 
   
2012
   
2011
 
Segment operating income
  $ 2,769     $ 8,734  
Other non-segment items of income (expense)
               
General and administrative
    (935 )     (3,692 )
Advisory fees
    (2,700 )     (3,462 )
Provision on impairment of notes receivable and real estate assets
    -       (444 )
Other income
    2,171       551  
Equity in earnings of investees
    33       22  
Income tax benefit
    1,537       1,942  
Income from continuing operations
  $ 2,875     $ 3,651  

The table below reconciles the segment information to the corresponding amounts in the Consolidated Balance Sheets:
 
   
June 30,
 
   
2012
   
2011
 
Segment assets
  $ 960,110     $ 1,070,137  
Investments in real estate partnerships
    7,437       12,138  
Other assets and receivables
    190,369       186,456  
Assets held for sale
    2,329       132,620  
Total assets
  $ 1,160,245     $ 1,401,351  
 
 
 
 
18

 
 
   
Commercial
                               
For the Six Months Ended June 30, 2012
 
Properties
   
Apartments
   
Hotels
   
Land
   
Other
   
Total
 
Operating revenue
  $ 18,760     $ 41,763     $ -     $ -     $ 75     $ 60,598  
Operating expenses
    10,269       19,970       -       558       290       31,087  
Depreciation and amortization
    3,223       7,736       -       -       (138 )     10,821  
Mortgage and loan interest
    3,701       23,175       -       3,277       4,066       34,219  
Interest income
    -       -       -       -       8,063       8,063  
Gain on land sales
    -       -       -       3,716       -       3,716  
Segment operating income (loss)
  $ 1,567     $ (9,118 )   $ -     $ (119 )   $ 3,920     $ (3,750 )
Capital expenditures
    877       235       -       285       -       1,397  
Assets
    166,902       561,711       -       231,497       -       960,110  
                                                 
Property Sales
                                               
Sales price
  $ 6,825     $ 45,610     $ 3,369     $ 20,914     $ -     $ 76,718  
Cost of sales
    7,313       39,983       252       17,198       -       64,746  
Gain (loss) on sales
  $ (488 )   $ 5,627     $ 3,117     $ 3,716     $ -     $ 11,972  
                                                 
                                                 
   
Commercial
                                         
For the Six Months Ended June 30, 2011
 
Properties
   
Apartments
   
Hotels
   
Land
   
Other
   
Total
 
Operating revenue
  $ 20,201     $ 35,824     $ -     $ 469     $ (14 )   $ 56,480  
Operating expenses
    10,922       18,331       -       1,128       286       30,667  
Depreciation and amortization
    3,630       6,706       -       -       (174 )     10,162  
Mortgage and loan interest
    4,608       14,724       -       6,586       3,979       29,897  
Interest income
    -       -       -       -       1,871       1,871  
Gain on land sales
    -       -       -       19,373       -       19,373  
Segment operating income (loss)
  $ 1,041     $ (3,937 )   $ -     $ 12,128     $ (2,234 )   $ 6,998  
Capital expenditures
    59,392       11,003       -       8,259       -       78,654  
Assets
    177,298       555,522       -       337,317       -       1,070,137  
                                                 
Property Sales
                                               
Sales price
  $ 109,411     $ -     $ 2,525     $ 110,909     $ -     $ 222,845  
Cost of sales
    117,002