<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1994
Commission File Number 1-9948
AMERICAN REALTY TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Georgia 54-0697989
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10670 North Central Expressway, Suite 300, Dallas, Texas 75231
(Address of Principal Executive Offices) (Zip Code)
(214) 692-4700
(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. Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 3,124,164
(Class) (Outstanding at April 29, 1994)
1
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements have not been examined by
independent certified public accountants but in the opinion of the management
of American Realty Trust, Inc. (the "Company"), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of consolidated
results of operations, consolidated financial position and consolidated cash
flows at the dates and for the periods indicated, have been included.
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
--------------- --------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing.................................................. $ 28,279 $ 28,547
Nonperforming, nonaccruing.................................. 23,225 23,222
--------------- --------------
51,504 51,769
Real estate held for sale, net of accumulated
depreciation ($5,213 in 1994 and $5,320 in 1993).......... 20,870 21,426
Less - allowance for estimated losses....................... (9,437) (9,913)
--------------- --------------
62,937 63,282
Real estate held for investment, net of accumulated
depreciation ($1,629 in 1994 and $1,424 in 1993).......... 31,025 31,011
Marketable equity securities, at market value............... 2,008 -
Cash and cash equivalents................................... 595 843
Investments in real estate entities......................... 39,827 40,005
Other assets (including $489 in 1994 and $477 in
1993 due from affiliates)................................. 4,785 4,720
--------------- --------------
$ 141,177 $ 139,861
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE> 3
AMERICAN REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
------------ ------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable................................. $ 52,788 $ 53,693
Margin borrowings.......................................... 19,448 16,147
Accounts payable and other liabilities (including
$3,383 in 1994 and $3,637 in 1993 due to
affiliate)............................................... 11,391 10,552
--------------- --------------
83,627 80,392
Minority interest.......................................... 587 1,149
Redeemable Common Stock issued and outstanding
360,000 shares........................................... 2,200 2,200
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized
16,667,000 shares, issued and outstanding
2,524,164 shares......................................... 25 25
Paid-in capital............................................ 64,553 64,553
Accumulated (deficit)...................................... (9,815) (8,458)
--------------- --------------
54,763 56,120
--------------- --------------
$ 141,177 $ 139,861
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 4
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------------
1994 1993
---------- ----------
(dollars in thousands,
except per share)
<S> <C> <C>
Income
Rentals....................................................... $ 2,381 $ 1,329
Interest...................................................... 741 1,740
Equity in (losses) of investees............................... (527) (798)
Other......................................................... 365 46
--------------- --------------
2,960 2,317
Expenses
Property operations........................................... 1,577 862
Interest...................................................... 1,634 1,545
Advisory and servicing fees to affiliate...................... 320 328
General and administrative.................................... 608 213
Depreciation and amortization................................. 335 237
Minority interest............................................. 55 (72)
--------------- --------------
4,529 3,113
--------------- --------------
(Loss) before gain on sale of real estate and
extraordinary gain............................................ (1,569) (796)
Gain on sale of real estate..................................... 176 143
Extraordinary gain.............................................. 36 3,364
--------------- --------------
Net income (loss)............................................... (1,357) 2,711
Redeemable Common Stock, accretion of discount.................. - (129)
--------------- --------------
Income (loss) applicable to Common shares....................... $ (1,357) $ 2,582
=============== ==============
Earnings per share
(Loss) before gain on sale of real estate and
extraordinary gain............................................ $ (.54) $ (.27)
Gain on sale of real estate................................... .06 .05
Extraordinary gain............................................ .01 1.15
--------------- ------------
Net income (loss)............................................. (.47) .93
Redeemable Common Stock, accretion of discount................ - (.05)
--------------- ------------
Income (loss) applicable to Common shares..................... $ (.47) $ .88
=============== ============
Weighted average Common shares used in computing
earnings per share............................................ 2,884,164 2,934,037
=============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 5
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1994
<TABLE>
<CAPTION>
Common Stock
------------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
---------- ------------- ------------- -------------- --------------
(dollars and shares in thousands)
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1994...... 2,524,164 $ 25 $ 64,553 $ (8,458) $ 56,120
Net (loss)............. - - - (1,357) (1,357)
----------- ------------- ------------- -------------- --------------
Balance,
March 31, 1994....... 2,524,164 $ 25 $ 64,553 $ (9,815) $ 54,763
=========== ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 6
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------
1994 1993
---------- ----------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Interest collected............................. $ 870 $ 1,373
Rentals collected.............................. 1,770 1,664
Distributions received from real estate
entities' operating cash flow................ 695 207
Interest paid.................................. (1,390) (969)
Payments for property operations............... (2,272) (888)
Advisory and servicing fees paid to affiliate.. (320) (412)
General and administrative expenses paid....... (635) (282)
-------- -------
Net cash provided by (used in) operating
activities................................. (1,282) 693
Cash Flows From Investing Activities
Collections on notes receivable................ 231 387
Proceeds from sale of real estate.............. 640 561
Proceeds from sale of marketable equity
securities.................................... 107 450
Purchase of marketable equity securities....... (2,069) -
Investment in real estate entities............. (807) (1,165)
Real estate improvements....................... (148) (302)
Deposits on acquisition of notes receivable.... - (150)
------- -------
Net cash provided by (used in) investing
activities................................... (2,046) (219)
Cash Flows From Financing Activities
Proceeds from notes payable.................... - 100
Payments on notes payable...................... (1,135) (1,112)
Net collections (advances) to/from affiliates.. 914 (701)
Proceeds from issuance of Common stock......... - 200
Margin borrowings, net......................... 3,301 1,030
------- -------
Net cash provided by (used in) financing
activities................................... 3,080 (483)
Net (decrease) in cash and cash equivalents... (248) (9)
Cash and cash equivalents, beginning of period...... 843 510
------- -------
Cash and cash equivalents, end of period............ $ 595 $ 501
======= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 7
AMERICAN REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1994 1993
---------- ----------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net income (loss) to net cash
provided by operating activities
Net income (loss)....................................... $ (1,343) $ 2,711
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities
Extraordinary gain................................... (36) (3,364)
Depreciation and amortization........................ 335 237
Gain on sale of real estate.......................... (176) (143)
Distributions from real estate entities'
operating cash flow.................................. 695 207
Equity in losses of investees........................ 527 798
Decrease (increase) in accrued interest
receivable........................................... 160 (355)
Decrease (increase) in other assets.................. (1,061) 183
Increase (decrease) in accounts payable and
other liabilities.................................... (383) 419
--------- ---------
Net cash provided by (used in) operating
activities.......................................... $ (1,282) $ 693
========= =========
Schedule of noncash investing activities
Carrying value of real estate acquired through
foreclosure in satisfaction of notes receivable
with a net carrying value of $5,220..................... $ - $ 5,220
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
7
<PAGE> 8
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the three-month period ended March 31, 1994
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1994. For further information, refer to the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993 (the "1993 Form 10-K").
NOTE 2. NOTES AND INTEREST RECEIVABLE
The borrower on a $1.7 million first mortgage note receivable secured by land
in Osceola, Florida has failed to make the required payments subsequent to
August 10, 1993, including the payment of principal and interest due at the
note's November 1, 1993 maturity. The Company instituted judicial foreclosure
proceedings and was awarded a summary judgment in January 1994. The note had a
principal balance of $1.6 million at March 31, 1994. On March 8, 1994, the
borrower paid a nonrefundable fee of $50,000 to delay the sale of the property
at foreclosure for 45 days and on April 22, 1994, the borrower paid a second
$50,000 nonrefundable fee to delay the foreclosure sale for an additional 60
days to June 27, 1994. The Company does not expect to incur any loss upon
foreclosure as the estimated fair value of the collateral property exceeds the
carrying value of the note.
In conjunction with the sale of a restaurant site in Los Angeles, California,
the Company provided $100,000 of purchase money financing. The note bears
interest at 8% per annum, requires monthly interest only payments and matures
May 1, 1997. See NOTE 3. "REAL ESTATE."
In August 1990, the Company foreclosed on its fourth lien note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada. The Company
acquired the hotel and casino property at foreclosure subject to first and
second lien mortgages totaling $10.0 million and a disputed third lien
mortgage. In June 1992, the Company sold the hotel and casino to the third
lienholder for a $22 million wraparound mortgage note receivable, a $500,000
unsecured note receivable, and $100,000 in cash. The Company recorded a
deferred gain of $4.3 million in connection with the sale of the hotel and
casino resulting from the disputed third lien mortgage being subordinated to
the Company's wraparound mortgage note receivable. The $500,000 note was paid
off in July 1993. Payments of interest and principal on the Company's
wraparound note receivable were made directly by the borrower to the holder of
the first and second lien mortgages and were applied against interest and
principal thereon. Since October 1993, the borrower has failed to make the
monthly payments required by the Company's wraparound mortgage note receivable
to the holder of the first
8
<PAGE> 9
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued)
and second lien mortgages. The Company's wraparound mortgage note receivable
had a principal balance of $22.7 million at March 31, 1994, including
compounded interest. In April 1994, the Company, the borrower and the
underlying lienholder agreed to modify and extend both the Company's wraparound
mortgage note receivable and the underlying liens.
The modified wraparound mortgage note receivable continues to accrue interest
at 11% per annum with any unpaid interest being applied monthly to the
principal and requires payments of $150,000 per month beginning May 1, 1994
through January 1, 1995, at which time monthly payments increase to $250,000
until the note's extended maturity date of July 1, 1995, when the unpaid
principal balance together with any accrued but unpaid interest is due. The
May payment of $150,000 has been received.
The underlying lienholder has agreed to forebear exercising its rights under
the first and second liens on the condition that the Company remit to it the
greater of either $150,000 or all sums received by the Company, after May 1,
1994, on the Company's wraparound mortgage note receivable. In addition, the
Company is required to pay down the liens by $225,000 upon execution of the
forbearance agreement. The Company has made the May payment of $150,000 on the
first and second liens.
NOTE 3. REAL ESTATE
In March 1994, the Company sold a restaurant site in Los Angeles, California,
for $190,000, receiving net cash of $68,500 and providing purchase money
financing of $100,000. The Company paid a real estate sales commission of
$5,700 to Carmel Realty, Inc., an affiliate of the Company's advisor, based
upon the $190,000 sales price of the property. The Company recognized a
$26,000 gain on the sale. See NOTE 2. "NOTES AND INTEREST RECEIVABLE."
In April 1991, the Company acquired for cash all of the capital stock of a
corporation which owned 181 developed residential lots in Fort Worth, Texas.
Through December 31, 1993, a total of 143 of the residential lots were sold.
In the first quarter of 1994, six additional lots were sold for an aggregate
gain of $23,000.
In September 1991, the Company purchased all of the capital stock of Denton
Road Investment Corporation ("Denton Road"), which owns a 60% interest in a
joint venture, which in turn owned 113 partially developed residential lots in
Denton, Texas. Through December 31, 1993, 84 of the residential lots were
sold. In the first quarter of 1994, 11 additional lots were sold for an
aggregate gain of $127,000.
NOTE 4. INVESTMENTS IN REAL ESTATE ENTITIES
The Company's investment in real estate entities includes equity securities of
three publicly traded real estate investment trusts
9
<PAGE> 10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
(collectively the "Trusts"), Continental Mortgage and Equity Trust ("CMET"),
Income Opportunity Realty Trust ("IORT") and Transcontinental Realty Investors,
Inc. ("TCI"), units of limited partner interest in National Realty, L.P.
("NRLP"), a general partnership interest in NRLP and National Operating, L.P.
("NOLP"), the operating partnership of NRLP, through the Company's 76.8%
limited partner interest in Syntek Asset Management, L.P. ("SAMLP") and
interest in real estate joint venture partnerships. Basic Capital Management,
Inc. ("BCM"), the Company's advisor, serves as advisor to the Trusts, and
performs certain administrative and management functions for NRLP and NOLP on
behalf of SAMLP.
Because the Company may be considered to have the ability to exercise
significant influence over the operating and investing policies of these
entities, the Company accounts for its investment in the Trusts, NRLP, and the
joint venture partnerships under the equity method of accounting.
Substantially all of the Company's equity securities of the Trusts and NRLP are
pledged as collateral for borrowings.
The Company's investment in real estate entities, accounted for under the
equity method, at March 31, 1994 was as follows:
<TABLE>
<CAPTION>
Percentage Carrying Equivalent
of the Company's Value of Investee Market Value
Ownership at Investment at Book Value at of Investment at
Investee March 31, 1994 March 31, 1994 March 31, 1994 March 31, 1994
- - -------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NRLP 44.1% $ 11,949 $ - * $ 25,104
CMET 30.9 11,105 24,876 12,625
IORT 18.1 2,083 4,715 2,791
TCI 20.3 6,397 19,672 7,744
--------- ---------
31,534 $ 48,264
=========
General partner
interest in NRLP
and NOLP 7,261
Other 1,032
---------
$ 39,827
=========
</TABLE>
- - -------------------------
* At March 31, 1994, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1993,
was $113.0 million. Revaluation equity is defined as the difference
between the appraised value of the partnership's real estate,
adjusted to reflect the partnership's estimate of disposition costs,
and the amount of the mortgage notes payable and accrued interest
encumbering such property as reported in NRLP's Annual Report on Form
10-K for the year ended December 31, 1993.
The Company's management continues to believe that the market value of each
of the Trusts and NRLP undervalues their assets and the Company
10
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AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
has, therefore, continued to increase its ownership in these entities in
1994, as its liquidity has permitted.
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner of in excess of 14% of the Company's
outstanding Common Stock, to acquire 287 developed residential lots
adjacent to the Company's other residential lots in Fort Worth, Texas. The
partnership agreement designates the Company as managing general partner.
The partnership agreement also provides the partner with a guaranteed 10%
return on his investment. Through December 31, 1993, 18 residential lots
were sold and 13 lots were sold in the first quarter of 1994. At March 31,
1994, 256 lots remained to be sold.
The following information summarizes the combined results of operations of
the real estate entities the Company accounts for using the equity method
for the three months ended March 31, 1994:
<TABLE>
<S> <C>
Revenues.............................................. $ 43,360
Property operations................................... (28,932)
Depreciation.......................................... (4,940)
Interest expense...................................... (13,095)
Provision for losses.................................. (200)
Gain on sale of partnership interest.................. 2,514
---------
Net income (loss)..................................... $ (1,293)
=========
</TABLE>
The Company's cash flow from the Trusts and NRLP is dependent on the
ability of each of the entities to make distributions. TCI's distribution
policy provides for an annual determination of distributions after year
end, and then only to the extent necessary to retain its status as a Real
Estate Investment Trust ("REIT") for tax purposes. The Company expects to
receive no distributions from TCI in 1994. In December 1993, NRLP resumed
regular quarterly distributions at a rate of $0.20 per unit. In March
1993, CMET and IORT resumed regular quarterly distributions at a current
quarterly rate of $0.15 per share. In the first quarter of 1994, the
Company received aggregate distributions of $153,000 from CMET and IORT and
$109,000 from NRLP.
In the first quarter of 1994, the Company purchased a total of $811,000 of
equity securities of the Trusts and NRLP.
NOTE 5. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
During the first quarter of 1994, the Company began purchasing equity
securities of entities other than those of the Trusts and NRLP. The
Company purchased a total of $2.1 million of such other equity securities
to diversify and increase the liquidity of its margin accounts. These
securities are considered a trading portfolio and are therefore valued at
market. In the first quarter of 1994, the Company recognized an unrealized
decline of $79,000 in the market value of these
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO (Continued)
equity securities offset by a realized $11,000 gain. Such amounts are
included in other income in the accompanying Consolidated Statements of
Operations.
NOTE 6. NOTES AND INTEREST PAYABLE
In March 1992, the Company obtained a $1.3 million working capital loan
from a financial institution. The loan was secured by equity securities of
the Trusts and NRLP. The loan originally matured April 1, 1993 and was
extended to April 1, 1994. The balance of the loan, $350,000 at March 31,
1994, plus accrued but unpaid interest was paid off at the loan's maturity.
The Company's borrowing from a financial institution with a balance of
$10.4 million at March 31, 1994, collateralized by a note receivable with
an outstanding principal balance of $17.4 million, was scheduled to mature
on December 18, 1994. At December 31, 1993, the Company had reached
agreement with the lender to further extend the note's maturity to December
18, 1997. The extended note will bear interest at the prime rate plus 2%,
require monthly principal payments of $75,000 and require the Company to
pledge as additional collateral units of NRLP with a market value of $2.0
million.
Also at December 31, 1993, the Company had reached agreement with another
lender to extend its loan to the Company, with a principal balance of
$750,000 at March 31, 1994, which matured in August 1993. The completed
note extension provides for a maturity date of July 1995, requires the
Company to make monthly principal reduction payments of $50,000 and to
pledge 240,000 newly issued shares of the Company's Common Stock as
additional collateral for the loan. All other terms remain unchanged.
In May 1993, the Company obtained a $1.8 million first mortgage secured by
the Rosedale Office Towers, a 84,798 square foot office building in
Minneapolis, Minnesota, which was previously unencumbered. The Company
pledged as additional collateral for the loan 141,176 newly issued shares
of the Company's Common Stock. The loan matured April 30, 1994. The
Company and the lender have agreeded to extend the loans maturity date to
May 1, 1997, increase the first mortgage to $2.5 million and reduce the
loan's interest rate to the three-month LIBOR rate plus 3/4%, fixed at the
beginning of each quarter. The loan extension will require monthly
interest only payments, with the principal and accrued but unpaid interest
due at maturity.
At the time of paying off the second lien construction loan on the Park
Plaza Shopping Center in December 1993, as discussed in detail in the
Company's 1993 Form 10-K, the Company placed $105,000 into an escrow
account to complete remaining parking lot and exterior renovations at the
center. The Company is to receive a credit against the first
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. NOTES AND INTEREST PAYABLE (Continued)
mortgage for one-half of these monies as expended. As of March 31, 1994,
the Company had expended $73,000 and received a credit of $36,000 against
the first mortgage, reducing the balance to $3.6 million at March 31, 1994.
The Company has margin arrangements with various brokerage firms which
provide for borrowings of up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin
arrangements are secured by equity securities of the Trusts, NRLP as well
as other marketable equity securities and bear interest rates ranging from
4 1/2% to 8%. Margin borrowings were $19.4 million at March 31, 1994.
NOTE 7. REDEEMABLE COMMON STOCK
In June 1992, the Company sold 397,359 newly issued shares of its Common
Stock to a private investor for $1.9 million cash. Terms of the sale
agreement provide the investor with the option of requiring the Company to
reacquire up to 360,000 of the purchased shares at a price of $6.11 per
share, a total of $2.2 million. Such option is exercisable by the investor
for a two year period expiring in March 1995. The Company has accreted the
difference between the issuance price and the redemption price using the
"interest method". To secure its payment obligations under the option
agreement, the Company assigned to the investor its interest in the $22
million note receivable secured by the Continental Hotel and Casino. In
addition, BCM, the Company's advisor, and the trust that owns BCM, have
guaranteed the Company's payment obligation to purchase such shares.
NOTE 8. INCOME TAXES
Financial statement income varies from taxable income principally due to
the accounting for income and losses of investees, gains and losses from
asset sales, depreciation on owned properties, amortization of discounts on
notes receivable and payable and the difference in the allowance for
estimated losses. The Company had no taxable income or provision for
income taxes in the three months ended March 31, 1993 or 1994.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is involved in various lawsuits arising in the
ordinary course of business. Management of the Company is of the opinion
that the outcome of these lawsuits would have no material impact on the
Company's financial condition.
NOTE 10. LIQUIDITY
The Company's principal sources of cash flow have been and will continue to
be from property operations, collection of mortgage notes receivable, sales
of real estate and externally generated funds. Externally
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10. LIQUIDITY (Continued)
generated funds include borrowings against marketable equity securities,
proceeds from the issuance of debt secured by real estate and notes
receivable, borrowings from the Company's advisor, as well as a possible
equity offering.
The Company continues to experience liquidity problems and expects that
cash flow from operations together with externally generated funds will be
sufficient to meet its various cash needs only if the Company is able to
renew and extend mortgage financings as they mature. If the Company were
unsuccessful in obtaining new financings or refinancings, the Company
anticipates it could obtain additional advances from its advisor in amounts
sufficient to satisfy its cash requirements. During the remainder of 1994,
principal payments on notes payable totaling $4.7 million come due. It is
the Company's intention to either pay such debt when due or seek to extend
the maturity dates one or two years while attempting to obtain other long-
term financing. Due to the limited long-term financing available to the
Company, there can be no assurance that the Company will be successful in
extending such "balloon" payments or that it will not ultimately lose
certain of its assets to foreclosure. However, the Company's management
believes it will continue to be successful in obtaining at least the
minimum amount of extensions or other proceeds or advances to enable it to
maintain anticipated levels of property operations, existing commitments
and ownership of all properties in which it has equity.
__________________________________
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
American Realty Trust, Inc. (the "Company") was organized in 1961 to
provide investors with a professionally managed, diversified portfolio of
equity real estate and mortgage loan investments selected to provide
opportunities for capital appreciation as well as current income.
Liquidity and Capital Resources
General. Cash and cash equivalents at March 31, 1994 aggregated $595,000,
compared with $843,000 at December 31, 1993. Although the Company
anticipates that during the remainder of 1994 it will generate excess funds
from operations, as discussed below, such excess funds are not expected to
be sufficient to discharge all of the Company's debt obligations as they
mature. The Company will therefore continue to rely on externally
generated funds, including borrowings against its investments in various
real estate entities and other marketable equity securities, mortgage notes
receivable, the sale or refinancing of
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
properties, and, to the extent available and necessary, borrowings from its
advisor to meet its debt service obligations, pay taxes, interest and other
non-property related expenses.
At December 31, 1993, notes payable totaling $10.7 million had scheduled
maturities during 1994 or were in default. As discussed below, the Company
has reached agreement with the lenders on $6.9 million of such debt to
modify and extend their debt. In addition, the Company paid off an
additional $350,000 debt obligation on its April 1, 1994 maturity.
The Company intends to either payoff, extend the maturity dates or obtain
alternate financing for the remainder of its debt obligations that mature
in 1994. There can be no assurance, however, that these efforts to obtain
alternate financing or debt extensions will be successful.
The Company expects an increase in cash flow from property operations
during the remainder of 1994. This increase is expected to be derived from
an increase in occupancy and rental rates at the Company's apartment
complexes and from a full year's operations of the properties acquired in
1993. The Company is also expecting continued lot sales at its two Texas
residential subdivisions generating additional cash flow.
The Company expects that funds from existing cash resources, collections on
mortgage notes receivable, sales or refinancing of real estate, and
borrowings against its investments in real estate entities and other
marketable equity securities, mortgage notes receivable and, to the extent
available and necessary, borrowings from the Company's advisor, will be
sufficient to meet the cash requirements associated with its current and
anticipated level of operations, maturing debt obligations and existing
commitments in the foreseeable future. To the extent that the Company's
liquidity permits, the Company may make investments in real estate,
additional investments in real estate entities, and fund or acquire
mortgage notes.
Notes Receivable. The Company anticipates a continued improvement in the
operations of the properties securing its mortgage notes receivable in
certain regions of the continental United States, in particular the
Southwest region. In spite of this perceived improvement in the real
estate market in general and the Southwest in particular, the Company can
give no assurance that it will not continue to experience further
deterioration in cash flow due to new problem loans.
In April 1994, the Company and the underlying lienholder agreed to modify
and extend both the Company's $22.7 million wraparound mortgage note
receivable and the underlying liens. The modified note continues to accrue
interest at 11% per annum with any unpaid interest being added monthly to
the principal balance, require payments of $150,000 per month
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
beginning May 1, 1994 through January 1, 1995 at which time monthly
payments will increase to $250,000 until the extended maturity date of July
1, 1995.
Loans Payable. The Company has reached agreement with the underlying
lienholder on the Company's $22.7 million wraparound mortgage note
receivable secured by the Continental Hotel in Las Vegas, Nevada. The
underlying liens totaled $6.1 million at March 31, 1994. The underlying
lienholder has agreed to forebear exercising its rights under the first and
second liens on the condition that the Company remit to it the greater of
either $150,000 or all sums received by the Company, after May 1, 1994, on the
Company's wraparound mortgage note receivable. In addition, the Company is
required to pay down the liens by $225,000 upon execution of the
forbearance agreement. The lienholder has received the May payment of
$150,000. See NOTE 2. "NOTES AND INTEREST RECEIVABLE."
The Company has also reached agreement with the lender to extend the $1.8
million first mortgage secured by the Rosedale Towers Office Building,
increasing the loan balance to $2.5 million. The loan will bear interest
at the three-month LIBOR rate plus 3/4%, fixed at the beginning of each
quarter, require monthly interest only payments, with the principal balance
and accrued but unpaid interest due at maturity on May 1, 1997. See NOTE
6. "NOTES AND INTEREST PAYABLE."
The Company has margin arrangements with various brokerage firms which
provide for borrowings up to 50% of the market value of the Company's
marketable equity securities. The borrowings under such margin
arrangements are secured by such equity securities and bear interest rates
ranging from 4 1/2% to 8%. Margin borrowings were $19.4 million at March
31, 1994, an increase of $3.3 million from December 31, 1993.
Equity Investments. Since the fourth quarter of 1988, the Company has been
purchasing shares of real estate investment trusts having the same advisor
as the Company, and units of limited partner interest in National Realty,
L.P. ("NRLP"). It is anticipated that additional equity securities of the
trusts, Continental Mortgage and Equity Trust ("CMET"), Income Opportunity
Realty Trust ("IORT") and Transcontinental Realty Investors, Inc. ("TCI"),
and NRLP will be acquired in the future through open-market and negotiated
transactions to the extent the Company's liquidity permits.
Equity securities of CMET, IORT, TCI and NRLP held by the Company may be
deemed to be "restricted securities" under Rule 144 of the Securities Act
of 1933 ("Securities Act"). Accordingly, the Company may be unable to sell
such equity securities other than in a registered public offering or
pursuant to an exemption under the Securities Act for a period of two years
after they are acquired. Such restrictions may reduce the Company's
ability to realize the full fair market value of such investments if the
Company attempted to dispose of such securities in a short period of time.
The Company's cash flow from these invest-
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
ments is dependent on the ability of each of the entities to make
distributions. TCI's distribution policy provides for annual determination
of distributions after year end, and then only to the extent of its taxable
income, if any. CMET, IORT and NRLP, returned to the payment of regular
quarterly distributions in 1993. The Company has received distributions
totaling $153,000 in 1994 from CMET and IORT and $109,000 from NRLP.
The Company's management, on a quarterly basis, reviews the carrying value
of the Company's mortgage loans, properties held for investment and
properties held for sale. Generally accepted accounting principles require
that the carrying value of an investment held for sale cannot exceed the
lower of its cost or its estimated net realizable value. In those
instances in which estimates of net realizable value of the Company's
properties are less than the carrying value thereof at the time of
evaluation, a provision for loss is recorded by a charge against
operations. The estimate of net realizable value of the mortgage loans is
based on management's review and evaluation of the collateral properties
securing such loans. The review generally includes selective property
inspections, a review of the property's current rents compared to market
rents, a review of the property's expenses, a review of the maintenance
requirements, discussions with the manager of the property and a review of
the surrounding area.
Commitments
In June 1992, the Company sold 397,359 newly issued shares of its Common
Stock to a private investor for $1.9 million cash. Terms of the sale
agreement provide the purchaser with an option to require the Company to
reacquire up to 360,000 of the shares at $6.11 per share , a total of $2.2
million. Such option is exercisable for a two year period expiring in
March 1995. To secure its payment obligations under the option agreement,
the Company assigned its interest in the $22 million note receivable
secured by the Continental Hotel and Casino in Las Vegas, Nevada. In
addition, Basic Capital Management, Inc., the Company's advisor, and the
trust that owns it have agreed to guarantee the Company's payment
obligation.
In October 1993, NRLP, Syntek Asset Management, L.P. ("SAMLP"), the NRLP
Oversight Committee and the Company reached an agreement evidenced by a
detailed Term Sheet to nominate a candidate to succeed SAMLP as general
partner of NRLP and National Operating, L.P. ("NOLP"), the operating
partnership of NRLP, and to consummate the 1990 settlement of a class
action suit. The Term Sheet also sets forth an agreement in principle to
effect a restructuring of NRLP and the spinoff by NRLP to its unitholders
of shares of a newly-formed subsidiary which would qualify as a Real Estate
Investment Trust ("REIT") for federal tax purposes. The Company is NRLP's
largest unitholder and a 76.8% limited partner of SAMLP. SAMLP currently
serves as the general partner of NRLP and NOLP and a newly formed
subsidiary of SAMLP is to be nominated as successor
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Commitments (Continued)
general partner. The Term Sheet further provides that within nine months
of the spinoff transaction, the Company will make a cash tender offer to
purchase up to 60% of NRLP's units of limited partner interest held by
unitholders unaffiliated with the Company or SAMLP for $12.00 per unit (an
estimated maximum purchase price of $8.0 million), unless the NRLP units
have traded at an appreciably higher average price for the prior thirty
days.
Results of Operations
For the three months ended March 31, 1994, the Company had a net loss of
$1.4 million, compared to net income of $2.7 million for the three months
ended March 31, 1993. The Company's first quarter 1993 net income was
attributable to an extraordinary gain of $3.4 million. The primary factors
contributing to the Company's first quarter 1994 net loss are discussed in
the following paragraphs.
Net rental income (rental income less property operating expenses)
increased from $467,000 in the first quarter of 1993 to $804,000 in the
first quarter of 1994. This increase is primarily due to obtaining through
foreclosure the Boulevard Villas Apartments in July 1993 contributing
$199,000 to the increase and the Company's other residential and commercial
properties contributing $212,000 to the increase, due to higher occupancy
and rental rates. These increases were offset in part by a decrease of
$142,000 due to the sale of the Fox City Shopping Center in August 1993.
Interest income decreased from $1.7 million for the first quarter of 1993
to $741,000 for the first quarter of 1994. This decrease is primarily
attributable to the nonperforming Continental Hotel and Osceola note
receivable decreasing interest income by $662,000, the 1993 Collecting Bank
settlement decreasing interest income by $205,000 and $102,000 decrease due
to the foreclosure of the collateral securing the Boulevard Villas note
receivable in July 1993.
Equity in losses of investees decreased from a loss of $798,000 for the
first quarter of 1993 to a loss of $527,000 for the first quarter of 1994.
This decrease in equity losses is primarily attributable to improved
operating results at TCI and NRLP.
Interest expense increased from $1.5 million for the first quarter of 1993
to $1.6 million for the first quarter of 1994. This increase is primarily
due to new or refinanced mortgage obligations increasing interest expense
by $328,000 and an additional $99,000 due to an increase in the Company's
margin debt. These increases are offset by $202,000 decrease from
principal reductions and an additional $180,000 decrease due to the August
1993 Collecting Bank settlement.
Other income increased from $46,000 for the first quarter of 1993 to
$365,000 for the first quarter of 1994. The increase is primarily due
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
to $415,000 of preferred return income received on a joint venture
interest, offset in part by a $79,000 unrealized decline in the market
value of the Company's marketable equity securities trading portfolio.
Depreciation and amortization expense increased from $237,000 for the first
quarter of 1993 to $335,000 for the first quarter of 1994. This increase
is attributable to the properties obtained by the Company through
foreclosure subsequent to March 31, 1993.
Advisory and servicing fees decreased from $328,000 for the first quarter
of 1993 to $301,000 for the first quarter of 1994 due to the Company's
lower gross assets, the basis for calculation of such fee.
General and administrative expenses increased from $213,000 for the first
quarter of 1993 to $608,000 for the first quarter of 1994. This increase
is primarily the result of legal fees incurred in connection with
litigation relating to a loan guarantee and legal and consulting fees
incurred on debt and notes receivable extensions and modifications.
Gains on real estate sales increased from $143,000 in the first quarter of
1993 to $176,000 in the first quarter of 1994 due to the $26,000 gain from
the sale of a restaurant site in California. The gains on the sale of
residential lots was comparable in both periods. See NOTE 3. "REAL
ESTATE."
The Company reported a $3.4 million extraordinary gain in the first quarter
of 1993 and $36,000 in the first quarter of 1994. The extraordinary gain
in 1993 is the Company's share of an equity investee's reported
extraordinary gain of $9.0 million from the acquisition at a discount of
its mortgage debt. The extraordinary gain in 1994 is due to the
forgiveness of debt on a first mortgage resulting from early payoff of the
second mortgage in December 1993. See NOTE 6. "NOTES AND INTEREST
PAYABLE."
Environmental Matters
Under various federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for removal or
remediation costs, as well as certain other potential costs relating to
hazardous or toxic substances (including governmental fines and injuries to
persons and property) where property-level managers have arranged for the
removal, disposal or treatment of hazardous or toxic substances. In
addition, certain environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties may seek
recovery from the Company for personal injury associated with such
materials.
The Company's management is not aware of any environmental liability
relating to the above matters that would have a material adverse effect on
the Company's business, assets or results of operations.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Inflation
The effects of inflation on the Company's operations are not quantifiable.
Revenues from property operations fluctuate proportionately with
inflationary increases and decreases in housing costs. Fluctuations in the
rate of inflation also affect the sales values of properties and,
correspondingly, the ultimate gains to be realized by the Company from
property sales. Moreover, the Company frequently lends at fixed rates
while it borrows at floating rates. In periods of falling interest rates,
this could result in the Company's mortgage loan portfolio yielding
above-market rates while the cost of borrowing decreases.
Recent Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has recently issued
Statement of Financial Accounting Standards ("SFAS") No. 114 - "Accounting
by Creditors for Impairment of a Loan", which amends SFAS No. 5 -
"Accounting for Contingencies" and SFAS No. 15 - "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." The statement requires that
impaired loans be measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate. SFAS No. 114
is effective for fiscal years beginning after December 15, 1994. The
Company's management has not fully evaluated the effects of implementing
this statement, but expects that they will not be material as the statement
is applicable to debt restructurings and loan impairments after the earlier
of the effective date of the statement or the Company's adoption of the
statement.
At its January 26, 1994 meeting, the FASB directed its staff to prepare an
exposure draft, that if approved, would eliminate the provisions of SFAS
No. 114 that describe how a creditor should recognize income on an impaired
loan and add disclosure requirements on income recognized on impaired
loans. The effective date of SFAS No. 114 is not anticipated to change.
______________________________________
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K as follows:
None.
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN REALTY TRUST, INC.
Date: May 16, 1994 By: /s/ Karl L. Blaha
Karl L. Blaha
President
Date: May 16, 1994 By: /s/ Hamilton P. Schrauff
Hamilton P. Schrauff
Executive Vice President and
Chief Financial Officer
21
