<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, 1995
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 2,929,164
- ---------------------------- ---------------------------------
(Class) (Outstanding at April 28, 1995)
<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,
1995 1994
------------- ------------
(dollars in thousands)
<S> <C> <C>
Assets
------
Notes and interest receivable
Performing.......................................... $ 47,842 $ 47,378
Nonperforming, nonaccruing.......................... 1,821 2,315
--------------- --------------
49,663 49,693
Real estate held for sale, net of accumulated
depreciation ($5,098 in 1995 and $5,423 in 1994).. 15,285 23,748
Less - allowance for estimated losses............... (8,201) (8,201)
--------------- --------------
56,747 65,240
Real estate held for investment, net of accumulated
depreciation ($1,695 in 1995 and $1,396 in 1994).. 27,982 27,950
Marketable equity securities, at market value....... 6,107 1,309
Cash and cash equivalents........................... 478 193
Investments in real estate entities................. 39,597 38,844
Other assets........................................ 3,227 3,826
--------------- --------------
$ 134,138 $ 137,362
=============== ==============
</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,
1995 1994
------------- ------------
(dollars in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Notes and interest payable......................... $ 37,738 $ 45,695
Margin borrowing.................................. 32,484 26,391
Accounts payable and other liabilities (including
$1,187 in 1995 and $1,505 in 1994 due to
affiliate)....................................... 8,442 8,921
--------------- --------------
78,664 81,007
Minority interest.................................. 461 461
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; authorized
16,667,000 shares, issued and outstanding
2,929,164 shares................................. 29 29
Paid-in capital.................................... 66,749 66,749
Accumulated (deficit).............................. (11,765) (10,884)
--------------- --------------
55,013 55,894
--------------- --------------
$ 134,138 $ 137,362
=============== ==============
</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,
------------------------------------
1995 1994
------------ -------------
(dollars in thousands,
except per share)
<S> <C> <C>
Income
Rents.......................................... $ 5,407 $ 2,381
Interest....................................... 1,323 741
Equity in (loss) of investees.................. (1,260) (527)
Other.......................................... (650) 365
--------------- --------------
4,820 2,960
Expenses
Property operations............................ 3,879 1,577
Interest....................................... 1,757 1,634
Advisory and servicing fees to affiliate....... 304 320
General and administrative..................... 560 608
Depreciation and amortization.................. 440 335
Minority interest.............................. - 55
--------------- --------------
6,940 4,529
--------------- --------------
(Loss) before gain on sale of real estate and
extraordinary gain............................. (2,120) (1,569)
Gain on sale of real estate...................... 924 176
Extraordinary gain............................... 315 36
--------------- --------------
Net (loss)....................................... $ (881) $ (1,357)
=============== ==============
Earnings per share
(Loss) before gain on sale of real estate and
extraordinary gain........................... $ (.72) $ (.54)
Gain on sale of real estate.................... .31 .06
Extraordinary gain............................. .11 .01
--------------- --------------
Net (loss)..................................... $ (.30) $ (.47)
=============== ==============
Weighted average Common shares used in computing
earnings per share............................. 2,929,164 2,884,164
=============== ==============
</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, 1995
<TABLE>
<CAPTION>
Common Stock
------------------------ Paid-in Accumulated Stockholders'
Shares Amount Capital Earnings Equity
--------------- ------------- ------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1995...... 2,929,164 $ 29 $ 66,749 $ (10,884) $ 55,894
Net (loss)........... - - - (881) (881)
--------------- ------------- ------------- -------------- --------------
Balance, March 31, 1995 2,929,164 $ 29 $ 66,749 $ (11,765) $ 55,013
=============== ============= ============= ============== ==============
</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,
------------------------------------
1995 1994
--------------- --------------
(dollars in thousands)
<S> <C> <C>
Cash Flows From Operating Activities
Rents collected................................. $ 5,996 $ 1,770
Interest and dividends collected................ 1,512 870
Distributions received from equity investees'
operating cash flow........................... 421 695
Payments for property operations................ (4,733) (2,272)
Interest paid................................... (1,562) (1,390)
Advisory and servicing fees paid to affiliate... (304) (320)
General and administrative expenses paid........ (651) (635)
Other........................................... (5) -
--------------- --------------
Net cash provided by (used in) operating
activities.................................. 674 (1,282)
Cash Flows From Investing Activities
Collections on notes receivable................. 958 231
Proceeds from sale of real estate............... 9,668 640
Proceeds from sale of marketable equity
securities..................................... 570 107
Purchase of marketable equity securities........ (6,302) (2,069)
Investment in real estate entities.............. (2,214) (807)
Real estate improvements........................ (652) (148)
--------------- --------------
Net cash provided by (used in) investing
activities................................. 2,028 (2,046)
Cash Flows From Financing Activities
Payments on notes payable...................... (8,003) (1,135)
Net collections (advances) to/from affiliates.. (507) 914
Margin borrowing, net......................... 6,093 3,301
--------------- --------------
Net cash provided by (used in) financing
activities................................. (2,417) 3,080
Net increase (decrease) in cash and cash
equivalents... 285 (248)
Cash and cash equivalents, beginning of period... 193 843
--------------- --------------
Cash and cash equivalents, end of period......... $ 478 $ 595
=============== ==============
</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,
-----------------------------------
1995 1994
--------------- --------------
(dollars in thousands)
<S> <C> <C>
Reconciliation of net (loss) to net cash provided
by operating activities
Net (loss)....................................... $ (881) $ (1,343)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities
Extraordinary gain............................. (315) (36)
Depreciation and amortization.................. 440 335
Gain on sale of real estate.................... (924) (176)
Distributions from equity investees' operating
cash flow.................................... 421 695
Equity in losses of investees.................. 1,260 527
Unrealized loss on marketable equity securities 996 67
(Increase) decrease in accrued interest
receivable................................... (81) 160
(Increase) decrease in other assets............ 511 (1,128)
Increase in accrued interest payable........... 83 301
(Decrease) in accounts payable and
other liabilities............................ (931) (684)
Other.......................................... 95 -
--------------- --------------
Net cash provided by (used in) operating
activities................................. $ 674 $ (1,282)
=============== ==============
</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, 1995
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. 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, 1994 (the "1994 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 failed to make required payments subsequent to August 10,
1993, including the payment of principal and interest due at the note's
maturity on November 1, 1993. The Company instituted judicial foreclosure
proceedings and was awarded a summary judgment in January 1994. During 1994,
the borrower paid the Company a total of $235,000 in nonrefundable fees to
delay foreclosure of the property. In February and March 1995, the borrower
paid the Company a total of $35,000 to delay the foreclosure until April 24,
1995. On April 21, 1995, the borrower filed for a bankruptcy petition. The
Company is in the process of filing a motion with the bankruptcy court to lift
the court's stay and allow the Company to proceed with foreclosure. The note
had a principal balance of $1.6 million at March 31, 1995. The Company does
not expect to incur any loss upon foreclosure as the estimated fair value of
the collateral property, less estimated cost of sale, exceeds the carrying
value of the note.
NOTE 3. REAL ESTATE
In February 1995, the Company sold the Boulevard Villas Apartments in Las
Vegas, Nevada, for $9.6 million. The Company initially treated the sale as a
financing transaction, the Company having provided the purchaser with his $1.6
million down payment, by loaning a like amount, secured by a second lien on an
office building in Houston, Texas. In March 1995, the office building was sold
and the Company's loan was paid in full. The Company received net cash of $3.4
million from the sale of the apartment after the payoff of $5.9 million in
existing mortgage debt recognizing a gain of $924,000 on the sale. The Company
paid a real estate brokerage commission of $288,000 to Carmel Realty, Inc., an
affiliate of Basic Capital Management, Inc. ("BCM"), the Company's advisor,
based on the $9.6 million sales price.
In 1991, the Company purchased all of the capital stock of a corporation which
owned 181 developed residential lots in Fort Worth, Texas. Through December
31, 1994, a total of 169 of the residential lots had
8
<PAGE> 9
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. REAL ESTATE (Continued)
been sold. In the first three months of 1995 two additional lots were sold,
with 10 lots remaining to be sold at March 31, 1995.
Also in 1991, the Company purchased all of the capital stock of a company which
owns a 60% interest in a joint venture, which in turn owned 113 partially
developed residential lots in Denton, Texas. Through December 31, 1994, 109 of
the residential lots had been sold. In the first three months of 1995 no
additional lots were sold. At March 31, 1995, four lots remained to be sold.
NOTE 4. SYNTEK ASSET MANAGEMENT, L.P.
In July 1989, the Company acquired Southmark Corporation's ("Southmark") 96%
limited partner interest in SAMLP, the general partner of National Realty, L.P.
("NRLP") and National Operating, L.P. ("NOLP"), the operating partnership of
NRLP. Gene E. Phillips, a Director and Chairman of the Board of the Company
until November 16, 1992, is a general partner, and until March 4, 1994, William
S. Friedman, a Director and President of the Company until December 31, 1992,
was also general partner of SAMLP. In February 1992, in accordance with the
provisions of the settlement of adversary proceedings, the Company assigned to
Southmark a 19.2% limited partner interest in SAMLP.
NRLP, SAMLP and Messrs. Phillips and Friedman were among the defendants in a
class action lawsuit arising from the formation of NRLP. An agreement
settling such lawsuit for the above mentioned defendants became effective on
July 5, 1990. The settlement agreement provides for, among other things; (i)
the appointment of an NRLP oversight committee, (ii) the establishment of
specified annually increasing targets for five years relating to the price of
NRLP's units of limited partner interest, (iii) a limitation and deferral or
waiver of NRLP's reimbursement to SAMLP of certain future salary costs, (iv) a
deferral or waiver of certain future compensation to SAMLP, (v) the required
distribution to unitholders of all of NRLP's cash from operations in excess of
certain renovation costs unless the NRLP oversight committee approves
alternative uses for such cash from operations, (vi) the issuance of unit
purchase warrants to members of the plaintiff class, and (vii) the contribution
by the then individual general partners of $2.5 million to NRLP over a
four-year period. In accordance with the indemnification provisions of SAMLP's
agreement of limited partnership, SAMLP indemnified Messrs. Phillips and
Friedman, the individual general partners, at the time, of SAMLP, for the $2.5
million payment to NRLP. The final annual installment of principal and
interest was paid by SAMLP in May 1994.
The settlement agreement provides for the withdrawal and replacement of SAMLP
as general partner if the unit price targets are not met for two consecutive
anniversary dates. The unit price targets for the first and second anniversary
dates were not met. On July 8, 1992, SAMLP notified the NRLP oversight
committee of the failure of NRLP to meet the
9
<PAGE> 10
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. SYNTEK ASSET MANAGEMENT, L.P.
unit price targets for two successive years and that it expects to resign as
general partner of NRLP and NOLP.
The withdrawal of SAMLP as general partner would require NRLP to purchase
SAMLP's general partner interest (the "Redeemable General Partner Interest") at
its then fair value, and to pay certain fees and other compensation as provided
in the partnership agreement. Syntek Asset Management, Inc. ("SAMI"), the
managing general partner of SAMLP, has calculated the fair value of such
Redeemable General Partner Interest to be $33.0 million at December 31, 1994,
before reduction for the principal balance ($4.2 million at March 31, 1995) and
accrued interest ($4.5 million at March 31, 1995) on the note receivable from
SAMLP for its original capital contribution to NRLP. There can be no assurance
that such amount at the time of any such withdrawal will not be substantially
higher or lower. The NRLP oversight committee previously has informed NRLP
that it calculated the amount of such Redeemable General Partner Interest, to
be less than the amount calculated by SAMI. Any dispute pertaining to the
amount of the Redeemable General Partner Interest upon the withdrawal of SAMLP
as general partner of NRLP and NOLP, will be resolved by the Judge appointed
pursuant to the class action settlement to supervise its implementation (the
"Supervising Judge"). NRLP's purchase of the Redeemable General Partner
Interest could have an adverse effect on the Company's investment in limited
partner units of NRLP ($13.7 million at March 31, 1995).
In January 1995, NRLP, SAMLP, the NRLP oversight committee and William H.
Elliott executed an Implementation Agreement which provides for the nomination
of an entity controlled by Mr. Elliott as successor general partner and for the
resolution of all related matters under the class action settlement. The
Implementation Agreement was subject to receipt of a notice from Mr. Elliott
that he consented to stand for election as the successor general partner. On
April 20, 1995, Mr. Elliott formally notified the parties that he would stand
for such election.
The Implementation Agreement shall be submitted to the Supervising Judge for
tentative approval and approval of the notice to be sent to the original class
members. Upon final approval by the Supervising Judge, the proposal to elect
the successor general partner will be submitted to the NRLP unitholders for a
vote. In addition, the unitholders will vote upon amendments to NRLP's
partnership agreement which relate to the proposed compensation of the
successor general partner and other related matters.
Upon approval by the unitholders, SAMLP shall withdraw as general partner and
the successor general partner shall take office. If the required approvals are
obtained, it is anticipated that the successor general partner may be elected
and take office during the third or fourth quarter of 1995.
10
<PAGE> 11
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. SYNTEK ASSET MANAGEMENT, L.P.
The Implementation Agreement provides that SAMLP, and its affiliates owning
units in NRLP, shall not vote to remove the successor general partner, except
for removal with cause, for a period of thirty months from the date the
successor general partner takes office. In addition, the Supervising Judge
shall make a determination of any amounts which NRLP may owe to SAMLP upon
SAMLP's withdrawal as general partner and any amounts which SAMLP or its
affiliates may owe to NRLP. Any amounts which NRLP may be determined to owe to
SAMLP may be paid over a period of time to be determined by the parties on
terms which shall not hinder NRLP's ability to meet its other financial
obligations.
Upon the election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner nominee is not elected, the existing settlement shall
remain in full force and effect and all of the provisions of the Implementation
Agreement shall be voided.
On April 24, 1995, the Company's Board of Directors approved the Company's
entering into a comfort and indemnification letter whereby the Company would
agree to indemnify Mr. Elliott and any entity controlled by Mr. Elliott which
is elected to serve as the successor general partner of NRLP and NOLP. Such
indemnification will stand behind any indemnification to which Mr. Elliott or
any entity controlled by Mr. Elliott may be entitled to under the NRLP
partnership agreement.
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES
The Company's investment in real estate entities includes (i) equity securities
of three publicly traded real estate investment trusts (collectively the
"Trusts"), Continental Mortgage and Equity Trust ("CMET"), Income Opportunity
Realty Trust ("IORT") and Transcontinental Realty Investors, Inc. ("TCI"), (ii)
units of limited partner interest of NRLP, (iii) a general partnership interest
in NRLP and NOLP, through the Company's 76.8% limited partner interest in SAMLP
and (iv) interests in real estate joint venture partnerships. 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.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
11
<PAGE> 12
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
The Company's investment in real estate entities, accounted for using the
equity method, at March 31, 1995 was as follows:
<TABLE>
<CAPTION>
Percentage Carrying
of the Company's Value of Equivalent Market Value
Ownership at Investment at Investee of Investment at
Investee March 31, 1995 March 31, 1995 at March 31, 1995 March 31, 1995
- ------- - ------------------ ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
NRLP 49.2% $ 13,659 $ * $ 32,614
CMET 35.3 11,752 27,436 15,435
IORT 22.9 2,479 5,835 3,556
TCI 25.9 7,824 24,753 10,405
----------- --------------
35,714 $ 62,010
==============
General partner
interest in NRLP
and NOLP 7,673
Other (3,807)
-----------
$ 39,580
===========
</TABLE>
____________________
* At March 31, 1995, NRLP reported a deficit partners' capital. The
Company's share of NRLP's revaluation equity at December 31, 1994,
was $144.9 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, 1994.
The Company's management continues to believe that the market value of each of
the Trusts and NRLP undervalues their assets and the Company has, therefore,
continued to increase its ownership in these entities in 1995.
Set forth below is summarized combined results of operations for the real
estate entities the Company accounts for using the equity method for the three
months ended March 31, 1995:
<TABLE>
<S> <C>
Revenues.................................................... $49,063
Property operating expenses................................. (32,192)
Depreciation................................................ (5,769)
Interest expense............................................ (14,645)
Provision for losses........................................ (541)
Gain on sale of real estate................................. -
Gain on sale of partnership interest........................ -
Extraordinary gain.......................................... 1,293
-------
Net (loss).................................................. $(2,791)
=======
</TABLE>
12
<PAGE> 13
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. INVESTMENT IN REAL ESTATE ENTITIES (Continued)
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 federal tax purposes. The Company expects to receive no
distributions from TCI in 1995. In 1993, CMET, IORT and NRLP all resumed
quarterly distributions. In the first three months of 1995, the Company
received aggregate distributions of $421,000 from CMET, IORT and NRLP.
In the first three months of 1995, the Company purchased a total of $2.2
million of equity securities of the Trusts and NRLP.
In January 1992, the Company entered into a partnership agreement with an
entity affiliated with the owner, at the time, of in excess of 14% of the
Company's outstanding shares of 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 each of the partners
with a guaranteed 10% return on their respective investments. Through December
31, 1994, 60 residential lots had been sold. In the first three months of 1995
an additional 18 lots were sold. At March 31, 1995, 209 lots remained to be
sold.
NOTE 6. MARKETABLE EQUITY SECURITIES - TRADING PORTFOLIO
In the first quarter of 1994, the Company began purchasing equity securities of
entities other than those of the Trusts and NRLP to diversify and increase the
liquidity of its margin accounts. In the first three months of 1995, the
Company purchased $6.3 million and sold $492,000 of such securities. These
equity securities are considered a trading portfolio and are carried at market
value. At March 31, 1995, the Company recognized an unrealized decline in the
market value of its trading portfolio securities of $996,000. Also in the
first three months of 1995, the Company realized a net gain of $62,000 from the
sale of trading portfolio securities and received $188,000 in dividends.
Unrealized and realized gains and losses on trading portfolio securities are
included in other income in the accompanying Consolidated Statements of
Operations.
NOTE 7. NOTES AND INTEREST PAYABLE
In April 1995, the Company refinanced the mortgage debt secured by the Kansas
City Holiday Inn in the amount of $3.5 million, with the ability to increase
the principal balance of the new mortgage by an additional $1.0 million over an
18 month period if certain performance criteria are achieved. The Company
received net cash of $485,000 after the payoff of $2.9 million of existing
mortgage debt and closing costs associated with the refinancing. The new
mortgage bears a variable interest rate of 4% over the three month London
Interbank Offered Rate adjusted quarterly,
13
<PAGE> 14
AMERICAN REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 7. NOTES AND INTEREST PAYABLE (Continued)
currently 10 1/4% per annum, not to exceed 14% per annum nor be less than 9
1/2% per annum. The new mortgage requires a $32,423 monthly principal and
interest payment and matures May 1, 2002. The Company paid a mortgage
brokerage and equity refinancing fee of $35,000 to BCM, the Company's advisor,
based on the $3.5 million refinancing.
The Company has margin arrangements with various brokerage firms which provide
for borrowing 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 and other marketable equity
securities, and bear interest rates ranging from 6.75% to 10.25% per annum.
Margin borrowing totaled $32.4 million at March 31, 1995.
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, 1994 or 1995.
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.
____________________________________
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, 1995 aggregated $478,000,
compared with $193,000 at December 31, 1994. Although the Company anticipates
that during the remainder of 1995 it will generate excess cash flow from
operations, as discussed below, such excess cash
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
flow is not 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 borrowing against its investments in various real
estate entities and other marketable securities, mortgage notes receivable and
the sale or refinancing of properties to meet its debt service obligations, pay
taxes, interest and other non-property related expenses.
At December 31, 1994, notes payable totaling $13.6 million had scheduled
maturities during 1995. The Company intends to either payoff, extend the
maturity dates or obtain alternate financing for its debt obligations that
mature during the remainder of 1995. There can be no assurance, however, that
these efforts to obtain alternative financing or debt extensions will be
successful.
The Company expects an increase in cash flow from property operations during
the remainder of 1995. This increase in cash flow is expected to be derived
from improved operations of the Kansas City Holiday Inn, which the Company
acquired in 1993, due to major rehabilitation completed in 1994 and from the
operations of the Denver Merchandise Mart and Inn at the Mart (collectively the
"Mart") obtained in the second quarter of 1994. The Company also expects lot
sales at its two Texas residential subdivisions to generate additional cash
flow. See NOTE 3. "REAL ESTATE."
The Company expects that funds from existing cash sources, collections on
mortgage notes receivable, sales or refinancing of real estate and/or mortgage
notes receivable, and borrowing against its investments in marketable equity
securities and notes receivables 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 equity
investments in real estate, additional investments in marketable equity
securities and fund or acquire mortgage notes.
Notes Receivable. The Company has received $1.0 million in principal payments
in the three months ended March 31, 1995, including a $860,000 note payoff at
its maturity in February 1995.
Loans Payable. In April 1995, the Company refinanced the mortgage debt secured
by the Kansas City Holiday Inn. The Company received net cash of $485,000
after the payoff of the existing $2.9 million debt and the payment of closing
costs associated with the refinancing. The Company has the ability to increase
the principal balance of the new mortgage by an additional $1.0 million if
certain performance criteria are met. See NOTE 6. "NOTES AND INTEREST
PAYABLE."
The Company has margin arrangements with various brokerage firms which provide
for borrowing up to 50% of the market value of marketable equity securities.
The borrowing under such margin arrangements are secured by
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Liquidity and Capital Resources (Continued)
such equity securities and bear interest rates ranging from 6.75% to 10.25% per
annum. Margin borrowing totaled $32.4 million at March 31, 1995, an increase
of $6.0 million from December 31, 1994.
Equity Investments. The Company has investments in shares of three Real Estate
Investment Trusts (the "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 of NRLP will be
acquired in the future through open-market and negotiated transactions to the
extent the Company's liquidity permits.
Equity securities of the Trusts 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 investments 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 REIT for federal tax purposes.
The Company expects to receive no distributions from TCI in 1995. CMET, IORT
and NRLP resumed their payment of quarterly distributions in 1993. The Company
has received distributions totaling $421,000 in the first three months of 1995
from CMET, IORT and NRLP.
On a quarterly basis, the Company's management reviews the carrying value of
the Company's mortgage notes receivable, properties held for investment and
properties held for sale. Generally accepted accounting principles require that
the carrying amount of such assets cannot exceed the lower of their respective
carrying amounts or estimated net realizable value. In an instance where the
estimated net realizable value is less than the carrying amount at the time of
evaluation, a provision for loss is recorded by a charge against earnings. The
estimate of net realizable value of a mortgage note receivable is based on
management's review and evaluation of the collateral property securing such
note. 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.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies
Syntek Asset Management, L.P. ("SAMLP") serves as the general partner of NRLP.
The Company owns a 76.8% limited partner interest in SAMLP. The Company also
owns approximately 49% of the outstanding units of NRLP. In January 1995,
NRLP, SAMLP, the NRLP oversight committee and William H. Elliott executed an
Implementation Agreement which provides for the nomination of an entity
controlled by Mr. Elliott to stand for election as the successor general
partner of NRLP and for the resolution of all related matters under a prior
class action settlement. The Implementation Agreement was subject to receipt
of a notice from Mr. Elliott that he consented to stand for election as the
successor general partner. On April 20, 1995, Mr. Elliott formally notified
the parties that he would stand for such election.
The Implementation Agreement shall be submitted to the Supervising Judge for
tentative approval and approval of the notice to be sent to the original class
members. Upon final approval by the Supervising Judge, the proposal to elect
the successor general partner will be submitted to the NRLP unitholders for a
vote. In addition, the unitholders will vote upon amendments to NRLP's
partnership agreement which relate to the proposed compensation of the
successor general partner and other related matters.
Upon approval by the unitholders, SAMLP shall withdraw as general partner and
the successor general partner shall take office. If the required approvals are
obtained, it is anticipated that the successor general partner may be elected
and take office during the third or fourth quarter of 1995.
The Implementation Agreement provides that SAMLP, and its affiliates owning
units in NRLP (including the Company), shall not vote to remove the successor
general partner, except for removal with cause, for a period of thirty months
from the date the successor general partner takes office. In addition, the
Supervising Judge shall make a determination of any amounts which NRLP may owe
to SAMLP upon SAMLP's withdrawal as general partner and any amounts which SAMLP
or its affiliates may owe to NRLP. Any amounts which NRLP may be determined to
owe to SAMLP may be paid over a period of time to be determined by the parties
on terms which shall not hinder NRLP's ability to meet its other financial
obligations.
Upon the election and taking office of the successor general partner, the class
action settlement and the NRLP oversight committee shall be terminated. If the
successor general partner nominee is not elected, the existing settlement shall
remain in full force and effect and all of the provisions of the Implementation
Agreement shall be voided.
On April 24, 1995, the Company's Board of Directors approved the Company's
entering into a comfort and indemnification letter whereby the Company would
agree to indemnify Mr. Elliott and any entity controlled by Mr. Elliott which
is elected to serve as the successor general
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Commitments and Contingencies (Continued)
partner of NRLP and NOLP. Such indemnification will stand behind any
indemnification to which Mr. Elliott or any entity controlled by Mr. Elliott
may be entitled to under the NRLP partnership agreement.
Results of Operations
For the three months ended March 31, 1995, the Company reported a net loss of
$881,000, compared to a net loss of $1.4 million for the three months ended
March 31, 1994. The primary factors contributing to the Company's reduced net
loss are discussed in the following paragraphs.
Net rental income (rents less property operating expenses) increased from
$804,000 for the three months ended March 31, 1994 to $1.5 million for the
three months ended March 31, 1995. The increase is principally due to the
Company's 1993 acquisition of the Kansas City Holiday Inn, combined with the
Company's obtaining the Mart in April 1994. These increases were partially
offset by the Company's sale of four apartment complexes in November 1994 and
an additional apartment complex in February 1995.
Interest income from mortgage notes receivable increased from $741,000 for the
three months ended March 31, 1994 to $1.3 million for the three months ended
March 31, 1995. The increase is primarily due to the collection of interest on
the note receivable secured by the Continental Hotel and Casino throughout the
entire first quarter of 1995 compared to the note's nonperformance during the
first quarter of 1994.
Equity in loss of investees increased from a loss of $527,000 for the three
months ended March 31, 1994 to a loss of $1.3 million for the three months
ended March 31, 1995. The increase in equity losses is attributable to the
Company's continued increase in equity ownership in each of CMET, IORT, TCI and
NRLP, increasing the Company's proportionate share of equity in the results of
operations of each such entity. Combined operating losses of the four entities
increased from a loss of $1.3 million for the three months ended March 31, 1994
to an operating loss of $2.8 million for the three months ended March 31, 1995.
Other income decreased from $365,000 for the three months ended March 31, 1994
to a loss of $650,000 for the three months ended March 31, 1995. The decrease
is primarily due to a $996,000 unrealized loss on the Company's trading
portfolio securities. See NOTE 6. "MARKETABLE EQUITY SECURITIES - TRADING
PORTFOLIO."
Interest expense increased from $1.6 million for the three months ended March
31, 1994 to $1.8 million for the three months ended March 31, 1995. The three
month increase is primarily attributable to debt refinancings and debt assumed
on the Company obtaining the Mart subsequent to March 31, 1994 and a $6.0
million increase in margin borrowing from December 31, 1994.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
Depreciation and amortization increased from $335,000 for the three months
ended March 31, 1994 to $440,000 for the three months ended March 31, 1995.
This increase is attributable to the Company's obtaining the Mart in April 1994
and spending approximately $1.2 million for capital improvements to the Kansas
City Holiday Inn in 1994.
Advisory and mortgage servicing fees of $320,000 for the three months ended
March 31, 1994 approximated the $304,000 for the three months ended March 31,
1995.
General and administrative expenses decreased from $608,000 for the three
months ended March 31, 1994 to $560,000 for the three months ended March 31,
1995. The three month decrease is primarily attributable to legal fees
incurred in 1994 in connection with litigation relating to a loan guarantee and
legal and consulting fees incurred in connection with nonperforming notes
receivable.
Gains on sale of real estate sales were $924,000 for the three months ended
March 31, 1995 compared to $176,000 for the three months ended March 31, 1994.
In the three months ended March 31, 1995, the Company recognized a $924,000
gain on the sale of the Boulevard Villas Apartments. The 1994 gain is related
to the sale of residential lots.
The Company reported a $36,000 extraordinary gain for the three months ended
March 31, 1994 compared to a $315,000 extraordinary gain for the three months
ended March 31, 1995. The 1994 extraordinary gain is due to the forgiveness of
a portion of a first mortgage from early payoff of the second mortgage. The
1995 extraordinary gain of $315,000 is the Company's share of an equity
investees' extraordinary gain from the early payoff of debt.
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 generally 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
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121 - "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of".
The statement requires that long-lived assets be considered impaired "...if the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset." If impairment exists,
an impairment loss shall be recognized, by a charge against earnings, equal to
"...the amount by which the carrying amount of the asset exceeds the fair value
of the asset." If impairment of a long-lived asset is recognized, the carrying
amount of the asset shall be reduced by the amount of the impairment, shall be
accounted for as the asset's "new cost" and such new cost shall be depreciated
over the asset's remaining useful life.
SFAS No. 121 further requires that long-lived assets held for sale "...be
reported at the lower of carrying amount or fair value less cost to sell." If
a reduction in a held for sale asset's carrying amount to fair value less cost
to sell is required, a provision for loss shall be recognized by a charge
against earnings. Subsequent revisions, either upward or downward, to a held
for sale asset's fair value less cost to sell shall be recorded as an
adjustment to the asset's carrying amount, but not in excess of the asset's
carrying amount when originally classified or held for sale. A corresponding
charge or credit to earnings is to be recognized. Long-lived assets held for
sale are not to be depreciated. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995.
The Company's management has not fully evaluated the effects of adopting SFAS
No. 121, but expects that the Company's policy with regard to the
classification of revenue producing properties as assets held for sale prior to
entering into a firm contract of sale, will require reevaluation.
The Company's management estimates that if the Company had adopted SFAS No. 121
effective January 1, 1995, its depreciation and net loss in the first quarter
of 1995 would not have been affected and that a provision for loss for either
impairment of its properties held for investment or for a decline in estimated
fair value less cost to sell of its properties held for sale would not have
been required.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -------------------------------------------------------
27.0 Financial Data Schedule
(b) Reports on Form 8-K as follows:
None.
21
<PAGE> 22
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 12, 1995 By: /s/ Karl L. Blaha
------------------------- ------------------------------
Karl L. Blaha
President
Date: May 12, 1995 By: /s/ Hamilton P. Schrauff
-------------------------- -----------------------------
Hamilton P. Schrauff
Executive Vice President and
Chief Financial Officer
22
<PAGE> 23
AMERICAN REALTY TRUST, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended March 31, 1995
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
- ------- --------------------------------------------------- ------
<S> <C> <C>
27.0 Financial Data Schedule 24
</TABLE>
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 478
<SECURITIES> 6,107
<RECEIVABLES> 49,663
<ALLOWANCES> 8,201
<INVENTORY> 0
<CURRENT-ASSETS> 3,227
<PP&E> 50,060
<DEPRECIATION> 6,793
<TOTAL-ASSETS> 134,138
<CURRENT-LIABILITIES> 0
<BONDS> 37,738
<COMMON> 29
0
0
<OTHER-SE> 54,984
<TOTAL-LIABILITY-AND-EQUITY> 134,138
<SALES> 0
<TOTAL-REVENUES> 5,407
<CGS> 0
<TOTAL-COSTS> 3,879
<OTHER-EXPENSES> 440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,757
<INCOME-PRETAX> (2,120)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 315
<CHANGES> 0
<NET-INCOME> (881)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
