The following discussion should be read in conjunction with our consolidated financial statements and related notes in Part II, Item 8 of this Report. Our results of operations for the year endedDecember 31, 2021 were affected by a acquisitions and disposition, refinancing activity, development activity as discussed below.
Management's Overview
We are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development throughout theSouthern United States . Our portfolio of income-producing properties includes multifamily residential properties, office buildings and other commercial properties. Our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project. Our operations are managed byPillar Income Asset Management, Inc. ("Pillar") in accordance with an Advisory Agreement. Pillar's duties include, but are not limited to, locating, evaluating and recommending real estate and real estate-related investment opportunities. Pillar also arranges our debt and equity financing with third party lenders and investors. We rely upon the employees of Pillar render services to us in accordance with the terms of the Advisory Agreement. Pillar is considered to be a related party due to its common ownership with RAI. 18
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The following is a summary of our recent acquisition, disposition, financing and development activities:
Acquisitions and Dispositions
•On
•During the year endedDecember 31, 2019 , we sold 105.1 acres of land for an aggregate sales price of$30.0 million and purchased 41.9 acres for an aggregate purchase price of approximately$4.6 million . •OnMarch 5, 2020 , we acquired a 49.2 acres land parcel inKent, Ohio for$5.4 million that was funded by a$2.0 million cash payment and a$3.4 million note payable that bears interest at 10% and matures onNovember 13, 2024 .
•On
•On
•On
•During the year endedDecember 31, 2020 , we sold a total of 58.8 acres of land from our holdings inWindmill Farms for$12.9 million , in aggregate, resulting in gains on sale of$11.1 million . In addition, we sold 26.79 acres of land from our holdings inMercer Crossing during the year endedDecember 31, 2020 for$16.3 million , resulting in a gain on sale of$5.7 million . •OnMarch 30, 2021 , we sold a 50% ownership interest in Overlook atAllensville Phase II, a 144 unit multifamily property inSevierville, Tennessee , to Macquarie for$2.6 million resulting in a gain on sale of$1.4 million . Concurrent with the sale, we each contributed our 50% ownership interests in Overlook at Allensville Phase II into VAA. •OnAugust 26, 2021 , we sold 600Las Colinas , a 512,173 square foot office building inIrving, Texas for$74.8 million , resulting in a gain on sale of$27.3 million . We used the proceeds to pay down the mortgage note payable on the property (See "Financing Activities") and for general corporate purposes. •During the year endedDecember 31, 2021 , we sold a total of 134.7 acres of land from our holdings inWindmill Farms for$20.2 million , in aggregate, resulting in gains on sale of$10.3 million . In addition, we sold 14.1 acres of land from our holdings inMercer Crossing during the year endedDecember 31, 2021 for$9.0 million , resulting in a gain on sale of$6.4 million .
Financing Activities
•OnJuly 28, 2019 , we paid off the$41.5 million mortgage note payable onBrowning Place , which resulted in a loss on early extinguishment of debt of$5.2 million . Concurrent with the repayment of the mortgage note payable, we issued$78.1 million of Series C bonds (See Note 12 in our consolidated financial statements), which are collateralized byBrowning Place , bear interest at 4.65% and mature onJanuary 31, 2023 . •OnNovember 30, 2020 , we issued$19.7 million in additional Series A bonds (See Note 12 in our consolidated financial statements) for$18.8 million in net proceeds. We used the proceeds to fund in part our bond payments that were due onJanuary 30, 2021 .
•On
•On
•On
•On
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•On
•On
Development Activities
In 2020, we completed the construction of Parc at Denham Springs Phase II and
Sugar Mill Phase III for a total cost of
During 2021, we spent
We have investment in nine notes receivable that were issued to fund the development of multifamily properties (See Item 2 - Properties). As ofDecember 31, 2021 , one of the projects was in construction, two were in lease-up and six were stabilized. In 2021, we advanced$8.6 million on these development notes. Each of these notes are convertible, at our option, into a 100% ownership interest in the underlying property. During 2021, we advanced$2.3 million on the development of TowerBay Lofts , which is owned by a third party. We have an agreement that allows us to purchase this project, at our option, for the price of investment.
Other Developments:
During the year endedDecember 31, 2020 , we completed the construction of Parc at Denham Springs Phase II and Sugar Mill Phase III for a total cost of$17.2 million and$14.2 million , respectively.
During 2021, we recorded a loss of
OnNovember 17, 2021 , we entered into a Major Decision with Macquarie to engage a broker and initiate a sale of all the properties held by VAA, which are listed in Item 2. Properties as Joint Venture properties. In connection with the sale, VAA will distribute seven of its existing properties to us (referred to herein as the "Holdback Properties ") and we in turn, will contribute one of our properties ("Contributed Property") into the portfolio offered for sale to third-parties. The sales price for theHoldback Properties and Contributed Property will be the estimated value of these properties as stated in the agreement, multiplied by the ratio of the actual sales price of the portion of the VAA Portfolio sold to a third party to the estimated value of the those properties that were provided in the agreement. Each of the properties in the VAA Portfolio is appraised on an annual basis as part of our filing requirement with the TASE. As ofDecember 31, 2021 , the fair value of the VAA Portfolio, based on these appraisals was approximately$1.4 billion . The appraised value reflect an aggregate of individual property appraised value and does not reflect a premium that is sometimes offered in a portfolio sale. These values reflects a compression of cap rates for multifamily properties during the last year. However, there can be no assurances that these values will be realized. The Major Decision agreement will expire onAugust 1, 2022 , if the VAA Portfolio has not been sold. Our ownership interest in VAA is held by SPC, and is therefore subject to the bond covenants of the three series of bonds that have been issued by SPC. These provisions include restrictions on the distribution of cash from SPC (See Note 12 - Bonds Payable in our consolidated financial statements).
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity withUnited States generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Some of these estimates and assumptions include judgments on revenue recognition, estimates for common area maintenance and real estate tax accruals, provisions for uncollectible accounts, impairment of long-lived assets, the allocation of purchase price between tangible and intangible assets, capitalization of costs and fair value measurements. Our significant
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accounting policies are described in more detail in Note 2-Summary of Significant Accounting Policies in our notes to the consolidated financial statements. However, the following policies are deemed to be critical.
Fair Value of Financial Instruments
We apply the guidance in ASC Topic 820, "Fair Value Measurements and Disclosures," to the valuation of real estate assets. These provisions define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date that is other than in a forced or liquidation sale, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity's own data.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
Level 1-Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2-Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3-Unobservable inputs that are significant to the fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Related Parties
We apply ASC Topic 805, "Business Combinations", to evaluate business relationships. Related parties are persons or entities who have one or more of the following characteristics, which include entities for which investments in their equity securities would be required, trust for the benefit of persons including principal owners of the entities and members of their immediate families, management personnel of the entity and members of their immediate families and other parties with which the entity may deal if one party controls or can significantly influence the decision making of the other to an extent that one of the transacting parties might be prevented from fully pursuing our own separate interests, or affiliates of the entity.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, we 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 for personal injury associated with such materials. We are not aware of any environmental liability relating to the above matters that would have a material adverse effect on our business, assets or results of operations. Inflation The effects of inflation on our operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, our earnings from short-term investments, the cost of new financings and the cost of variable interest rate debt will be affected.
Results of Operations
Many of the variations in the results of operations, discussed below, occurred because of the transactions affecting our properties described above, including those related to theLease-Up Properties and theDisposition Properties (each as defined below). 21 -------------------------------------------------------------------------------- For purposes of the discussion below, we define "Same Properties " as those properties that are substantially leased-up and in operation for the entirety of both periods of the comparison.Non-Same Properties for comparison purposes include those properties that have been recently constructed or leased-up ("Lease-up Properties ") and properties that have been disposed of ("Disposition Properties "). A developed property is considered leased-up, when it achieves occupancy of 80% or more.We move a property in and out ofSame Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison. Accordingly, theSame Properties consist of all properties, excluding theLease-up Properties and theDisposition Properties for the periods of comparison. For the comparison of the year endedDecember 31, 2021 to the year endedDecember 31, 2020 , theLease-up Properties areForest Grove , Parc at Denham Springs Phase II and Sugar Mill Phase III; and theDisposition Properties are 600Las Colinas , Overlook at Allensville Phase II,Bridge View Plaza ,Farnham Park and Villager. The following table provides a summary of the results of operations of 2021 and 2020: For the Years Ended December 31, 2021 2020 Variance Multifamily Segment Revenue $ 14,495$ 14,686 $ (191) Operating expenses (8,167) (8,482) 315 6,328 6,204 124 Commercial Segment Revenue 23,313 37,223 (13,910) Operating expenses (12,693) (15,878) 3,185 10,620 21,345 (10,725) Segment operating income 16,948 27,549 (10,601) Other non-segment items of income (expense) Depreciation and amortization (11,870) (14,755) 2,885 General, administrative and advisory (29,927) (20,023) (9,904) Interest, net (5,659) (11,906) 6,247 Loss on extinguishment of debt (1,451) - (1,451) (Loss) gain on foreign currency transactions (6,175) (13,378) 7,203 Gain sale or write down of assets 24,647 36,895 (12,248) Income (loss) from joint ventures 14,634 (379) 15,013 Other income 5,298 7,264 (1,966) Net income (loss) $ 6,445$ 11,267 $ (4,822)
Comparison of the year ended
Our
•The$10.7 million decrease in operating profits in our commercial segment is attributed a decrease of$8.1 million from theSame Properties and$1.9 million from theDisposition Properties . The decrease at theSame Properties is primarily due to a$5.9 million lease termination payment atBrowning Place in 2020 and a decline in occupancy. The lease termination payment relates to a former tenant that has been replaced by a new tenant at increased rents. •The$9.9 million increase in general, administrative and advisory expenses is primarily due to a an increase in advisory fees related to the sale of 600Las Colinas , the refinance of Villas at Bon Secour (See "Acquisitions and Dispositions" and "Financing Activities" in Management's Overview), and legal costs associated with the Clapper litigation and the VAA Earn Out arbitration. 22 -------------------------------------------------------------------------------- •The decrease in interest expense, net is primarily due to the repayment of the loan on 600Las Colinas (See "Acquisitions and Dispositions" and "Financing Activities" in Management's Overview) and the repayment of other notes payable in 2021.
•The decrease in loss on foreign currency transactions is due to the decrease in
the amount of bonds payable outstanding during 2020 in comparison to 2021,
offset in part by the continued decrease in the value of the dollar in
comparison to the New
•The$1.5 million loss on extinguishment of debt in 2021 is due to the early extinguishment of our mortgage note payable on 600Las Colinas and Villas at Bon Secour (See "Financing Activities" in Management's Overview). •The$12.2 million decrease on gain on sale or remeasurement of assets is primarily due to the$29.6 million charge from the remeasurement of the Earn Out Obligation (See "Acquisitions and Dispositions" in Management's Overview) and a$6.7 million decrease in gain on sale of land in 2021, offset in part by a$28.0 million increase gain on sale of various commercial and multifamily properties in 2021 (See "Acquisitions and Dispositions" in Management's Overview).
•The
Comparison of the year ended
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended
Liquidity and Capital Resources
Our principal sources of cash have been, and will continue to be, property operations; proceeds from land and income-producing property sales; collection of mortgage notes receivable; collections of receivables from related companies; refinancing of existing mortgage notes payable; and additional borrowings, including mortgage notes and bonds payable, and lines of credit. Our principal liquidity needs are to fund normal recurring expenses; meet debt service and principal repayment obligations including balloon payments on maturing debt; fund capital expenditures, including tenant improvements and leasing costs; fund development costs not covered under construction loans; and fund possible property acquisitions. We anticipates that our cash, cash equivalents and short-term investments as ofDecember 31, 2021 , along with cash that will be generated in 2022 from notes and interest receivables, will be sufficient to meet all of our cash requirements. We intends to selectively sell land and income-producing assets, refinance or extend real estate debt and seek additional borrowings secured by real estate to meet our liquidity requirements. Although history cannot predict the future, historically, we have been successful at refinancing and extending a portion of our current maturity obligations.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data" and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below (dollars in thousands): Year Ended December 31, 2021 2020 Incr /(Decr)
Net cash (used in) provided by operating activities
$ 3,498 $ (15,021) Net cash provided by investing activities$ 100,822 $ 4,196 $ 96,626 Net cash used in financing activities$ (103,585)
The decrease in cash from operating activities is primarily due to the
The increase in cash provided by investing activities is primarily due to a$64.6 million increase in proceeds from sale of assets, a$28.0 million decrease in originations and advances on notes receivable, a$9.9 million increase in collection of notes 23 -------------------------------------------------------------------------------- receivable and a$9.4 million decrease in development and renovation of real estate. The increase in proceeds from sale of assets is primarily due to the sale of 600Las Colinas in 2021 (See "Acquisitions and Dispositions" in Management's Overview). The increase in cash used in financing activities is primarily due to a$85.5 million increase in payments of mortgages, notes and bonds payable and$10.7 million decrease in proceeds from mortgages, notes and bonds payable. The increase in payments of mortgages, notes and bonds payable is due to the pay off of the loan on 600Las Colinas in 2021, the refinancing of Villas at Bon Secour in 2021 (See "Financing Activities" in Management's Overview), and a$34.1 million increase in payments on the bonds payable. 24 --------------------------------------------------------------------------------
Funds From Operations ("FFO")
We use FFO in addition to net income to report our operating and financial results and considers FFO and FFO-diluted as supplemental measures for the real estate industry and a supplement to GAAP measures.The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of properties, plus real estate related depreciation and amortization, impairment write-downs of real estate and write-downs of investments in an affiliate where the write-downs have been driven by a decrease in the value of real estate held by the affiliate and after adjustments for unconsolidated joint ventures. Adjustments for unconsolidated joint ventures are calculated to reflect FFO on the same basis. We also presents FFO excluding the impact of the effects of foreign currency translation. FFO and FFO on a diluted basis are useful to investors in comparing operating and financial results between periods. This is especially true since FFO excludes real estate depreciation and amortization, as we believe real estate values fluctuate based on market conditions rather than depreciating in value ratably on a straight-line basis over time. We believe that such a presentation also provides investors with a meaningful measure of our operating results in comparison to the operating results of other real estate companies. In addition, we believe that FFO excluding gain (loss) from foreign currency transactions provide useful supplemental information regarding our performance as they show a more meaningful and consistent comparison of our operating performance and allows investors to more easily compare our results. We believe that FFO does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP, and is not indicative of cash available to fund all cash flow needs. We also caution that FFO, as presented, may not be comparable to similarly titled measures reported by other real estate companies. We compensate for the limitations of FFO by providing investors with financial statements prepared according to GAAP, along with this detailed discussion of FFO and a reconciliation of net income to FFO and FFO-diluted. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated financial statements.
The following reconciles our net income attributable to FFO and FFO-basic and
diluted, excluding loss from foreign currency transactions and loss on
extinguishment of debt for the years ended
For the Year Ended December 31, 2021 2020 2019 Net income (loss) attributable to the Company$ 3,347 $ 9,030 $ (15,958) Depreciation and amortization on consolidated assets 11,870 14,755 13,379 Gain (loss) on sale or write down of assets (24,647) (36,895) (15,192) Gain on sale of land 16,645 25,171 15,272
Depreciation and amortization on unconsolidated joint ventures at pro rata share
11,604 11,295 20,440 FFO-Basic and Diluted 18,819 23,356 17,941 Loss on extinguishment of debt 1,451 - 5,219 Loss on foreign currency transactions 6,175 13,378 15,108 FFO-adjusted$ 26,445
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