Executive Summary / Key Takeaways

• American Realty Investors (ARL) operates as a real estate investment company focused on acquiring, developing, and owning multifamily and commercial properties, primarily in the Southern U.S., with a significant portion of its operations conducted through its majority-owned subsidiary, Transcontinental Realty Investors (TCI).
• The company's strategy is centered on opportunistic land development and the construction of new multifamily properties, evidenced by its active Windmill Farms project and four specific multifamily developments underway, which are expected to drive future asset value and revenue growth.
• First quarter 2025 results showed a notable increase in net income attributable to common shares, rising to $3.0 million ($0.18 per diluted share) from $1.8 million ($0.11 per diluted share) in Q1 2024, primarily driven by improved segment profits and a gain on real estate transactions.
• ARL faces competitive pressures from larger, more diversified REITs and those with potentially more advanced operational technology, and its profitability metrics currently lag behind several peers, highlighting a need for continued operational efficiency improvements.
• Key factors for investors to monitor include the successful execution and lease-up of the development pipeline, the ability to manage liquidity through asset sales and refinancing, and the implications of related-party transactions and ongoing litigation.

A Foundation Built on Land and Opportunity

American Realty Investors, Inc. (ARL), established in 1999, has carved out a niche in the real estate investment landscape with a core strategy focused on the acquisition, development, and ownership of income-producing multifamily and commercial properties. Operating predominantly in the Southern United States, ARL distinguishes itself through an opportunistic approach to land acquisition and development, particularly in high-growth suburban markets. This foundational element, coupled with its significant ownership stake (approximately 78.4%) in Transcontinental Realty Investors, Inc. (TCI), through which substantially all operations are conducted, positions ARL uniquely within the sector.

The real estate investment trust (REIT) market is characterized by intense competition from a diverse array of players, ranging from large, diversified national REITs to smaller, regionally focused entities and private equity firms. ARL competes directly with companies like Ventas Inc. (VTR) and Realty Income Corp. (O) in the commercial property space, and UDR Inc. (UDR) and Apartment Income REIT Corp. (AIR) in the multifamily sector. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, ARL's portfolio size suggests it holds a smaller aggregate market share compared to these larger, more established rivals.

ARL's competitive standing is shaped by its strategic emphasis on land development, which offers potential for faster project scaling and capital efficiency compared to competitors reliant solely on acquiring existing assets. However, ARL's profitability metrics, such as net margin (TTM -5.07%) and ROE (TTM -0.02%), currently lag behind several peers. For instance, UDR and AIR, focused on multifamily, exhibit stronger net margins (UDR TTM 5%, AIR TTM 2%) and ROE (UDR TTM 3%, AIR TTM 4%), while Realty Income (O), with its net-lease model, boasts significantly higher margins (TTM Net Margin 16%). This highlights an operational efficiency gap that ARL must address to enhance its competitive position.

While some competitors, particularly in the multifamily sector like UDR, are noted for leveraging advanced property management technology to drive operational efficiency, information regarding ARL does not detail specific, proprietary technological differentiators or significant R&D initiatives aimed at creating a technological moat in property management or development processes. The company's operations are managed externally by Pillar Income Asset Management, Inc., and property management is handled by Regis Realty Prime, LLC (for some commercial properties) and other outside companies. The absence of a clearly articulated technological advantage means ARL's competitive edge relies more heavily on its land holdings, development expertise, and market timing rather than technological innovation in operations.

Operational Structure and Recent Performance

ARL's operational model relies entirely on external management provided by Pillar Income Asset Management, Inc., a related party. This structure encompasses everything from identifying investment opportunities to asset management, property development, construction management, and financing arrangements. Regis Realty Prime, LLC, another related party, manages some commercial properties and provides leasing and brokerage services, while outside management companies handle multifamily properties and one commercial property. This related-party structure, while providing integrated services, carries inherent risks as transactions may not always be on an arms-length basis, potentially impacting terms and conditions.

As of March 31, 2025, ARL's portfolio included four office buildings totaling approximately 1.06 million square feet, fourteen directly owned multifamily properties comprising 2,328 units, four multifamily properties under development totaling 906 units, and approximately 1,797 acres of developed and undeveloped land.

The first quarter of 2025 demonstrated positive momentum in key financial metrics. Net income attributable to common shares increased significantly to $3.0 million, or $0.18 per diluted share, compared to $1.8 million, or $0.11 per diluted share, for the same period in 2024. Total revenue saw a modest increase to $12.0 million from $11.9 million year-over-year.

Breaking down the performance by segment provides further insight. The Multifamily Segment reported revenues of $8.8 million in Q1 2025, up from $8.5 million in Q1 2024, contributing $4.7 million in profit, a 10.1% increase from $4.3 million. Management attributed this improvement primarily to an increase in rents. The Commercial Segment, while seeing a slight decrease in revenue to $3.2 million from $3.4 million, experienced a substantial increase in profit, rising 34.2% to $1.3 million from $974 thousand. This profit growth was primarily driven by a decrease in the cost of insurance and property taxes.

Other income and expense items also influenced the bottom line. Net interest income decreased by $1.6 million, primarily due to a lower average balance and decreased interest rates on short-term investments. A significant factor contributing to the net income increase was a $3.9 million gain on real estate transactions in Q1 2025, largely stemming from a $3.1 million condemnation settlement related to land in Windmill Farms.

Development Pipeline and Capital Strategy

ARL's strategic focus on development is a key driver of its future value proposition. The company is actively developing Windmill Farms in Kaufman County, Texas, transforming land into single-family lots, multifamily properties, and retail spaces. This involves developing infrastructure, with costs reimbursed through municipal bonds issued by the Districts. As of March 31, 2025, ARL had $55.2 million in District Receivables related to this project.

In addition to Windmill Farms, ARL is undertaking the ground-up construction of four specific multifamily properties:

• Alera (Lake Wales, FL): 240 units, total cost $55.3 million, $43.9 million incurred as of March 31, 2025, expected completion December 2025.
• Bandera Ridge (Temple, TX): 216 units, total cost $49.6 million, $35.7 million incurred, expected completion November 2025.
• Merano (McKinney, TX): 216 units, total cost $51.9 million, $34.3 million incurred, expected completion November 2025.
• Mountain Creek (Dallas, TX): 234 units, total cost $50.0 million, $5.1 million incurred, expected completion October 2026.

These projects represent a significant capital commitment, with $26.3 million in development costs incurred during Q1 2025 alone, funded in part by $17.1 million in construction loan borrowings.

Liquidity and capital resources are critical for funding these developments and meeting ongoing obligations. ARL's principal sources of cash include property operations, asset sales, collection of notes receivable, refinancing, and additional borrowings. Principal uses of cash are recurring expenses, debt service (including balloon payments), capital expenditures, development costs, and potential acquisitions.

During Q1 2025, net cash used in operating activities was $7.4 million, an increase from $3.9 million provided in Q1 2024, primarily due to changes in accounts payable and other liabilities. Net cash used in investing activities increased significantly to $16.6 million from $11.6 million, driven by the increase in development and renovation costs and net redemption of short-term investments to fund these activities. Net cash provided by financing activities rose to $15.6 million from $1.5 million, reflecting the borrowings on construction loans.

Management anticipates that current cash and cash equivalents ($13.8 million at March 31, 2025), restricted cash ($18.2 million), short-term investments ($74.9 million), and cash generated from receivables and future operations will be sufficient to meet cash requirements.

The company intends to selectively sell assets, refinance debt, and seek additional borrowings to manage liquidity, a strategy it has historically employed successfully. However, the company was not in compliance with the minimum debt service coverage ratio covenant for the loan on 770 South Post Oak as of March 31, 2025, requiring surplus cash flow from that property to be held by the lender until compliance is restored.

Beyond property development, ARL's strategic initiatives include increasing its ownership in Income Opportunity Realty Investors, Inc. (IOR) through its subsidiary TCI. Following a tender offer and market purchases, TCI's ownership in IOR increased to 84% by March 31, 2025, up from 83.2% at December 31, 2024. TCI may acquire additional IOR shares opportunistically.

Competitive Landscape and Risks

ARL operates in a competitive environment where its strengths in regional market focus and land development are balanced against the scale, diversification, and potentially greater operational efficiencies of larger peers. While ARL's land assets provide a runway for future growth, its current profitability metrics lag, potentially impacting its ability to attract capital and compete on price or yield compared to companies like UDR or AIR. Realty Income's net-lease model offers a different competitive challenge in the commercial space, demonstrating significantly higher operating margins.

The reliance on related parties for management and services introduces potential conflicts of interest, as transactions may not always be in ARL's best interest. This structure is a notable difference compared to many publicly traded REITs with internal management teams.

Key risks for ARL include the successful execution of its development pipeline, which is subject to construction delays, cost overruns, and market absorption risk upon completion. The ability to manage liquidity is paramount, particularly given debt maturities and the need to fund development costs. The DSCR covenant non-compliance on 770 South Post Oak highlights property-specific operational risks that can impact financial flexibility. Furthermore, ongoing litigation, such as the Nixdorf case where a favorable jury verdict was reversed on appeal, introduces uncertainty and potential financial exposure. Market conditions, including interest rate fluctuations and economic downturns, can impact property values, rental rates, and the availability and cost of financing, affecting ARL's ability to execute its strategy of asset sales and refinancing.

Conclusion

American Realty Investors presents an investment narrative centered on unlocking value through strategic land development and the expansion of its multifamily portfolio. The first quarter of 2025 demonstrated improved profitability driven by segment performance and opportunistic asset sales, providing a snapshot of the potential inherent in its asset base. The ongoing development pipeline, with specific completion timelines for four multifamily projects and continued progress at Windmill Farms, represents the core engine for future growth in asset value and rental income.

However, investors must weigh this growth potential against the competitive pressures from larger, more efficient peers and the inherent risks associated with the company's external, related-party management structure, liquidity management challenges, and legal contingencies. ARL's ability to successfully execute its development projects on time and budget, achieve favorable lease-up rates, and navigate its financing needs will be critical determinants of its future performance and its ability to narrow the profitability gap with competitors. The strategic importance of its land holdings and the potential for value creation from these assets remain central to the long-term investment thesis, provided the company can effectively manage the associated development and market risks.