American Realty Investors Inc.
11/06/2025 | Press release | Distributed by Public on 11/06/2025 12:20
Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis by management should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes included in this Quarterly Report on Form 10-Q (the "Quarterly Report") and in our Form 10-K for the year ended December 31, 2024 (the "Annual Report").
This Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, principally, but not only, under the captions "Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". We caution investors that any forward-looking statements in this report, or which management may make orally or in writing from time to time, are based on management's beliefs and on assumptions made by, and information currently available to, management. When used, the words "anticipate", "believe", "expect", "intend", "may", "might", "plan", "estimate", "project", "should", "will", "result" and similar expressions which do not relate solely to historical matters are intended to identify forward-looking statements. These statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that, while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update our forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
•general risks affecting the real estate industry (including, without limitation, the inability to enter into or renew leases, dependence on tenants' financial condition, and competition from other developers, owners and operators of real estate);
•risks associated with the availability and terms of construction and mortgage financing and the use of debt to fund acquisitions and developments;
•demand for apartments and commercial properties in our markets and the effect on occupancy and rental rates;
•our ability to obtain financing, enter into joint venture arrangements in relation to or self-fund the development or acquisition of properties;
•risks associated with the timing and amount of property sales and the resulting gains/losses associated with such sales;
•failure to manage effectively our growth and expansion into new markets or to integrate acquisitions successfully;
•risks and uncertainties affecting property development and construction (including, without limitation, construction delays, cost overruns, inability to obtain necessary permits and public opposition to such activities);
•risks associated with downturns in the national and local economies, increases in interest rates, and volatility in the securities markets;
•costs of compliance with the Americans with Disabilities Act and other similar laws and regulations;
•potential liability for uninsured losses and environmental contamination; and
•risks associated with our dependence on key personnel whose continued service is not guaranteed.
The risks included here are not exhaustive. Some of the risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements, include among others, the factors listed and described at Part I, Item 1A. "Risk Factors" Annual Report on Form 10-K, which investors should review.
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 the Southern United States. Our portfolio of income-producing properties includes residential apartment communities ("multifamily properties"), office buildings and retail properties ("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 by Pillar 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, asset management, and arranging debt and equity financing with third party lenders and investors. We have no employees; all of our services are performed by Pillar employees. Pillar is considered to be a related party due to its common ownership with May Realty Holdings, Inc. ("MRHI"), who is our controlling shareholder.
The following is a summary of our recent acquisition, disposition, financing and development activities:
Acquisitions and Dispositions
•On December 13, 2024, we sold 30single family lots from our holdings in Windmill Farms for $1.4 million, resulting in a gain on sale of $1.1 million.
•On March 25, 2025, we received $3.5 million in proceeds from the condemnation settlement that provided for the conveyance of 11.2acres from our holdings in Windmill Farms, resulting in a gain on sale of $3.1 million.
•During the nine months ended September 30, 2025, we sold 51lots from our holdings in Windmill Farms for $2.3 million, resulting in a gain on sale of $1.8 million.
•On October 10, 2025, we sold Villas at Bon Secour, a 200 unit multifamily property in Gulf Shores, Alabama, for $28.0 million (See "Financing Activities").
Financing Activities
•On January 1, 2024, we amended our cash management agreement with Pillar. As a result, the interest rate on the related party receivable changed from prime plus one to SOFR.
•On February 8, 2024, we extended the maturity of our loan on Windmill Farmsto February 28, 2026 at an interest rate of 7.50%.
•On June 6, 2024, we extended the maturity of our New Concept Energy loan to September 30, 2027 with an interest rate at SOFR.
•On July 10, 2024, we replaced the existing loan on Forest Grove with a $6.6 millionloan that bears interest at SOFR plus 2.15% and matures on August 1, 2031.
•On October 21, 2024, we entered into a $27.5 millionconstruction loan to finance the development of Mountain Creek (See "Development Activities") that bears interest at SOFR plus 3.45% and matures on June 17, 2027.
•On May 30, 2025, we paid off the $10.8 millionloan on 770 South Post Oak with cash on hand.
•On October 10, 2025, we paid off the $18.8 millionloan on Villas at Bon Secour in connection with the sale of the underlying property (See "Acquisitions and Dispositions").
Development Activities
Our development activities include the development of Windmill Farms and the construction of four multifamily properties.
Windmill Farms is a collection of freshwater districts ("Districts") in Kaufman County Texas that is being developed into single family lots, multifamily properties and retail properties. In connection with the project, we develop the infrastructure in Windmill Farms in order for the land to appreciate and to sell land units ("lots") to home builders for construction of single family homes. We receive reimbursement of the infrastructure costs ("District Receivables") through the issuance of municipal bonds by the Districts. As of September 30, 2025, we have $55.7 million in District Receivables.
We have entered into development agreements with Pillar to develop multifamily properties. Each of these development projects is being funded in part by a construction loan.
The following is a summary of construction costs (dollars in thousands) incurred as of September 30, 2025:
| Project | Units | Location | Total Projected Cost | Costs Incurred | Expected Completion Date | |||||||||||||||||||||||||||
| Alera | 240 | Lake Wales, FL | $ | 55,330 | $ | 53,292 | December 2025 | |||||||||||||||||||||||||
| Bandera Ridge | 216 | Temple, TX | 49,603 | 45,232 | November 2025 | |||||||||||||||||||||||||||
| Merano | 216 | McKinney, TX | 51,910 | 47,577 | November 2025 | |||||||||||||||||||||||||||
| Mountain Creek | 234 | Dallas, TX | 49,971 | 5,818 | June 2027 | |||||||||||||||||||||||||||
| 906 | $ | 206,814 | $ | 151,919 | ||||||||||||||||||||||||||||
During the nine months ended September 30, 2025, we incurred $59.2 million in development costs, which were funded in part by $54.9 million in borrowing from our construction loans. All four of these development projects are garden style apartments, which allows for construction to be completed in phases. During the three months endedSeptember 30, 2025, we received our initial tranche of completed units from Alera, Bandera Ridgeand Merano, which allows us to start the lease-up process.
Other Developments
On October 31, 2024, we executed a Settlement Agreement and General Release (the "Settlement Agreement") covering litigation that was instituted by David M. Clapper and related entities (collectively "Clapper") in the U.S. District Court for the Northern District of Texas regarding a 1998 multifamily property transaction. In connection with the Settlement Agreement we paid Clapper $23.4 million, which we accrued during the three and nine months ended September 30, 2024..
On December 16, 2024, TCI announced an offer ("Tender Offer") to purchase up to 100,000 shares of the outstanding common shares of IOR at a price of $18 per share, subject to certain conditions. The Tender Offer was completed on January 29, 2025, which resulted in TCI's acquisition of 21,678 shares for a total cost of $0.5 million.
As provided in amendment number 31 to the Schedule 13D that TCI filed with the SEC subsequent to the completion of the Tender Offer, if the appropriate opportunity exists at attractive prices, TCI may acquire additional shares of IOR. During the nine months ended September 30, 2025, TCI purchased an additional 32,845 common share of IOR in the market for a total cost of $0.6 million.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with United 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 accounting policies are described in more detail in Note 2-Summary of Significant Accounting Policies in our notes to the consolidated financial statements in the Annual Report. 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 market participants at the measurement date, establish a hierarchy that prioritizes the information used in developing fair value estimates and require disclosure of fair value measurements by level within the fair value hierarchy. The hierarchy gives the highest priority to quoted prices in active markets (Level 1 measurements) and the lowest priority to unobservable data (Level 3 measurements), such as the reporting entity's own data.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and includes three levels defined as follows:
Level 1 - Unadjusted quoted prices for identical and unrestricted assets or liabilities in active markets.
Level 2 - Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 - Unobservable inputs that are significant to the fair value measurement.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
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.
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 the Development Properties, the Acquisition Properties and the Disposition Properties (each as defined below).
For purposes of the discussion below, we define "Same Properties" as all of our properties with the exception of those properties that have been recently constructed or leased-up ("Development Properties"), properties that have recently been acquired ("Acquisition Properties") and properties that have been disposed ("Disposition Properties"). A developed property is considered leased-up, when it achieves occupancy of 80% or more. We move a property in and out of Same Properties based on whether the property is substantially leased-up and in operation for the entirety of both periods of the comparison. The Development Activities for the comparison of the three and nine months ended September 30, 2025 to the three and nine months ended September 30, 2024were Alera, Bandera Ridge and Merano (See "Development Activities" in Management's Overview). There were no Acquisition Properties or Disposition Properties for the comparison of the three and nine months ended September 30, 2025 to the three and nine months ended September 30, 2024.
The following table (dollars in thousands) summarizes our results of operations for the three and nine months ended September 30, 2025and 2024:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||
| 2025 | 2024 | Variance | 2025 | 2024 | Variance | |||||||||||||||||||||||||||||||||
| Multifamily Segment | ||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 8,528 | $ | 8,266 | $ | 262 | $ | 25,785 | $ | 25,451 | $ | 334 | ||||||||||||||||||||||||||
| Operating expenses | (5,109) | (4,642) | (467) | (13,680) | (13,358) | (322) | ||||||||||||||||||||||||||||||||
| 3,419 | 3,624 | (205) | 12,105 | 12,093 | 12 | |||||||||||||||||||||||||||||||||
| Commercial Segment | ||||||||||||||||||||||||||||||||||||||
| Revenue | 4,307 | 3,341 | 966 | 11,218 | 9,828 | 1,390 | ||||||||||||||||||||||||||||||||
| Operating expenses | (2,441) | (2,347) | (94) | (6,382) | (6,889) | 507 | ||||||||||||||||||||||||||||||||
| 1,866 | 994 | 872 | 4,836 | 2,939 | 1,897 | |||||||||||||||||||||||||||||||||
| Segment operating income ("NOI") | 5,285 | 4,618 | 667 | 16,941 | 15,032 | 1,909 | ||||||||||||||||||||||||||||||||
| Other non-segment items of income (expense) | ||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | (2,936) | (3,120) | 184 | (8,881) | (9,429) | 548 | ||||||||||||||||||||||||||||||||
| General, administrative and advisory | (3,922) | (3,561) | (361) | (11,459) | (10,460) | (999) | ||||||||||||||||||||||||||||||||
| Interest income, net | 2,408 | 3,383 | (975) | 6,174 | 10,075 | (3,901) | ||||||||||||||||||||||||||||||||
| Gain (loss) on real estate transactions | 755 | (23,400) | 24,155 | 5,593 | (23,400) | 28,993 | ||||||||||||||||||||||||||||||||
| Income from joint ventures | 116 | 423 | (307) | (24) | 1,407 | (1,431) | ||||||||||||||||||||||||||||||||
| Other income (expense) | (1,386) | 4,641 | (6,027) | (1,197) | 3,552 | (4,749) | ||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 320 | $ | (17,016) | $ | 17,336 | $ | 7,147 | $ | (13,223) | $ | 20,370 | ||||||||||||||||||||||||||
Comparison of the three months ended September 30, 2025 to the three months ended September 30, 2024:
Our $17.3 million increase in net income is primarily attributed to the following:
•The $0.2 million decrease in multifamily NOI is due to a $0.4 million decrease from the Development Properties offset in part by a $0.2 million increase from the Same Properties.
•The $0.9 million increase in NOI from our commercial segment is primarily due to an increase in occupancy at Stanford Center.
•The $1.0 million decrease in interest income, net is due to a $1.4 million decrease in interest income offset in part by a $0.4 million decrease in interest expense. The decrease in interest income was primarily due to a decrease in funds available for investments and a decline in interest rates. Our decrease in interest expense is primarily due to the pay off of the loan on 770 South Post Oak in 2025 and refinancing Forest Grove in 2024.
•The $24.2 million decrease in loss on real estate transaction is primarily due to the $23.4 million settlement of the Clappermatter in 2024 (See "Other Developments" in Management's Overview).
•The increase in other income, net is primarily due to an increase in income tax benefit as a result of the sale of the VAA Portfolio in 2022.
Comparison of the nine months endedSeptember 30, 2025 to the nine months ended September 30, 2024:
Our $20.4 million increase in net income is primarily attributed to the following:
•Our multifamily segment had a $0.4 million increase in NOI from Same Propertiesthat was offset by a $0.4 million decrease from our Development Properties.
•The $1.4 million increase in NOI from our commercial segment is primarily due to an increase in occupancy at Stanford Center.
•The $3.9 million decrease in interest income, net is due to a $4.6 million decrease in interest income offset in part by a $0.7 million decrease in interest expense. The decrease in interest income was primarily due to a decrease in funds available for investments and a decline in interest rates. Our decrease in interest expense is primarily due to the pay off of the loan on 770 South Post Oak in 2025 and refinancing Forest Grove in 2024.
•The $29.0 million decrease in loss on real estate transaction is primarily due to the $23.4 million settlement of the Clappermatter in 2024 (See "Other Developments" in Management's Overview).
•The increase in gain on sale of assets is primarily due to the $3.1 million condemnation settlement and the sale of land parcels in 2025 (See "Acquisitions and Dispositions" in Management's Overview).
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 notes receivable; refinancing of existing mortgage notes payable; and additional borrowings, including mortgage and other notes payable.
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 anticipate that our cash and cash equivalents as of September 30, 2025, along with cash that will be generated from notes related party receivables and investment in cash equivalents and short-term investments, will be sufficient to meet all of our cash requirements. We may 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.
The following summary discussion of our cash flows is based on the consolidated statements of cash flows in our consolidated financial statements, 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):
| Nine Months Ended September 30, | |||||||||||||||||
| 2025 | 2024 | Variance | |||||||||||||||
| Net cash (used in) provided by operating activities | $ | (2,351) | $ | 16,859 | $ | (19,210) | |||||||||||
| Net cash used in investing activities | $ | (48,965) | $ | (26,898) | $ | (22,067) | |||||||||||
| Net cash provided by financing activities | $ | 40,546 | $ | 93 | $ | 40,453 | |||||||||||
The $19.2 million increase in cash used in operating activities is primarily due to a $1.3 million increase in other assets, a $9.0 million decrease in accounts payable and other liabilities, a decrease in interest income and an increase in our tax provision.
The $22.1 million increase in cash used in investing activities is primarily due to the $37.2 million increase in development and renovation of real estate offset in part by the $10.6 million increase in net redemption of short-term investments and a $5.8 million increase in proceeds from the real estate transactions. The increase in development and renovation of real estate relates to the construction of development projects (See "Development Activities" in Management's Overview). The increase in net redemption of short-term investments was to provide additional funds for the development and renovation of real estate and the repayment of the mortgage on 770 South Post Oak in 2025.
The $40.5 million increase in cash provided by financing activities was due to the $44.2 million increase in borrowings on our construction loans in connection with our development projects (See "Development Activities" in Management's Overview) offset in part by a $3.7 million increase in payments of mortgages and other notes payable(See "Financing Activities" in Management's Overview).
Funds From Operations ("FFO")
We use FFO in addition to net income to report our operating and financial results and consider 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.
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.
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 table reconciles net income attributable to the Company to FFO and FFO adjusted for the three and nine months ended September 30, 2025and 2024(dollars and shares in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2025 | 2024 | 2025 | 2024 | ||||||||||||||||||||
| Net income (loss) attributable to common shares | $ | 129 | $ | (17,460) | $ | 5,921 | $ | (14,542) | |||||||||||||||
| Depreciation and amortization | 2,936 | 3,120 | 8,881 | 9,429 | |||||||||||||||||||
| (Gain) loss on real estate transactions | (755) | 23,400 | (5,593) | 23,400 | |||||||||||||||||||
| Gain on sale of land | 755 | - | 4,847 | - | |||||||||||||||||||
| Depreciation and amortization on unconsolidated joint ventures at our pro rata share | 90 | 68 | 239 | 206 | |||||||||||||||||||
| FFO-Basic and Diluted | $ | 3,155 | $ | 9,128 | $ | 14,295 | $ | 18,493 | |||||||||||||||
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