American Realty Investors Inc (ARL)

A. Company Overview

American Realty Investors, Inc. is a Nevada Corporation that operates as a fully integrated, externally managed real estate investment company. The firm specializes in the acquisition, development, and management of high-quality multifamily and commercial properties, primarily located in the Southern United States. The company also engages in investments related to mortgage notes receivable and land held for either appreciation or future development.

B. Corporate Structure

A significant aspect of American Realty Investors' corporate structure is its ownership of approximately 78.4% of the common stock of Transcontinental Realty Investors, Inc. (TCI), a company whose common stock is publicly traded on the New York Stock Exchange (NYSE). Most of American Realty Investors' operations occur through TCI, which reports its financial results in the consolidated financial statements of the company. TCI primarily holds its assets through its wholly-owned subsidiary, Southern Properties Capital Ltd. (SPC), which was established to raise funds via the issuance of non-convertible bonds on the Tel-Aviv Stock Exchange.

Moreover, American Realty Investors owns around 82.3% of the common stock of Income Opportunity Realty Investors, Inc. (IOR), which is also publicly listed on the NYSE.

In 2018, SPC entered into a joint venture with the Macquarie Group, forming the Victory Abode Apartments, LLC (VAA). This collaboration resulted in the sale of a 50% ownership interest in 51 multifamily properties. The financial results from VAA are accounted for using the equity method in American Realty Investors' financial statements. VAA subsequently sold 45 of its properties to a third party and distributed the remaining seven properties to American Realty Investors in a liquidating distribution in 2022.

C. Controlling Stockholder

The controlling stockholder of American Realty Investors is Realty Advisors, Inc. (RAI) along with its affiliates, which own approximately 90.8% of the company's common stock. The management structure has several overlapping roles, as the officers and directors of American Realty Investments also serve similar roles for TCI. Although both companies have aligned business objectives, management practices caution about potential conflicts of interest that might arise when determining investment opportunities. Investment opportunities may be allocated based on respective investment goals, financial capacity, and the appropriateness of particular investments for each entity.

D. Management

The management of American Realty Investors is undertaken by Pillar Income Asset Management, Inc., a wholly-owned subsidiary of RAI, through an Advisory Agreement and a Cash Management Agreement. Pillar's responsibilities include:

• Identifying and evaluating real estate investment opportunities: Its role encompasses extensive market analysis, due diligence, and investment strategy formulation.
• Arranging financing: Pillar facilitates debt and equity financing with third-party lenders and investors.
• Serving dual roles: Pillar acts as both the advisor to American Realty Investors and as a cash manager for TCI and IOR.

American Realty Investors has no direct employees; thus, it relies on Pillar's staff for operational execution in compliance with the terms of their agreements.

E. Portfolio Composition

As of December 31, 2023, the portfolio of American Realty Investors consists of:

• Commercial Properties: Four office buildings totaling approximately 1,056,793 square feet.
• Multifamily Properties: Fourteen properties, comprising 2,328 apartment units.
• Land Holdings: Approximately 1,843 acres of both developed and undeveloped land.

F. Recent Activity

American Realty Investors has recently engaged in several financing and development activities:

• Bond Payments: The company paid off $67.5 million of Series C bonds on January 31, 2023, and completed early payments for other Series A and Series B bonds in May 2023.
• Loan Extensions: Loan maturity for Windmill Farms was extended to February 28, 2026, at a revised interest rate.
• Construction Financing: Multiple construction loans have been secured for developments such as Lake Wales, Merano, and Bandera Ridge, with expected completion dates in 2025.
• Land Development: There are ongoing agreements to develop portions of land in Windmill Farms into residential lots.

G. Business Plan and Investment Policy

American Realty Investors aims to maximize long-term value for its stockholders through acquiring and developing income-producing multifamily properties primarily in secondary markets across the Southern United States. The strategy emphasizes:

• Long-term investments: The company generally holds assets to achieve sustained value and income.
• Property management proficiency: High occupancy levels and competitive rents are prioritized, along with vigilant cost control practices.
• Opportunistic Acquisitions: The company actively pursues opportunities for acquiring commercial properties and land for potential future development.
• Financing: Investments are often financed through operating cash flows, sales proceeds, and various forms of debt, including HUD-insured mortgage loans, which facilitate lower interest rates and longer terms.

H. Competition

The real estate sector in which American Realty Investors operates is characterized by intense competition. The company competes with various real estate entities, many possessing greater financial clout. Key competitive factors include property location, management performance in leasing and marketing activities, and overall operating expense control. For multifamily properties, additional competitive aspects involve property design, tenant amenities, and the general upkeep of buildings, all of which affect market positioning and rental pricing.

I. Government Regulations

The properties managed by American Realty Investors must adhere to a range of regulations, including safety standards, environmental laws, the Americans with Disabilities Act, and local rent control laws. These regulatory frameworks guide property operation and development activities.

J. Segments

American Realty Investors operates through two primary business segments:

1. Multifamily Properties: Involves acquisition, development, and management of residential buildings. Services include apartment rental and tenant-associated offerings like parking and storage.
2. Commercial Properties: Primarily focuses on office space leasing, encompassing additional tenant services.

By maintaining this structured approach, American Realty Investors strives to fortify its market presence while executing its growth and investment strategies effectively.