AMERICAN REALTY INVESTORS INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID 782 ) 24 Consolidated Balance Sheets at December 31, 2024 and 2023 27 Consolidated Statements of Operations for the Years Ended December 31, 2024, 2023 and 2022 28 Consolidated Statements of Equity for the Years Ended December 31, 2024, 2023 and 2022 29 Consolidated Statements of Cash Flows for the Years Ended December 31, 2024, 2023 and 2022 30 Notes to Consolidated Financial Statements 31 Financial Statement Schedules Schedule III—Real Estate and Accumulated Depreciation 48 Schedule IV—Mortgage Loan Receivables on Real Estate 50 23 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of and Stockholders of American Realty Investors, Inc. Dallas, Texas Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of American Realty Investors, Inc. and Subsidiaries as of December 31, 2024 and 2023, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes and schedules (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of American Realty Investors, Inc. as of December 31, 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024 in conformity with accounting principles generally accepted in the United States of America. Basis of Opinion These consolidated financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Impairment of investment in real estate Description of the Matter The Company’s net investment in real estate totaled $557.4 million as of December 31, 2024. As discussed in Note 2 to the consolidated financial statements, the Company periodically assesses whether there has been any impairment in the carrying value of its properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. Impairment is recognized on real estate assets held for investment when indicators of impairment are present and the future undiscounted cash flows for a real estate asset are less than its carrying amount, at which time the real estate asset is written down to its estimated fair value. 24 Auditing the Company's impairment assessment for real estate assets was complex because of the subjective auditor judgment necessary in evaluating management’s identification of indicators of potential impairment. Our evaluation of management’s identification of indicators of impairment included our related assessment of such indicators, either individually or in combination, in determining whether a triggering event has occurred that requires the Company to evaluate the recoverability of the real estate asset. How We Addressed the Matter in Our Audit We obtained an understanding of the Company’s controls over the Company’s real estate asset impairment assessment process. Our testing of the Company’s impairment assessment included, among other procedures, evaluating significant judgments applied in determining whether indicators of impairment existed for the Company’s real estate assets. Our procedures included obtaining evidence to corroborate such judgments and searching for evidence contrary to such judgments, including searching for significant tenant write-offs or upcoming lease expirations with little prospects for replacement tenants. We also searched for any significant declines in operating results of a real estate asset that could be due to a triggering event or an indicator of potential impairment. Collectability of Notes Receivable Description of the Matter At December 31, 2024, the Company had notes receivable in the amount of $138.3 million. The Company performs an assessment as to whether or not substantially all of the amounts due under these notes receivable is deemed probable of collection. Subsequently, for notes where the Company concludes that it is not probable that it will collect substantially all payments due under the note, the Company creates an allowance for any amounts not probable of collection. Auditing the Company's collectability assessment is complex due to the judgment involved in the Company’s determination of the collectability of these notes. The determination involves consideration of the terms of the note, whether or not the note is currently performing, and any security for the note. How We Addressed the Matter in Our Audit We obtained an understanding of the Company's controls over notes receivable and their collectability assessment. Our testing included among other things, confirming selected notes receivable, determining if the notes were performing according to their terms and testing the Company’s evaluation of the underlying security interest if necessary. Revenue Recognition (straight-line) for commercial tenants Description of the Matter During 2024, the Company recognized office rental revenues and tenant recoveries of $13.0 million and deferred rent receivables of $3.8 million at December 31, 2024. As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from commercial properties on a straight-line basis over the terms of the related leases. Auditing the Company's straight-line calculations is complex due to the free rent periods, lease amendments and escalation clauses contained in many of the leases. How We Addressed the Matter in Our Audit We obtained an understanding of the Company's controls over office rental revenues and tenant recoveries, including controls over management’s calculation of the straight-line calculation and deferred rent receivable. To test the straight-line rent revenue and deferred rent receivable, we performed audit procedures that included, among others, evaluating the data and assumptions used in determining the calculation and agreeing amounts in the calculation to copies of lease agreements. In addition, we tested the completeness and accuracy of the data that was used in management’s straight-line rent and deferred rent receivable calculation. 25 Emphasis of Liquidity As described in Note 19, management intends to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet the Company’s liquidity requirements. Supplemental Information The supplemental information contained in Schedules III and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with the Security and Exchange Commission’s rules. In our opinion, the supplemental information is fairly stated, in all material respects, in relation to the financial statements as a whole. FARMER, FUQUA & HUFF, PC Richardson, Texas March 20, 2025 We have served as the Company’s auditor since 2004. 26 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value amounts) December 31, 2024 2023 Assets: Real estate $ 557,388 $ 501,586 Cash and cash equivalents 19,918 36,740 Restricted cash 20,557 42,327 Short-term investments 79,800 90,448 Notes receivable (including $ 71,365 and $ 75,362 at December 31, 2024 and 2023, respectively, from related parties) 138,349 144,142 Investment in unconsolidated joint ventures 10,246 10,060 Receivable from related parties 97,544 96,533 Other assets (including $ 1,855 and $ 2,012 at December 31, 2024 and 2023, respectively, from related parties) 109,000 101,648 Total assets $ 1,032,802 $ 1,023,484 Liabilities and Equity Liabilities: Mortgages and other notes payable $ 185,398 $ 182,683 Accounts payable and other liabilities (including $ 601 and $ 1,016 at December 31, 2024 and 2023, respectively, to related parties) 32,105 11,866 Accrued interest 3,238 2,633 Deferred revenue 9,791 9,791 Total liabilities 230,532 206,973 Equity: Shareholders' equity Preferred stock, Series A, $ 2.00 par value, 15,000,000 shares authorized, 1,800,614 shares issued and outstanding 1,801 1,801 Common stock, $ 0.01 par value, 100,000,000 shares authorized; 16,152,043 shares issued and outstanding 162 162 Additional paid-in capital 61,161 61,638 Retained earnings 538,699 553,402 Total shareholders’ equity 601,823 617,003 Noncontrolling interest 200,447 199,508 Total equity 802,270 816,511 Total liabilities and equity $ 1,032,802 $ 1,023,484 The accompanying notes are an integral part of these consolidated financial statements. 27 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) For the Years Ended December 31, 2024 2023 2022 Revenues: Rental revenues (including $ 652 , $ 882 and $ 931 for 2024, 2023 and 2022, respectively, from related parties) $ 44,763 $ 47,023 $ 34,080 Other income 2,555 3,477 3,464 Total revenue 47,318 50,500 37,544 Expenses: Property operating expenses (including $ 346 , $ 366 and $ 433 for 2024, 2023 and 2022, respectively, from related parties) 27,063 27,896 18,339 Depreciation and amortization 12,276 13,646 9,686 General and administrative (including $ 3,871 , $ 4,006 and $ 4,191 for 2024, 2023 and 2022, respectively, from related parties) 6,395 10,011 10,033 Advisory fee to related party 8,225 10,187 8,753 Total operating expenses 53,959 61,740 46,811 Net operating loss ( 6,641 ) ( 11,240 ) ( 9,267 ) Interest income (including $ 8,985 , $ 13,260 and $ 15,600 for 2024, 2023 and 2022, respectively, from related parties) 19,973 26,847 26,559 Interest expense ( 7,838 ) ( 9,502 ) ( 17,529 ) Gain on foreign currency transactions — 993 20,067 Loss on early extinguishment of debt — ( 1,710 ) ( 2,805 ) Equity in income from unconsolidated joint ventures 1,449 3,242 469,268 (Loss) gain on real estate transactions ( 23,989 ) ( 1,923 ) 87,132 Income tax provision 3,607 ( 1,456 ) ( 98,108 ) Net (loss) income ( 13,439 ) 5,251 475,317 Net income attributable to noncontrolling interest ( 1,264 ) ( 1,283 ) ( 101,968 ) Net (loss) income applicable to the Company $ ( 14,703 ) $ 3,968 $ 373,349 Earnings per share Basic and diluted $ ( 0.91 ) $ 0.25 $ 23.11 Weighted average common shares used in computing earnings per share Basic and diluted 16,152,043 16,152,043 16,152,043 The accompanying notes are an integral part of these consolidated financial statements. 28 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENT OF EQUITY (Dollars in thousands, except share amounts) Preferred Stock Common Stock Paid-in Capital Retained Earnings Total Stockholders' Equity Noncontrolling Interest Total Equity Balance, January 1, 2022 $ 1,801 $ 162 $ 62,090 $ 176,085 $ 240,138 $ 96,713 $ 336,851 Net income — — 373,349 373,349 101,968 475,317 Balance, December 31, 2022 1,801 162 62,090 549,434 613,487 198,681 812,168 Net income — — — 3,968 3,968 1,283 5,251 Repurchase of treasury shares by IOR — — — — — ( 908 ) ( 908 ) Adjustment to noncontrolling interest — — ( 452 ) — ( 452 ) 452 — Balance, December 31, 2023 1,801 162 61,638 553,402 617,003 199,508 816,511 Net (loss) income — — — ( 14,703 ) ( 14,703 ) 1,264 ( 13,439 ) Repurchase of treasury shares by IOR — — — — — ( 802 ) ( 802 ) Adjustment to noncontrolling interest — — ( 477 ) — ( 477 ) 477 — Balance, December 31, 2024 $ 1,801 $ 162 $ 61,161 $ 538,699 $ 601,823 $ 200,447 $ 802,270 The accompanying notes are an integral part of these consolidated financial statements. 29 AMERICAN REALTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) For the Years Ended December 31, 2024 2023 2022 Cash Flow From Operating Activities: Net (loss) income $ ( 13,439 ) $ 5,251 $ 475,317 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Loss (gain) on sale, remeasurement or write down of assets 23,989 1,923 ( 87,132 ) Gain on foreign currency transactions — ( 993 ) ( 20,067 ) Loss on early debt extinguishment — 1,710 2,805 Depreciation and amortization 12,533 14,571 13,111 Provision (recovery) for doubtful accounts 166 1,593 ( 3,284 ) Equity in income from unconsolidated joint ventures ( 1,449 ) ( 3,242 ) ( 469,268 ) Distribution of income from unconsolidated joint ventures 1,263 — 5,200 Changes in assets and liabilities, net of acquisitions and dispositions: Other assets ( 6,872 ) ( 10,273 ) 7,782 Related party receivables ( 1,011 ) ( 11,081 ) ( 7,585 ) Accrued interest payable 605 ( 1,719 ) ( 1,318 ) Accounts payable and other liabilities ( 14,696 ) ( 28,794 ) 39,053 Net cash provided by (used in) operating activities 1,089 ( 31,054 ) ( 45,386 ) Cash Flow From Investing Activities: Collection of notes receivable 5,792 1,967 3,027 Originations and advances on notes receivable — ( 6,500 ) ( 2,305 ) Purchase of short-term investments ( 59,097 ) ( 91,007 ) ( 277,641 ) Redemption of short-terms investments 69,745 120,346 175,250 Development and renovation of real estate ( 57,933 ) ( 18,462 ) ( 18,686 ) Deferred leasing costs ( 1,189 ) ( 1,128 ) ( 1,163 ) Proceeds from sale of assets 1,342 188 44,591 Distributions from unconsolidated joint ventures — 21,409 384,284 Net cash (used in) provided by investing activities ( 41,340 ) 26,813 307,357 Cash Flow From Financing Activities: Proceeds from mortgages and other notes payable 15,112 — — Payments on mortgages, other notes and bonds payable ( 12,452 ) ( 137,657 ) ( 111,022 ) Repurchase IOR shares ( 802 ) ( 908 ) — Debt extinguishment costs — ( 435 ) ( 1,355 ) Deferred financing costs ( 199 ) ( 20 ) — Net cash provided by (used in) financing activities 1,659 ( 139,020 ) ( 112,377 ) Net (decrease) increase in cash and cash equivalents ( 38,592 ) ( 143,261 ) 149,594 Cash and cash equivalents, beginning of year 79,067 222,328 72,734 Cash and cash equivalents, end of year $ 40,475 $ 79,067 $ 222,328 The accompanying notes are an integral part of these consolidated financial statements. 30 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Organization As used herein, the terms “the Company”, “We”, “Our”, or “Us” refer to American Realty Investors, Inc., a Nevada corporation, which was formed in 1999. Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ARL”. Over 90 % of our stock is owned by related party entities. Our primary business is the acquisition, development and ownership of income-producing residential and commercial real estate properties. In addition, we opportunistically acquire land for future development in in-fill or high-growth suburban markets. From time to time and when we believe it appropriate to do so, we will also sell land and income-producing properties. We generate revenues by leasing apartment units to residents, and leasing office, industrial and retail space to various for-profit businesses as well as certain local, state and federal agencies. We also generate income from the sales of income-producing properties and land. We own approximately 78.4 % of the common stock of Transcontinental Realty Investors, Inc. ("TCI") and substantially all of our operations are conducted through TCI, whose common stock is listed on the NYSE under the symbol “TCI”. Accordingly, we include TCI’s financial results in our consolidated financial statements. At December 31, 2024, our property portfolio consisted of: • Commercial pr operties , consisting of four office buildings with an aggregate of approximately 1,060,236 rentable square feet; • Fourteen multifamily properties in operation, comprising 2,328 units; • Four multifamily properties under development, comprising 906 units; and • Approximately 1,804 acres of developed and undeveloped land. Our day to day operations are managed by Pillar Income Asset Management, Inc. (“Pillar”). Their duties include, but are not limited to, locating, evaluating and recommending real estate-related investment opportunities and arranging debt and equity financing with third party lenders and investors. All of our employees are Pillar employees. Three of our commercial properties are managed by Regis Realty Prime, LLC (“Regis”). Regis provides leasing, construction management and brokerage services. All of our multifamily properties and one of our commercial properties are managed by outside management companies. Pillar and Regis are considered to be related parties (See Note 14 – Related Party Transactions). 2. Summary of Significant Accounting Policies Basis of presentation These consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America. We consolidate entities in which we are considered to be the primary beneficiary of a variable interest entity (“VIE”) or have a majority of the voting interest of the entity. We have determined that we are a primary beneficiary of the VIE when we have (i) the power to direct the activities of a VIE that most significantly impacts its economic performance, and (ii) the obligations to absorb losses or the right to receive benefits that could potentially be significant to the VIE. In determining whether we are the primary beneficiary, we consider qualitative and quantitative factors, including ownership interest, management representation, ability to control decision and other contractual rights. We account for entities in which we have less than a controlling financial interest or entities where we are not deemed to be the primary beneficiary under the equity method of accounting. Accordingly, we include our share of the net earnings or losses of these entities in our results of operations. Certain prior year amounts have been reclassified to conform wi th the current year presentation. These reclassifications had no effect on the reported results of operation. 31 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Real estate, depreciation, and impairment Real estate assets are stated at the lower of depreciated cost or fair value, if deemed impaired. Major replacements and betterments are capitalized and depreciated over their estimated remaining useful lives. Depreciation is computed on a straight-line basis over the useful lives of the properties (buildings and improvements— 10 to 40 years; furniture, fixtures and equipment— 5 to 10 years). We assess whether an indicator of impairment in the value of our real estate exists by considering expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include projected rental revenue, operating costs and capital expenditures as well as estimated holding periods and capitalization rates. If an impairment indicator exists, the determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. We generally hold and operate our income producing real estate long-term, which decreases the likelihood of their carrying values not being recoverable. Real estate classified as held for sale are measured at the lower of the carrying amount or fair value less cost to sell. Cost capitalization The cost of buildings and improvements includes the purchase price of property, legal fees and other acquisition costs. We also capitalize development costs including costs directly related to planning, developing, initial leasing and constructing a property as well as interest, property taxes, insurance, and other direct project costs incurred during the period of development. Capitalized costs also include direct and certain indirect costs clearly associated with the project. Indirect costs include real estate taxes, insurance and certain shared administrative costs. In assessing the amounts of direct and indirect costs to be capitalized, allocations are made to projects based on estimates of the actual amount of time spent on each activity. Indirect costs not clearly associated with specific projects are expensed as period costs. We consider a construction project as substantially completed and held available for occupancy upon the receipt of certificates of occupancy, but no later than one year from cessation of major construction activity. We cease capitalization on the portion (1) substantially completed and (2) occupied or held available for occupancy, and we capitalize only those costs associated with the portion under construction. Deferred leasing costs We capitalize leasing costs on our commercial properties, which include commissions paid to outside brokers, legal costs incurred to negotiate and document a lease agreement. We allocate these costs to individual tenant leases and amortize them over the related lease term. Short-Term Investments We account for our investment in corporate bonds and demand notes (collectively "debt securities") as held-to-maturity securities as we have the intent and the ability to hold these securities until maturity. Accordingly, our debt securities are carried at their amortized cost. The discount on these debt securities is amortized into interest income on a straight-line basis over the term of the underlying notes, which approximate the effective interest method. 32 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Fair value measurement Fair value represents 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. In determining fair value we apply the following hierarchy: 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 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 its own separate interests, or affiliates of the entity. Recognition of revenue Rental revenue includes fixed minimum rents, reimbursement of operating costs and other leasing income. Rental revenue for residential property, which is generally leased for twelve months or less, is recorded when due from residents, whereas rental revenue for commercial properties, which is generally leased for more than twelve months, is recognized on a straight-line basis over the terms of the related leases. Reimbursements of operating costs, as allowed under most of our commercial tenant leases, consist of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, and are recognized as revenue in the period in which the recoverable expenses are incurred. We record these reimbursements on a “gross” basis, since we generally are the primary obligor with respect to purchasing goods and services from third-party suppliers; we have discretion in selecting the supplier and have the credit risk with respect to paying the supplier. An allowance for credit losses is recorded for all past due rents and operating expense reimbursements considered to be uncollectible. Cash and Cash Equivalents and Restricted Cash We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value. Restricted cash includes cash balances held in escrow by financial institutions under the terms of certain secured notes payable and certain unsecured bonds payable. Concentration of credit risk We maintain our cash balances at commercial banks and through investment companies, the deposits that are insured by the Federal Deposit Insurance Corporation. At December 31, 2024 and 2023, the Company maintained balances in excess of the insured amount. 33 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Income taxes We are a “C” corporation” for U.S. federal income tax purposes. However, we are included in the May Realty Holdings, Inc. ("MRHI"). consolidated group for tax purposes. We have a tax sharing agreement that specifies the manner in which the group will share the consolidated tax liability and also how certain tax attributes are to be treated among members of the group. Comprehensive income (loss) Net income and comprehensive income are the same for the years ended December 31, 2024, 2023 and 2022. Use of estimates In the preparation of consolidated financial statements in conformity with GAAP, it is necessary for 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 consolidated financial statements and the reported amounts of revenues and expense for the year ended. Actual results could differ from those estimates. Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 aims to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss. The update also requires disclosure regarding the chief operating decision maker and expands the interim segment disclosure requirements. Our adoption of this update in December 2024 did not have a material impact on our disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires entities to disclose additional information with respect to the effective tax rate reconciliation and to disclose the disaggregation by jurisdiction of income tax expense and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the impact of ASU 2023-09 on our consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses (“ASU 2024-03”), and in January 2025, the FASB issued ASU 2025-01, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date ("ASU 2025-01"). ASU 2024-03 requires additional disclosure of the nature of expenses included in the income statement as well as disclosures about specific types of expenses included in the expense captions presented in the income statement. ASU 2024-03, as clarified by ASU 2025-01, is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact of these standards on our consolidated financial statements. 34 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 3. Earnings Per Share Earnings per share (“EPS”) has been computed by dividing net income available to common shares, adjusted for preferred dividends, by the weighted-average number of common shares outstanding during the period. The following table provides our basic and diluted EPS calculation: For the Year Ended December 31, 2024 2023 2022 Net (loss) income $ ( 13,439 ) $ 5,251 $ 475,317 Net income attributable to noncontrolling interest ( 1,264 ) ( 1,283 ) ( 101,968 ) Net (loss) income applicable to the Company $ ( 14,703 ) $ 3,968 $ 373,349 Weighted-average common shares outstanding - basic and diluted 16,152,043 16,152,043 16,152,043 EPS attributable to common shares - basic and diluted $ ( 0.91 ) $ 0.25 $ 23.11 4. Supplemental Cash Flows Information The following presents the schedule of interest paid and other supplemental cash flow information: For the Years Ended December 31, 2024 2023 2022 Cash paid for interest $ 6,353 $ 11,014 $ 22,211 Cash paid for income taxes $ 3,403 $ 38,072 $ 55,288 Cash, cash equivalents and restricted cash - beginning of year Cash and cash equivalents $ 36,740 $ 113,445 $ 50,748 Restricted cash 42,327 108,883 21,986 $ 79,067 $ 222,328 $ 72,734 Cash, cash equivalents and restricted cash - end of year Cash and cash equivalents $ 19,918 $ 36,740 $ 113,445 Restricted cash 20,557 42,327 108,883 $ 40,475 $ 79,067 $ 222,328 Payment on mortgages, other notes and bonds payable Mortgages and other notes payable $ 12,452 $ 6,481 $ 67,263 Bonds payable — 131,176 43,759 $ 12,452 $ 137,657 $ 111,022 The following is a schedule of noncash investing and financing activities: For the Years Ended December 31, 2024 2023 2022 Accrued development cost $ 13,209 $ 1,664 $ — Property acquired in exchange for reduction of related party receivable $ — $ 8,764 $ — Assets distributed from joint venture $ — $ — $ 133,372 Liabilities assumed by joint venture $ — $ — $ 72,143 Distribution from joint venture applied to Earn Out Obligation $ — $ — $ 34,159 35 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 5. Operating Segments Segment information is prepared on the same basis that our chief operating decision maker ("CODM") reviews information to assess performance and make resource allocation decisions. Our CODM is our President and Chief Executive Officer. We operate in two reportable segments: (i) the acquisition, development, ownership and management of multifamily properties ("Residential Segment") and (ii) the acquisition, ownership and management of commercial real estate properties ("Commercial Segment"). The services for our segments include property rentals and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources. Therefore, depreciation and amortization expense is not allocated among segments. General and administrative expenses, advisory fees, interest income and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level. The following table presents our profit by reportable segment: For the Years Ended December 31, 2024 2023 2022 Residential Segment Revenue $ 34,103 $ 34,962 $ 19,601 Operating expenses ( 18,252 ) ( 17,749 ) ( 9,524 ) Profit from segment 15,851 17,213 10,077 Commercial Segment Revenue 12,967 14,943 17,059 Operating expenses ( 8,811 ) ( 10,147 ) ( 8,815 ) Profit from segment 4,156 4,796 8,244 Total profit from segments $ 20,007 $ 22,009 $ 18,321 The following table reconciles our profit by reportable segment to net income (loss): For the Years Ended December 31, 2024 2023 2022 Profit from reportable segments $ 20,007 $ 22,009 $ 18,321 Other non-segment items of income (expense) Depreciation and amortization ( 12,276 ) ( 13,646 ) ( 9,686 ) General and administrative ( 6,395 ) ( 10,011 ) ( 10,033 ) Advisory fee to related party ( 8,225 ) ( 10,187 ) ( 8,753 ) Other income 248 595 884 Interest income 19,973 26,847 26,559 Interest expense ( 7,838 ) ( 9,502 ) ( 17,529 ) Gain on foreign currency transactions — 993 20,067 Loss on early extinguishment of debt — ( 1,710 ) ( 2,805 ) Equity in income from unconsolidated joint ventures 1,449 3,242 469,268 (Loss) gain on real estate transactions ( 23,989 ) ( 1,923 ) 87,132 Income tax provision 3,607 ( 1,456 ) ( 98,108 ) Net (loss) income $ ( 13,439 ) $ 5,251 $ 475,317 36 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The table below reconciles the segment information to the corresponding amounts in the consolidated balance sheets: December 31, 2024 2023 Segment assets $ 523,792 $ 462,419 Real estate 59,197 69,139 Investments in unconsolidated joint ventures 10,246 10,060 Notes receivable 138,349 144,142 Receivable from related parties 97,544 96,533 Cash, short-term investments and other non-segment assets 203,674 241,191 Total assets $ 1,032,802 $ 1,023,484 6. Lease Revenue We lease our multifamily properties and commercial properties under agreements that are classified as operating leases. Our multifamily leases generally include minimum rents and charges for ancillary services. Our commercial property leases generally included minimum rents and recoveries for property taxes and common area maintenance. Minimum rental revenues are recognized on a straight-line basis over the terms of the related leases. The following table summarizes the components of rental revenue for the years ended December 31, 2024, 2023 and 2022: For the Year Ended December 31, 2024 2023 2022 Fixed component $ 43,676 $ 45,466 $ 32,163 Variable component 1,087 1,557 1,917 Total rental revenue $ 44,763 $ 47,023 $ 34,080 The following table summarizes the future rental payments to us from under non-cancelable leases, which excludes multifamily properties, which typically have lease terms of one-year or less: Year Amount 2025 $ 11,709 2026 12,492 2027 12,439 2028 11,885 2029 9,654 Thereafter 20,988 Total $ 79,167 37 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 7. Real Estate Activity At December 31, 2024 and 2023, our real estate investment is comprised of the following: December 31, 2024 2023 Land $ 104,076 $ 104,156 Building and improvements 375,430 372,399 Tenant improvements 16,629 16,286 Construction in progress 140,046 76,110 Total cost 636,181 568,951 Less accumulated deprecation ( 78,793 ) ( 67,365 ) Total real estate $ 557,388 $ 501,586 Construction in progress consists of the development of Windmill Farms and the costs associated with our ground-up development projects. 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 to home builders land units (“lots”) designated for residential construction of single family homes according to the land use. The infrastructure costs (See Note 11 – Other Assets ) are reimbursed by the Districts through the issuance of municipal bonds in accordance with various indemnity agreements. We currently have agreements to develop two parcels of land in Windmill Farms . The agreements provide for the development of 125 acres of raw land into approximately 470 land lots to be used for single family homes for a total of $ 24,279 . During 2024, we spent $ 3,616 on reimbursable infrastructure investments. On March 15, 2023, we entered into a development agreement with Pillar to build a 240 unit multifamily property in Lake Wales, Florida (" Alera ") that is expected to be completed in 2025 for a total cost of approximately $ 55,330 . The cost of construction will be funded in part by a $ 33,000 construction loan (See Note 12 – Mortgages and Other Notes Payable). The development agreement provides for a $ 1,637 fee that will be paid to Pillar over the construction period. As of December 31, 2024, we have incurred a total of $ 36,583 in development costs, including $ 1,172 in development fees. On November 6, 2023, we entered into a development agreement with Pillar to build a 216 unit multifamily property in McKinney , Texas (" Merano ") that is expected to be completed in 2025 for a total cost of approximately $ 51,910 . The cost of construction will be funded in part by a $ 25,407 construction loan (See Note 12 – Mortgages and Other Notes Payable ). The development agreement provides for a $ 1,551 fee that will be paid to Pillar over the construction period. As of December 31, 2024, we have incurred a total of $ 24,828 in development costs, including $ 1,029 in development fees. On December 15, 2023, we entered into a development agreement with Pillar to build a 216 unit multifamily property in Temple , Texas (" Bandera Ridge ") that is expected to be completed in 2025 for a total cost of approximately $ 49,603 . The cost of construction will be funded in part by a $ 23,500 construction loan (See Note 12 – Mortgages and Other Notes Payable ). The development agreement provides for a $ 1,607 fee that will be paid to Pillar over the construction period. As of December 31, 2024, we have incurred a total of $ 26,273 in development costs, including $ 684 in development fees. On October 21, 2024, we entered into a development agreement with Pillar to build a 234 unit multifamily property in Dallas , Texas (" Mountain Creek ") that is expected to be completed in 2026 for a total cost of approximately $ 49,791 . The cost of construction will be funded in part by a $ 27,500 construction loan (See Note 12 – Mortgages and Other Notes Payable ). The development agreement provides for a $ 1,574 fee that will be paid to Pillar over the construction period. As of December 31, 2024, we have incurred a total of $ 5,037 in development costs. We incurred depreciation expense of $ 11,662 , $ 12,887 and $ 8,962 for the years ending December 31, 2024, 2023 and 2022, respectively. 38 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) (Loss) gain on real estate transactions consists of the following: For the Year Ended December 31, 2024 2023 2022 Land(1) $ 1,095 $ 188 $ 4,752 Residential properties(2) — — 83,758 Commercial properties(3) — — 686 Other(4) ( 25,084 ) ( 2,111 ) ( 2,064 ) $ ( 23,989 ) $ ( 1,923 ) $ 87,132 (1) Includes the sale of lots related to our investment in Windmill Farms, Mercer Crossing and other land holdings. (2) On January 14, 2022, we sold Toulon, a 240 unit multifamily property in Gautier, Mississippi for $ 26,750 , resulting in a gain on sale of $ 9,364 . We used the proceeds from the sale to pay off the $ 14,740 mortgage note payable on the property and for general corporate purposes. On September 16, 2022, in connection with the sale of properties by VAA (See Note 10 - Investment in Unconsolidated Joint Ventures), we sold Sugar Mill Phase III, a 72 unit multifamily property in Baton Rouge , Louisiana for $ 11,800 , resulting in a gain on sale of $ 1,871 . We used the proceeds from the sale to pay off the $ 9,551 mortgage note payable on the property and for general corporate purposes. On November 1, 2022, we acquired control of the VAA Holdback Portfolio VAA (See Note 10 – Investment in Unconsolidated Joint Ventures ), which resulted in a $ 73,187 gain on remeasurement of assets. (3) On May 17, 2022 , we sold Fruitland Park, a 6,722 square foot commercial building in Fruitland Park, Florida for $ 750 , resulting in a gain on sale of $ 667 . We used the proceeds from the sale for general corporate purposes. (4) On October 31, 2024, we paid $ 23,400 to Clapper to resolve all claims related to real estate dispute ( See Note 19 – Commitments and Contingencies ) . Other amounts i nclude write-off of development costs. 8. Short-term Investments The following is a summary of our short term investment as of December 31, 2024 and 2023: December 31, 2024 2023 Corporate bonds, at par value $ 80,000 $ 90,000 Demand notes 325 1,484 80,325 91,484 Less discount ( 525 ) ( 1,036 ) $ 79,800 $ 90,448 The average interest rate on the investments was 5.20 % and 5.65 % at December 31, 2024 and December 31, 2023, respectively. 39 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 9. Notes Receivable The following table summarizes our notes receivables at December 31, 2024 and 2023: Carrying Value Interest Rate Maturity Date Borrower / Project 2024 2023 ABC Land and Development, Inc. $ 4,408 $ 4,408 9.50 % 6/30/2026 ABC Paradise, LLC 1,210 1,210 9.50 % 6/30/2026 Autumn Breeze(1) 1,451 2,157 5.00 % 7/1/2025 Bellwether Ridge(1) 3,798 3,798 5.00 % 11/1/2026 Cascades at Spring Street(2)(3) — 180 4.96 % 6/30/2027 Dominion at Mercer Crossing(4) 6,167 6,354 8.50 % 6/7/2028 Echo Station(2)(3) 10,120 10,305 4.96 % 12/31/2032 Forest Pines(1) 6,472 6,472 5.00 % 5/1/2027 Inwood on the Park(2)(3) 20,208 20,325 4.96 % 6/30/2028 Kensington Park(2)(3) 6,994 10,262 4.96 % 3/31/2027 Lake Shore Villas(2)(3) 5,855 6,000 4.96 % 12/31/2032 Prospectus Endeavors 496 496 6.00 % 10/23/2029 McKinney Ranch 3,926 3,926 6.00 % 9/15/2029 Ocean Estates II(2)(3) 3,615 3,615 4.96 % 5/31/2028 One Realco Land Holding, Inc. 1,728 1,728 9.50 % 6/30/2026 Parc at Ingleside(1) 3,759 3,759 5.00 % 11/1/2026 Parc at Opelika Phase II(1)(5) 3,190 3,190 10.00 % 1/13/2023 Parc at Windmill Farms(1)(5) 7,886 7,886 5.00 % 11/1/2022 Phillips Foundation for Better Living, Inc.(2) 107 182 4.96 % 3/31/2028 Plaza at Chase Oaks(2)(3) 11,772 11,772 4.96 % 3/31/2028 Plum Tree(1) 1,478 1,767 5.00 % 4/26/2026 Polk County Land 3,000 3,000 9.50 % 6/30/2026 Riverview on the Park Land, LLC 1,045 1,045 9.50 % 6/30/2026 Spartan Land 5,907 5,907 6.00 % 1/16/2027 Spyglass of Ennis(1) 4,705 5,179 5.00 % 11/1/2024 Steeple Crest(1) 6,358 6,498 5.00 % 8/1/2026 Timbers at The Park(2)(3) 11,146 11,173 4.96 % 12/31/2032 Tuscany Villas(2)(3) 1,548 1,548 4.96 % 4/30/2027 $ 138,349 $ 144,142 (1) The note is convertible, at our option, into a 100 % ownership interest in the underlying development property, and is collateralized by the underlying development property. (2) The borrower is determined to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. (3) Principal and interest payments on the notes from Unified Housing Foundation, Inc. (“UHF”) are funded from surplus cash flow from operations, sale or refinancing of the underlying properties and are cross collateralized to the extent that any surplus cash available from any of the properties underlying the notes. (4) The note bears interest at prime plus 1.0 %. (5) We are working with the borrower to extend the maturity and/or exercise our conversion option. 40 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 10. Investment in Unconsolidated Joint Ventures On November 16, 2018 , our SPC subsidiary formed the Victory Abode Apartments, LLC ("VAA"), a joint venture with the Macquarie Group (“Macquarie”). VAA was formed as a result of a sale of the 50 % ownership interest in a portfolio multifamily properties owned by us in exchange for a 50 % voting interest in VAA a nd a note payable (“Mezzanine Loan”). In connection with the formation of VAA, ten of the initial properties were subject to an earn-out provision ("Earn Out") that provided for a remeasurement of value after a two-year period following the completion of construction. Upon the formation of VAA, we recorded an initial liability ("Earn Out Obligation") of $ 10,000 for the advance on the Earn Out that we received from Macquarie. Upon remeasurement, the Earn Out Obligation was determined to be approximately $ 39,600 , and as a result, we recorded a charge of $ 29,600 in 2021 (See Note 7 – Real Estate Activity). In accordance with the joint venture operating agreement, the Earn Out Obligation was paid from our share of subsequent distributions from VAA. On June 17, 2022, we entered into an agreement to sell 45 properties (“VAA Sale Portfolio”) owned by VAA and one property owned by our SPC subsidiary. On September 16, 2022, VAA completed the sale of the VAA Sale Portfolio for $ 1,810,700 , resulting in a gain on sale of $ 738,444 to the joint venture. In connection with sale, we received an initial distribution of $ 182,848 from VAA, which included the payment of the remaining balance of the Earn Out Obligation. On November 1, 2022, we received an additional distribution from VAA, which included the full operational control of the seven remaining properties ("VAA Holdback Portfolio") and a cash payment of $ 204,036 . On March 23, 2023, we received $ 17,976 from VAA, which represented the remaining distribution of the proceeds from the sale of the VAA Sale Portfolio. We used our share of the proceeds from the sale of the VAA Sale Portfolio to invest in short-term investments, investment in real estate, pay down our debt and for general corporate purposes. We also have a 20 % ownership interest in Gruppa Florentina, LLC ("Milano"), which operates several pizza parlors in Central and Northern California. Milano also has 23 franchised locations, including two operating, under the trade name Angelo & Vito’s Pizzerias. 11. Other Assets At December 31, 2024 and 2023, our other assets are comprised of the following: December 31, 2024 2023 Acquisition deposits $ 17,642 $ 19,127 Windmill Farms infrastructure receivables (1) 52,700 49,084 Interest receivable 16,652 14,209 Tenant and other receivables 3,989 9,250 Prepaid expenses and other assets 12,312 7,904 Deferred tax assets 5,705 2,074 $ 109,000 $ 101,648 (1) Represents roads, sewer, and utility infrastructure costs in connection with our development of Windmill Farms (See Note 7 - Real Estate Activity). These costs are reimbursable through bonds issued by the municipality in accordance with underlying indemnity agreements. 41 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 12. Mortgages and Other Notes Payable Below is a summary of our notes and interest payable as of December 31, 2024 and 2023 : Carrying Value Interest Rate Maturity Date Property/ Entity 2024 2023 770 South Post Oak $ 10,939 $ 11,187 4.36 % 6/1/2025 Alera(1) 8,554 — 7.55 % 3/15/2026 Blue Lake Villas 9,327 9,503 3.15 % 11/1/2055 Blue Lake Villas Phase II 3,271 3,349 2.85 % 6/1/2052 Chelsea 7,878 8,064 3.36 % 12/1/2050 EQK Portage 3,350 3,350 5.00 % 11/13/2029 Forest Grove(2) 6,421 6,988 7.50 % 8/1/2031 Landing on Bayou Cane 14,162 14,442 3.52 % 9/1/2053 Legacy at Pleasant Grove 12,381 12,716 3.55 % 4/1/2048 New Concept Energy(5) 3,542 3,542 4.96 % 9/30/2027 Northside on Travis 11,125 11,394 2.50 % 2/1/2053 Parc at Denham Springs 16,048 16,399 3.75 % 4/1/2051 Parc at Denham Springs Phase II 15,419 15,608 4.05 % 2/1/2060 RCM HC Enterprises 5,086 5,086 5.00 % 12/31/2029 Residences at Holland Lake 10,219 10,424 3.60 % 3/1/2053 Villas at Bon Secour 18,798 19,205 3.08 % 9/1/2031 Villas of Park West I(3) 8,983 9,181 3.04 % 3/1/2053 Villas of Park West II(3) 8,158 8,334 3.18 % 3/1/2053 Vista Ridge 9,342 9,512 4.00 % 8/1/2053 Windmill Farms(4) 2,395 4,399 7.50 % 2/28/2026 $ 185,398 $ 182,683 (1) On March 15, 2023, we entered into a $ 33,000 construction loan to finance the development of Alera (See Note 7 - Real Estate Activity) that bears interest at SOFR plus 3 % and matures on March 15, 2026, with two one-year extension options. (2) On July 10, 2024, we replaced the existing loan on the property with a $ 6,558 loan that bears interest at SOFR plus 2.15 % and matures on August 1, 2031. (3) On November 1, 2022, we agreed to assume the mortgage note payable from our joint venture in connection with the acquisition of the underlying property (See Note 10 - Investment in Unconsolidated Joint Ventures) and obtained final lender approval of the assumption in 2024. (4) On February 8, 2024, we extended the maturity to February 28, 2026 at an interest rate of 7.50 %. (5) On June 6, 2024 , we extended the maturity of the loan to September 30, 2027 with an interest rate at SOFR. As of December 31, 2024 , we were in compliance with all of our loan covenants except for the minimum debt service coverage ratio (“DSCR”) for the loan on 770 South Post Oak. As a result, the lender requires us to lock the surplus cash flow of the property into a designated deposit account controlled by them, until we are in compliance with the DSCR for a period of two consecutive quarters. On November 6, 2023 , we entered into a $ 25,407 construction loan to finance the development of Merano (See Note 7 - Real Estate Activity) that bears interest at prime plus 0.25 % and matures on November 6, 2028 . As of December 31, 2024 , no advances have been drawn on the loan. On December 15, 2023 , we entered into a $ 23,500 construction loan to finance the development of Bandera Ridge (See Note 7 - Real Estate Activity) that bears interest at SOFR plus 3 % and matures on December 15, 2028 . As of December 31, 2024 , no advances have been drawn on the loan. 42 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) On October 21, 2024, we entered into a $ 27,500 construction loan to finance the development Mountain Creek (See Note 7 - Real Estate Activity) that bears interest at SOFR plus 3.45 % and matures on March 15, 2029 . As of December 31, 2024 , no advances have been drawn on the loan. All of the above mortgages and other notes payable are collateralized by the underlying property. In addition, we have guaranteed the loans on Alera, Bandera Ridge, Merano, Mountain Creek, Villas at Bon Secour and Windmill Farms. Future principal payments due on our notes payable at December 31, 2024 are as follows: Year Amount 2025 $ 14,338 2026 12,124 2027 3,422 2028 3,488 2029 3,611 Thereafter 149,327 186,310 Deferred finance cost ( 912 ) $ 185,398 13. Bonds Payable We issued three series of nonconvertible bonds ("Bonds") through SPC, which were traded on the TASE. The Bonds were denominated in New Israeli Shekels ("NIS") and provided for semiannual principal and interest payments. On January 31, 2023, we completed our scheduled bond payment, which included the full repayment of the Series C bonds. On May 4, 2023, we paid off the remaining balances of the Series A and Series B Bonds and withdrew from the TASE. In connection with the Bonds, we incurred a gain on foreign currency transactions of $ 993 , and $ 20,067 , for the years ended December 31, 2023 and 2022, respectively. 43 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 14. Related Party Transactions We engage in certain business transactions with related parties, including but not limited to acquisitions and dispositions of real estate. Transactions involving related parties cannot be presumed to be carried out on an arm’s length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities. Related party transactions may not always be favorable to our business and may include terms, conditions and agreements that are not necessarily beneficial to or in our best interest. Pillar and Regis are wholly owned by affiliates of the MRHI, which indirectly owns appro ximately 90.8 % of our common shares. Pillar is compensated for services in accordance with an Advisory Agreement. Regis receives property management fees and leasing commissions in accordance with the terms of its property-level management agreement. In addition, Regis is entitled to receive real estate brokerage commissions in accordance with the terms of a non-exclusive brokerage agreement. Rental income includes $ 652 , $ 882 and $ 931 for the years ended December 31, 2024, 2023 and 2022, respectively, for office space leased to Pillar and Regis. Property operating expense includes $ 346 , $ 366 and $ 433 for the years ended December 31, 2024, 2023 and 2022, respectively, for management fees on commercial properties payable to Regis. General and administrative expense includes $ 3,871 , $ 4,006 and $ 4,191 for the years ended December 31, 2024, 2023 and 2022, respectively, for employee compensation and other reimbursable costs payable to Pillar. Advisory fees paid to Pillar were $ 8,225 , $ 10,187 and $ 8,753 for the years ended December 31, 2024, 2023 and 2022, respectively. Development fees paid to Pillar were $ 2,236 and $ 649 for the year ended December 31, 2024 and 2023, respectively. Notes receivable include amounts held by UHF (See Note 9 – Notes Receivable). UHF is deemed to be a related party due to our significant investment in the performance of the collateral secured by the notes receivable. In addition, we have a related party receivable from Pillar (" Pillar Receivable "), which represents amounts advanced to Pillar net of unreimbursed fees, expenses and costs as provided above. The Pillar Receivable bears interest in accordance with a cash management agreement. On January 1, 2024, an amendment to the cash management agreement changed the interest rate on the Pillar Receivable from prime plus one percent to SOFR. Interest income on the UHF notes and the Pillar Receivable was $ 8,985 , $ 13,260 and $ 15,600 for the years ended December 31, 2024, 2023 and 2022, respectively. Accrued interest on the UHF notes of $ 1,855 and $ 2,012 is included in other assets at December 31, 2024 and 2023, respectively. 15. Noncontrolling Interests The noncontrolling interest represents the third party ownership interest in TCI and Income Opportunity Realty Investors, Inc. ("IOR"). At December 31, 2024, we owned 78.4 % of TCI, which in turn owned 83.2 % of IOR. 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 purchase price of $ 390 plus associated expenses. Upon completion of the Tender Offer, TCI's ownership in IOR was increased to 83.7 %. 16. Stockholders' Equity Dividends: Our decision to declare dividends on common stock is determined on an annual basis following the end of each year. In accordance with that policy, no dividends on our common stock were declared for 2024, 2023 , or 2022 . Future dividends to common stockholders will be determined in light of conditions then existing, including our financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by our board of directors. 44 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) Preferred Stock: We are authorized to issue up to 15,000,000 shares of Series A 10.0 % Cumulative Convertible Preferred Stock with a par value of $ 2.00 per share with a liquidation preference of $ 10.00 per share plus accrued and unpaid dividends. Dividends are payable quarterly at the annual rate of $ 1.00 per share, or $ .25 per share when declared. The Series A Preferred Stock may be converted into common stock at 90.0 % of the average daily closing price of our common stock for the prior 20 trading days. 17. Deferred Income In previous years, we sold properties to related parties where we have had continuing involvement in the form of management or financial assistance associated with the sale of the properties. Because of the continuing involvement associated with the sale, the sales criteria for the full accrual method was not met, and as such we deferred the gain recognition and accounted for the transaction by applying the finance, deposit, installment or cost recovery methods, as appropriate. The gains on these transactions have been deferred until the properties are sold to a non-related third party. As of December 31, 2024, we had deferred gain of $ 9,791 . 18. Income Taxes We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The (benefit) expense for income taxes consists of: Years Ended December 31, 2024 2023 2022 Current: Federal $ ( 3,754 ) $ 1,293 $ 77,374 State 147 163 7,710 Deferred and Other: Federal — — 13,024 State — — — Total tax (benefit) expense $ ( 3,607 ) $ 1,456 $ 98,108 45 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The reconciliation between our effective tax rate on income from operations and the statutory rate is as follows: Years Ended December 31, 2024 2023 2022 Income tax (benefit) expense at federal statutory rate $ ( 3,598 ) $ 1,293 $ 118,940 State and local income taxes net of federal tax expense 147 163 7,705 Temporary tax differences Change in valuation allowance ( 156 ) — ( 28,537 ) Reported tax (benefit) expense $ ( 3,607 ) $ 1,456 $ 98,108 Effective tax rate 21.0 % 23.6 % 24.9 % We are subject to taxation in the United States and various states and foreign jurisdictions. As of December 31, 2024, our tax years for 2021 through 2024 are subject to examination by the tax authorities. With few exceptions, as of December 31, 2024, we are no longer subject to U.S federal, state, local, or foreign examinations by tax authorities for the years before 2021. Components of the Net Deferred Tax Asset: December 31, 2024 2023 Deferred tax asset: Basis difference in fixed assets $ 2,333 $ 1,952 Deferred gain and net operating loss carryforward 3,372 122 Net deferred tax asset $ 5,705 $ 2,074 We have state net operating losses in many of the various states in which we operate. 46 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 19. Commitments and Contingencies We believe that we will generate excess cash from property operations in the next twelve months; such excess, however, might not be sufficient to discharge all of our obligations as they become due. We intend to sell income-producing assets, refinance real estate and obtain additional borrowings primarily secured by real estate to meet our liquidity requirements. We had been engaged in litigation with David Clapper and entities related to Mr. Clapper (collectively, “Clapper") since 1999. The matter originally involved a transaction in 1998 in which we were to acquire eight multifamily properties from the Clapper. Through the years, several rulings, both for and against us, were issued with a range of settlement from zero to $ 148,000 . On October 31, 2024, we executed a Settlement Agreement and General Release (the “Settlement Agreement”) and paid $ 23,400 to resolve all claims. On November 8, 2024, the court dismissed the case with prejudice. We are defendants in litigation related to a property sale ("Nixdorf") that was completed in 2008, which was tried to a jury in March 2023. On March 18, 2023, the jury in the case returned a “Plaintiff take nothing” verdict in our favor. On January 7, 2025, the Fifth District Court of Appeals at Dallas reversed the trial court's judgement and remanded the case to the trial court. We intend to challenge the ruling by writ of mandamus. 20. Quarterly Results of Operations The following is a tabulation of our quarterly results of operations for the years 2024 and 2023. Quarterly results presented may differ from those previously reported in our Form 10-Q due to the reclassification of the operations. 2024 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 11,899 $ 11,773 $ 11,607 $ 12,039 Net operating loss ( 1,517 ) ( 1,277 ) ( 2,063 ) ( 1,784 ) Net income (loss) attributable to the Company 1,751 1,167 ( 17,460 ) ( 161 ) EPS - basic and diluted $ 0.11 $ 0.07 $ ( 1.08 ) $ ( 0.01 ) 2023 Quarter Ended March 31, June 30, September 30, December 31 Revenues $ 11,688 $ 12,239 $ 12,526 $ 14,047 Net operating (loss) income ( 3,086 ) ( 3,859 ) ( 2,104 ) ( 2,191 ) Net income (loss) attributable to the Company 2,978 125 2,988 ( 2,123 ) EPS - basic and diluted $ 0.18 $ 0.01 $ 0.18 $ ( 0.13 ) 21. Subsequent Events The date to which events occurring after December 31, 2024, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 20, 2025, which is the date of which the financial statements were available to be issued. There are no subsequent events that would require an adjustment to the financial statements. 47 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2024 Initial Cost Cost Capitalized Subsequent to Acquisition Gross Amount Carried at End of Year Property/Location Encumbrances Land Buildings Land Building & Improvements Total Accumulated Depreciation Date of Construction Date Acquired Multifamily Alera $ 8,554 $ — $ — $ 36,583 $ 6,064 $ 30,519 $ 36,583 $ — Bandera Ridge — — — 26,273 2,700 23,573 26,273 — Blue Lake Villas 9,327 6,920 27,680 219 6,920 27,899 34,819 1,517 2002 2022 Blue Lake Villas Phase II 3,271 2,400 9,600 53 2,400 9,653 12,053 523 2004 2022 Chelsea 7,878 1,225 11,230 53 1,231 11,277 12,508 1,794 1999 2018 Forest Grove 6,421 1,440 10,234 64 1,440 10,298 11,738 1,191 2020 2020 Landing on Bayou Cane 14,162 2,011 18,255 122 2,011 18,377 20,388 2,421 2005 2018 Legacy at Pleasant Grove 12,381 2,005 18,109 116 2,033 18,197 20,230 5,127 2006 2018 Merano — — — 24,828 4,500 20,328 24,828 — Mountain Creek — — — 5,037 3,510 1,527 5,037 — Northside on Travis 11,125 7,160 28,640 14 7,160 28,654 35,814 1,552 2008 2022 Parc at Denham Springs 16,048 6,060 24,240 29 6,060 24,269 30,329 1,318 2007 2022 Parc at Denham Springs Phase II 15,419 1,505 16,975 — 1,505 16,975 18,480 2,186 2010 2009 Residences at Holland Lake 10,219 6,300 25,200 51 6,300 25,251 31,551 1,373 2004 2022 Villas at Bon Secour 18,798 2,715 15,385 87 2,715 15,472 18,187 2,491 2007 2018 Villas of Park West I 8,983 8,200 32,800 100 8,200 32,900 41,100 1,783 2005 2022 Villas of Park West II 8,158 6,860 27,440 22 6,860 27,462 34,322 1,487 2010 2022 Vista Ridge 9,342 1,339 13,398 6 1,339 13,404 14,743 3,957 2009 2018 160,086 56,140 279,186 93,657 72,948 356,035 428,983 28,720 Commercial 770 South Post Oak 10,939 1,763 16,312 1,537 1,763 17,849 19,612 4,473 1970 2015 Browning Place — 5,096 49,441 15,054 5,096 64,495 69,591 32,392 1984 2005 Stanford Center — 20,278 25,876 3,749 20,278 29,625 49,903 13,208 2007 2008 Other — 646 74 ( 98 ) 622 — 622 — 10,939 27,783 91,703 20,242 27,759 111,969 139,728 50,073 Developed and Undeveloped Land Mercer Crossing — 2,999 — ( 166 ) 2,833 — 2,833 — 2018 Windmill Farms 2,395 43,608 — 3,717 47,325 — 47,325 — 2006 Other 8,436 19,608 — ( 2,296 ) 17,312 — 17,312 — 10,831 66,215 — 1,255 67,470 — 67,470 — $ 181,856 $ 150,138 $ 370,889 $ 115,154 $ 168,177 $ 468,004 $ 636,181 $ 78,793 48 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION As of December 31, 2024 2024 2023 2022 Reconciliation of Real Estate Balance at January 1, $ 568,951 $ 559,875 $ 359,296 Additions 69,145 29,474 240,018 Deductions ( 1,915 ) ( 20,398 ) ( 39,439 ) Balance at December 31, $ 636,181 $ 568,951 $ 559,875 Reconciliation of Accumulated Depreciation Balance at January 1, $ 67,365 $ 66,054 $ 62,933 Additions 11,662 12,887 8,962 Deductions ( 234 ) ( 11,576 ) ( 5,841 ) Balance at December 31, $ 78,793 $ 67,365 $ 66,054 49 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS As of December 31, 2024 Description Interest Rate Maturity Date Periodic Payment Terms Prior Liens Face Amount Carrying Value ABC Land and Development, Inc. 9.50 % 6/30/2026 No payments until maturity $ — $ 4,408 $ 4,408 ABC Paradise, LLC 9.50 % 6/30/2026 No payments until maturity — 1,210 1,210 Autumn Breeze 5.00 % 7/1/2025 No payments until maturity or conversion 23,878 1,451 1,451 Bellwether Ridge 5.00 % 11/1/2026 No payments until maturity or conversion 17,363 3,798 3,798 Dominion at Mercer Crossing 8.50 % 6/7/2028 No payments until maturity 38,077 6,167 6,167 Echo Station 4.96 % 12/31/2032 Payments from excess property cash flows 12,936 10,120 10,120 Forest Pines 5.00 % 5/1/2027 No payments until maturity or conversion 25,329 6,472 6,472 Inwood on the Park 4.96 % 6/30/2028 Payments from excess property cash flows 24,889 20,208 20,208 Kensington Park 4.96 % 3/31/2027 Payments from excess property cash flows 14,896 6,994 6,994 Lake Shore Villas 4.96 % 12/31/2032 Payments from excess property cash flows 25,076 5,855 5,855 Prospectus Endeavors 6.00 % 10/23/2029 No payments until maturity — 496 496 McKinney Ranch 6.00 % 9/15/2029 No payments until maturity — 3,926 3,926 Ocean Estates II 4.96 % 5/31/2028 Payments from excess property cash flows 1,642 3,615 3,615 One Realco Land Holding, Inc. 9.50 % 6/30/2026 No payments until maturity — 1,728 1,728 Parc at Ingleside 5.00 % 11/1/2026 No payments until maturity or conversion 24,200 3,759 3,759 Parc at Opelika Phase II 10.00 % 1/13/2023 No payments until maturity or conversion 22,367 3,190 3,190 Parc at Windmill Farms 5.00 % 11/1/2022 No payments until maturity or conversion 34,237 7,886 7,886 Phillips Foundation for Better Living, Inc. 4.96 % 3/31/2028 Payments from excess property cash flows — 107 107 Plaza at Chase Oaks 4.96 % 3/31/2028 Payments from excess property cash flows 8,658 11,772 11,772 Plum Tree 5.00 % 4/26/2026 No payments until maturity or conversion 17,104 1,478 1,478 Polk County Land 9.50 % 6/30/2026 No payments until maturity — 3,000 3,000 Riverview on the Park Land, LLC 9.50 % 6/30/2026 No payments until maturity — 1,045 1,045 Spartan Land 6.00 % 1/16/2027 No payments until maturity — 5,907 5,907 Spyglass of Ennis 5.00 % 11/1/2024 No payments until maturity or conversion 21,908 4,705 4,705 Steeple Crest 5.00 % 8/1/2026 No payments until maturity or conversion 10,806 6,358 6,358 Timbers at The Park 4.96 % 12/31/2032 Payments from excess property cash flows 12,879 11,146 11,146 Tuscany Villas 4.96 % 4/30/2027 Payments from excess property cash flows 1,451 1,548 1,548 $ 337,696 $ 138,349 $ 138,349 50 AMERICAN REALTY INVESTORS, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) SCHEDULE IV - MORTGAGE LOANS As of December 31, 2024 2023 2022 Balance at January 1, $ 144,142 $ 139,609 $ 136,607 Additions — 6,500 4,653 Deductions ( 5,793 ) ( 1,967 ) ( 1,651 ) Balance at December 31, $ 138,349 $ 144,142 $ 139,609 51 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.