American Realty Investors: Navigating High Rates with Resilience, but Can It Sustain?

American Realty Investors, Inc. (NYSE: ARL) has navigated the high-interest-rate environment of 2025 with a mix of strategic asset management and operational discipline, posting a 157.1% year-over-year surge in earnings per share (EPS) to $0.18 in Q2 2025. While the results highlight resilience, investors must weigh the company's reliance on one-time gains and its uneven performance across property segments to assess its appeal as a defensive real estate investment.

Earnings Resilience: A Tale of Gains and Cost Control

ARL's Q2 net income of $2.8 million was driven by a $1.1 million gain from the sale of 30 single-family lots at Windmill Farms and the repayment of a $10.8 million loan on its 770 South Post Oak property. These actions reduced debt and boosted liquidity, demonstrating prudent capital management. Operating expenses rose modestly by 0.9% to $13.17 million, while the net operating loss narrowed by $0.3 million, reflecting cost discipline. However, the absence of forward guidance and the reliance on non-recurring gains raise questions about the sustainability of these results.

Revenue Stability: Multifamily Strength vs. Commercial Weakness

Rental revenue grew 3.3% year-over-year to $11.51 million, driven by 94% occupancy in multifamily properties—a defensive asset class in a high-rate environment. Multifamily demand remains robust, with ARL's Stanford Center contributing to improved occupancy. However, commercial properties lagged at 57% occupancy, underscoring sector-specific vulnerabilities. The disparity highlights the need for ARL to diversify its revenue streams or reposition underperforming assets.

Liquidity and Debt: A Modest Leverage Profile

ARL's debt-to-equity ratio of 26.7% is relatively conservative, and its $278.22 million in liabilities are manageable against $607.77 million in shareholders' equity. The company's $92.3 million in cash and short-term investments, though down from $119.1 million at year-end 2024, remain sufficient to fund its 70%-funded development pipeline of 906 multifamily units. However, operating cash flow turned negative in Q2, with a $10.3 million outflow, signaling potential liquidity pressures if development costs escalate.

Investment Considerations: Defensive Traits with Caveats

ARL's high multifamily occupancy and disciplined debt management make it a compelling defensive play in a high-rate environment. Multifamily REITs typically benefit from sticky rental income and inelastic demand, which ARL leverages effectively. However, the company's reliance on asset sales (e.g., Windmill Farms) and its underperforming commercial segment introduce volatility. Investors should monitor:
1. Commercial Property Turnaround: Can ARL boost occupancy in its 57%-occupied commercial assets through repositioning or tenant diversification?
2. Development Pipeline Execution: Will the Mountain Creek project, with its $27.5 million undrawn loan, deliver returns without straining liquidity?
3. Interest Rate Sensitivity: How will rising borrowing costs impact its $215.9 million in debt, particularly as SOFR-based construction draws increase?

Conclusion: A Mixed Bag for Defensive Investors

ARL's Q2 results showcase resilience through cost control and strategic asset sales, but its long-term appeal as a defensive investment hinges on addressing commercial underperformance and reducing reliance on non-recurring gains. For risk-averse investors, ARL offers a stable multifamily portfolio and modest leverage, but the lack of forward guidance and liquidity pressures warrant caution. Those willing to tolerate short-term volatility for potential upside in its development pipeline may find value, but the stock is best suited for a diversified portfolio rather than as a core holding in a high-rate environment.